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Cenovus spending cut expected to set trend as sector adjusts to oil prices

Analysts said Canadian oil production this year is expected to fall as more producers follow Cenovus’s example
Cenovus. (The Canadian Press)

Forecasts for a stand-pat year for drilling in 2020 in the Canadian oilpatch are up in the air following an oil price crash Monday linked to a dispute between Russia and Saudi Arabia over oil production cuts.

In its 2020 forecast in November, the Canadian Association of Oilwell Drilling Contractors predicted 4,905 wells would be drilled in Canada this year, a slight increase over 2019 but less than half the 11,226 wells drilled in 2014.

Drillers had been pleased with activity levels so far this year but the plunging price that prompted oilsands producer Cenovus Energy Inc. to deeply slash its spending plans endangers that, said CAODC chief executive Mark Scholz.

“I would say if things get progressively worse, I can’t see how we would come close to our original forecast of a flat year,” he said in an interview on Tuesday.

“In fact, it would have to be downgraded significantly.”

Analysts said Canadian oil production this year is expected to fall as more producers follow Cenovus’s example.

The Calgary-based company announced Tuesday it would cut its capital spending plan for 2020 to between $900 million and $1 billion, down about 32 per cent from earlier plans for between $1.3 billion and $1.5 billion.

Financial observers were quick to compare the oil price meltdown with a similar situation in late 2014 that also involved the Saudis trying to assert control over global oil markets.

“Back in 2014 when the Saudis last decided to wage a market share battle, (West Texas Intermediate crude) fell from US$80 per barrel on U.S. Thanksgiving to a low of US$28 per barrel in 2016,” pointed out CIBC analyst Robert Catellier in a report.

“The result was a cancellation of as many as nine oilsands projects.”

On Monday, the April crude contract fell US$10.15 to US$31.13 per barrel. On Tuesday, it regained US$3.23 to reach US$34.36 per barrel.

Tudor Pickering Holt & Co. analysts pointed out in a note that non-oilsands oil production in Western Canada fell by about 140,000 barrels per day from the end of 2015 to the summer of 2016 as companies halted spending on new wells.

“Given prevailing rhetoric that Canadian barrels trend along the higher end of the cash cost spectrum, particularly those from the oilsands, investor interest has perked up on the potential for Canada to be among the first to shut-in or decline given the rapid decline in crude prices,” they said.

The fight between the major oil producers is being compounded by worries about lower global demand due to slower economic growth as a result of the novel coronavirus outbreak.

The COVID-19 situation will likely dissipate over time, Catellier said, but its presence in combination with volatile Saudi oil policy adds “considerable uncertainty” to the market.

Canada’s oil industry has survived price shocks in the past but the sector is less durable today because of pipeline project delays and cancellations, said Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers.

He said the situation creates “immediate negative impacts” for Canada’s economy.

Cenovus also said Tuesday it will temporarily suspend its crude-by-rail program.

Under an Alberta program to give relief from its mandated oil production curtailments to companies that add crude-by-rail capacity, Cenovus had been increasing output in recent months.

Production this year, however, is now expected to total between 432,000 and 486,000 barrels of oil equivalent per day, down from its earlier guidance for between 472,000 and 496,000 barrels of oil equivalent per day.

Lower oil price forecasts had already resulted in spending cuts in the oilpatch before Monday.

Last week, Canadian Natural Resources Ltd. trimmed $100 million from its 2020 capital spending budget while warning it could cut another $300 million to $400 million if market turmoil continues.

A spokeswoman declined comment Tuesday when asked if that decision had been made.

Dan Healing, The Canadian Press

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