Signs of recovery in Canada’s oil patch
17 Jun 2016
GEOFFREY MORGAN Financial Post
More rigs headed to oilfields
Leading producer boosts budget for well drilling starting in early July
After a prolonged and brutally challenging oil price collapse, one of Canada’s largest energy players has signalled it will send additional rigs back out into Western Canada’s oilfields, a tentative sign of confidence in rising prices
Canadian Natural Resources Ltd., the country’s largest producer of natural gas and conventional heavy oil, said it will spend $50 million more than initially planned to drill 123 new heavy oil wells, five new light oil wells and 11 thermal oil wells in the second half of this year, with the first of those newly deployed rigs starting work in July.
The additional spending is small relative to the company’s overall budget, targeted between $3.5 billion and $3.9 billion, but shows a renewed confidence in the hardhit sector.
CNRL president Steve Laut said at the company’s investor day this week that the decision was made “with oil prices strengthening,” but he was cautious to commit any more money to further drilling even if prices continue to recover.
“Right now, we’re pretty happy with taking this first step. We’ll wait and see,” Laut said in an interview Thursday. Spending more money and drilling even more wells was a “possibility,” he said, “but I think we’ll need to wait until we set our budget for 2017.”
CNRL is one of the first large oil and gas producers to deploy more capital spending since oil prices began their long slide roughly two years ago. The company is able to re-deploy rigs in part because it has been able to sharply reduce its costs.
During investor day presentations, CNRL executives said the company could add 210,000 barrels of daily oil production with West Texas Intermediate benchmark prices at or near US$50 per barrel.
A handful of other producers around North America have also begun deploying more rigs in recent weeks. Oklahoma City-based Devon Energy Corp. boosted its capital expenditure budget to US$1.3 billion from US$1.1 billion this year to bring more production online.
Calgary-based Tourmaline Oil Corp., another low-cost producer, said Wednesday that it could increase the number of rigs it plans to use in 2017 to 22 from 12, if prices rise.
Still, Laut said he was not concerned with what other operators were doing and their actions’ potential effect on oil prices. “We’re focused on our own activities so don’t really worry too much about our competitors,” he said.
WTI declined Wednesday to under US$47 per barrel Thursday, after the benchmark had settled at above US$50 earlier this month.
Moody’s Investor Service said in a report Thursday there are still risks to the oil price recovery since the gains have been supported by temporary factors such as the wildfires around Fort McMurray and violence in Nigeria.
“As companies start to drill and increase supply, it contributes to the price issue,” Moody’s senior vice-president, corporate finance group Terry Marshall said.
Marshall added he expects oil producers will be cautious about rig redeployments in 2016 given that oil prices have risen and fallen to and from US$50 and US$60 at various times over the past two years.
Raymond James analyst Chris Cox said in a research note that CNRL signalled it could also begin spending more money on conventional oil and gas development, which “has been de-emphasized in the past few years” as the company has focused on completing a major expansion of its Horizon oilsands mine.
Asked whether CNRL would ramp up spending on conventional oil and gas assets, Laut said that initially extra money would be used to strengthen the company’s balance sheet.
“Then we’ll take a balanced approach between the balance sheet, returns to shareholder, resource development and acquisitions,” he said.