Rough Start to 2016 Brings Down Canadian Oil Company Spending

  • `Just the beginning' as Husky, Whitecap lower capital budgets
  • More cuts seen as crude price assumptions fall: Morgan Stanley

The year has barely begun and Canadian energy companies are already throwing assumptions made late in 2015 out the window to make room for darker views.

Husky Energy Inc. and Whitecap Resources Inc. this week joined Vermilion Energy Inc. in making deeper cuts to their 2016 spending plans as oil prices continued their slide, worsening prospects for a meaningful recovery this year. Together, the three companies have brought their budgets down by about C$945 million ($648 million).

“This is definitely just the beginning,” Benny Wong, an analyst at Morgan Stanley in New York, said Wednesday in a phone interview. “I would pretty much expect all the Canadian large caps to have to reduce.”

Producers keep lowering their price expectations as the oil rout worsens, with Brent and West Texas Intermediate both nearing $25 a barrel. That’s going to drive a second year of big budget cuts by Canadian producers, Wong said. On the bright side, the cuts mean output should fall more quickly, probably giving more torque to a price recovery down the road as shrunken companies aren’t able to respond swiftly to rising demand, he said.

Spending Declines

Upstream capital spending by about 35 Canadian companies -- the money allocated to expanding oil output -- is poised to fall by 35 percent, or C$15 billion, this year, Wong and a group of Morgan Stanley analysts wrote in a Jan. 19 note. That compares to an analyst consensus expectation of a 20 percent decline, according to the note.

Canadian producers, which typically release their annual budgets earlier than their U.S. peers, had largely assumed U.S. crude would average $50 a barrel in 2016, instead of the roughly $35 that the market is betting on now, according to Morgan Stanley.

Husky is taking “decisive action” during a persistent oil market imbalance, Asim Ghosh, the company’s chief executive officer, said Tuesday in a statement. The integrated producer controlled by Hong Kong billionaire Li Ka-Shing suspended its dividend altogether after switching to a stock dividend late last year, given the “the extended lower-for-longer outlook” for oil prices, according to the release.

Whitecap is responding to the “severe” decline in crude prices of the past few weeks, the company said in its Tuesday statement. In addition to a reduced budget, the producer also lowered its dividend by 40 percent.

Retaining Flexibility

Vermilion, which on Jan. 5 revised down its 2016 budget first released in November, is retaining the flexibility it may need for further cuts to spread out spending, Dean Morrison, a spokesman, said Wednesday in a phone interview.

Other Canadian producers are set to make budget cuts next month when they begin announcing earnings results for the 2015 fourth quarter, as requirements to fund oil-sands expansions already under way force them to reduce spending on conventional oil drilling, Wong said. The cuts come in advance of expected reductions by their U.S. counterparts, which have more flexibility to slow shale-oil development, he said.

“We’re seeing the same thing play out on the U.S. guys,” Wong said. “They’ve delayed providing 2016 budgets because a lot of them are still trying to get a feel of what they can spend.”

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