A painful aspect to this oil crash for Canada’s energy business is that the wounds from the last one haven’t fully healed.
If there is a positive, it’s that the lessons from 2014-16 are still fresh in the minds of executives and directors. The most important: act quickly and decisively.
Cenovus Energy Inc. did just that, announcing a series of measures late Monday to deal with crude prices that in one day tumbled 24 per cent – from cutting spending by almost a third to putting new oil sands projects on ice and halting crude shipments by rail.
Chief executive officer Alex Pourbaix’s swift response was just what was required after Cenovus’s stock lost more than half its value in one horrific session.
After all, there’s no reason to keep capital tied up expanding and shipping the company’s oil sands-derived crude output when the stuff is selling for about half of what it was at the start of year. It is the last thing investors need in the midst of an oil price war. The stock clawed back 11 per cent on Tuesday, as the market came away with some relief that Cenovus would preserve its resources.
Other companies also took harsh medicine: Surge Energy Inc. slashed its dividend by 90 per cent and pushed the remainder of its capital spending into the second half of the year. In the United States, Occidental Petroleum Corp. cut its dividend by 86 per cent and its capital spending by about US$1.7-billion. Marathon Oil Corp. reduced its capital budget by a fifth.
Others will undoubtedly follow, having struggled through the ravages of the last downturn, especially in Canada where the rout was pronounced. Then, many were slow to react to shifting tectonic plates in the oil world.
At the time, Saudi Arabia had abandoned its role as the world’s oil price cop, and refused to limit its own production when other countries such as the U.S. and Canada pumped oceans of higher-cost supply. That set world prices tumbling, and in subsequent years, concerns about demand kept a lid on markets.
Many in the oil patch initially figured markets would bounce back before too long, and made minimal reductions to spending while putting on a brave face and maintaining dividends. That put heavy pressure on balance sheets as debt metrics worsened along with dwindling cash flows as months wore on.
Eventually, companies made severe cuts to operations and staff, but not before stock prices tumbled throughout the sector. In some ways, the downturn never really ended in Alberta.
Now, Saudi Arabia and Russia appear to be digging in for a lengthy skirmish in the markets, after they failed to agree last week on output limits to deal with an economic slowdown. Two of the largest producers punching it out for market share means a world of hurt for the rest of the suppliers.
The industry had early indications of weakness as crude prices fell over worries about the global economic cost of the coronavirus outbreak, and some companies had begun to throttle back. Last week, for instance, Vermilion Energy Inc. cut its monthly payout by half, citing those risks. (This did not insulate the shares from the selloff, however. They are down more than 40 per cent from Friday.)
In a letter to investors on Tuesday, Eric Nuttall, portfolio manager for Ninepoint Partners, listed the oil prices required for various energy plays to work: Large oil sands producers need West Texas Intermediate of US$41 to US$46 a barrel to maintain dividends and keep production flat; U.S. shale producers require about US$55 a barrel; smaller conventional Canadian producers need US$48 to US$52. WTI settled up US$3.72 at US$34.85 on Tuesday.
“The easiest call in the world to make today is that the current oil price is completely unsustainable,” Mr. Nuttall wrote. “The more difficult call is how long the price collapse can go on for.”
Given the magnitude of the drop, and the likelihood that the path to recovery will be very bumpy, many companies already know the drill: cut first, and adjust later.
Jeffrey Jones