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The Oil Industry's Recovery Lacks One Important Ingredient –



The Oil Industry’s Recovery Lacks One Important Ingredient |

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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    The growing global oil and gas glut, partly caused by the coronavirus global lockdown but also due to mismanagement of the US shale sector and the OPEC+ price war fall-out, is causing mayhem in all energy sectors.

    Most of the media’s attention goes to upstream oil and gas operators and financial institutions. As US shale companies drown in debt, bankruptcies are expected to pile up within the next months. US shale, offshore oil and gas operators and most non-OPEC producers are going to be struggling to keep some air in the balloon that was filled the last years.

    In the next couple of months, due to OPEC++ production cuts and bankruptcies, a vast part of the overproduction will be removed, shrinking the glut to a much more acceptable level. Some analysts are even expecting growth before the end of 2020, based on misconceptions that oil prices could be even hovering around $40 per barrel at that time. Optimism based on simple Excel equations or mathematics are most probably going to be proven wrong.

    As long as the impact of the extended Covid-19 crisis on energy and on the global economy is not fully visible, and storage volumes are still building up, oil prices will probably stay low. At the same time, even if all goes back to a ‘pre-corona normal’, the normal will be different if nothing will have been learned from history.

    A demand collapse such as we are witnessing at present has never been seen before. Demand destruction to the tune of 20-25 million bpd is a giant shock to the total energy system. Market watchers, however, are focusing too much on E&Ps. The current financial situation of most NOCs, IOCs and large independent producers is not yet dire, while smaller drillers are already on life-support. The industry will, in the end, find the right balance again as much production from smaller producers will be shut in or disappear for good.

    The main objective for many producers is to be able to produce significant volumes at the end of the crisis. This is partly misunderstood in the media, as most operators are not the ones directly responsible for the production of hydrocarbons. The main players here are the oilfield services, the companies with the technical know-how and tools to produce a barrel of oil.

    Premium: Oil Storage Nears Its Limit

    Oilfield service companies offer technologies and equipment to oil and natural gas drillers and are crucial in the exploration and completion process, but are also responsible for the manufacturing and mending of equipment. Overall, the fate of all oil service firms is positively correlated to crude prices and also to the capital investment decisions of E&P operators.

    The current correlation however is very negative, as low oil prices hit oilfield services exponentially harder. It’s strange to see that non-oil and gas analysts are understanding the threat better for other sectors, than oil and gas does. The threat to the survival and revamp of the automotive sector worldwide is not the cash-flow and debt levels of VW, Mercedes, Toyota or GM, but the survivability of the automotive part suppliers. Without automotive suppliers, no car or vehicle will leave the factory in Stuttgart or Detroit. 

    The situation is no different for the oil, gas and energy sector. Without oilfield services, production will stall and decline within months. The situation is dire for mainstream independent oilfield services companies, not only in US shale, where giants like Schlumberger, Halliburton or National Oilwell Varco are cutting their investments and workforce, but also in other non-OPEC and OPEC regions.

    One Oil & Gas UK (OGUK) report already stated that the financial contagion triggered by historically low oil prices will threaten North Sea jobs, shrink its economic contribution and undermine energy security.

    According to Energy and Restructuring law firm Hayes and Boone’s, last year already a grand total of 50 energy companies filed for bankruptcy, including 33 oil and gas producers, 15 oilfield services companies and two midstream companies. The law firm warns that as the crisis in 2020 continues, they fear that the ax could now fall on debt-ridden oilfield services companies. Just in North America, oilfield services companies debt is said to reach $32 billion which is coming due between 2020 and 2024.

    The poor financial state of the industry is well represented by the sector’s favorite benchmark, the VanEck Vectors Oil Services ETF (NYSEARCA:OIH), which is down more than 70% YTD, considerably lower than the 30% plunge by the S&P 500. Rystad’s report last month that 20 percent of global oilfield services workers could be laid off this year has been undervalued as a real threat for the future. The firing of 1 million or more experts, drillers, engineers and workers means a possible productivity loss at the end of the year that will constrain a possible upsurge in demand and supply. 

