Canadian energy companies rolled out a fresh round of budget cuts and layoffs, taking action to prop up profits battered by oil's plunge.
Cenovus Energy Inc. on Thursday said it is laying off about 800 employees and has room to trim another $500-million from its already reduced 2015 budget of between $1.8-billion and $2-billion. Husky Energy Inc. said it has let go a "small" number of employees and revised its spending plan for the second time in three months, down $400-million to between $3-billion and $3.1-billion. Precision Drilling Corp. also released a slimmer budget, as it takes rigs out of service.
Meanwhile, Total SA, the French energy firm with global operations, booked a $2.2-billion (U.S.) charge on its Canadian bitumen assets, one of the few big writedowns of oil sands assets since crude prices started sinking last summer.
Oil producers are rushing to protect their fast-dwindling cash flow and stretched finances by bringing costs down as activity in the energy sector slows.
While many companies have taken steps that will reduce planned future production, few have pulled back on existing production and are now grappling with a continuing supply glut that is weighing on oil prices and profit margins. The sharp drop in oil prices has dramatically crimped netbacks, or returns after royalties, operating and transportation costs, for companies such as Cenovus. An average steam-driven oil sands plant earned about $4.33 (Canadian) a barrel in January, down from about $50 last August and the eight-year average of roughly $35 a barrel, according to TD Securities calculations.
And profit opportunities from exporting oil via rail are much harder to come by in the current market. Heavy Canadian crude shipped by rail to refineries on Texas' Gulf Coast – a strategy that blossomed because it gave energy companies access to markets where they could get higher prices – is no longer competitive when stacked against cheap oil transported from other regions.
Low oil prices, coupled with asset writedowns, have left some big companies with sizeable losses.
Husky said it lost $603-million, or 65 cents a share, in the fourth quarter as it wrote down the value of some assets in western Canada by $622-million due to low oil prices. A year ago, the company earned $177-million in fourth-quarter profit, or 18 cents. Cenovus said it lost $472-million or 62 cents in the fourth quarter, down from a loss of $58-million or 8 cents in the same period last year. Cenovus recorded a goodwill impairment charge of $497-million tied to its Pelican Lake project, one of its lesser developed oil sands properties.
"While we believe that oil prices will improve in time, we acknowledge that they will likely remain low for the remainder of 2015," Robert Pease, the executive who oversees Cenovus's markets, products and transportation activity, said on his company's fourth-quarter conference call Thursday. "In this environment, it becomes each more important to maximize the margin on every barrel of oil we produce."
As margins erode, Husky, Cenovus, and other large oil sands players are turning the screws on suppliers in a bid to lower overall costs. The will deepen the pain for service companies already reeling from extensive layoffs and reduced activity levels. Husky is targeting up to $600-million in savings as it renegotiates contracts.
"No suppliers are immune," Rob Peabody, Husky's chief operating officer, told analysts. Cenovus expects to squeeze suppliers for savings worth between five and 10 per cent of current costs.
Menno Hulshof, an analyst at Toronto-Dominion Bank, predicts Encana Corp. will cut its budget by 29 per cent, bringing it down to $2-billion from between $2.7-billion and $2.9-billion. Encana is one of the only major Canadian energy firms that has not trimmed its 2015 budget, although it may be forced to follow the pack given its current plan is based on oil trading at an average price of $70 (U.S.) a barrel in 2015. West Texas intermediate oil traded at around $51 Thursday.