Welcome to Cut Town.
Calgary has already weathered months of oil patch staff reductions, capital spending cutbacks, dividend shrinkage and asset sales, all coping mechanisms to deal with the collapse in crude prices.
September, though, feels like the beginning of Phase Three of the downturn that has cast a pall over a city that was the economic envy of Canada just a year ago. Several companies made new cuts, putting almost 1,000 more people out of work.
The problem is, no one knows how many phases there will be. Each time crude prices rally, as they did over the past week, hopes of a recovery rise. The retreats that follow in the market raise questions anew about whether the trough will ever end.
Last week, U.S. crude oil slumped to a multiyear low just more than $38 (U.S.) a barrel, and then it rocketed to more than $49 on Monday. On Tuesday, it pulled back nearly 8 per cent, as speculation about production cuts by the Organization of Petroleum Exporting Countries dissipated. That's neck-snappingly volatile.
In May and June, there was a belief, a hope, a wish, in downtown Calgary that the worst might be over, as oil climbed to $60 a barrel, and Canadian heavy crude discounts narrowed to where financial returns began to bud. By early summer, it was all over and Phase Two ushered in more spending and dividend cuts at companies such as Encana Corp., Crescent Point Energy Corp. and Baytex Energy Corp.
Now, with timing for recovery as unclear as ever, a flurry of new cuts have hit Cut Town. By morning on the first day of the month, Penn West Petroleum Ltd., struggling with the high debt it built up before the downturn, announced it is laying off 400 people, more than a third of its workers and most based in Calgary.
It has also chopped its budget by 40 per cent from its initial number to $500-million, and suspended its dividend. The stock tumbled 17 per cent.
Ending an exchange about break-even oil prices with Penn West chief executive officer Dave Roberts on a conference call held to discuss the tough medicine, an analyst captured the moment by not saying thank you, but, "well, good luck to all of us."
The afternoon before, staff at ConocoPhillips's Canadian division were told that 400 of them, plus another 100 contractors, were being let go as part of a series of global staff reductions at the U.S. oil major.
This came as the company squeezed first oil from the second phase of its Surmont oil sands development, a milestone that on any other day would have generated high fives at the 9th Ave. S.W. headquarters.
These job eliminations add to an estimated 35,000 positions that Tim McMillan, CEO of the Canadian Association of Petroleum Producers, said in July have been culled from field and head office operations across Alberta.
Also on Tuesday, Pengrowth Energy Corp. halved its quarterly dividend to a penny a share, a tiny offering that likely remains mostly to stay on side with dividend-focused funds that hold the stock. The company has reduced its staff by 7 per cent this year and has chopped capital spending by 78 per cent versus 2014.
Meanwhile, MEG Energy Corp., the oil sands producer, hired Bank of Montreal and Credit Suisse to help it market the company's interest in a key pipeline as a way to cut its debt while oil prices languish.
Those are more than enough developments for a less than an 18-hour span, but expect a lot more as summer vacations fade in the rear-view mirror and the third quarter nears its end, with investors feeling burned.
The mood around town was not helped this week by macro developments also largely fuelled by oil's fall. On Monday, Alberta Finance Minister Joe Ceci cautioned that the provincial deficit could balloon to $6.5-billion if the industry's woes continue apace.
On Tuesday came statistical confirmation that Canadians can stop pussy-footing around and call the country's economic condition what it is – a recession. Oil, a massive export commodity for the country, is a big culprit.
The oil patch has used all the tools it has at its disposal for dealing with ever-shrinking cash flow, from employment levels to expenditures to sales. Assuming Phase Three is just getting started, it's certain that each will be kept sharp.
Jeffrey Jones