Copyright of the Daily Oil Bulletin 2018
Plagued By Uncertainty, Large Producers Likely To Spend Well Below Cash Flow
Under-spending cash flow by big producers is expected to result in less overall activity in the Canadian E&P sector this year, a CFA Society Calgary audience heard on Wednesday.
Historically, Canadian exploration and production companies’ capital spending plus dividend payouts essentially equalled cash flow, said Jeff Fetterly, a principal and oilfield services analyst at Peters & Co. Limited.
But that trend reversed itself in 2017 and is expected to be more pronounced in 2018 and 2019, Fetterly told the chartered financial analysts’ annual oilfield services forecast breakfast.
Peters expects Canadian producer cash flow in 2018 to exceed spending by about $10 billion.
Most notable are oilsands heavyweights Canadian Natural Resources Limited and Suncor Energy Inc. Those companies recently completed megaprojects and haven’t committed to further big projects.
But Peters also expects other large-cap producers such as Cenovus Energy Inc., Seven Generations Energy Ltd. and Tourmaline Oil Corp. to under-spend cash flow as well.
Intermediates and junior producers are “largely spending cash flow,” Fetterly said, but that isn’t enough to offset under-spending by large caps.
Driving the tightfisted budgets are macro factors and political factors.
The former includes anemic natural gas prices and wide heavy/light crude differentials resulting from insufficient pipeline capacity.
“And then there's the broader political element in Canada that's certainly, I think, having an impact on producers’ willingness to spend within Canada right now,” Fetterly said.
As a result Peters has forecast overall Canadian E&P capital spending in 2018 will be about seven per cent less than last year’s total.
Oilsands capital spending is expected to stay weak in 2018 while non-oilsands spending is expected to be “flat to modestly down” compared to last year, Fetterly said.
A few producers may actually boost their budgets, “but on a broad basis, we don't see a lot of companies willing or capable of increasing capital spending in any meaningful way in the second half of the year,” he said.
In 2013 and 2014, oilsands budgets represented about 40 per cent of total Canadian producer spending.
“That number has declined to about 25 per cent,” Fetterly said. “And even though the base-level maintenance spending is there, the growth capital spending in the oilsands is obviously slowing down significantly.”
In the United States, the biggest, most active operators are increasing spending.
Compared to 2016, the biggest, busiest operators in the U.S. increased spending by 60 per cent last year, compared to 40 per cent by comparable companies in Canada, Fetterly said.
“And if you look at 2018 guidance, it looks like capital spending in the U.S. will be up somewhere in the range of 15 to 20 per cent.”
As well, he suggested many of the operators in this group are currently basing capital programs on commodity price assumptions below the strip price.
So if actual oil prices in the second half of this year match the current forward strip prices, “I think there is a potential that U.S. capital programs could further increase,” Fetterly said.
He said the U.S. recovery is now about 100 weeks old.
“It's tracking as the fastest recovery in the U.S. of the last 35 years. And we do expect that trend will slow,” the Peters analyst said. “But nonetheless, the outlook, the activity levels in the U.S. are robust.”
“And when you combine that with sort of the development pace of sustaining areas like the Permian, I'd say the U.S. market looks quite favourable for the foreseeable future as well.”