• Oilsands producers pile on debt to survive the crash but eye tentative recovery

    Source: Financial Post - Top Stories / 23 Jul 2020 17:20:48   America/New_York

    CALGARY — Suncor Energy Inc. and Cenovus Energy Inc., two of Canada’s largest oilsands producers, have taken on billions of dollars of debt to weather the historic oil price collapse and COVID-19 pandemic this year but believe the outlook is beginning to improve. “I’m wary to say the worst is behind us,” Cenovus president and CEO Alex Pourbaix said in an interview with the Financial Post on Thursday after his company posted a $235-million net loss in the second quarter, which is down from net earnings of $1.8 billion a year earlier. “(But) we got through this a lot better than many people thought at the beginning.” Still, Pourbaix said Cenovus and the wider oilsands industry responded to the collapse in crude oil prices with cuts in the second quarter and are now expecting a better outlook for the sector for the rest of the year. Pourbaix said the entire domestic oil industry showed its flexibility and shut in over 1 million barrels of daily oil production as crude prices crashed. There is still 500,000 bpd shut in across Western Canada, the CEO estimates. For its part, Cenovus shut in 60,000 bpd in April and had considered shutting in up to 100,000 bpd. As Canadian heavy oil prices began to rise in May, Pourbaix said the company began ramping its production back up. By June, the company reached full production and even bought output credits to pump oil beyond its mandated quota imposed by the Alberta government. The province has left production limits unchanged at 3.81 million bpd from December through to August. Alberta powers up hydrogen sector with three small-scale projects as part of plan to reduce emissions Oilsands’ slow return keeps once-congested pipelines partly empty Full pain of pandemic about to be revealed in oilpatch’s ‘ugliest’ earnings ever The company’s results Thursday show it produced an average of 400,000 bpd in the second quarter, an 8 per cent increase over the 371,000 bpd it pumped during the same quarter in 2019. While Cenovus was able to add production over the course of the quarter, it also increased its debt load, which the company has been working to pare back since its $17.7-billion acquisition of ConocoPhillips oilsands and Canadian natural gas assets in 2017. Both Cenovus and Suncor added to their short- and long-term debt in the first six months of the year as the combination of the coronavirus pandemic and the Saudi-Russian oil price standoff led to crude oil prices crashing in March. In the second quarter, both West Texas Intermediate and Western Canada Select oil price benchmarks tumbled into negative territory. Particularly painful for heavy oil producers, the WCS price languished below US$5 per barrel for an extended period as commuters stayed home from work and refineries scaled back the amount of oil they were processing. The WCS benchmark traded down 1.5 per cent to US$31.89 per barrel on Thursday, while U.S. West Texas Intermediate (WTI) crude fell 2 per cent to settle at US$41.07. Cenovus, which had no short-term borrowings at the end of 2019, now lists $299 million in short-term debt. The company’s long-term debt has risen to $8 billion at the end of the second quarter, compared with roughly $6.7 billion at the end of 2019. On an earnings call Thursday, analysts grilled Pourbaix and other Cenovus executives about the company’s plan with its expected cash now that oil prices are rising again. “From our perspective, absolute priority is the balance sheet until we get that debt back down to a level that we’re a lot more comfortable with,” Pourbaix said, noting the company’s goal is to drive its net debt below $5 billion before it re-instated its dividend, which it suspended in April. Citibank’s Prashant Rao noted that the sequential improvement in the quarter leaves Cenovus in good position for a second half recovery on the back of rising oil prices. “These results confirm our views going into the print. Shares continue to trade substantially below long-term fair value; our DCF-based methodology points to C$9 as the starting point for an appropriate valuation. We reiterate our Buy,” the analyst said in a note on Thursday. The Cenovus stock was trading down just under a half per cent to $6.65 per share in a broadly negative market. Suncor, Canada’s largest oil company by market capitalization, also saw both its short-term and long-term debt rise. The Calgary-based integrated oil producer’s short term debt rose to $3 billion at the end of June, up from $2.1 billion at the end of 2019. Its long-term debt jumped to almost $16 billion at the end of the second quarter from roughly $12.9 billion at the end of last year. “We knew that the second quarter would be challenging. Certainly the most challenging in our modern history,” Suncor president and CEO Mark Little said on the company’s second quarter earnings call Thursday. Little and other Suncor executives said the company is not expecting to take on more debt in the second half of the year but stopped short of detailing what the company would do with rising cashflows as oil prices improve. Little said it was too early to commit to a strategy amid volatility in crude markets and uncertainty about the coronavirus pandemic as economies re-open. “Let’s see it before we decide what to do with that additional cash,” Little said. Suncor reported a net loss of $614 million in the second quarter, compared with $2.7 billion in net earnings a year earlier. During the pandemic, Suncor and its partners Teck Resources Ltd. and Total SA decided to shut down one of the two units at its 190,000-bpd Fort Hills oilsands mining project. Little said there is currently a debate among the partners about scaling production back up at the facility. “There’s a substantial chance it’ll be back online by the end of the year,” Little said. Phil Skolnick, analyst at Eight Capital, expects some producers “to ramp up production and further drive down the high fixed operating cost burden. ” Overall, Suncor financial and operating results were better than expected, National Bank Financial analyst Travis Wood wrote in a research note, raising its target price for the stock to $28 per share from $27. The stock was trading at $23.1, down nearly 3.4 per cent for the day. “Through the remainder of the year, Suncor will continue to focus on costs, with incremental help from what should be a fully operating (Fort Hills mine) by year-end,” Skolnick said, adding that a new pipeline connecting its Syncrude project and its main oilsands mind would soon be complete and further boost productivity. Financial Post • Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan http://feedproxy.google.com/~r/FP_TopStories/~3/pOjmmjuGkSM/oilsands-producers-pile-on-debt-to-survive-the-crash-but-eye-tentative-recovery
Share on,