Oil prices have climbed above US$81 a barrel and natural gas markets continue to heat up as winter weather draws near .
These are bullish times for Canadian petroleum producers, with strong third-quarter profits anticipated in the coming weeks, after companies survived the depths of last year’s downturn.
Even with higher commodity prices, don’t expect a sudden change in business strategies as 2022 capital programs roll out before the end of the year.
On Thursday, Whitecap Resources unveiled its plans for next year. Its blueprint includes a 38 per cent monthly dividend increase, paying down debt and modest production growth.
It’s a familiar refrain for the sector, which is seeing the effect of red-hot oil and gas prices.
“We are in a new paradigm,” Whitecap CEO Grant Fagerheim said in an interview.
“We have not seen these conditions, with strong oil prices, strong natural gas pricing — we have got a weaker Canadian dollar (and) you have strong capital efficiencies.”
The Calgary-based oil and gas producer announced a capital program next year of about $480 million — above this year’s revised spending of around $430 million — but $90 million below preliminary expectations .
The reduction stems from accelerating about $55 million of spending into the final three months of this year, securing the rigs and labour needed to add 39 wells to its fourth-quarter drilling program.
It has also seen about $35 million in savings from continued capital efficiency measures.
The company announced an increase to its monthly dividend, pointing out it can fully pay for its 2022 capital budget plans and dividends from fund flows with benchmark oil prices as low as US$40 a barrel.
On Thursday, benchmark West Texas Intermediate (WTI) crude prices closed at $81.31, up 87 cents, its highest point since 2014. Benchmark U.S. natural gas prices were up slightly, closing at $5.69 per mmBTU.
“I don’t think we are going to see material spending increases. There are a few factors at play here that might lead to some natural minor and unavoidable increases, namely core inflation,” said analyst Patrick O’Rourke of ATB Capital Markets.
“Companies need to be cautious of protecting their balance sheets because there’s not a lot of capital available — whether it be debt or equity — and if there is a pullback in prices, companies want to be prepared.”
A recent survey of Canadian oilpatch executives, conducted by Raymond James, found their average price outlook for oil a year from now is $76.50 a barrel.
Asked what they will do with higher free cash flow levels, 57 per cent of operators expect to spend “slightly higher” or “higher” next year. Two-thirds of respondents anticipate greater efforts to reduce debt, and 53 per cent expect more spending on dividends.
Surge Energy CEO Paul Colborne said the company, along with much of the Canadian sector, will remain cautious about spending additional money to boost output after last year’s downturn.
The Calgary-based junior producer, which completed two acquisitions in the past year, expects capital spending of about $120 million next year to keep production stable.
“We’re all a little gun shy by the way of ramping up production. We’d rather pay down debt, keep production flat, generate free cash flow,” he said.
“In Surge’s case, we would look more for sustained oil prices at high levels before we would change much.”
And that’s precisely what investors want to hear.
Laura Lau, chief investment officer with Brompton Group, said the market wants to see producers remain focused on higher dividends and increasing share buybacks, not enacting double-digit spending increases.
“There will be a point where investors will be happy for them to spend more money to increase production, but not too much,” she added.
There will be ample financial ability to increase dividends and share buybacks.
A report this week from Peters & Co. noted WTI oil averaged $70 a barrel in the July-to-September period, its highest quarterly average since 2014 and well above the $41 mark recorded a year earlier.
Meanwhile, AECO natural gas prices in Alberta averaged $3.58 per thousand cubic feet, up 58 per cent from a year earlier.
“This commodity price strength is expected to persist into (the fourth quarter) and will provide optionality for many producers with respect to capital allocation decisions into 2022,” the report states.
Last month, Tourmaline Oil Corp. announced a $1.13-billion capital budget for 2022, which it described as “essentially a maintenance program.”
Canada’s largest gas producer said its 2021 capital program had been raised to $1.38 billion, with increases in the second half of the year focused on higher production and a modest acceleration of drilling.
The company also announced an increase to its regular quarterly dividend, as well as declaring a special cash dividend.
All of this comes amid talk of a global energy crisis, with record natural gas prices in Europe, while a Bank of America report this month said Brent crude could hit $100 a barrel if “low stocks and an air-travel rebound collide with a cold winter.”
Fagerheim said the “energy crunch” that the world is now grappling with is the culmination of underinvestment in production for the past five years, which will not be easy to reverse.
At Whitecap, the company said it will fully fund its 2022 capital program and its higher dividend payments, and will still have plenty of free cash to spare.
It will direct about half of its discretionary funds to bolstering its balance sheet, while the rest is returned to investors through share buybacks and dividends.
“Investors are not wanting you to grow more aggressively than five per cent. So at this particular time, investors are preferring a return of capital back,” Fagerheim added.
“We will see if behaviours change after the first quarter of next year and into the back half of 2022.”
Chris Varcoe is a Calgary Herald columnist.
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