Canada’s biggest oil producers are located on a near-record pile of money, providing them with the resources to keep investing and manage debt while weathering the worst price rout inside a generation.
The five largest oil producers including Suncor Energy Inc. and Cenovus Energy Inc. possess a combined $8.5 billion in cash and cash equivalents, a rise of seven.6 per cent from the year earlier and most twice the amount seen during 2009 downturn. The figures, that are little changed from the record $9 billion in 2014, don’t range from the proceeds from Imperial Oil Ltd.’s recent sale of their Esso-brand gasoline stations for $2.8 billion.
“Located on cash along with a healthy balance sheet has turned into a competitive advantage,” Amir Arif, an analyst at Cormark Securities Inc. in Calgary, said by phone. “This option still have a lot of capital they need to spend.”
Divestitures, cost cutting, equity raises, and dividend cuts have helped bolster balance sheets as Canadian oil producers buckle down for the “lower for longer” prices Suncor Chief Executive Officer Steven Williams has described. Compared with the final downturn when commodity prices made a quick recovery, the industry isn’t betting on the return to high prices and needs the money to have their operations expanding.
Having funds are an important survival tactic as commodity markets remain volatile regardless of the recent recovery that saw oil prices rebound toward US$40 from more than a 12-year low of about US$26 a barrel in February. West Texas Intermediate is anticipated to average $39.50 this season, according to the estimates compiled by Bloomberg. Its northern border American benchmark advanced around 85 cents US to US$37.19 a barrel around the New York Mercantile Exchange on Wednesday.
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Steam Technology
Suncor’s Fort Hills bitumen mine alone this year could consume 1 / 2 of the company’s available cash. Spending on Fort Hills will definitely cost $4.5 billion this year, with Suncor accountable for about half the outlay, the organization has stated.
“Our strong balance sheet helped us deliver on our commitments to shareholders including funding our major growth projects, such as Fort Hills and Hebron,” spokeswoman Sneh Seetal said in an e-mail. “We are drawing the money balance down in order to continue funding those projects through this era of low oil prices.”
Imperial and Cenovus must also cash to develop assets using steam technology. Imperial Oil in a March 11 statement filed an application for an oil-sands project that will produce 50,000 barrels each day from 2022, while expansions at Cenovus’s Foster Creek and Christina Lake sites will start producing oil in the third quarter, the organization said in a Feb. 11 statement.
Financial Resilience
“Our number one priority during this period of low oil prices would be to maintain our financial resilience and the strength of our balance sheet,” Brett Harris, a spokesman for Cenovus, said within an e-mail. “We will be taking a very conservative method of make sure that we don’t compromise the total amount sheet strength that we’ve worked so hard to construct over the last year or so.”
Imperial will assess the “pace and scope” of future investments depending on market and business conditions, spokeswoman Killeen Kelly said within an e-mailed response.
Canada’s largest oil producers had about $4 billion in money in March 2009, as the cost of crude started to climb from a low of just below US$34 a barrel in 2008. Their funds reserves fell to $1.9 billion by 2011 as the recovery became predominant and also the industry began to expand again.
Nix Acquisitions
The spending, combined with the stop by prices, has taken a toll on balance sheets with debt now standing at an average of 2.16 times earnings before interest, taxes, depreciation and amortization, compared with 1.08 times last year, according to data compiled by Bloomberg.
The cash reserves are a “comfort,” such an environment, said John Stephenson, chief executive officer of Stephenson & Co. Capital Management in Toronto, which oversees $55 million.
While there may be a temptation to use the money for acquisitions, the low price and the large undeveloped assets the companies already have could keep them from pursuing more large transactions, Stephenson said.
“The appetite for a deal is pretty minimal,” he said, describing the marketplace as “frozen over time.” So-called tuck-in acquisitions is feasible, but they would need to be flowing barrels instead of new projects, based on Stephenson.
‘Step-Change’
Canadian Natural Resources has the smallest cash pile of the five-largest producers. The company’s cash-flow generation, flexible capital expenditure program and available liquidity “all support a powerful budget,” said spokeswoman Julie Woo, in an email. Completion of the next thing in the company’s Horizon oilsands mine with result in a “significant step-change” for money flow later this season, she added.
Husky’s capital expenditures will stay in balance with cash flow this year, said spokeswoman Kim Guttormson in an email. If oil prices rise above the company’s assumptions, the priorities will include paying down debt, restoring a sustainable dividend, and purchasing capital projects, she added.
Suncor has spent billions on two large transactions in the past year, including an all-stock takeover of Canadian Oil Sands Ltd., a transaction worth $6.3 billion including debt. The Calgary-based oil producer also purchased a 10 % stake within the Fort Hills bitumen mining project from Total SA.
Share Price
So far, investors aren’t rewarding Canada’s largest oil companies for that cash moats they’ve created. Shares of those with biggest cash piles are on the most this season through Monday.
Company Cash & Cash Equivalents Price Change YTD
Suncor $4.05 billion -2.6 percent
Imperial $203 million -1.7 percent
Cenovus $4.1 billion -0.9 percent
Husky $70 million +14 percent
Canadian Natural $69 million +19 percent
The Suncors and Canadian Natural Resources “around the globe is going to do relatively well came from here however the commodity is just so volatile,” Stephenson said. “It’s not for widows and orphans. I don’t think people should be chasing these moves.”
Bloomberg News