    Premium: The Oil Sector That Will Suffer The Most

    Former oil and gas crises in the 1980s or 2010s have shown that knowledge destruction because of layoffs can significantly slow down a recovery in the sector. Taking into account that the average oil and gas worker is above 45 years of age, a large part of those becoming unemployed will never come back again. Additionally, the possible bankruptcy of small specialized oilfield services also will destroy specific knowledge not easy to be regained if demand is growing again. Former oil price collapses have led to a strategy change at IOCs, removing part of their inside capabilities in engineering and operations, cutting costs meant handing over project implementation to independent oilfield services. IOCs and NOCs are now doing the same again, putting most of the current crisis fall-out on oilfield services companies that will have no other option than to cut their workforce. Oilfield servicing margins, even in good times, have been under pressure. 

    Oil & gas’ future faces several threats and lack of human capital is a very underestimated one that threatens profitability of the sector going forward. Without human capital, which in most cases is being provided by oilfield services, less oil and gas will be able to be produced, refined, stored or processed. 

    By Cyril Widdershoven for

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      First-quarter GDP worst showing since 2009: StatCan – CTV News



      OTTAWA —
      Canada’s economy had its worst quarterly showing since 2009 through the first three months of 2020 owing to COVID-19, Statistics Canada said Friday, warning an even steeper drop may be coming.

      Gross domestic product fell at an annualized rate of 8.2 per cent in the first quarter, including a 7.2-per-cent drop in March as restrictions by public health officials began rolling out, including school closures, border shutdowns and travel restrictions.

      Preliminary information indicates an 11 per cent drop in GDP for April, but the statistics agency said that figure is likely to be revised as more information becomes available.

      Similarly, the agency said first-quarter figures are likely to have larger than usual revisions in subsequent data releases. Some numbers had to be estimated because they were not available.

      Early indications are that March and April could end up as the largest consecutive monthly declines on record.

      The drastic drop in gross domestic product likely doesn’t fully reflect the experience of every Canadian, said BMO chief economist Douglas Porter, noting GDP is just one barometer of how the pandemic has affected the domestic economy.

      “You don’t get the entire picture just from GDP and even from employment (figures) because policy-makers have stepped up with such unusual and aggressive actions that a lot of the common metrics just don’t apply 100 per cent in this episode,” Porter said in an interview.

      The federal response to date totals about $152 billion in direct spending. The parliamentary budget officer has said that could leave the deficit at $260 billion, with a national debt north of $950 billion.

      A preliminary estimate released by the Finance Department on Friday showed deficit of $21.8 billion for the fiscal year that closed in March. The figure will still be subject to revisions, which may land it closer to the government’s last estimate of $26.6 billion.

      The monthly fiscal monitor also showed the debt pushed past $794.4 billion.

      Many of the items adding to this year’s deficit are expected to show up in supplementary spending estimates. The documents will be scrutinized for four hours in mid-June based on the motion the adopted this week to put the Commons on extended hiatus until late September.

      Budget officer Yves Giroux told a Commons committee on Friday that would provide parliamentarians little opportunity to properly scrutinize tens of billions, if not over $100 billion in proposed spending.

      “It comes up as a very expensive four hours potentially for Canadian taxpayers,” he said. “The amount of scrutiny for this unprecedented spending will also be unprecedented, but for the wrong reasons.”

      The latest federal spending figures showed $41.44 billion has been paid to 8.29 million people through the Canada Emergency Response Benefit, and $7.9 billion in wage subsidies to 181,883 companies.

      MPs on the Commons finance committee were told Thursday the cost of the wage susbidy program is somewhat less than the original $73-billion estimate. Consultations are underway to understand why companies aren’t accessing the program that covers 75 per cent of salaries, subject to a cap of $847 per week, per employee.

      Asked about the lopsided spending, Prime Minister Justin Trudeau said the subsidy will become “more and more important” as restrictions ease and businesses reopen. He also said the CERB has helped “support millions of Canadians who need help paying for groceries, paying their rent.”

      Statistics Canada said household spending, a backbone of the Canadian economy, was down 2.3 per cent in the first quarter of 2020, the steepest quarterly drop ever recorded.

      The drop in household spending was broad, affecting goods like new cars and clothing, and services for food as bars and restaurants in particular were ordered closed. Instead, spending on going out became money spent staying in, Statistics Canada said, noting increases in household food and alcohol by 7.2 per cent and six per cent, respectively.

      As a result of less spending overall, the savings rate rose for the quarter to 6.1 per cent from the 3.6 per cent recorded in the fourth quarter of 2019 with higher rates recorded at higher income levels.

