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

Persistently low oil prices are drawing attention to cost cuts and layoffs in the Canadian oil industry as companies release details of their latest financial results.

North American standard The price of a barrel of oil has fallen from around US$70 a barrel at the start of the year to less than US$60 this week.

The persistently low prices were largely due to the decision by the Organization of the Petroleum Exporting Countries (OPEC) and its allies to begin produce more oilwhich would increase global supply and reverse the production cuts that helped drive up prices.

Crude oil is Canada's largest export product and any decline in prices means less revenue for the economy, especially for Alberta.

But Canadian companies have certain advantages, especially compared to their American counterparts, analysts say.

Survival by adaptation

Over the past decade, many companies here have gone out of business or been acquired by larger players, leaving a handful of larger companies that are less vulnerable to market fluctuations and 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, managing director of institutional equity research at Calgary-based ATB Capital Markets.

“In some ways it’s actually Darwinian.”

However, companies on both sides of the border have started to cut back.

Calgary-based Imperial Oil announced earlier this fall that it plans to eliminate about 20 per cent of its workforce, or about 900 jobs, in the coming years. Similarly, the American company ConocoPhillips said it would cut some of its Canadian employees will start work in November.

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

“They want to be 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 the same. While those who have taken the unusual step of increasing their spending plans in a lower price environment, such as those based in the US Matador Resourcessaw their stock prices fall, O'Rourke says.

He expects this to mean more stinginess is ahead.

“It's kind of a copycat industry,” O'Rourke said, noting that “shareholders reward conservative capital plans and capital discipline.”

Benefits of oil patch

Dane Gregoris, an analyst at Calgary-based energy research firm Enverus, says Canada's oil field has other advantages that help keep production levels high despite lower prices. It is still reliably productive and, in the long run, costs less to operate.

US companies operating in the Permian Basin, which covers western Texas and New Mexico, are facing problems. This is because even though it is part of the country most prolific oil-producing area, according to the US Energy Information Administration (EIA), it has recently produced more water and natural gas, and less oil.

With prices low, U.S. companies are reluctant to spend money on drilling new wells that won't produce as much oil, prompting the CEO of leading Texas producer Diamondback Energy to suggest earlier this year that that country's production had reached “turning point“and this production will begin to decline.

In comparison, Canada is more dominated by oil sands, which requires mines and factories. And while their initial capital costs are high, once they're spent, companies can continue production—and even increase it by finding efficiencies here and there—without spending a lot of money.

Even the country's traditional oil sector is better off than the U.S. because it is not burdened by the problems of the Permian Basin, Gregoris says.

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

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

Access to these markets in recent months has helped offset some of the negative impact of the general decline in commodity prices, says ATB's O'Rourke.

Despite these benefits, Gregoris says the low price situation is far from ideal and will likely continue for several months. OPEC and its allies plan to continue increasing production in December, then a pause in the new year.

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

“We kind of foresee that the environment we find ourselves in today will change next year,” he said.