Companies' 'bank lines will be cut': Oilpatch pummelled as oil price crash raises fears of job losses – Financial Post

On Sunday afternoon, Brian Schmidt, chief executive of Calgary-based Tamarack Valley Energy Ltd., glanced at the mayhem in the oil price futures market and immediately knew the world had changed since his board of directors met several days earlier.

“Right then and there, you knew it was going to be a bloodbath,” said Schmidt, who immediately fired off an email to his staff cancelling any new drilling projects.

The ground in Alberta may still be frozen, but the drilling season is likely to end before mud season begins thanks to an escalating feud between Russia and Saudi Arabia over how to rebalance oil supply, as the deadly coronavirus strain COVID-19 spreads, threw markets across the world, including in Canada, into turmoil.

Instead of cutting back on production, two of the world’s biggest oil exporters dug in their heels, with Saudi Arabia signalling it will raise production. That triggered a war for market share that on Monday sent oil prices down by as much as 30 per cent and battered Alberta’s already ailing energy sector. The S&P/TSX Composite Index had its worst day in more than a decade, falling more than 10 per cent while the Capped Energy Index fell just over 27 per cent with Cenovus Energy Inc. losing nearly $4.5 billion in market capitalization as its stock plummeted 51 per cent by end of close.

Most large producers, including Suncor Energy Inc. and Canadian Natural Resources Ltd. also experienced double-digit declines in their share prices as did junior and intermediate producers’ such as Schmidt’s Tamarack, which lost hundreds of millions of dollars in value as its share price declined 30 per cent on Monday.

The hits come as Canada’s oil sector is struggling through a prolonged period of low oil prices and a lack of pipeline capacity to move their product that has repelled many investors — including most recently the legendary investor Warren Buffett, who pulled out of a liquefied natural gas project in Quebec last week — and left the smallest companies on precarious financial footing.

Right then and there, you knew it was going to be a bloodbath

After the latest blow rained down Monday, many analysts and economists predicted the severe impact to Alberta and the rest of Canada’s economy would add pressure on the federal government to introduce some form of economic stimulus in the coming months.

“The drop in oil prices is just the second wave of the coronavirus impact on Canada,” said Avery Shenfeld, chief economist for CIBC Capital Markets.

The first hits came when manufacturing, air travel and shipping slowed as businesses shut down and people stayed home in response to the spread of the COVID-19 virus. But while low oil prices normally provide a form of economic stimulus, it is unlikely to have an effect in an environment where people are trying to contain the spread of a super bug, said Shenfeld.

The current situation is clouded by uncertainty, including whether either Saudi Arabia or Russia will back down or whether other countries, including shale producers in the U.S., will have to curtail production because oil prices are too low, Shenfeld said.

Either way, he predicted that Canadian oil producers would cut capital expenditures if oil prices remain depressed, which would have ripple effects on the rest of the economy.

“One way or another, there will be pressure on the federal government to deliver some fiscal stimulus,” said Shenfeld.

That could be one-time funding to provincial health authorities as they deal with coronavirus, one-time cheques to families to encourage spending or support for companies that are affected by the virus, he said.

“The only thing I can guarantee you is volatility,” said Joseph Marchand, an associate professor of economics at the University of Alberta.

Marchand, who has studied how Alberta’s economy has responded to past booms and busts in oil prices, said volatility is likely to delay hiring decisions, and could even result in firings.

But the outlook is not entirely bleak and some predicted the sell-off of Canadian oil stocks was an overreaction.

Richard Masson, an executive fellow at the University of Calgary’s School of Public Policy and chairman of the World Petroleum Council Canada, said he believes Russia’s decision to not cut back its production is actually aimed at weakening U.S. shale producers who need to drill new wells every few weeks. They will have difficulty raising money to do so as low oil prices persist, he said.

The drop in oil prices is just the second wave of the coronavirus impact on Canada

Avery Shenfeld

“I think the plan from the Russian side is really to make those people (in the U.S.) run out of money,” said Masson. “The problem in Canada is that will take a while.”

The largest producers, including Cenovus, Suncor and Canadian Natural, are actually well-positioned to withstand the downturn, because of the lack of pipeline access, they have spent the past few years paying down debt and buying back shares, Masson said.

Oilsands projects, which are generally very expensive to build, can also withstand price volatility, he added.

“I’ve never seen an oilsands project get shut-in by low oil prices — never seen it happen,” said Masson, saying the costs of shutting down and laying off people are too high.

But he and others predicted that there would be a more severe impact for the country’s smallest producers, in Alberta and beyond.

Laura Lau, chief investment officer at Toronto-based Brompton Funds said the oil price crash will hurt the domestic industry.

“It gets worse, and we are at risk of actually shutting in some of our oil and gas. I don’t believe the oilsands, especially the big oilsands mine… but what we have seen in the past is some of the in situ, SAGD projects… and we can certainly see some of the oil and gas being shut over these low prices,” Lau told the Financial Post.

Equity markets that were once a lifeline for oil firms in times of distress have started to dry up as investment giants such as BlackRock Inc. pull back from the sector, forcing producers to rely on debt instead. For companies that are struggling to turn a profit, the latest coronavirus disruption adds a new layer of volatility and risk that will deter bank lending, according to Peter Tertzakian, executive director of the ARC Energy Research Institute.

“When the price of oil was in the mid-US$50 range, you had a lot of companies just sort of stumbling along,” Tertzakian said, who added, “Well, this event basically puts them over the edge. Companies that were in the US$50 range basically will have their bank lines cut.”

The hit to the energy sector will reverberate throughout the Canadian economy too, with deeper regional impacts in oil-producing provinces such as Alberta, Saskatchewan and Newfoundland, where deficits are likely and economic growth will slow.

Nonetheless, some energy companies are riding with the latest wave, by now accustomed to protests over pipelines, rail blockades and  COVID-19.

Grant Fagerheim, chief executive of Calgary-based Whitecap Resources, said the drop in oil prices was “even more aggressive” than he expected. He said the company has mostly fixed debt with no maturities — including $1.2 billion in non-current liabilities as of the end of last year — and is focused on paying down debt.

The latest disruption arrived just days before a planned three-month break up for the mud season, providing ample time to take stock and make a decision about how much to cut spending, if at all.

“The worst thing you can do is overreact,” Fagerheim said. “You have to be quick, but don’t overreact.”

With a file from Naomi Powell

Financial Post

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