Canada’s oil patch booked three consecutive years of hefty losses after the oil prices crash in 2014. This year, the industry is set to post a very slim gross profit—the first profit in four years.
Despite the expectation that the tide is finally turning for Canada’s oil producers, significant challenges remain, with constrained pipeline capacity and limited capability to expand export markets the biggest of them all, the Conference Board of Canada said in a report last week.
The industry will have its winners and laggards this year, analysts say, but as a whole, it will be a very long and very slow recovery of revenues for the Canadian oil patch, the Conference Board of Canada reckons.
Rising oil prices and production will help the oil industry to turn to profitability this year—it is expected to generate a combined US$1.1 billion (C$1.4 billion) in pre-tax profits on revenues of US$73.2 billion (C$92 billion).
In the past three years, Canada’s oil patch booked a cumulative loss of US$25.5 billion (C$32 billion) due to the oil price crash that crippled producers’ revenues, Financial Post’s Geoffrey Morgan writes.
Revenues at Canadian oil firms are not expected to reach the record US$92.3 billion (C$116 billion) booked in 2014 until 2021, when revenues are seen at US$94.7 billion (C$119 billion).
“We just don’t expect (oil) prices to get back to where they were in 2014 any time in the foreseeable future and so the end result is that it’s a very long, slow recovery in terms of the revenue picture,” said Michael Burt, Director, Industrial Economic Trends at the Conference Board of Canada.
The cost cuts in the downturn will help the industry to enjoy a meager combined pre-tax profit this year, but the sector is not poised to return to booming growth in financial performance, and only the very best of the projects will go ahead in the next five years, Burt told Financial Post.
Canada’s crude oil production is expected to rise by an average annual rate of 3.4 percent between 2018 and 2022, with the vast majority of that increase coming from the oil sands. However, the competitiveness of Canadian producers is undermined by domestic bottlenecks in pipeline takeaway capacity and surging U.S. shale production, the Conference Board said.
“As pipeline capacity in Western Canada cannot keep up with growing production, more oil has to be shipped by rail at a higher cost. This causes a price differential between Canadian oil prices and other global benchmarks, resulting in foregone profits for Canadian oil producers. Canada will also need to rely on new pipelines to expand into new export markets, which might soon become crucial given soaring U.S. oil production,” the Board said.
In recent months, transportation bottlenecks widened the discount at which Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—trades relative to West Texas Intermediate (WTI). Some Canadian producers have started to actively market non-core assets, trying to dispose of heavy oil portfolios that they can’t monetize efficiently. Others have slowed down production in response to increased market access constraints.
In addition, Kinder Morgan’s Trans Mountain Expansion project—a pipeline designed to take more oil out of Alberta to the British Columbia coast—now hangs in the balancemore than ever before, after Kinder Morgan said it would suspend the project entirely if the legal issues surrounding it cannot be resolved by May 31.
According to National Bank Financial analysts, “regulatory and fiscal headwinds continue to challenge the Canadian sector, creating a difficult investment environment.” The bank also expects Canadian oil prices to continue to be volatile and weak through 2022, due to the limited takeaway capacity, with Canada’s oil discount at US$18-22 over the next four years.
Yet, the analysts are optimistic that some producers would do better than the industry average this year. These are Canadian Natural Resources, Crescent Point Energy, Enerplus Corp, and Whitecap Resources.
Canadian Natural is one of just two companies that analysts at Peters & Co. Ltd. expect to report rising production and cash flow in Q1 over Q4 2017, when companies start to report Q1 earnings later this month. The other is Tourmaline Oil Corp. According to Peters & Co, Cenovus Energy and Seven Generations Energy will also outperform the industry average, while Husky Energy and Imperial Oil are expected to underperform the sector.
Canada’s oil patch may be in for a first—albeit paltry—pre-tax profit for the first time in four years, but without additional takeaway capacity, the industry could see its competitiveness further eroded.