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Last Trade - 18/09/20

Sector
Energy
Size
Large Cap
Market Cap £16.04bn
Enterprise Value £30.23bn
Revenue £11.40bn
Position in Universe 26th / 2689

Long-suffering Canadian oilpatch faces 'biggest existential crisis' yet

Mon 11th May, 2020 6:00am
* Canadian majors have higher debt levels than U.S. rivals
    * Producers in Alberta need higher prices to be profitable
    * Fuel demand down 30% worldwide
    * Oil sands spending to hit 15-year low

    By Jeff Lewis and Rod Nickel
    TORONTO/WINNIPEG, Manitoba, May 11 (Reuters) - Canada's oil
patch has endured five years of existential threats that have
pruned weaker companies, but now its strongest firms are trying
to navigate the coronavirus pandemic, which has set off the
worst crisis in the oil industry in 40 years.    
    Economic shutdowns have ground travel to a halt, cutting
fuel demand by roughly 30% worldwide. With consumption down, oil
producers around the globe cut production sharply.
    Canada, the fourth-largest oil producer, has shut in 644,000
barrels per day, according to Eight Capital, among the highest
in the world and 13% of February's production. The nation's
biggest companies face weak demand while managing high levels of
debt, forcing them to cut spending to levels not seen since
early in the oil sands boom 15 years ago.
    Canada's Suncor Energy Inc  SU.TO , Cenovus Energy Inc
 CVE.TO  and Husky Energy Inc  HSE.TO  all posted quarterly
losses in the billions of dollars, cut or scrapped dividends and
slashed budgets.
    Those three, along with Canadian Natural Resources Ltd
 CNQ.TO , sport a debt-to-total-equity percentage of 48.5% on
average, compared with 28.3% for U.S. majors ConocoPhillips Co
 COP.N , Chevron Corp  CVX.N  and Exxon Mobil Corp  XOM.N ,
according to Refinitiv data. 
    "The balance sheets of some very good companies are not as
strong as they should be," said Tim McMillan, president of the
Canadian Association of Petroleum Producers.     
    The industry has reduced spending by $7 billion and oil
sands investment looks to hit its lowest in 15 years, according
to consultancy IHS Markit. Spending had already plunged from
more than $30 billion in 2014 to under $10 billion last year.
    That may not be enough. Oil sands companies will need to
focus on shaving operating costs due to the discounted price for
Canadian heavy oil and higher operating expenses for generating
steam and running trucks and equipment to extract crude, said
April Read, senior upstream analyst at consultancy Wood
Mackenzie.
    Canadian Natural, Canada's biggest oil and gas producer,
said it requires a U.S. West Texas Intermediate crude oil price
(WTI)  CLc1  of $30 to $31 a barrel to cover sustaining costs
and its dividend, which it maintained even as it posted a
quarterly loss of C$1.3 billion. 
    U.S. crude closed at $24.74 a barrel on Friday. A barrel of
Western Canada Select (WCS) sells for around $21. 
 urn:newsml:reuters.com:*:nL4N2CP2LL   
    Canadian Natural has C$1.9 billion in debt maturing this
year, but executives said banks remained supportive and that it
foresaw no issues funding the dividend. It has cut about 120,000
bpd of production for May and could extend curtailments to June
if prices remain low, President Tim McKay told Reuters. 
    "We just have to cross that bridge when we get there," he
said.  
    Debt-saddled Cenovus, a top-four Canadian oil producer,
scrapped its dividend entirely as its first-quarter loss swelled
to C$1.8 billion. Chief Executive Alex Pourbaix said last week
that the company is in "strong financial position," having
repaid C$2 billion since last year.  urn:newsml:reuters.com:*:nL4N2CH05G 
    However, Cenovus may be forced to issue more shares,
diluting the investments of current holders, said Jason Mann,
chief investment officer at EdgeHill, which sold its Cenovus
shares in February.
    "They've just got a stressed balance sheet," he said. "Too
much debt, not enough cash flow."
    Suncor, Canada's No. 2 oil and gas producer, cut its
dividend for the first time ever on Tuesday as it reported a
first-quarter loss of C$3.53 billion.  urn:newsml:reuters.com:*:nL4N2CN442
    
    PIPELINES FEEL THE HEAT TOO    
    Unlike the United States, Canada's oil industry has been
under fire since the 2014 crash, as any recovery was snuffed by
congested pipelines. Now, finally, those lines have space, due
to demand destruction.
    Canadian pipeline operator Enbridge Inc  ENB.TO  posted a
C$1.4 billion quarterly loss. The company, accustomed to
rationing space on its Mainline system, now has spare
capacity. urn:newsml:reuters.com:*:nL1N2C8174 
    It may have to revisit plans to overhaul Mainline terms as
producers shelve expansions, said Ryan Bushell, president at
Newhaven Asset Management, which owns shares.
    "People aren't going to want to commit volumes over a
20-year basis when they don't know if they're going to get
through the next 20 days," he said.
    
    GLIMMERS OF HOPE
    Canada does have some advantages. 
    The nation's heavy crude is well-suited for making asphalt
for road construction. Consultancy Rystad Energy expects U.S.
demand for "other refined products" including asphalt will fall
just 11% in the second quarter, compared with a 68% drop for jet
fuel and 24% for gasoline.
    Storage has not filled as rapidly as in the United States,
so production is not likely to slow more than needed.
 urn:newsml:reuters.com:*:nL4N2CH05G
    Canada has also already announced C$2.5 billion ($1.8
billion) in measures to help the industry. Banks are relaxing
lending standards for energy firms to avert a wave of
bankruptcies - marking a different stance from lenders in the
United States.  urn:newsml:reuters.com:*:nL3N2C23SU  urn:newsml:reuters.com:*:nL2N2BX2ZI
    Still, Alberta's unemployment could spike to 25% from the
current 13.4%, Premier Jason Kenney has said. Oil and gas
extraction workers make up 6% of Alberta's employment, according
to Statistics Canada, not including refineries and petrochemical
plants.    
    “This is probably the biggest existential crisis the Alberta
oil industry has faced,” said Mike Ashar, who led Suncor's oil
sands and refining units through the 1990s. 

 (Reporting by Rod Nickel in Winnipeg, Manitoba and Jeff Lewis
in Toronto
Editing by Marguerita Choy)
 ((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs; 1-204-230-6043;
jeff.lewis@tr.com; +1-647-200-7236))
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