Varcoe: The lower loonie has a positive side for Canadian oil fields

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The annual season for Canadian oil producers as they work out their spending plans for the year ahead is now underway and it has arrived with two contradictory forces at play: lower oil prices and the fallout from a falling loonie. .

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Benchmark U.S. crude prices have retreated from early June highs of US$120 a barrel to fall below US$80 recently amid growing fears of a looming global recession that could reduce demand. West Texas Intermediate crude closed Friday at US$79.49 a barrel, down $1.74.

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Analysts say the drop took some of the steam from planned budget increases for 2023.

“This market volatility with oil prices and stock prices puts many increased investment budgets on hold,” said analyst Jeremy McCrea of ​​Raymond James.

“There is less and less confidence about the direction that commodity prices will take here over the next year.”

On the other hand, the loonie is falling against the rising US greenback.

A lower Canadian dollar reinforces the return on crude oil and natural gas sold in US dollars — and that helps producers weather some of the headwinds.

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Earlier this week, Whitecap Resources became one of the first Canadian producers to release its spending plan for next year, announcing a capital budget of $925 million.

It expects to drill about 250 wells in Saskatchewan, Alberta and British Columbia, following the successful acquisition of XTO Energy Canada by Whitecap for $1.9 billion in June.

The takeover makes apples-and-apples comparisons between this year’s budget and 2023 tricky; Whitecap’s capital expenditures are pegged at $680 million in 2022.

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In a conference call with analysts on Wednesday, Chief Financial Officer Thanh Kang noted that every $5 a barrel change in WTI changes Whitecap’s cash flow by $110 million a year.

However, a five-cent drop in the loonie to 73 cents against the U.S. dollar recently “cushioned” the company from falling oil prices, improving its cash levels by $135 million, he said.

Even with “significant volatility, the commodity price environment remains solid, especially in light of the weak Canadian dollar,” CEO Grant Fagerheim said.

Birchcliff Energy executives gathered in Lake Louise on Friday for a planning session, including preparation for its 2023 business.

“We have more computer executions of different scenarios than you can shake your fist at. You have so many variables,” Birchcliff CEO Jeff Tonken said in an interview.

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Analysts say volatility is the order of the day – and for the year ahead – given rising inflation pressures, labor constraints, uncertain geopolitical forces and fears of a global recession.

Overall industry spending has increased in 2022 on the strength of commodity prices, although it is still well below 2014 levels, when crude prices previously exceeded $100 a barrel and major projects tar sands have advanced.

During the second quarter of the year, the industry’s capital expenditures for mining reached $9.3 billion, its highest level since 2018, according to Statistics Canada.

Alberta Energy Minister Sonya Savage noted that provincial land lease sales and drilling activity levels were also up, aAlthough the Western Canadian Select heavy oil discount has widened in recent months.

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The province estimates that oil and gas investment in Alberta this year will increase nearly 35% from 2021 levels.

“Our (provincial) budget is based on oil at $70 a barrel and our industry is profitable even at much lower prices,” Savage said in an interview.

“I don’t expect the price of oil to stay below $80. I’m pretty sure it’ll (go up) and I’m not worried about capital expenditure either. The industry is rather optimistic.

Precision Drilling Corp. CEO Kevin Neveu said the Calgary-based company had 67 rigs in service in Canada this week. That’s right after the peak of 72 active rigs last winter, typically the industry’s busiest season.

He expects a lot of drilling activity to take place in the Montney formation and the Clearwater heavy oil play next year. As oil prices fall, customers have “wiggle room” as they have underutilized their cash levels.

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“We expect to see demand for drilling and services pick up in 2023. I would say that’s sort of a 5% low, maybe up to 10%,” Neveu added.

While spending in the sector is expected to increase, part of that is due to inflation. Even if companies wanted to invest a lot more money, they face bottlenecks due to labor and equipment constraints.

“We don’t expect a drastic change in activity,” said oil services analyst Tim Monachello of ATB Capital Markets. “It’s just kind of modest growth.”

And there’s a positive force helping the sector this fall — the rapidly declining Canadian dollar. The loonie fell to its lowest level in two years earlier this week and fell to 72.96 US cents on Thursday.

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Even with lower oil prices, WTI crude prices sit near $110 a barrel in Canadian dollars, while Western Canadian Select heavy oil remains around $80, according to a report from Eight Capital on Friday.

“In Canadian dollars, oil prices are almost 40% higher than what you’d see in US dollars, so that’s pretty significant,” he said. Phil Skolnick, analyst at Eight Capital.

At Birchcliff, Tonken noted that the company sells 87% of its natural gas in US dollars. He also expects natural gas prices to remain healthy next year.

Additionally, the company expects to be debt free later this year, which will reduce some of the risks associated with the unpredictability of commodity markets and currency exchange rates.

Tonken expects spending across the Canadian sector to be “measured and balanced” in 2023.

“I don’t think you’re going to see a ton of growth. You will see growth of some businesses,” he added.

“We’re full of optimism…but we don’t see any giant drilling programs that will substantially increase production.”

Chris Varcoe is a columnist for the Calgary Herald.

cvarcoe@postmedia.com