CALGARY – Canadian Natural Resources Ltd. president Tim McKay describes his company’s ongoing push to convince fund managers that oilsands are a more investible business today than before the oil price collapse of 2014 as “a marathon.”
On the company’s earnings call last Thursday — and indeed, as all oilsands companies reported second quarter results in the last two weeks — executives faced questions about why their stocks continue to suffer institutional investor apathy despite significantly improved costs and a better market outlook for heavy oil given production declines in places like Mexico and Venezuela.
A report in April from IHS Markit shows that operating costs have seen a 40 per cent reduction in operating costs to US$20 per barrel. Steam-based oilsands projects have seen their costs fall closer to 50 per cent, to roughly US$7 to US$8 per barrel over the same time period.
Despite the belt-tightening and efficiencies, major Canadian energy companies continue to trade near multi-year lows and some oilsands focused producers are trading near their historic lows as analysts say generalist investors have largely abandoned the sector to invest in tech.
To date, McKay said, Canadian Natural and its competitors in the oilsands haven’t gotten much credit for the cost cutting initiatives the industry has undertaken.
However, with ground breaking imminent on projects such as the Trans Mountain pipeline expansion, the company is hopeful sentiment toward the industry is turning.
“I think we’re starting to get some traction,” CNRL executive vice-chair Steve Laut said, adding that part of his responsibilities for the past year have been highlighting his company’s and his industry’s improvements on cost and environmental performance. “That’s starting to make a difference,” he said.
Canadian Natural’s oilsands mining and upgrading costs averaged $24.17 per barrel in the second quarter of 2019, the result of a prolonged effort to rein in expenses.
Those costs are 28 per cent lower than they were in the same quarter five years ago, in 2014, when the company’s average cost to mine and upgrade oilsands bitumen was $36.61 per barrel. They’re also down 46 per cent from a high point of $44.94 per barrel in the second quarter of 2013.
While there have been a number of factors driving costs down — including a decline in natural gas commodity prices, driving down input costs at oilsands businesses — the single largest contributing factor to the reduction in costs has been an improvement in reliability, IHS Markit vice-president, North American crude oil markets Kevin Birn said.
“I have been surprised at the degree to which they’ve delivered those reductions,” Birn said, adding that debottlenecking projects and other cost cutting drives have also had a dramatic effect.
In addition, now just a handful of companies own the majority of oilsands producing assets, which has also eliminated the inflationary pressures in the basin as CNRL, Suncor Energy Inc. and Cenovus Energy Inc. have spent billions buying up assets from foreign firms exiting the play.
Five years after oilsands operations had a reputation for being among the most expensive oil operations globally, Birn said the business has changed. “I call it utility style oil,” he said, noting the companies are now driving the cash they generate into returns rather than plowing that money back into new growth projects.
Thanks to cost cutting and also a string of opportunistic acquisitions, they’re also generating more cash amid lower oil prices.
A comparison of 2014 and 2019 results show that cash flows at the six largest oilsands companies in Canada are up 19 per cent at a time when realized bitumen and Western Canada Select heavy oil prices still haven’t recovered to what they were pre-2014 oil price crash. The West Texas Intermediate benchmark oil price traded at US$55.25 per barrel on Friday, whereas WTI traded over US$100 per barrel for the entire first half of 2014.
However, you wouldn’t know that looking at the stock performance of these companies, or indeed at the broader energy sector.
“Generally, broadly speaking, energy is an unloved sector,” said Jennifer Rowland, a St. Louis-based oil and gas analyst for Edward Jones, who covers both U.S. and Canadian oil producers. “It just seems like the industry can’t win.”
The S&P/TSX Capped Energy Index is down 5.18 per cent year-to-date, even as the Standard & Poor’s U.S. Energy Index is up 5 per cent during the same period. U.S. crude is up 22 per cent for the year.
It just seems like the industry can’t win
Jennifer Rowland, analyst, Edward Jones
For oilsands producers, Rowland said, costs have come down dramatically but they also started at the higher end of the cost curve and “it’s not like they’re taking costs out and everybody else is standing still.”
In 2014, she said, generalist and institutional investors wanted to own oil and gas stocks for their growth. Fund managers who want that type of growth in their portfolio have shifted their money into the tech sector.
Now, they want to see oil and gas companies demonstrate that they can be value-oriented stocks rather than growth, and more energy companies need to demonstrate their cost-discipline in order to be rewarded as value holdings.
Oilsands companies are also making increasingly bold moves to try and demonstrate this to investors — in some cases, acting completely opposite to actions taken in the lead up to 2014, when the oilsands were the world’s hottest energy play.
At MEG Energy Corp., for instance, president and CEO Derek Evans announced the company was not going to renew one of its leases on a future growth project and would instead “let those lands disappear” rather than pay the increasing annual rent on the land.
Still, generalist and institutional investors are staying on the sidelines, Rowland said.
Looking at Suncor Energy Inc.’s ability to generate $3.4 billion in cash from operating activities last quarter, she said, “These are the kind of stocks that investors should want to own.”
However, given the buyers’ strike, she said it was “just not fun right now” to be in the oil business or to be an analyst covering it.
“General investors are saying, ‘To heck with energy,’” she said.
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