Canada’s oil patch is in for another shock, as energy companies are expected to abandon a record number of aging oil and gas wells over the next year, a move that will weigh heavily on businesses with older oil and gas fields.thomaslenne
Optimism is creeping into the oil patch.
Rising oil and gas prices and a big drop in costs are prompting energy companies to top up capital spending and tempt investors with higher production levels after two years of malaise in the sector.
Penn West Petroleum Ltd. said on Thursday it plans to spend $180-million on operations this year, up from its previous estimate of $150-million, with the largest chunk earmarked for its Alberta Cardium operations. Average output is projected to rise 16 per cent from the fourth quarter of 2016.
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The company, which slimmed down drastically in 2016 with a $975-million sale of assets, said its restructuring was completed just as energy markets began their recovery. Before the disposition, it had struggled under the weight of high debt and declining cash flow.
"Times are exciting," chief executive officer David French told analysts. "[The year] 2017 marks a significant turning point as we emerge from a complicated 2016 with a streamlined asset base, healthy financial position and a notable transition to a growth trajectory."
Penn West shares climbed 3 per cent after the budget announcement. They've tripled since May.
The company was joined by a number of other firms offering positive prospects, including Kelt Exploration Ltd. and Crew Energy Inc. Larger players Canadian Natural Resources Ltd. and Cenovus Energy Inc. announced late last year the restart of oil-sands developments they had halted as crude prices collapsed and the industry struggled to cut costs.
The more upbeat moves come amid the recent rise in oil prices, partly a result of the agreement by the Organization of Petroleum Exporting Countries and a handful of allies to cut production by 1.8 million barrels a day. West Texas intermediate crude has climbed 20 per cent since August, settling up 50 cents (U.S.) at $53.76 a barrel on Thursday.
Natural gas prices have also strengthened on cold temperatures and longer-term expectations of rising demand for exports from the United States. Gas futures settled at $3.27 per million British thermal units, up 13 per cent since the start of November.
Rising commodity prices are only one factor behind what looks to be a resurgence in the sector, however.
"Budgets seem to be going up, well results seem to be getting better. There are a lot of good things going on in the Canadian energy patch to be optimistic about," said Jeremy McCrea, analyst at Raymond James. "I'm a lot more optimistic at the start of this year than I have been in a lot of other years."
Indeed, improving technology in drilling and hydraulic fracturing is paying dividends as companies develop plays such as the Montney natural gas deposit that straddles the Alberta-British Columbia boundary, he said. "They are doing higher-intensity fracs for quite a bit cheaper than what they've historically been able to do. It's just giving them higher productivity."
Late Wednesday, Kelt said it agreed to sell some of its Alberta assets for $100-million (Canadian) in a deal that allows it to boost its capital expenditures by $10-million, to $145-million. Much of the money will be used to develop the company's Montney properties in British Columbia and boost overall output 25 per cent by the end of 2017.
With the asset sale, the company will have no trouble living within its means, and may boost capital spending plans again in the spring, even if commodity prices flatten out, GMP FirstEnergy analyst Stacey McDonald wrote in a note to clients. Kelt shares jumped more than 6 per cent Thursday.
Crew, meanwhile, said it plans to spend $200-million this year, a larger sum than analysts had projected, with the lion's share directed at Montney drilling. Average production is forecast at up to 27,000 barrels of oil equivalent a day, 15-per-cent higher than in 2016. The company is looking to sell its heavy-oil assets in the Lloydminster area.
Another indication of optimism is potential initial public offerings in energy after a more than two-year halt, with private companies such as Velvet Energy, Canbriam Energy Inc. and Teine Energy Ltd. said to be considering going public. This follows some recent U.S. IPOs.
"Private equity wants to start pushing them out to the public market. I think that's certainly a good sign that investor appetite is improving," said Laura Lau, portfolio manager at Brompton Group.
Jeffrey Jones