Skip to main content

Here's the bad news for the oil patch: The Keystone XL pipeline is delayed again. The good news? Just about everything else.

When the industry starts reporting first-quarter results next week, the financial turnaround at many companies is going to look impressive. It is hard to find a stat that has not worked in their favour since the start of the year. That's rare.

Natural gas markets, heavy oil prices, the impact of the weaker loonie – it's all gravy following several quarters of uncertainty and a few of downright downturn.

Gas was the biggest surprise. Formerly the sad sack of commodities, Alberta natural gas was 72 per cent richer in the first quarter of 2014 versus a year earlier as heating demand surged with frigid weather and inventories across the continent drained.

The industry worked around the seemingly endless U.S. regulatory process for Keystone XL, with expansions of other pipelines and a big jump in oil-by-rail capacity, which helped dissipate the so-called "bitumen bubble" that had pressured Canadian crude. That led to a 24-per-cent increase in prices for Western Canadian Select, the benchmark heavy oil.

Share prices have followed suit. In the past year, the Toronto Stock Exchange's capped energy index is up 35 per cent. On Wednesday it hit a 32-month high.

So what are these companies going to do with all the extra coin? For most of the big players, don't expect markedly fatter capital spending budgets.

Here's why: First, the CEOs of Encana Corp., Talisman Energy Inc. and Penn West Exploration Ltd. have all put their companies on austerity drives to refocus resources on the highest-return assets, especially ones that produce oil and natural gas liquids.

In the meantime, they have jettisoned properties and promised to keep pruning.

Encana, for instance, is readying its PrairieSky royalty unit for an initial public offering, with some analysts pegging the value of the spinoff at nearly $4-billion.

So any big shifts in strategy, months after imposing deep cuts, would only be decried as knee-jerk reactions to commodity prices that could easily retrace their paths back down.

Also, the nature of the Canadian oil and gas business has changed a lot since the financial crisis prompted its last great meltdown, at least for the largest companies.

Most have moved away from the old model of drilling scads of wells during the good times and hitting the brakes when oil and gas prices dropped.

Technology has made things much more project-oriented, especially in the oil sands.

A company such as Cenovus Energy Inc., for example, wins regulatory approval for a phase of a steam-driven project, estimates the cost, builds it to a predetermined size, starts it up and then moves on to the next one.

That leaves a few other options for unexpected cash flow. Some companies have gone shopping. On Wednesday, Crescent Point Energy Corp. said it was doing just that – scooping up CanEra Energy Corp., a private oil producer, for $1.1-billion in cash, stock and assumed debt to bolster its holdings in Saskatchewan.

It extends a string of deals following a weak merger and acquisition market in 2013. Among them: Canadian Natural Resources Ltd.'s $3.1-billion purchase of Devon Energy Corp.'s gas-rich Canadian conventional assets and Baytex Energy Corp.'s $1.8-billion takeover of Texas-focused Aurora Oil & Gas.

Investment bankers in Calgary say they expect takeover activity to keep piling up as capital flows in.

A few companies will funnel money into accelerated debt reduction, taking advantage of the opportunity to beef up their balance sheets. Others will increase dividends or extend share buybacks, although recent gains in the stock market may render the latter unnecessary.

These are not the worst choices the industry has ever faced. They certainly show there are many facets to the sector apart from ad nauseum debate over an oil pipeline to the U.S. Gulf Coast.

They may also show that the industry and its investors are moving beyond the prospect of Keystone XL proceeding.