Alberta's smaller oil producers eye output boost after curbs lifted (updated)

Obsidian Energy

21/08/2019 22:56

(Adds Cenovus executive comment)
    By Rod Nickel and Nia Williams
    WINNIPEG, Manitoba/CALGARY, Alberta, Aug 21 (Reuters) -
S mall and mid-sized Alberta oil producers are looking to
increase drilling as early as this autumn after the Canadian
province exempted a dozen of them from government-mandated oil
production cuts, boosting the struggling industry.
    Alberta's previous New Democratic Party government imposed
production limits in January to drain an oil glut that built up
due to congested pipelines. 
    On Tuesday, the new United Conservative Party government
extended curtailments through 2020, citing a delay to Enbridge
Inc's  ENB.TO  Line 3 replacement that could swell inventories
again unless the limits remained in place.  urn:newsml:reuters.com:*:nL2N25G1D9
    It also doubled an exemption threshold in the curtailment
policy to 20,000 barrels per day (bpd), eliminating constraints
on 13 companies whose output falls below that level. Alberta's
16 biggest producers will be the only ones receiving curtailment
orders starting in October.
    "We were diverting capital into share buybacks and into
Saskatchewan," Tamarack Valley Energy Ltd  TVE.TO  Chief
Executive Brian Schmidt told Reuters in an interview. "Now we'll
put capital back to work in Alberta."
    Tamarack will adjust 2020 capital spending plans because of
the changes and could lift its Alberta production by another
2,000-3,000 bpd, Schmidt said. The Calgary-based company
currently produces 11,000 bpd in Alberta, just under half its
total output.
    Other producers that benefit include Whitecap Resources Inc
 WCP.TO , Athabasca Oil Corp  ATH.TO , Pengrowth Energy Corp
 PGF.TO , Baytex Energy Corp  BTE.TO  and Obsidian Energy Ltd
 OBE.TO , AltaCorp Capital Research said in a note.
    Pengrowth deferred spending more than half of its C$45
million ($33.9 million) capital budget earlier in 2019, but now
looks to increase drilling as early as October, Chief Executive
Pete Sametz said. That will also reduce the need to buy credits
from other producers that allowed Pengrowth to produce over its
quota, he said. 
    "We're really happy about (the higher exemption). That's
good for our company."    
    Whitecap, which shifted capital to neighboring province
Saskatchewan this year because of curtailments, can now consider
restoring Alberta production for 2020, said CEO Grant Fagerheim.
    The company has capacity to produce 15,000-16,000 bpd in
Alberta.
    "This is a very wise move by the Alberta government,"
Fagerheim said. "Now as we go into our budget cycle (for 2020),
it changes the way we think for sure. We can look at our assets
on a total basis to get the best returns."
    Tweaking the exemption will prop up Alberta's struggling
oilfield services companies by increasing drilling, said Gary
Mar, CEO of the Petroleum Services Association of Canada, but he
said the outlook is still challenging.
    "Making small adjustments so small producers are exempt will
help keep people in the service business around. It's the best
of a bad situation," Mar said.    
    With curtailments lasting longer, differentials between
Canadian heavy and U.S. light crude look more stable, giving
investors reason for greater comfort in heavy oil producers
Canadian Natural Resources Ltd  CNQ.TO , Cenovus Energy Inc
 CVE.TO , MEG Energy Corp  MEG.TO  and Athabasca, CIBC analyst
Jon Morrison said in a note.
    Toronto-listed shares of MEG and Cenovus led the way higher
among producers on Wednesday, rising 4% and 3% respectively.  
    "The curtailment extension is a smart move by government,"
said Cenovus executive Al Reid. "This announcement simply
acknowledges that new pipeline capacity will not be available by
the end of 2019, as originally expected when the curtailment
regulation was first introduced." 
    Extending curtailments is modestly negative for integrated
producers Suncor Energy Inc  SU.TO , Imperial Oil Ltd  IMO.TO 
and Husky Energy Inc  HSE.TO , as their operations, which
include refineries, are less vulnerable to discounted Canadian
prices, CIBC's Morrison said.
    All three have supported ending curtailments as soon as
possible. A Suncor spokeswoman said on Wednesday the company
does not support government intervention in the markets, while a
Husky spokeswoman said uncertainty about how long curtailments
will last had dented investor confidence.

($1 = 1.3289 Canadian dollars)

 (Reporting by Rod Nickel in Winnipeg, Manitoba and Nia Williams
in Calgary, Alberta
Editing by Marguerita Choy)
 ((rod.nickel@tr.com; 1 204 230 6043; Reuters Messaging:
Twitter: @RodNickel_Rtrs))