      The savings built up during the shutdown period could translate into extra spending as restrictions ease, said CIBC senior economist Royce Mendes in a note.

      TD senior economist Brian DePratto wrote in a note that it isn’t unreasonable to think a modest recovery may already be forming.

      “The key question is what kind of recovery? Given the significant hits to incomes and longer-lasting impacts on some industries, a marathon appears more likely than a sprint.”

      This report by The Canadian Press was first published May 29, 2020.

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      Alberta partners with fast-food restaurants to distribute 4 non-medical masks to every resident –



      The Alberta government will provide every resident with four non-medical face masks, as the province continues its phased approach to relaunch the economy.

      Health Minister Tyler Shandro announced Friday morning that the government has partnered with A&W, McDonald’s Canada and Tim Hortons to distribute the masks at the restaurants’ drive-thru locations.

      The masks will be free of charge.

      “Alberta is the first and so far, as far as I know, the only province that has decided to distribute masks province-wide,” Shandro said. “This program will help Albertans get back to work and enjoy everyday activities safely.”

      While mask use is not mandatory, Alberta’s chief medical officer of health has recommended Albertans wear a non-medical mask when two metres of physical distance cannot be maintained, such as on public transit.

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      A total of about 20 million non-medical masks will be distributed at a cost of around $20 million. Shandro said partnering with the fast-food restaurants will cut down on the distribution cost to government, which is around $350,000.

      “These three partners are doing it without added expense to the Alberta taxpayer,” Shandro said.

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      The drive-thru pickup also provides safe physical distancing for Albertans, as people will be able to stay in their vehicles.

      Shandro said the three restaurant companies have about 600 drive-thru locations in the province, and 95 per cent of Albertans live within 10 kilometres of one of these locations.

      The province is working on a plan to ensure distribution of masks is possible to the remaining five per cent of the population, Shandro said.

      “Even if you don’t have an A&W, a McDonald’s or a Tim Hortons in your community, you will be able to get your four masks,” he said.

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      The government’s distribution cost is “for us to be able to pay for the gap distribution for the other five per cent of folks who may not be able to get to a drive-thru,” according to Shandro.

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      Distribution will be done on the honour system.

      “We’re not asking for folks to bring in their health-care card and get a punch to show that they’re already picked up,” Shandro said.

      [ Sign up for our Health IQ newsletter for the latest coronavirus updates ]

      “This is on the honour system, but Albertans are responsible and they’ve shown us that. Throughout the response to this pandemic, Albertans have shown us that they are responsible.

      “Obviously there may be some folks who will be unable to make their way to a drive-thru — I’m thinking about one of my parents in particular — and whether it’s me or one of my siblings who has to go pick up for my parents, that’s going to be the case. And the folks at the 600 stores, the employees, are going to just have to trust Albertans and we’re going to have to trust Albertans.”

      Alberta’s Dr. Hinshaw lays out best practices for wearing face masks to slow COVID-19 spread

      Alberta’s Dr. Hinshaw lays out best practices for wearing face masks to slow COVID-19 spread

      The health minister stressed the three-layered, non-medical face masks are not part of the provincial supply of personal protective equipment (PPE) meant for health-care workers and first responders.

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      The masks are single-use, Shandro said.

      “They are not medical grade masks. We are not taking away any of the PPE from our front lines,” Shandro said.

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      In a media release from the province, all three restaurants expressed their pleasure to be part of the mask program.

      “A&W is very pleased to support the government of Alberta with this great initiative. Our restaurants across the province have been quick to step up and help organize the distribution of masks, and are looking forward to welcoming Albertans at our drive-thrus,” A&W Canada president and CEO Susan Senecal said.

      “McDonald’s Canada, together with our franchisees, have been committed to helping our communities throughout this pandemic. We welcome this opportunity to use our drive-thru operations to assist the Alberta government, and do the right thing for Albertans when they need us most,” said Jeff Kroll with McDonald’s Canada.

      “Throughout the pandemic, the 1,500 Tim Hortons owners across Canada have been eagerly supporting their local communities and stepping up to answer calls for assistance. When we were asked by the Alberta government to help distribute masks through our drive-thrus we did not hesitate. We’re proud to have been asked to participate in this important program and do our part to help Alberta move forward on its relaunch strategy,” Tim Hortons COO Mike Hancock said.

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      Tanya Doucette, a Tim Hortons owner who runs eight locations across central Alberta, said the province has asked that they not hand out the mask bags inside the restaurant, just through the drive-thru.

