CALGARY – Energy fund managers told their clients to take heartburn medication and oil CEOs braced for impact but, in the end, no one was spared from the unprecedented collapse in energy markets this week.
“I don’t feel we were particularly spared,” said Ian Dundas, president and CEO of Enerplus Corp., who saw his company’s share price fall 37 per cent on Monday — a brutal day for the light oil and gas player, but relatively better than some of his competitors, who saw their share prices fall 50 to 70 per cent.
Now, Dundas and his peers are completely reworking capital budgets for the year, reconsidering spending plans and trying to cut costs after oil prices collapsed on news Saudi Arabia would flood the market with oil in its price war with Russia.
“We, like everybody else I know, are re-examining our spending plans with a downward bias,” Dundas said Tuesday, adding the company was moving swiftly on its spending review. “I think moving slowly in this is not a good plan.”
On Tuesday, Saudi Arabia announced it planned to produce 12.5 million barrels of oil per day next month, up from 9.7 million bpd in March, while it also cut prices for its crude to undercut Russia. In response, Russian Energy Minister Alexander Novak said Tuesday his country could increase its oil output by 500,000 bpd.
Caught in the crossfire are Canadian and U.S. oil producers, who are already reviewing their spending plans.
Late Monday, Cenovus Energy Inc. responded to its 52 per cent share price drop on the day by slashing spending, cutting its crude-by-rail program and reducing its planned production for the year.
“Consistent with our commitment to balance sheet strength, we’re exercising our flexibility to reduce discretionary capital while maintaining our base business and delivering safe and reliable operations,” Cenovus CEO Alex Pourbaix said in a release.
Cenovus, which climbed nearly 12 per cent Tuesday to $4.27 per share to pare back some losses, announced the company would spend between $900 million and $1 billion this year, down from between $1.3 billion and $1.5 billion.
Other producers including Whitecap Resources Inc., Journey Energy Inc., Tamarack Valley Energy Ltd. have all deferred planned spending.
“Companies overnight have gone into survival mode,” said Eric Nuttall, partner and senior portfolio manager with Ninepoint Partners in Toronto, whose fund is focused on the energy sector.
Nuttall’s trading screen turned bright red on Monday as energy companies tumbled along with oil prices, marking the biggest oil market correction in decades — worse than either the 2014 oil price crash or the 2008 financial crisis.
Companies overnight have gone into survival mode
Eric Nuttall
“It was my worst day by far,” he said. “When across the board, names are down 30, 40 or 50 per cent, there’s only so much you can do. You can take advantage of selling the weak to buy the strong.”
Nuttall said he was active on Monday, selling off a U.S. shale oil company to buy a Canadian oilsands producer, which he declined to name as he’s restricted on it for a few days after a trade.
Other fund managers also signalled they consider Canadian oil and gas companies better prepared for the current downturn than some U.S.-headquartered producers.
“We still favour Canadian companies over U.S. companies — we think Canadian companies will weather this storm a lot better,” BMO Capital Markets managing director and chief investment strategist Brian Belski told the Financial Post in a video interview.
He said that many Canadian companies have “found religion” around controlling spending in recent years, which has led to more debt repayments, better balance sheets and reduced costs.
“We don’t think it’s time to sell energy, we think it’s time to be a little more prudent in our energy picks, especially in the United States because United States companies have actually been spending more money,” Belski said.
Enerplus’s Dundas said he believes his company has entered this period in a relatively healthy financial position. He said Monday’s drop was “an unprecedented shock, but we’re in a good starting place.”
Data from CIBC World Markets shows Enerplus’s debt-to-cash flow ratio was 0.9 at the end of 2019, meaning the company could repay its debt in under a year at 2019 pricing and cash flows.
“The only thing that matters now is balance sheets,” said Jennifer Rowland, with Edward Jones in St. Louis, adding that Monday’s oil market rout was particularly hard on companies with higher debt levels.
“Anybody that’s carrying more debt than they should be was punished more,” she said.
U.S. crude rebounded nearly 8 per cent to US$33.89 Tuesday morning after falling 25 per cent Monday — but nobody expects the market to return to normalcy amid a showdown between Riyadh, Moscow and U.S. shale producers.
Western Canada Select, the heavy oil benchmark price that most oilsands producers receive for their production, rose slightly to US$20.14 per barrel on Tuesday according to Bloomberg. By contrast, WCS traded at US$32.49 per barrel a month ago on Feb. 10.
The uncertain forecast and volatile prices mean capital and operational expenditure of exploration and production companies will likely be cut by US$100 billion in 2020 and another US$150 billion in 2021 if oil prices remain around US$30 level, according to Rystad Energy.
“Unfortunately, this volume war, if it continues throughout 2020 and 2021, will lead to a massive wave of bankruptcies and consolidation in the service market, whose debt obligations are set to grow 27 per cent into 2021,” said Audun Martinsen, Oslo-based head of oilfield service research at Rystad. “Companies with low leverage and with healthy order books from past wins in 2018 and 2019 will be able to steer through the storm.”
The only thing that matters now is balance sheets
Jennifer Rowland
RBC Capital Markets believe nearly a million barrels a day of demand growth will be destroyed this year, if oil remains in the US$30-40 barrel range. It’s RBC’s base case, with a 40 per cent probability.
RBC’s bear case however, also has a 40 per cent probability. And it entails Saudi Arabia and Russia ramping output, but resilient U.S. producers still managing to crank out substantial output for sometime to come.
Rory Johnston, managing director and market economist at Price Street, a Toronto-based market research firm, said the Saudis planned to send “an astronomical amount” of oil into the market beginning next month, which will create a supply shock in the market, which had already been grappling with a contraction in oil demand as a result of the outbreak of the coronavirus.
“It’s a historic move to have an outright demand contraction along with a price war,” Johnston said.
However, Johnston also noted that oil prices partially rebounded on Tuesday on news that the Saudis planned to send more oil into the market than they can physically pump.
He said most economists believe that the Arab country’s total production capacity is around 12 million bpd, so plans to sell 12.5 million bpd beginning in April implies they will be drawing oil out of storage to flood the market.
“They can’t keep that production level going indefinitely,” he said, indicating there is some hope in oil markets the supply-side shock will be brutal but short-lived.
