2020 Guidance Preview: Still Early, But Some Industry Experts Foresee Relatively Flat Spending Next Year

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Encana working in the Montney. Image: Encana Corporation

While producers are still going through their 2020 budgeting processes, and it is too early to determine their upcoming spending plans, many analysts and service providers anticipate next year’s Canadian oil and gas capital expenditure programs will be similar to 2019 levels.

“I hope to be wrong, for my sake, but I think that based on consensus, what analysts are suggesting for 2020, is it’s more of the same or similar to 2019, or slightly less just for Canada,” Duncan Au, president and chief executive officer of CWC Energy Services Corp., told the Bulletin. “And then, in the U.S., I think it’ll be a similar situation.”

During the upcoming guidance season, the Daily Oil Bulletin will again publish weekly updates to producers’ capital spending, drilling and production forecasts (tentatively scheduled to start Nov. 12 — see the Corporate Guidance tab on the DOB). Data for these weekly updates is supplied by DOB sister company Evaluate Energy.

To date, just over 20 of the companies tracked by Evaluate have released 2020 data, so it’s still very early to discuss broader trends.

“From the North American companies that are so far providing capex figures for 2020, however, the overall total seems to be trending towards a flat trajectory for next year, with any increase in operating cash flow to instead be channelled towards other priorities,” said Mark Young, senior oil and gas analyst with Evaluate Energy.

“If recent data is any indication, [those priorities] will be share buybacks, cost cutting initiatives and debt repayment.”

During 2019, Canadian and U.S. producers pulled back on spending compared to 2018 actual capex totals — for both oil and gas. Of the Canadian companies it tracks, Evaluate is forecasting 2019 capex of just over US$25 billion, down almost US$2 billion from the prior year.

Source: Evaluate Energy

In Canada, capital has been constrained due to commodity pricing pressures, issues surrounding existing pipeline choke-points, mandated crude oil production cuts in Alberta, and uncertainty surrounding the in-service date of major new pipeline builds (Keystone XL, TMX) and replacements (Enbridge Inc.’s Line 3).

Substantive 2020 capex increases not expected

Ben Brunnen, vice-president of oilsands and fiscal policy at the Canadian Association of Petroleum Producers (CAPP), does not expect substantive 2020 capital spending increases. In fact, he expects it to be flat or worse in 2020 compared to 2019. With 2019 spending expectations of $36 billion nationwide, he said, CAPP targets the same for next year, maybe less.

“We’re working off a general trend of declining investment. For oilsands, 2019 represents the fifth consecutive year of decrease in investment. Our expectation for 2020 is that at best it will be constant. For the conventional side in Western Canada, we have seen a decline in investment since 2017. At best I think that is going to be constant, with possibly a slight decrease as well.”

He added: “We’ve seen a decline on the East Coast from 2017, and we don’t anticipate any new projects being sanctioned out there in the next year either.”

On the natural gas front, at best CAPP expects companies largely will invest to replace their production next year. While he has seen and expects to see some more movement in resolving natural gas pipeline congestion, Brennan does not anticipate a substantive increase from a price perspective. “As a result, companies are struggling in the natural gas space and I think they’ll continue to do so for the foreseeable future.”

In terms of a positive signal that could possibly increase spending for this segment, Brunnen highlighted a possible final investment decision on the Woodfibre LNG project, as well as some continued progress towards debottlenecking and expanding the NOVA gas transmission system.

“Those pieces will help with our industry from an investment perspective and confidence perspective, but it is going to be a year where we rebuild confidence in the system, where we must provide line-of-sight from an investor perspective that we will get that market access aligned.

“Maybe we’ll see a project or two announced, but we really won’t see any growth capital come back to the basin until late 2020 or subsequently.”

Deep Basin spending

Mark Oberstoetter, research director at Wood Mackenzie Canada Ltd., said that while his firm’s analysts predict next year’s spending to be fairly flat, possibly “nudging more down than up,” it is interesting to note that as industry directs less money to the oilsands, more is going to areas such as Montney and Duvernay.

“We can kind of call out companies like [Tourmaline Oil Corp.] and [ARC Resources Ltd.] that kind of FID’d some plant expansions a few years ago, and those are still spending pretty heftily into 2020, and they’ve been pretty clear about that in their long-term outlooks, whereas now we’re not seeing any growth in the oilsands with the curtailment. There are different stories for each resource theme.”

Unfortunately, he added, those areas where spending is increasing do not make up for reduced spending in other industry segments. Wood Mackenzie anticipates overall spending in Canada’s energy sector to reach US$25 billion in 2019, which is about the same as it would expect for next year.

Licensing trends

In reviewing recent licensing trends (for the period July 1 to Oct. 25, 2019), the Montney and the Duvernay are in the Top 5 when charting licences issued by projected zone. (For more trend analysis, click here for the DOB’s well licence dashboard.)

During this period, producers have licensed 372 Montney wells. The Top 5 is rounded out by wells targeting the Viking, McMurray, Clearwater and Duvernay.

