2021 Top Operators Report: Producers Focus On Financial Health, Operational Excellence, Shareholder Interests, And ESG Concerns
Editor’s note: Last year, when assembling the 2020 Top Operators Report, the COVID-19 pandemic had shuttered the global economy. Oil demand had been reduced by over 20 million bbls/d and prices were at lows not seen in decades.
The mood of the Canadian industry was grim. After five years of being rocked by wild price volatility the pandemic hit like a knockout punch.
The 2021 Top Operators Report looks back at how Canada’s oil and gas leaders pivoted to meet the challenges of 2020, and how they are positioning their organizations for future success.
Once again, we have tapped into the experience of professional services firm KPMG in Canada to provide insight into what strategies operators could pursue to thrive in the current environment.
The report also features a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage, along with commentary from data providers Evaluate Energy and CanOils.
The worst is over.
As the pandemic recedes the global economy is gradually getting back on its feet.
Oil prices have bounced back and are now trading in the US$70/bbl range, generating free cash flow for Canadian operators after flat-lining for most of 2020. Natural gas prices are also at profitable levels for most operators, hovering at around C$3.00/GJ this summer.
But that doesn’t mean oil and gas operators can relax and let down their guard, said Michael McKerracher, National Energy Leader for KPMG in Canada.
“Oil prices are at a plateau and could move either way. There are as many optimists as pessimists in the market. The OPEC+ group needs to manage supply well.”
Given this market uncertainty operators must balance how they invest cash flows, he said. Repairing balance sheets remains the main priority, as it was before the pandemic.
“You need a healthy balance sheet. It was apparent a number of companies were challenged in staying solvent,” explained McKerracher. “Large companies had the support of the debt markets and banks through the whole period. Smaller producers had to live through a tough environment. There was a lot of carnage along the way. Lots of good producers didn’t make it.”
As a result, “many companies are now focused on paying down debt,” he noted. “Debt structures are being realigned as investors want lower debt to cash flow ratios.”
After a tough last five years investors are looking to see a return on capital. They are also looking for improved ESG performance and a strategy for successfully navigating the energy transition as it gains momentum.
“Yield, dividends, share repurchases, capital expenditures, energy transition type costs — CFOs are trying to balance all these challenges,” said McKerracher, adding that methods to return capital to shareholders will vary according to each operator’s circumstances. “If you are not sure you can sustain dividend increases, then share buybacks make sense as they can be more flexible. Investors want increasing dividends but they don’t want them going up and down.”
There is a push by more optimistic analysts to see industry plow money back into capital expenditures to grow production. But McKerracher said it is unlikely large companies will adjust spending plans this year.
“Some smaller companies are going to spend to grow to a size to be noticed by analysts and investors. They want to grow to a size that investors are willing to play.”
The long-term effort to cut costs and improve operational efficiency is expected to continue, he added, although the focus is changing towards investment in technology and away from lay-offs and service price concessions.
“Energy producers have driven most energy service companies to the point they can no longer reinvest to maintain operations. Some producers are realizing that and don’t want companies to go under. They want to maintain a competitive market.
Other than technology advances, there isn’t a lot of additional cost savings outside of M&A activity.”
Technology, whether subsurface or in the back office, will be the next target for investment to improve productivity and drive out costs. McKerracher sees significant opportunities in automating back office functions and leveraging data analytics to improve decision-making throughout organizations.
He also expects a growing focus on ESG and energy transition efforts as governments around the world push for what they call a “new normal.” But he urges caution in how these transition choices are made.
“We’ve seen majors divest of oilsands plays or sell assets to look better in the ESG environment but this reduces cash flows and then they don’t have anything left to reinvest,” he explained. “It’s not a real strategy for the energy transition.”
The KPMG National Energy Leader also questions whether spending on carbon credits is a good long-term strategy.
“Companies shouldn’t be buying carbon credits halfway around the world,” he explained. “They have to build emissions reductions into their operations through technology like carbon capture, methane mitigation, or better cokers. Investing in technologies or processes core to their operations that reduce carbon will stand the test of time rather than buying credits where you don’t know their quality over time. Credits are risky long-term. Global sentiment wants investment in the energy transition and we expect CFOs to spend as it fits into their operations.”
So, what looks like success in the post pandemic era?
“Long-term lower debt, a sustainable dividend, and having the money to allocate to carbon zero efforts. I don’t think industry will have an easy go of it. Production is needed now and for decades to come, but it’s not going to get any easier.”
- Capital Spending