Alberta crude production cuts expected to create winners and losers: analysts

Alberta crude production cuts expected to create winners and losers: analysts

CALGARY — Oil production cuts announced by the Alberta government will have the desired outcome of reducing steep discounts on its oil, but it will also create winners and losers, financial analysts say.

Shares in the companies most likely to benefit from the move to curtail crude production from larger producers starting Jan. 1 soared Monday as the price differential for heavy oilsands bitumen-blend fell.

Meanwhile, shares in oil producers who had been either benefiting or insulated from the discount prices stayed put or subsided.

“There are going to be a number of producers who will shoulder the brunt of the Alberta government’s 325,000 barrels per day in mandated production curtailments of raw crude and bitumen (namely the oilsands producers), but the broader health of the province is likely to benefit over the medium term from the decision as a result of narrowing differentials and stronger royalty revenue,” said a report from Calgary-based AltaCorp Capital.

Alberta Premier Rachel Notley announced Sunday the province will require producers with more than 10,000 barrels per day of output to cut production by about 8.7 per cent until there is enough shipping space on pipelines to improve prices, expected to take three months.

After that, the reduction will be lowered to 95,000 bpd through the rest of 2019.

In early trading Monday, Cenovus Energy Inc. rose as much as 13 per cent over its Friday close to $11.11, while Canadian Natural Resources Ltd. rose as much as 16 per cent to $38.74.

Cenovus CEO Alex Pourbaix was the first oilsands CEO to call for the province to curtail production. On Sunday both Cenovus and Canadian Natural issued statements of support for the Alberta move, as did Chinese-owned oilsands producer CNOOC-Nexen.

Canada’s largest oil and gas company, Suncor Energy Inc., said Monday its estimate of the impact of the provincial cuts will be provided when it issues its 2019 capital and production guidance.

“Suncor believes the market is the most effective means to balance supply and demand and normalize differentials,” it said. It has said it is insulated from price discounts because of its Canadian refineries and pipeline contracts.

In mid-day trading, Suncor was down 1.5 per cent while fellow Calgary-based companies that both produce and refine oil, Imperial Oil Ltd. and Husky Energy Inc., were off 4.1 per cent and 0.8 per cent, respectively.

The winners from the curtailments will include the provincial government (which estimates it will earn $1.1 billion more from royalties in the 2019-20 fiscal year); energy producers in B.C. and Saskatchewan, who will benefit from better prices without having to cut production; condensate producers, as that light oil isn’t included in the curtailment; and junior energy producers who are exempt from the program, AltaCorp said in its report.

The losers include integrated producers who will likely pay more for their refining feedstock and companies that had intended to grow their production in the first half of 2019, it said.

Of the 378 operators with active oil production in Alberta in October, only 25 produce more than 10,000 bpd, AltaCorp noted.

Oilfield service companies are also on the losing side of the equation, said GMP FirstEnergy in a note, because drilling budgets will likely shrink in early 2019.

Companies that previously reduced output voluntarily will receive credit under the Alberta plan.

Analysts said that means the market is already halfway to the provincial goal as estimates suggest about 150,000 bpd has already been shut in, mainly by Cenovus and Canadian Natural.

“Anecdotally, this will likely be a messy process with collateral damage (reservoir management, abandonments, take-or-pay overhang),” said a report from National Bank of Canada analysts.

The discount between Western Canadian Select bitumen-blend oil and New York-traded West Texas Intermediate was about US$21 per barrel on Monday morning, an improvement of about US$7 per barrel from Friday, according to Net Energy. WTI was up almost US$2 per barrel.

“We estimate oil prices need to average only US$2.50 per barrel higher to offset the cash flow impact of the mandated production cut,” said senior analyst Jennifer Rowland of Edward Jones Equity Research in a note.

The cuts will hit the larger Canadian economy, according to BMO Capital Markets, which estimates gross domestic product will drop by more than two per cent on an annualized basis in the first quarter of 2019.

