When will big growth and bigger spending come back to Canada’s oilpatch?
It hasn’t happened yet, although companies are starting to cast an eye towards potential expansions as cash flow levels surge with rising oil prices.
On the heels of second-quarter results that pumped out $982 million in profits — and record funds from operations of $2.7 billion — Canadian Natural Resources began sketching out details Thursday on future growth opportunities from the oilsands.
The country’s largest petroleum producer is examining projects that could add up to 95,000 barrels per day of output within several years from its Horizon oilsands mine. That’s the equivalent of adding an intermediate petroleum producer to its hefty mix.
In the short term, Canadian Natural Resources, which just finished a major expansion at Horizon, is working on ways to incrementally increase synthetic crude oil production by another 35,000 to 45,000 barrels per day.
No price tag for the development has been released. Company president Tim McKay expects a final decision this fall.
If the project does move ahead, work would be completed in a series of steps, timed around annual maintenance at the facility, to increase Horizon’s output.
“We feel very comfortable that the project is a very good project,” McKay said in an interview.
“We see these opportunities as being very robust economically.”
With benchmark U.S. oil prices closing Thursday near US$69 a barrel, these types of smaller, less capital-intense growth initiatives look mighty attractive today.
The real question is how much faith do petroleum producers have that crude prices will hold or go higher over the long term.
Canadian Natural Resources executive vice-chairman Steve Laut told a conference call Thursday the company is fine-tuning costs but would need to see West Texas Intermediate crude around $45 to $55 a barrel for the project to break even and provide a return.
In the longer-term, the Calgary-based producer has another project under the microscope.
It’s received early results from engineering and design work to expand the paraffinic froth treatment process at the Horizon operation north of Fort McMurray, designed to add another 40,000 to 50,000 barrels a day.
Preliminary estimates put the price at $1.4 billion.
“We would look to go to (the) board with an execution plan this fall. What we’d see is, potentially, maybe three to five years out for doing that project,” McKay added.
For the oilpatch, it’s refreshing to hear companies start to talk about expansion strategies as higher oil prices settle in this year.
Companies like Suncor Energy and Husky Energy have also talked about the next wave of growth coming from smaller, bite-sized developments that incrementally ratchet up production from existing operations.
It’s not the old days of big-ticket, multibillion-dollar greenfield developments employing thousands of workers.
But it is growth, which creates more jobs, production and royalties in the province.
“I would suspect expansions are the most robust economically; you’re able to do them in a step-wise fashion and control your costs,” McKay explained.
“I think, intuitively, that’s the best probably for most companies.”
The early wave of second-quarter reports has shown impressive results from many of the biggest players, demonstrating the payoff of cutting costs in lean years, and of higher prices bolstering cash flow levels.
For example, Suncor Energy spun out $972 million in net earnings during the quarter on $2.45 billion of cash from operations, even with the recent outage at Syncrude.
What makes the comments by Canadian Natural Resources unusual is the company’s willingness to talk about oilsands growth, rather than focusing purely on paying down debt or returning money to shareholders through dividends and buybacks.
“They are the first ones to talk about meaningful-sized potential expansions,” said analyst Jennifer Rowland with Edward Jones in St. Louis.
“With the cash they have, it does make sense to be looking at those kinds of projects.”
Canadian Natural Resources also announced it will increase its capital spending by $170 million this year to $4.6 billion to advance engineering and to purchase equipment for its Horizon expansion efforts.
Athabasca Oil Corp. also boosted its capital budget this week by $45 million to $185 million, and Suncor has increased its spending plans to about $5.35 billion this year, up from $4.75 billion.
But few others have followed suit.
Earlier this week, the Petroleum Services Association of Canada cut the number of wells it expects to be drilled this year by 500 to 6,900 across the country, a sign of pessimism in the service sector.
A new Raymond James report points out Canadian exploration and production companies will generate 22 per cent more cash flow in 2018 than last year.
Yet, producers have “stubbornly maintained” flat to lower year-over-year budgets this year, it noted.
The prevailing oilpatch psychology is to focus on capital discipline, although current economics indicate companies can find attractive returns through the drill bit, it said.
“We believe producers will effectively increase budgets through the balance of 2018 and that drilling-completion activity will trend higher,” said the report.
Analyst Jeremy McCrea with Raymond James believes industry sentiment is slowly improving, although companies are remaining prudent after several tough years and tepid investor interest.
“These firms are seeing fundamentally some of the better profits they’ve seen in a long, long time. The obvious question is why haven’t cap-ex budgets increased?” McCrea said.
“Given the huge (oil price) volatility swings we’ve seen over the last couple of years, there’s a real reluctance to put money to work.”
In other words, management teams and boards need to gain more confidence — on prices, market access and investor interest — before opening their wallets up wider.
Stronger oil prices through the fall, more progress on pipelines and another string of solid earnings should provide the fix.
Chris Varcoe is a Calgary Herald columnist.
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