Near-Record Cash `Comfort' for Canada Oil Firms Amid Price Routby
Oil producers face longer recovery amid long list of projects
Big acquisitions on back burner as companies focus on costs
Canada’s biggest oil producers are sitting on a near-record pile of cash, giving them the resources to keep investing and manage debt while weathering the worst price rout in a generation.
The five largest oil producers including Suncor Energy Inc. and Cenovus Energy Inc. have a combined C$8.5 billion ($6.4 billion) in cash and cash equivalents, an increase of 7.6 percent from a year earlier and more than twice the levels seen during 2009 downturn. The figures, which are little changed from a record C$9 billion in 2014, don’t include the proceeds from Imperial Oil Ltd.’s recent sale of its Esso-brand gas stations for C$2.8 billion.
“Sitting on cash and a healthy balance sheet has become a competitive advantage,” Amir Arif, an analyst at Cormark Securities Inc. in Calgary, said by phone. “These guys 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 last downturn when commodity prices made a quick recovery, the industry isn’t betting on a return to high prices and needs the money to keep their operations expanding.
Having cash is an important survival tactic as commodity markets remain volatile despite the recent recovery that saw oil prices rebound toward $40 from more than a 12-year low of about $26 a barrel in February. West Texas Intermediate is expected to average C$39.50 this year, according to the estimates compiled by Bloomberg. The North American benchmark fell 2.4 percent to C$36.32 at 9:59 a.m. Tuesday on the New York Mercantile Exchange.
Suncor’s Fort Hills bitumen mine alone this year could eat up half of the company’s available cash. Spending on Fort Hills will cost C$4.5 billion this year, with Suncor responsible for about half the outlay, the company has said.
“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 cash balance down in order to continue funding those projects through this period of low oil prices.”
Imperial and Cenovus will also need to cash to develop assets using steam technology. Imperial Oil in a March 11 statement filed an application for an oil-sands project that would produce 50,000 barrels a day from 2022, while expansions at Cenovus’s Foster Creek and Christina Lake sites will begin producing oil in the third quarter, the company said in a Feb. 11 statement.
“Our number one priority during this period of low oil prices is to maintain our
financial resilience and the strength of our balance sheet,” Brett Harris, a spokesman for Cenovus, said in an e-mail. “We are going to be taking a very conservative approach to ensure that we don’t compromise the balance sheet strength that we’ve worked so hard to build over the last year or so.”
Imperial will evaluate the “pace and scope” of future investments depending on market and business conditions, spokeswoman Killeen Kelly said in an e-mailed response.
Canada’s largest oil producers had about C$4 billion in cash in March 2009, as the price of crude began to climb from a low of just under $34 a barrel in 2008. Their cash reserves fell to C$1.9 billion by 2011 as the recovery took hold and the industry began to expand again.
The spending, combined with the drop in 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,” in such an environment, said John Stephenson, chief executive officer of Stephenson & Co. Capital Management in Toronto, which oversees C$55 million.
While there may be a temptation to use the money for acquisitions, the low price and the large undeveloped assets that the companies already have will keep them from pursuing more large transactions, Stephenson said.
“The appetite for a deal is pretty minimal,” he said, describing the market as “frozen in time.” So-called tuck-in acquisitions may be possible, but they would have to be flowing barrels rather than new projects, according to Stephenson.
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 strong financial position,” said spokeswoman Julie Woo, in an email. Completion of the next phase at the company’s Horizon oil-sands mine with result in a “significant step-change” for cash flow later this year, she added.
Husky’s capital expenditures will remain 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 investing in capital projects, she added.
Suncor has already spent billions on two large transactions in the past year, including an all-stock takeover of Canadian Oil Sands Ltd., a transaction worth C$6.3 billion including debt. The Calgary-based oil producer also bought a 10 percent stake in the Fort Hills bitumen mining project from Total SA.
So far, investors aren’t rewarding Canada’s largest oil companies for the cash moats they’ve created. Shares of those with biggest cash piles are down the most this year 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 “of the world will do relatively well from here but 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.”