Plunging oil prices are prompting Canadian energy firms to shelve hundreds of millions in capital spending as the oil patch braces for a flood of cheap crude hitting global energy markets.
Seven Generations Energy (VII.TO) is reducing its 2020 capital investment budget by $200 million, or 18 per cent, to $900 million. MEG Energy (MEG.TO) is cutting its 2020 capital budget by 20 per cent, from $250 million to $200 million. Cenovus Energy (CVE.TO)(CVE) announced a roughly 32 per cent cut to its 2020 capital spending plan, and a temporary suspension of crude-by-rail operations, on Monday.
The moves follow a historic oil price crash brought on by the onset of a Saudi Arabia-Russia oil price war. Last week, talks broke down between OPEC and its allies over proposed production cuts to stabilize the oil market in response to the COVID-19 virus dampening global demand.
Russia balked at the proposal, prompting Saudi Arabia to up its production and slash prices for spring deliveries. The United Arab Emirates, Kuwait and Iraq have followed the Kingdom’s lead. Russia also vowed to add supply.
Energy stocks were the biggest laggard on the S&P/TSX Composite Index in a broadly-negative session on Wednesday.
The price of North American benchmark West Texas Intermediate (WTI) crude slid about three per cent on Wednesday to just over US$33 per barrel. Western Canadian Select fell nearly six per cent to just over US$20 per barrel.
“Facing unprecedented volatility and weakness in global commodity markets stemming from demand concerns related to COVID-19, and a price war fuelled by certain OPEC+ members, Bonterra's focus remains on protecting the balance sheet, preserving the inherent value of its assets and retaining financial flexibility,” the company said in a corporate update on Tuesday evening.
Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary, said Canadian oil companies have been tightening their belts and improving efficiency for years under weak commodity prices. The cuts, he said, are a logical next step as the price of oil falls close to companies’ break-even levels.
“The fact is, there is not a lot that they can do right now,” he told Yahoo Finance Canada. “Some of these cash costs from these projects are US$20 to US$25 per barrel. When you put in corporate costs, the break-even is at US$30 to US$40 per barrel, which is still higher than where it is now.”
While Pelletier said oil prices do not historically stay near the $30-level for long, Goldman Sachs oil strategist Damien Courvalin predicts prices will remain in that range for at least the next six months. Like their Canadian counterparts, he said U.S. producers have few options to offset the Saudi and Russian-led price pressure in the near-term.
MEG Energy and Seven Generations also pared back production guidance for 2020.
MEG Energy now expects between 93,000 and 95,000 barrels per day compared with earlier guidance for between 94,000 and 97,000 barrels per day. Seven Generations forecasts 185,000 and 190,000 barrels per day, down from between 200,000 and 205,000.