Cenovus Energy Inc. is chopping spending by 15 per cent to around $2.6-billion in 2015, and warned it may cut deeper yet, in a clear sign that Canada's oil-patch heavyweights are feeling the strain of the dramatic drop in crude prices.
Chief executive Brian Ferguson said the company tries to avoid setting its budgets based on day-to-day gyrations in oil prices, but it was forced to rerun its numbers as it formulated plans against the backdrop of crude's relentless slide.
"Our budget process – it's a large program – starts in August and kind of builds up from the grassroots. We adjusted our budget assumptions around the end of October," Mr. Ferguson said in an interview. "Two weeks ago at the OPEC meeting, pricing in the mid-$70s seemed quite realistic. I don't know where the price is going to go in the next two weeks, or even few days."
West Texas Intermediate oil fell below $60 a barrel for the first time in five years on Thursday, dropping 99 cents to $59.95 (U.S.) a barrel, its lowest since July, 2009. It's down more than 40 per cent since the end of June.
Markets are panicked by projections of a weak demand and a glut of supply. Saudi Arabia, the most powerful member of the Organization of the Petroleum Exporting Countries, keeps signalling it is prepared to maintain its output as prices slide in order to protect its market share and force rivals, especially U.S. shale oil producers, to stop drilling.
Cenovus is one of the largest Canadian energy players to cut spending in the wake of oil's plunge.
The oil-sands producer has tested its plans at $65 a barrel, and at that level it still generates enough cash flow to cover $2.1-billion in capital it has already committed to expansion projects at its two main Alberta developments, Foster Creek and Christina Lake, Mr. Ferguson said.
"So we've got a lot of financial flexibility in our program, but it's one of those things – what you don't want to do is budget in real-time."
Other oil sands and heavy oil companies including Baytex Energy Corp. and MEG Energy Corp. have clawed back spending. Canadian Natural Resources Ltd. has signalled that $2-billion of its $8.6-billion budget is "flexible" capital that could be deferred. Canadian Oil Sands Ltd. took the more drastic step of sharply reducing its dividend.
Shares in all energy companies have come under severe pressure as oil prices have weakened.
Leading up to last month's OPEC decision to maintain output levels, Canadian producers were somewhat shielded by a narrow discount on the price of their heavy oil versus light crude. And the weak Canadian dollar boosts revenue and profit as oil sales in U.S. dollars are translated back to Canadian. But now oil prices are so low that those cushions are doing little to protect plunging cash flows.
Cenovus, known for miserly operating costs, said it will maintain its dividend while projecting annual cash flow of roughly $2.75-billion. But that is assuming oil prices well above current levels – WTI oil at $77 (U.S.) a barrel and Western Canadian Select (WCS) heavy crude, a domestic benchmark, at around $60.50. WCS sold this week for $43 a barrel.
Mr. Ferguson touted financial flexibility his company has in its operations, which also include interests in two major U.S. refineries, as well as strong balance sheet.
Initially, it is slowing spending on longer-term projects still in the early development stages, including Narrows Lake, Telephone Lake and Grand Rapids. It plans to keep its work force number at today's levels.
"If there is a substantive downward excursion for any kind of extended period here on pricing, then we would certainly go back and reassess the program," Mr. Ferguson said.
"What we are focusing on for capital investment in 2015 will be contributors to production, and therefore cash flow, in 2016, 2017 – very high-return projects. That's the brownfield expansion, largely of Foster Creek and Christina Lake, the big call on capital, as well as maintaining our existing conventional production."
Overall output is forecast at around 206,000 barrels a day, 4 per cent above the 2014 average.
Cenovus was spun off by Encana Corp. in 2009 in a move that had been delayed by the previous severe drop in oil prices. Mr. Ferguson pointed out there is no global financial or monetary crisis pressuring crude this time.
"You've got a very strong U.S. economy right now and lower oil and gas prices are actually stimulative in terms of the U.S. economy or Asian economy. So one would anticipate there would be a demand response because of lower energy costs," he said.
Like oil's previous slide, however, Cenovus and other companies that keep investing will be the beneficiaries of lower labour and service costs as the industry slows down, he said.