Low prices are hurting the oil sector, but Canada has a few advantages

Persistently low oil prices are putting a spotlight on spending cuts and layoffs in the Canadian oilpatch, as companies release details of their latest financial performance.

The North American benchmark price for a barrel of crude has fallen from around $70 US per barrel at the outset of the year to less than $60 US this week. 

Persistently low prices have largely been driven by a move from the Organization of Petroleum Exporting Countries (OPEC) and its allies to start releasing more oil, driving up the global supply and reversing production cuts that had helped lift prices.

Crude oil is Canada’s largest export and any hit to the price means less revenue for the economy, especially for Alberta.

But Canadian companies are buoyed by certain advantages, especially compared to their U.S. counterparts, analysts say. 

Surviving by adapting

In the last decade, many companies here have gone out of business or been scooped up by larger players — leaving a handful of bigger companies that are both less vulnerable to market fluctuations and are narrowly focused on keeping costs low while returning money to shareholders.

“The companies that have survived here are the companies that have been able to adapt,” said Patrick O’Rourke, the Calgary-based managing director of institutional equity research at ATB Capital Markets.

“It’s effectively Darwinism, in a sense.”

Still, companies on both sides of the border have made cuts. 

Earlier this fall, Calgary-based Imperial Oil announced it planned to eliminate about 20 per cent of its workforce, or around 900 jobs, in the coming years. Likewise, U.S.-based ConocoPhillips said it would cut some of its Canadian employees beginning in November.

The layoffs come as companies attempt to shore up their balance sheets in the event of a greater price “collapse,” said oil market analyst Rory Johnston. 

“They want to make sure that they are as prepared as possible,” said Johnston, author of the Commodity Context newsletter. 

Companies like Calgary-based Whitecap Resources are tightening their budgets or keeping them flat. While those that have taken the unusual step of raising their spending plans amid the lower price environment, like the U.S.-based Matador Resources, have seen their stock prices fall, says O’Rourke.

He expects that means more penny-pinching to come.

“It’s a bit of a copycat industry,” said O’Rourke, noting that “shareholders are rewarding conservative capital plans and capital discipline.”

Advantages of the oilpatch

Dane Gregoris, an analyst with Calgary-based energy research firm Enverus, says the Canadian oilpatch has other advantages that help keep production high despite lower prices. It is still reliably productive and, in the long run, cheaper to exploit.

U.S. companies operating in the Permian Basin, which straddles west Texas and New Mexico, have been plagued by problems. That’s because, despite being the country’s most prolific oil-producing area, according to the U.S. Energy Information Administration (EIA), it has lately been producing more water and natural gas and less oil. 

With prices low, U.S. companies are reluctant to spend money to drill new wells that won’t generate as much oil, leading the CEO of the leading Texas producer Diamondback Energy to suggest earlier this year that production in that country has hit a “tipping point” and that production will start to decline. 

In comparison, Canada is more dominated by the oilsands, which require mines and factories. And though capital costs for those are high upfront, once spent, companies can keep production chugging along — and even raise it by finding efficiencies here and there — without spending a lot of money. 

Even the conventional oil sector in this country is better positioned versus that of the U.S., because it’s not encumbered by the problems with the Permian Basin, says Gregoris.

“There is some optimism from Wall Street’s perspective, and Bay Street, that these Canadian oil companies are well positioned for the long-term given their depth of resource,” he said.

The completion of the Trans Mountain Pipeline expansion, which carries oil from Alberta to the B.C. coast, has also helped Canadian producers by opening access to new export markets in Asia. 

Access to those markets has, in recent months, helped to somewhat offset the sting of overall lower commodity prices, says O’Rourke, with ATB.

Despite these advantages, Gregoris says, the low price environment is far from ideal and will likely continue for months to come. OPEC and its allies plan to continue ramping up production in December, then pause in the new year.

Prices are estimated to stay around $62 US per barrel for the rest of the year, and could tumble down to around $52 US in 2026, according to the latest forecast from the EIA. 

“We sort of anticipate the environment we’re in today that translates into next year,” he said.