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Saturday, Apr 4th, 2020

Varcoe: Bankruptcies, job losses worry province as oilpatch wrestles with grim outlook

The following text was excerpted from the media outlet cited on March 13, 2020 and is provided to Noia members for information purposes only. Any opinion expressed therein is neither attributable to nor endorsed by Noia.

From Calgary Herald 

How hard will the one-two punch of an epic drop in oil prices and a global pandemic hit the oilpatch and the broader Alberta economy?

At this point, the outlook is depressing.

Consider some preliminary economic modelling done in the past week by ARC Energy Research Institute.

Under a new base-case scenario for the Canadian oil and gas industry this year, lower oil prices (with benchmark West Texas Intermediate crude averaging US$41 a barrel in 2020) would have a cascading effect on the industry.

Cash flow levels are estimated to fall by 63 per cent, dropping from initial projections entering the year of $50 billion to just over $18 billion.

That’s a mammoth $32-billion drop.

The number of oil and gas wells drilled under this scenario could be chopped in half, to around 2,500.

How dismal is that?

According to data from the Canadian Association of Petroleum Producers, it would be the lowest number of wells completed dating back half-a-century or, on a more current basis, far below the 4,600 drilled in 2016 when oil prices tanked.

“This is as serious as it gets,” said ARC Energy Research Institute executive director Peter Tertzakian.

“The low prices aren’t going to last forever and the pandemic isn’t going to last forever. We just have to hunker down for the next six months to a year and take it from there.”

The situation is dynamic and can shift quickly. But the analysis provides a directional sense of just how enormous the challenge is facing the sector.

It was only a week ago when it looked like OPEC and Russia would strike an accord to lower production by an additional 1.5 million barrels per day to help stabilize oil prices as global energy demand stumbles due to the coronavirus outbreak.

Now, two of the world’s largest producing countries are cranking up output to inflict maximum pain on oil markets, including North American producers.

The escalating concern over COVID-19 adds another destabilizing dimension.

Much will depend on how long these two events unfold and how the public, business leaders and governments respond in the coming weeks.

One emerging issue is the level of debt already facing some energy companies, while a credit crunch could come in the weeks and months ahead as cash-flow levels drop.

A sharp downturn in oilpatch spending will also lead to less drilling, reverberating through the industry.

“There is a triaging … of issues here,” Tertzakian said.

“The greatest concern is not actually with the (exploration and production) companies. In the near term, it’s the service companies …the activity just completely slows down.”

On Friday, the federal government announced it’s making $10 billion available to companies with a credit facility program, through the Business Development Bank of Canada and Export Development Canada. It will also will look at a broader fiscal stimulus package, potentially by next week.

The Bank of Canada also lowered its overnight rate by another half-percentage point on Friday, which should help.

Premier Jason Kenney said his government intends to unveil its own fiscal stimulus package next week, noting “we are likely facing a liquidity crisis amongst many of our mid-sized energy producers” because of their limited access to capital.

If the federal response isn’t adequate, the province is examining additional credit-type support initiatives. The premier said the province is looking at a “TARP-like instrument,” similar to the Troubled Asset Relief Program (TARP) implemented in 2008 by the United States during the financial crisis.

Ottawa and the province are clearly paying attention to what’s happened in the oilpatch, with announced spending cuts already near the $2-billion mark.

On Friday, ARC Resources lowered its capital spending from $500 million to no more than $300 million. And Grand Tierra Energy reduced its capital expenditures to $70 million from $185 million.

Husky Energy said Thursday its capital spending program will fall by a third, or down $900 million.

Other cuts include Cenovus Energy lowering spending by $450 million and MEG Energy reducing its cap-ex by $50 million. Seven Generations Energy trimmed is spending by $200 million and Pipestone Energy’s capital program was scaled back by 60 per cent, a $90-million reduction.

“Corporate liquidity is literally the No. 1 thing you have to preserve in times like this because we don’t know how long we’ll be here,” said Pipestone CEO Paul Wanklyn.

“You have to preserve that room on your balance sheet to weather a long storm.”

Lower spending will lead to fewer jobs. It’s estimated every rig working in Alberta supports 140 to 160 direct and indirect jobs.

“Lots can change in three months, but unless there’s positive changes, it’s going to be a rough back half of the year,” said Total Energy Services CEO Dan Halyk, whose company suspended its dividend and lowered its capital spending on Friday.

“From an industry perceptive, there will be a lot of casualties.”

Alberta Central’s chief economist, Charles St-Arnaud, expects the tandem impact of lower oil prices and less economic activity tied to coronavirus will likely shove the country and province into recession.

He anticipates the province’s economy will contract by one to 1.5 per cent this year, which would likely translate into job losses of between 20,000 and 25,000.

“It will mean another year of hardship for Alberta,” St-Arnaud said. “The question is how long does the price stay at the current level.”

Other Alberta industries, such as travel and tourism, are also being hit, with WestJet expected to reduce staffing levels in response to a dramatic drop-off in air travel.

The wholesale and retail industry, accommodation and food services, and the information, culture and recreation sectors “are likely to be hit quite hard by COVID-19 disruptions,” ATB Financial economists wrote in a blog post on Friday.

The province is concerned about the impact on many businesses beyond energy, such as those in the travel, tourism and leisure sectors, and is considering a number of measures to assist Alberta employers and employees.

“We’re very worried. We are hearing about prospective bankruptcies and certain job losses,” Kenney said.

“One of the reasons we’re moving as quickly as we can to offer an economic rescue package is because I know business decisions are being made every day.”

A rapid response to such a volatile environment is necessary. For the province and thousands of workers and businesses, it can’t come soon enough.