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Canadian oil producers face pressure to further slash spending, limit losses

Companies, such as Cenovus, may cut their payouts to preserve cash.


Oil producers are facing renewed pressure to slash costs as crude prices tumble well below even the most bearish expectations of a few months ago.

U.S. West Texas intermediate (WTI) oil collapsed to under $27 (U.S.) a barrel, skidding far below the already miserly forecasts set by some of Canada's biggest energy companies and prompting fresh warnings of deeper cuts. The February contract, which expired Wednesday, fell nearly 7 per cent to $26.55 a barrel.

The Bank of Canada said it expects energy companies to slash spending by a further 25 per cent this year, even as it warned that producers are running short on levers to pull after chopping investment levels by 40 per cent in 2015. It had previously forecast a 20-per-cent reduction in spending this year.

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"Many firms indicate that neither they nor their suppliers are able to generate additional substantial cost savings or productivity increases in the short term," the bank said in its Monetary Policy Report. "Unlike conventional oil producers, oil sands producers find it difficult and expensive to scale back production, causing some to operate temporarily at a loss. With low oil prices persisting, firms anticipate more painful wage and staff cuts ahead."

The energy industry has already shed tens of thousands of jobs and scrapped growth projects to cope with the more than 70-per-cent plunge in global crude prices since mid-2014.

Yet the deepening slump this year has rapidly undermined even the most cautious industry outlooks.

For example, oil sands giant Suncor Energy Inc. based its 2016 budget on a WTI oil price of $50 a barrel and $35 for Western Canadian Select oil sands crude. On Wednesday, WCS for March delivery fetched around $14 less than WTI, broker Net Energy Inc. said, implying a value of just $14 a barrel for the Canadian oil.

The darkening outlook has forced several companies to revisit spending plans as losses swell and cash flow evaporates. This week, Whitecap Resources Inc. chopped its budget by more than half to $70-million (Canadian) and reduced its monthly dividend by 40 per cent.

Husky Energy Inc. has slashed its 2016 budget by 27 per cent and scrapped its dividend entirely. The Calgary-based company also deferred some drilling plans and cut its production outlook by roughly 4 per cent.

Rivals including Cenovus Energy Inc., Canadian Natural Resources Ltd., Crescent Point Energy Corp. and PrairieSky Royalty Ltd. may also cut their payouts to preserve cash, said Chris Cox, an analyst at Raymond James Ltd. in Calgary.

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"You'll see a wave of them," he said in an interview. Oil prices have sunk to a level where "each incremental dollar makes a huge difference in terms of the financial positions of these companies, and it eventually forces much more rash actions, which is what the market needs."

To be sure, major oil sands producers have managed to wring cost savings from a notoriously expensive supply chain since the downturn started.

TD Securities Inc. estimates the average break-even threshold for a mining project has fallen 21 per cent from a year ago, while average costs are down 18 per cent over the same period for steam-driven plants. A weakening loonie has also bolstered returns, as companies get paid in U.S. dollars while expenses are tied to the domestic currency.

Nonetheless, analysts say those gains are more than offset by the sharp drop in oil prices so far this year. Meanwhile, hopes for a near-term recovery have all but disappeared.

Citibank on Wednesday chopped its forecast for global benchmark Brent oil for this year to $40 (U.S.), citing concerns about Chinese demand and a "missing" output reaction to low prices from producers outside the Organization of Petroleum Exporting Countries.

"Just when you think it couldn't get any worse, you had the Iranians come on," said Martin Pelletier, managing director at Trivest Wealth Counsel Ltd. in Calgary.

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"Saudi Arabia's in a dispute with Iran so they're not in a hurry to support the price, they're going to let it go lower, and as a result you're seeing what's transpiring in the markets today. Everyone's just saying, I'm done with this."

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About the Author

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More


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