Possible capex changers

For CAPP’s Brunnen, while next year’s spending might be relatively flat, he is more optimistic about the year after that. “Absolutely I think 2021 likely will be a better year, assuming these market access issues become resolved.”

In terms of factors that could improve capital spending in the Canadian energy sector, Brunnen said companies are simply looking for good signals from an investor confidence perspective.

“We are expecting Line 3 to come into service near the end of 2020. And so, provided that schedule is maintained, I think that will continue with some confidence.”

Brunnen suggested the Alberta government enabling incremental rail shipment under the curtailment program is important to encouraging more oilsands investment, because the province simply cannot have a curtailment program and expect to see investment growth.

“Unless they’re able to make amendments to the curtailment program by incenting incremental rail, which is really the key growth lever available to the province and from a market access perspective, companies aren’t going to invest.”

Any commodity price changes could alter 2020 capital spending expectations, according to Oberstoetter. He noted companies currently are still planning next year’s budgets, with more formal guidance coming out around December.

“The reason why those guidance ranges can be so big is that [the companies] kind of submit those plans so that if WTI or WCS does ‘this,’ then ‘here’ is how the company responds. They’ll actually carve up their guidance into a few windows if prices change throughout the year.”

Regional issues can also act as levers when it comes to spending plans, he said, including the availability of crude-by-rail, as well as any changes to Alberta’s curtailment program.

“You could see positive progress on pipelines. That’s a big one. It’s easy to say that now, but in 2020 when there are actual shovels in the ground, maybe the sentiment will start to pick up and change on that.”

He added: “We produce a lot of gas, and so the story on that basis next year we think will be a little bit tighter and it won’t have as far and wide summer swings as we’ve had in the past two years. Part of that is regulatory and part of that is just the maintenance work now being more done than not. And so, that will be more positive, with a bit more stability on the gas side of the cash flows.”

Meanwhile, on the oilsands front, before companies feel confident enough to potentially announce new projects, Brunnen said that not only do they likely want to see enabled incremental crude-by-rail, but they probably want more confidence on completion of the Trans Mountain expansion, as well as the Line 3 expansion.

Likewise, Precision Drilling Corporation president and CEO Kevin Neveu told his company’s recent Q3 conference call that eliminating Alberta’s production curtailments and completion of Trans Mountain would be “constructive catalysts” for energy industry activity that would encourage investment in the Canadian sector.

“Political and regulatory uncertainty created a high sense of anxiety for many,” he said, adding his company has 52 rigs running currently in Canada, representing more than 30 per cent market share and a peak for the fall 2019 season.

“Looking forward, in Canada, we expect Precision’s winter 2020 activity levels will be in line with 2019, peaking in the low to mid-60s [rig utilization]. Demand remains firm for our Super Triple rigs in the Montney and Deep Basin. These rigs are largely committed for the winter season, and we expect day rates to be generally in line with 2019.”

In the company’s heavy oil segment, its Super Single rigs “have a strong market position, and we expect winter 2020 activity and pricing will also be in line with 2019,” Neveu said. “However, pricing pressure will remain intense on the shallower rigs in the Cardium, the Viking and southern Saskatchewan Bakken regions.”

American cool off

Throughout 2019, Au told the DOB, there has been a slowdown in U.S. drilling activity, with ramifications across the North American energy sector. “Overall, and in general, U.S. rig counts have come down from where they were throughout all of 2019. I don’t anticipate that will increase here going into 2020.”

Analysts in Dallas, Houston and Denver have been revising capital spending outlooks south of the 49th parallel, suggested Oberstoetter, as U.S. operators increasingly adopt a “capital discipline mantra,” which has already been the reality for Canadian operators for some time now.

“We’re seeing tempered growth in a number of the U.S. plays, with [ExxonMobil Corporation] and [Chevron Corporation] in the Permian as maybe the exceptions. It’s kind of in this new light where everyone is going to try and live within cash flow, and that’s what’s new about 2020 versus 2019. We are seeing a bit more similarity. The Canadians have been living with that, and now the U.S. companies will be pressured by their investors to do the same.”

In fact, a recent Reuters story suggested U.S. oil and gas employment numbers have started falling as the country’s energy sector contracts in response to lower prices, with further job losses anticipated in the months ahead as the rate of well drilling declines further.

As for Precision’s U.S. operations, Neveu said contracting activity and rate realization will improve quickly when customers finalize and begin to execute on their 2020 budgets. He anticipates intensified customer focus on efficiency, technology, and rig and crew performance.

“We also note that our [U.S.] customers are planning to smooth out drilling projects over the course of the year, and this is also intended to drive efficiency by reducing stop-start costs. This aligns very well with the capability of Precision’s Super Triple pad rigs with the proven performance of our crews, and the efficiency gains achievable with Precision’s PAC automation technologies.”

Fortunately, for CWC, the company moved two drilling rigs to the U.S. in May of this year that started drilling in June and proved to be positive contributors to Q3 results (which management will release on Friday). Au said: “Those two rigs were probably our highest-utilized rigs here in the third quarter, and we expect them to be going into 2020.”

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