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Crude prices may soon gouge Canadian oil patch

Investors have reason to become bullish on the oil patch but one observer cautions that some companies may be adopting a dividend-paying structure simply to pump up their stock price.

LARRY MACDOUGAL/The Canadian Press

Oil prices ended 2014 with the biggest annual decline since the financial crisis, collapsing under the pressure of weakening demand, a glut of global supplies and OPEC's refusal to keep playing the role of swing producer.

A 46-per-cent drop in North American oil prices since the end of 2013 has already forced deep spending cuts within the Canadian oil patch, and some analysts and investors warn that corporate budgets and staff numbers are at risk of being reduced further if the commodity-price rout continues.

The skid in crude prices has hit the shares of energy companies in Canada particularly hard, with the Toronto Stock Exchange's energy group losing 17.6 per cent of its value in the past 12 months, despite a surge in the first half of the year.

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Another month or two of oil and natural gas prices staying "where they are or continuing their descent" will likely trigger much deeper cost-cutting, said Martin Pelletier, portfolio manager and co-founder of Trivest Wealth Counsel.

In addition, some companies will be forced to write down the value of some of their reserves as tapping them is deemed much less of an economically viable proposition, said Brompton Group fund manager Laura Lau.

The biggest reductions in spending so far have been among energy companies that have the highest debt levels compared with declining cash flow expectations, such as Lightstream Resources Ltd. and Penn West Petroleum Ltd. They have also reduced dividends to give themselves some financial breathing room.

"I do think there's another round of cuts to come. A lot of them that have initially done a budget did not do it with [an oil price] starting with a 5," Ms. Lau said.

U.S. benchmark West Texas Intermediate crude settled on Wednesday down 85 cents (U.S.) at a more than 5 1/2-year low of $53.27 a barrel after U.S. government data showed a two million-barrel buildup of inventories at the Cushing, Okla. pipeline and storage hub. U.S. crude has lost nearly half its value since June, and Western Canada Select heavy crude, a bellwether for the oil sands, is down 51 per cent, according to data from FirstEnergy Capital Corp.

In November, members of the Organization of the Petroleum Exporting Countries refused to lower their 30 million-barrel-a-day total-output quota as the demand outlook for Europe and China weakens and a glut grows.

Saudi Arabia, OPEC's most prolific producer, has consistently said it will keep pumping crude at current levels even as prices fall, in what is essentially a game of chicken with U.S. shale oil producers, which have much higher costs.

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Now, some analysts have predicted there could be little if any recovery in prices in the first half of 2015. Recent moves by the U.S. administration toward loosening restrictions on oil exports to deal with the surge in light oil supplies from North Dakota and Texas point to even more crude gushing into global markets.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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