Explosive growth fuelled by big budgets is passé in the Canadian oil patch.
A few years ago, if a company slashed its budget, investors got nervous. Now, skinny spending plans are hot, with slews of oil and gas companies aiming to match their spending with cash flow, rather than beefing up budgets by going to the capital markets. The trend of aligning the two key financial figures continued this week, with investors pleased with companies that make it work and skittish about those that didn't get there.
This more conservative financial strategy does not rule out growth, and some still wonder if executives will keep to their promises of holding off on expansion if it means risking cost overruns. But if companies can stick to the strategy, they have a better chance of warding off danger should oil prices head south. Some are able to trim their budgets because they spent years spending and are now reaping the rewards of costly projects, and able to return more money to shareholders.
"The [exploration and production companies] are rightly trying to trim the fat on their budgets," said Robert Bellinski, an analyst at Morningstar Inc. "They've found religion. It's about time."
Suncor Energy Inc. has taken the lead on aligning cash flow with expenses. It spins enough cash to cover its operating expenses, dividend payments, and has money left over, notes Lanny Pendill, an analyst at Edward Jones. Suncor released its $7.8-billion capital spending budget in November, although it does not provide a cash-flow estimate. The market's prediction, however, put it at about $9.8-billion and Suncor is committed to paying about $1.2-billion in dividends per year, Mr. Pendill calculates.
"They are kind of in a league of their own right now," he said. "They are a financial powerhouse."
Suncor did not take the easy route. Big projects with big budgets – which it blew through, like many of its competitors – pinched. The market considered it financially shaky before it took over Petro-Canada in 2009.
Cenovus Energy Inc. and Canadian Natural Resources Ltd. are next on Mr. Pendill's list of financial favourites. If Cenovus, which Encana Corp. hived off in late 2009, hits the top end of its own 2014 cash-flow estimate and stays on budget, it will have a bit of cash left over after paying dividends, too, Mr. Pendill reckons.
CNRL has yet to report its 2014 budget, but the market considers it financially healthy, and its megaprojects are largely complete. Husky Energy Inc. has room to cover its operating costs and some of its dividend, according to analyst estimates, Mr. Pendill said. The company, which unveiled its 2014 budget on Wednesday, expects its capital expenditures to hit $4.8-billion, while its dividend payment comes in at $1.2-billion, and the market estimates its cash flow will total about $5.5-billion.
The financial pain of a few years ago is what has allowed the big oil-sands companies to now generate high cash flow, Mr. Pendill said. Some went over budget as they expanded, or expanded carefully but still fell short on cash flow, but now those expenses are in the past. Bitumen is coming out of the ground, rather than just cash into the ground. And after overspending budgets by billions, companies have learned it is best to tackle projects in smaller phases, warding off the chance of messing up.
"There's not a lot of capital seeking reckless spending as there maybe once was. It's a little harder to turn to capital markets and say, 'I have this great prospect, why don't you give us a couple hundred million or a billion, and let's see if it turns out,'" Morningstar's Mr. Bellinski said. "The appetite's not there any more."
Cenovus, for example, on Thursday pledged to shy away from pouring money into its Pelican Lake effort until the project shows more favourable returns. It is cutting its Pelican Lake spending by 50 per cent compared with last year. This style of restraint is part of the reason the company lowered its entire 2014 budget to between $2.8-billion and $3.1-billion, a 13-per-cent drop compared with 2013's spending forecast.
Cenovus chief executive Brian Ferguson explained his company's approach with a buzz phrase – "capital discipline" – that has become the industry's mantra.
"The reason that we reduced capital this year is … in a couple of words, is capital discipline," he said on a conference call Thursday. "That's really what it is, being very disciplined about how we allocate capital, being very disciplined about how we manage risk and being very disciplined about focusing on how we execute our plans."