Oilpatch braces for worst, as caution and more cost cutting becomes a dominant theme

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Asim Ghosh, president and CEO of the Calgary-based integrated oil company, said the global oil business has to return to stability before Husky ramps up investment and restores its cash dividends.

Husky Energy Inc. provided a first indication Tuesday of how the Canadian oil and gas sector will play a recovery: It’ll be a long and cautious way back.

Asim Ghosh, president and CEO of the Calgary-based integrated oil company, said the global oil business has to return to stability before Husky ramps up investment and restores its cash dividends.

Meanwhile, his company will keep using a conservative US$30-a-barrel oil for planning assumptions and will keep investment in line with cash flow.

“We will look for trend lines, not short-term headlines,” Ghosh told shareholders at the company’s annual meeting in Calgary.


With the market left to its own devices to determine oil prices, supply and demand will have to rebalance, and they are a long way from getting there, he said to reporters.

“We are into a new world where there isn’t a decider of the price,” he said, referring to the OPEC cartel’s focus on grabbing market share at the expense of prices.

He noted the recent rise in oil prices has been tempered for Canadian oil and gas companies because the Canadian dollar has also appreciated.

“While oil has moved favourably, the exchange has moved unfavourably,” he said.

Caution and more cost cutting are expected to be a dominant theme this year, as companies build defences against price volatility, pay down debt and adjust to new climate change policies. Most major Canadian energy companies are expected to report results in the next two weeks.

According to Citi Research, crude inventories are at record levels, but spare capacity is low and global supply disruptions are growing, giving the recent lift in oil prices some justification.

Brent spot prices have risen more than 60 per cent since its January low of US$27 a barrel, despite crude inventories building the entire time, Citi said in a report. WTI closed at US$44.04 on Tuesday in New York, up 3.3 per cent.

Husky reported a first-quarter loss Monday of $458 million, compared with a profit of $191 million in the same quarter of 2015, in what is expected to be a dismal reporting season for the industry.

Benchmark WTI oil prices averaged US$33.45 per barrel in the quarter, compared to US$48.63 per barrel in 2015. But Husky’s realized price was $25.02 per barrel of oil equivalent on average, compared to $40.84 in the first quarter of 2015, reflecting the discount applied to Canadian oil.

Husky’s operating costs were $13.31 — US$9.69 — per barrel, compared to $14.87 — US$11.99 — per barrel a year ago, as it focused on higher quality projects and efficiencies.

The company hopes to sell more assets to strengthen its balance sheet as part of its transition to lower costs and fewer plays.
Husky announced an agreement to sell a 35 per cent interest in a package of Canadian midstream energy assets to two linked Hong Kong-based firms for $1.7 billion in cash. The assets include about 1,900 kilometers of pipelines and tanks able to store 4.1 million barrels of oil in Hardisty and Lloydminster. Husky will continue to operate the assets and the plan is to grow the new business.

The firms are owned by Hong Kong billionaire Li Ka-Shing, owner of about 70 per cent of Husky stock. Ghosh said the deal is subject to Investment Canada review.

Husky revealed a setback at its flagship Liwan gas project in the South China Sea, another sign of the tough pricing environment.

CNOOC Ltd., its partner, wants to renegotiate gas prices given deteriorating market conditions in Guangdong. Husky said it has a contract, discussions are ongoing and if the dispute is not resolve it will go to court.

“It’s early days,” Ghosh said. “They have indicated a more difficult market in China and our view is that there is no contractual basis to change the price unilaterally. We have a legally binding take or pay contract.”

Overall, the sector’s historic can-do attitude is no more. Today it’s about sitting back and bracing for the worst.


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