Cenovus Energy Inc. slashed $700-million from its 2015 budget and shelved two more of its oil sands expansion projects, joining a growing list of major energy companies putting off spending in northern Alberta in reaction to sliding crude prices.
The Calgary oil producer on Wednesday revised its budget for the current year to $1.8-billion and $2-billion, following a move just last month to cut 2015 spending by 15 per cent.
Cenovus is in the middle of expansions at its Christina Lake and Foster Creek oil sands operations, but subsequent expansions at those projects have been put on hold. The company is also cancelling the "bulk" of its conventional drilling plans in Alberta and Saskatchewan.
Meanwhile, oil prices slumped again Wednesday, falling to the lowest close since March, 2009. The U.S. benchmark West Texas intermediate traded at $44.45 (U.S.) a barrel, down $1.78, as U.S. oil inventories climbed sharply amid a global oversupply.
At current oil prices, even established oil sands projects are struggling to make money. As a result, companies are pulling back spending on future, higher-cost projects and taking other steps to curtail near-term production.
Suncor Energy Inc. and Canadian Natural Resources Ltd. also cut their budgets and deferred expansion plans in the oil sands this month. But Cenovus's cuts extend beyond northern Alberta. Its decision to axe its conventional drilling plan comes as January's rig count in Canada is on track to hit a 15-year low. Cenovus also said it will make job cuts.
"I believe crude oil prices will rebound, but the timing is uncertain," Brian Ferguson, the company's chief executive, said in a statement. "We're taking the actions we deem prudent to help protect the financial resilience of Cenovus without compromising our future."
Cenovus' revised budget predicts its cash flow will total between $1.3-billion and $1.5-billion this year, assuming West Texas Intermediate oil trades at an average of $50.50 a barrel in 2015.
Randy Ollenberger, an energy analyst at the Bank of Montreal, notes Cenvous's expected cash flow is below its capital budget if calculated using the market's current long-term futures prices for oil. And this, he says, is before adding in the $800-million a year the company pays in dividends. Cenovus did not cut its dividend.
Brett Harris, a spokesman for the Calgary-based company, said Cenovus could make the difference a number of ways: using cash it has on the balance sheet; dipping into its credit facility; finding a buyer for its royalty-free property; and cutting its budget further.
Menno Hulshof, an analyst at Toronto-Dominion Bank, says the price of oil is now lower than what some established oil sands projects need to break even on the oil they produce today.
Oil must be worth at least $50.03 a barrel in order for Cenovus to break even on the crude it now produces at Christina Lake and $50.59 a barrel at Foster Creek, he said. (This excludes costs such as taxes, reclamation and general and administrative expenses). Suncor's Firebag and MacKay operations need oil to be worth $50.59 a barrel to break even, while CNRL's Primrose project requires oil at $47.03 a barrel, according to Mr. Hulshof. All of these projects use wells rather than mines to extract bitumen.
Cenovus's new budget will also amplify pain outside the oil sands. The Canadian Association of Oilwell Drilling Contractors says there were 353 rigs operating Tuesday, down 38 per cent from this time last year. The drop means only 44 per cent of the country's entire drilling fleet is being used right now. Analysts at Raymond James predict January's overall rig count will clock in at about 390, down 30 per cent from last year.
"This will be both the lowest January rig count in Canada since 1999 and the most substantially negative" year-over-year comparison for January since the firm began tracking the data in 1995.