Investors are rewarding energy companies amid signs that oil prices are steadying and relentless cuts to employment and spending levels are starting to bear fruit.
Canadian Natural Resources Ltd. and Baytex Energy Corp. led a fresh wave of oil-industry austerity on Thursday that included deeper cuts to 2016 budgets and production forecasts. Meanwhile, Calfrac Well Service Ltd. said Wednesday it shed an additional 500 staff, bringing total reductions at the company to around 2,300. Spanish oil giant Repsol SA also said it would cut its Calgary work force by as much as 15 per cent, after roughly 200 layoffs tied to its $8.3-billion (U.S.) takeover of Talisman Energy Inc. last year. CNOOC Ltd.-owned Nexen Energy ULC cut another 120 Canadian jobs this week.
The latest cuts were welcomed by investors wearied by months of aggressive pullbacks in the sector. Some of the industry's biggest players have pared dividends, jettisoned thousands of jobs, and shelved billions of dollars' worth of drilling plans to withstand the 70-per-cent plunge in U.S. and global oil prices since mid-2014.
Now, there is growing optimism that such moves are paying off, even as global oil stockpiles remain swollen and U.S. prices hover at severely depressed levels in the mid-$30s per barrel.
On Thursday, the TSX energy subindex rose 2.8 per cent, adding to a rally that has driven the group of major oil producers and their energy service providers up 6.9 per cent in the past month.
"Even though oil is still very, very weak, the market is getting much more comfortable that there's a visibility to a recovery," said Chris Cox, analyst at Raymond James Ltd. in Calgary.
"And once you can say that with some degree of confidence, that say, in the next six to 12 months oil will be meaningfully higher, if you have that level of confidence, these are names that you want to own now," he said.
A year ago, Canadian Natural chief executive officer Steve Laut warned that the Alberta-based industry was in jeopardy of falling into a "death spiral" unless it tamed runaway costs. He bemoaned a "made in Fort McMurray" cost structure that had eroded returns, even when U.S. crude fetched closer to $100 a barrel.
In an interview Thursday, he said the industry has made strides in bringing down costs over the course of the past year. For instance, the company's operating costs at its expanding Horizon oil-sands mine dropped 23 per cent in 2015 to $28.61 (Canadian) a barrel.
"We're very focused on making sure those gains we get are sustainable," he said.
Even so, the financial ravages of oil's collapse have taken a toll. The company on Thursday reported sharply lower fourth-quarter earnings and cut its 2016 budget by about one-fifth to between $3.5-billion and $3.9-billion. It also lowered its production forecast for this year by about 2 per cent to between 809,000 and 868,000 barrels of oil equivalent a day.
Net income for the final three months of 2015 tumbled 89 per cent to $131-million, or 12 cents per share, from $1.2-billion, or $1.09 a share one year earlier.
Last month, Moody's Investors Service downgraded the company's debt two notches to one level above junk status, citing weakened cash flow and elevated leverage as it seeks to boost production at its massive Horizon mine.
Officials with the company on Thursday stressed that it has the financial resources, including roughly $3.4-billion in available liquidity, to finish expansions at the project, as well as maintain its current dividend payments. It expects to spend $2-billion at the mine this year, while adding 45,000 barrels a day of additional output starting in seven months.
Despite growing output at Horizon, Mr. Laut said company-wide production would stay relatively flat through 2018 as it dials back annual spending to about $2.6-billion to pay down debt.
It has so far suspended about 7,000 barrels a day of uneconomic heavy oil production since January, 2015, he said.
Similarly, smaller rival Baytex said Thursday it has halted output of 7,500 barrels a day of heavy crude. The company chopped its budget by a third and said it may seek additional relief on conditions tied to its debt as it reported a fourth-quarter loss of $413-million.
With a report from Kelly Cryderman