      “They want to ensure safe social distancing, and I think because they’re worried people might show up in large numbers and queues in person, that could create risk,” Doucette said.

      “We have acrylic shields in our drive-thrus and our team members are wearing non-medical grade masks, so this is a safe distance option to hand out the masks.”

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      She said people must be in a vehicle, they cannot walk through the drive-thru.

      “What you can do if you don’t have a vehicle or you don’t have access to a vehicle, you can ask a friend or family member to pick up your allotment of masks for you through a drive-thru location at Tim Hortons,” she said.

      Representatives from McDonald’s and A&W also say that masks will only be handed out through the drive-thru, and people must be in a vehicle.

      The masks have arrived and will be ready for distribution early next month. Further details of the rollout will be released in the coming days.

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      Shandro encouraged Albertans to source their own non-medical masks through local businesses or make their own at home.

      “This is not meant to be able to provide Albertans with an unlimited supply.”

      More information on how to safely put on and take off a non-medical face mask can be found on the government’s website.

      Hinshaw clarifies that N95 masks are not required for ‘typical care to a patient’

      Hinshaw clarifies that N95 masks are not required for ‘typical care to a patient’

      Shandro said that on Friday morning, Alberta surpassed the 250,000 mark when it comes to how many COVID-19 tests have been performed in the province. He said about 220,000 unique Albertans have been tested, as some people have been tested twice.

      On Thursday, Alberta Health reported 29 new cases of COVID-19 in Alberta and two additional deaths related to the disease.

      There were 652 active cases of COVID-19 in Alberta on Thursday afternoon.

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      © 2020 Global News, a division of Corus Entertainment Inc.

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      Laurentian Bank slashes dividend by 40 per cent as profits tumble – The Globe and Mail



      Laurentian Bank of Canada slashed its dividend by 40 per cent on Friday following a sharp drop in profit, becoming the first large Canadian bank to cut its dividend payout in nearly 30 years.

      The Montreal-based bank reported a 79-per-cent drop in profit for the three months ended April 30, with net income falling to $8.9-million from $43.3-million in the same quarter last year. This was largely due to a spike in provisions for potential loan losses tied to weakening economic conditions caused by the COVID-19 pandemic.

      Laurentian responded by cutting its dividend to 40 cents a share, down from 67 cents. This is the first time a large Canadian bank has cut back dividend payouts since National Bank of Canada did so in 1992, according to data from Refinitiv.

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      “Although we believe that current earnings are not reflective of the future earnings power of the organization, we have reduced the dividend to $0.40 per share which improves operational flexibility until we reap the anticipated benefits of our strategic plan,” chief executive François Desjardins said in a press release.

      Laurentian shares fell more than 9 per cent in trading Friday morning.

      The bank’s earnings cap off a week of dismal results from Canadian banks, which saw profits eviscerated by a rise in loan loss provisions due to expectations of future defaults and weakening credit. Laurentian, a regional bank which focuses primarily on Quebec, managed to keep revenues flat on a year-over-year basis. But higher provisions slammed the bottom line.

      Laurentian recorded $54.9-million in provisions for credit losses, compared to $9.2-million a year ago. Gross impaired loans, which are loans that the bank does not expect to be paid back in full, rose to $235-million, up 25.8 per cent year-over-year. The biggest increase in loan impairment came from the bank’s commercial loan book, where gross impaired loans rose 42 per cent year-over-year.

      The results were worse than analysts had anticipated. The bank reported an adjusted earnings per share of $0.20, well below the $0.38 average that analysts had expected, according to Refinitiv data.

      In a note to clients, National Bank analyst Gabriel Dechaine noted that the miss was driven by a combination of higher than expected provisions for credit losses and elevated expenses, which were partially offset by a lower-than-forecast tax rate.

      “While necessary, a 40 per cent dividend cut may be viewed as insufficient, as pro forma payout ratios are still elevated,” Mr. Dechaine wrote.

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      The bank’s capital position deteriorated slightly in the quarter, with the closely watched common equity tier 1 ratio falling to 8.8 per cent from 9 per cent.

      “This level of capital provides the Bank with the flexibility to pursue organic growth, as well as to continue to invest in the implementation of our core banking system,” the bank said in a news release.

      However it added that it expects “regulatory capital ratios will remain below the level observed over the recent quarters.”

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