Financial results in the oilpatch were expected to be grim, yet the figures announced so far this week are still alarming, as the bloodletting of company balance sheets begins.
So far, there is red ink across the board with the combined losses at Husky Energy, Cenovus Energy and Vermilion Energy tallying nearly $5 billion during the first three months of the year, much of it because of asset writedowns. If these first quarter results are bad, the second quarter is already expected to be much worse, with historically low oil prices that even turned negative for a few days.
For service companies, it’s really going into hibernation mode.– Jackie Forrest, ARC Energy Research Institute
Still, the biggest concern for the oilpatch is how long this will last. The downturn of the last five years was too tough for many companies who went bankrupt, and the current predicament is immensely more difficult with little optimism about when the situation will improve.
Around the world, there is still too much oil coming out of the ground and not enough demand for fuel.
“While no one knows how long the current situation will play out, we are managing the business assuming any recovery will take an extended period of time,” said Rob Peabody, chief executive of Husky Energy.
Avoiding the ‘train wreck’
Companies are hunkering down and preparing as best they can with a combination of cutting pay, reducing capital spending, restricting dividends and, of course, pulling back on oil production.
“Our strategy is to keep as many barrels away from the train wreck as possible,” said Peabody. “We have minimized any business activity that is not immediately cash-positive in the current pricing environment.”
During a conference call to discuss Cenovus’s financial results, analysts asked company executives how much cash the oilsands firm could burn through by the end of the year. Cenovus has an all-in break-even point of about $38 US for West Texas Intermediate (WTI), the North American benchmark.
WTI closed at $15.06 a barrel Wednesday.
If prices end up averaging $28 per barrel, the company could accrue an extra $1.5 to $1.8 billion of debt by the end of 2020, although several factors are in play, including the exchange rate.
“Inevitably, we know this pandemic will pass and markets will recover,” said Alex Pourbaix, the chief executive of Cenovus.
“What’s not clear is exactly how long that’s going to take.”
That’s one reason some in Alberta want the federal government to provide more financial aid to the oilpatch, similar to what Ottawa provided to the automotive sector during the financial crisis more than a decade ago.
“All of our energy companies are hemorrhaging cash right now and more help is needed,” said Alberta Premier Jason Kenney.
$2.5B already announced
The federal government already announced $2.5 billion Cdn toward cleaning up old oil and gas wells and reducing methane emissions. The money should help companies in the service sector, who are seeing industry activity almost evaporate overnight.
“You don’t want to look a gift horse in the mouth. $1 billion is wonderful,” said Scott Darling, the president of Performance Energy Services, about Alberta’s share of the federal funding for well reclamation.
Still, when you consider how much capital spending even just a few companies like Husky have announced, it is higher than the amount of federal aid, he said.
“So it’s not going to save the industry, but it will help out, hopefully putting some people to work, and it seems fairly fast,” he said.
Right now, nearly all oil producers are losing money and, as they pull pack on spending, there isn’t much work for the service industry.
Capital spending in the oilpatch is expected to be half of last year’s amount, which was about $25 billion, according to Jackie Forrest with the ARC Energy Research Institute.
That’s the financial hole in the sector right now, an amount that is difficult for government to fill.
Service companies ‘going into hibernation’
“When it comes to industry activity, it will be very, very low. Probably the lowest we’ve ever seen,” Forrest said, with almost no drilling for the remainder of the year.
“So for service companies, it’s really going into hibernation mode.”
Other companies will announce their financial results over the next few weeks. On Tuesday, Calfrac Well Services delayed its first quarter results and instead announced several measures to cut costs including laying off 70 per cent of its workforce, which is more than 1,000 jobs.
How long the volatility remains in the oilpatch is anyone’s guess, but industry leaders hope it ends soon.
“The market forces, as cruel as they are when you see negative prices and things like that, are doing exactly what they are supposed to do,” said Peabody, with Husky, “which is to send very clear signals to people in the industry about what actions they should be taking.”