Some of the world's biggest oil and gas companies announced fresh cuts to spending and employment levels as tumbling crude prices sap profit and hopes for a deal to curb global oversupply fade.
U.S. crude oil prices crashed below $30 (U.S.) a barrel again on Tuesday as prospects dimmed for a co-ordinated supply cut between Russia and the Organization of Petroleum Exporting Countries.
BP PLC and Exxon Mobil Corp. reported sharply lower profits as benchmark West Texas intermediate oil fell. The U.S. contract skidded 5.5 per cent, or $1.74, in the session to $29.88 a barrel. The S&P/TSX Composite index fell 1.8 per cent, led by sharp declines in energy shares.
The renewed slide spells more trouble for debt-laden producers in Canada's oil patch that lack the financial heft, as well as the geographic and product diversification of their larger rivals, to weather a prolonged stretch of weak prices.
"If it's bad for those guys, it's going to be terrible for the mid-sized and small producers," said Martin Pelletier, portfolio manager at Trivest Wealth Counsel Ltd. in Calgary.
Even the Canadian industry's more resilient companies have seen yields jump on various debt obligations, underscoring heightened credit concerns among investors.
Yields on Encana Corp. bonds maturing in 2019 have shot up from below 4 per cent late last year to about 9 per cent currently, according to Bloomberg. Yields on long-term Canadian Natural Resources Ltd. bonds rose to 9 per cent from under 6 per cent in late 2015, while yields on long-term Cenovus Energy Inc. bonds have jumped from a little over 6 per cent to well over 9 per cent over the same period.
BP on Tuesday reported a loss of $6.5-billion for 2015, and said it would shed an additional 7,000 jobs by the end of 2017 to cope. U.S. giant Exxon cut planned spending by a quarter and halted share buybacks to conserve cash after posting a 58-per-cent drop in fourth-quarter earnings over 2014.
Its Canadian subsidiary, Imperial Oil Ltd., said fourth-quarter profit tumbled 85 per cent to $102-million (Canadian). The Calgary-based company expects to spend $1.8-billion this year, down sharply from roughly the $3.6-billion it spent in 2015.
Large, investment-grade companies are better equipped to withstand the oil-price shock, but they are still feeling pressure, said Victor Vallance, a senior vice-president at ratings agency DBRS Ltd. in Toronto.
"They're seeing their balance sheet being stretched and their sources of liquidity are shrinking," he said in an interview.
U.S. shale producers face the greatest risks of default, in part because many companies tapped the high-yield market to fund their growth, he added. By contrast, Canadian companies are more prudent, while banks have so far been "relatively accommodating" with the struggling sector, he said.
Nonetheless, smaller players have buckled under growing financial strains. Exall Energy Corp., Palliser Oil & Gas Corp. and Spyglass Resources Corp. were among 20 oil and gas firms that were placed into receivership last year, according to Sayer Energy Advisors.
"I'm sure you'll see defaults increase, particularly amongst the smaller companies that don't have the liquidity and don't have the sources of capital," Mr. Vallance said.
Analysts expect deeper cuts to dividends as companies try to align shrinking cash flows to already meagre payouts.
For example, TD Securities Ltd. estimates PrairieSky Royalty Ltd. would generate cash flow this year of $182-million based on the current outlook for future oil prices – well short of its annualized dividend level of $297-million. It forecasts a 36-per-cent cut to the monthly payout.
Meanwhile, the return of Iranian crude to global markets and concerns about China's economic health mean there is scant hope of oil moving above $35 (U.S.) a barrel in the short term, said Michael Tran, analyst at RBC Capital Markets in New York. "There's still just a lot of oil out there," he said.
"A lot of people looked at the last two weeks and said, 'Look, this is the recovery that everyone is waiting for.' And it certainly is not."
- The government estimates U.S. production will fall to an average 8.7 million barrels a day this year from 9.4 million in 2015.
- Oil-dependent states are hit hard. North Dakota faces a $1-billion (U.S.) budget shortfall. Alaska’s gap is an estimated $3.5-billion.
- At least 40,000 direct and 100,000 indirect oil jobs have been lost, according to a conservative estimate by the Canadian Association of Petroleum Producers.
- New Liberal government has promised a stimulus package and is likely to run a larger deficit than the $10-billion (Canadian) previously announced.
- Production grew by 650,000 barrels a day in 2015, second-largest growth behind the U.S., according to the International Energy Agency.
- Oil revenues make up nearly 95 per cent of Iraq’s budget. It’s looking at a deficit of over 24 trillion dinars (about $30.4-billion) for 2016.
- In 2011, prior to U.S. sanctions, Iran’s crude-oil exports were 2.6 million barrels a day. Exports dropped to 1.4 million barrels a day in 2014.
- The volume of daily trading on the Tehran Stock Exchange has increased from $40-million (U.S.) to $133-million since the lifting of most Western sanctions.
- European oil demand rose to an average 14.4 million barrels a day in 2015, up from 14.1 million barrels a day in 2014, according to the IEA. Demand is forecast to be flat this year.
- The International Monetary Fund forecast in November that the Russian economy would shrink by 0.6 per cent in 2016. Since then, oil has dropped almost another 40 per cent.
- Oil production in China was forecast to fall 0.7 per cent this year, even before the latest price declines. Older Chinese wells require up to $40 to produce one barrel. The lower the prices, the faster producers will close them down.
- India’s costs for imported crude have dropped by more than two-thirds since early 2014. The IEA expects demand in India to rise 5.7 per cent this year to 4.2 million barrels a day.
- In Nigeria, the naira currency has crashed from around 160 to the U.S. dollar a year ago to 300 to the dollar.
- In Angola, the staple crop, millet, cost more than 250 kwanzas ($1.60) per kilogram in late January, compared with a price of 100 kwanzas a month earlier, reported Jornal de Angola.
- In Brazil, the state-owned oil company has trimmed its spending forecast by 25 per cent for the 2015-19 period.
- The International Monetary Fund predicts that inflation in Venezuela will surpass 700 per cent in 2016