“The expected rebound in production later in the year should contain the full-year 2019 GDP impact and potentially lift 2020 slightly, depending on timing,” it added, adjusting its national growth forecast for 2019 to 1.8 per cent from 2.0 per cent.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

(Image from Facebook)
Rocky Mountain House store bars vaccinated customers

‘No proof the vax works and no proof it does not shed’

Bloc Québécois MP Sebastien Lemire rises during question period in the House of Commons on Parliament Hill in Ottawa on Friday, March 12, 2021. A Bloc Québécois MP has apologized for taking a screen shot of a Liberal MP who inadvertently appeared nude during virtual proceedings in the House of Commons last week. THE CANADIAN PRESS/Sean Kilpatrick
Bloc Québécois MP apologizes for taking nude photo of Liberal MP William Amos

‘I have no idea how that photo made its way into the media’

FILE - This Sunday, June 25, 2017, file photo shows TK Holdings Inc. headquarters in Auburn Hills, Mich. A driver in South Carolina is the latest person to be killed by an exploding Takata air bag inflator. Honda says that a faulty driver’s air bag blew apart in a crash involving a 2002 Honda Accord in Lancaster County, South Carolina. The company wouldn’t give details of the Jan. 9, 2021, crash near Charlotte, North Carolina, nor would it identify the person who was killed. (AP Photo/Paul Sancya, File)
South Carolina driver killed by exploding air bag inflator

Drivers can check to see if their vehicles have been recalled

Hospital staff shift the body of a COVID-19 patient on a stretcher to a waiting ambulance at a specialized COVID-19 hospital in Noida, a suburb of New Delhi, India, Wednesday, April 21, 2021. (AP Photo/Altaf Qadri)
Low on beds, oxygen, India adds global high 314K virus cases

Government rushing oxygen tankers to replenish hospital supplies

A traveler wearing a protective mask, due to the COVID-19 outbreak, walks through the nearly empty JetBlue terminal at Logan Airport in Boston, Friday, May 29, 2020. THE CANADIAN PRESS/AP, Charles Krupa
JetBlue expanding wings with service to Vancouver from New York and Boston

JetBlue will have to compete with Canadian airlines

Westerner Park’s Exhibition Hall was used as a vaccination clinic on Wednesday. A steady stream of people came to get their COVID-19 shots either by appointment or as walk-ins. Photo by PAUL COWLEY/Advocate staff
No long lineups at walk-in vaccination site in Red Deer

A steady stream of people walked into Westerner Park on Wednesday to… Continue reading

A Blanding’s turtle (Gabrielle Fortin/Contributed)
Earth Day: Finding hope in an old sweater

During the pandemic, many of us have spent several months at home.… Continue reading

Education Minister Adriana LaGrange says 1.7 million reusable masks have been ordered at a cost of $4.2 million.” (Advocate file photo).
Alberta teachers and education minister swap accusations of politicizing curriculum

EDMONTON — Education Minister Adriana LaGrange says the group representing Alberta teachers… Continue reading

FILE - In this March 19, 2021, file photo, people take pictures of the Olympic rings installed by the Japan Olympic Museum in Tokyo. The vaccine rollout in Japan has been very slow with less than 1% vaccinated. This of course is spilling over to concerns about the postponed Tokyo Olympics that open in just over three months.(AP Photo/Hiro Komae, File)
Olympic bodies launch competitive series in virtual sports

Olympic body hopes to reach more young people

Linda Tomlinson
Gardening: Leave the lawn until the soil is dry

Spring is arriving, Alberta style with warm days, cold days and snow.… Continue reading

Silent protests were held recently in response to Red Deer Public Schools’ decision to reject a Pride Week in favour of a Diversity Week. Some former employees at Red Deer Public are saying the decision is misguided. (File photo by Advocate staff)
Letter: School board silencing Pride Week concern

While it has been our practice to not comment on matters arising… Continue reading

Most Read