Varcoe: O&G is doing well, but Canadian producers don’t want to spend more

“We are all a little afraid of guns when it comes to ramping up production. We prefer to pay down debt, keep production stable, generate free cash flow ‘

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Oil prices have climbed above US $ 81 a barrel and natural gas markets continue to warm as winter approaches.

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It’s a bullish period for Canadian oil producers, with strong third-quarter earnings expected in the coming weeks, after companies weathered the trough of last year’s recession.

Even with higher commodity prices, don’t expect a sudden change in trading strategies as the 2022 investment programs roll out before the end of the year.

Whitecap Resources unveiled its plans for next year on Thursday. His plan calls for a 38% monthly dividend increase, debt repayment and modest output growth.

It’s a familiar refrain for the industry, which is feeling the effect of soaring oil and gas prices.

“We are in a new paradigm,” Whitecap CEO Grant Fagerheim said in an interview.

“We haven’t seen these conditions, with high oil prices, high natural gas prices – we have a weaker Canadian dollar (and) you have high capital efficiencies.”

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The Calgary-based oil and gas producer announced an investment program of about $ 480 million next year – on top of this year’s revised spending of about $ 430 million – but $ 90 million dollars below preliminary expectations .

The reduction stems from the acceleration of approximately $ 55 million in spending over the last three months of this year, securing the rigs and manpower needed to add 39 wells to its fourth drilling program. trimester.

It has also seen savings of approximately $ 35 million from ongoing capital efficiency measures.

The company announced an increase in its monthly dividend, stressing that it can fully pay its 2022 capital budget plans and dividend fund flows with benchmark oil prices as low as US $ 40 per barrel.

On Thursday, benchmark West Texas Intermediate (WTI) crude prices closed at $ 81.31, up 87 cents, their highest level since 2014. Benchmark US natural gas prices edged up, closing at 5 , $ 69 per mmBTU.

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“I don’t think we’re going to see increases in material spending. There are a few factors at play here that could lead to minor and inevitable natural increases, namely core inflation, ”said analyst Patrick O’Rourke of ATB Capital Markets.

“Companies need to be careful about protecting their balance sheets because there isn’t a lot of capital available – whether it’s debt or equity – and if there is a drop in prices, companies want to be prepared. “

A recent survey conducted by Raymond James of managers of Canadian oil fields found that their outlook for the average price for oil in one year is $ 76.50 per barrel.

When asked what they would do with higher levels of free cash flow, 57% of operators expect to spend “slightly more” or “more” next year. Two-thirds of those polled expect greater efforts to reduce debt, and 53 percent expect more spending on dividends.

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Surge Energy CEO Paul Colborne said the company, as well as much of the Canadian industry, would remain cautious about additional spending to boost production after last year’s slowdown.

The Calgary junior producer, which made two acquisitions in the past year, expects capital expenditures of around $ 120 million next year to keep production stable.

“We are all a little afraid of guns when it comes to ramping up production. We prefer to pay down debt, keep production stable, generate free cash flow, ”he said.

“In the case of Surge, we would look more for sustained high oil prices before changing much.”

And that is precisely what investors want to hear.

Laura Lau, chief investment officer at Brompton Group, said the market wanted producers to stay focused on higher dividends and increasing share buybacks, without adopting double-digit spending increases.

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“There will be a time when investors will be happy that they are spending more money to increase production, but not too much,” she added.

There will be sufficient financial capacity to increase dividends and share buybacks.

A report released this week by Peters & Co. noted that WTI oil averaged $ 70 a barrel from July through September, its highest quarterly average since 2014 and well above the $ 41 mark. registered a year earlier.

Meanwhile, AECO natural gas prices in Alberta averaged $ 3.58 per thousand cubic feet, up 58% from the previous year.

“This strength in commodity prices is expected to persist until (Q4) and will provide an option for many producers in capital allocation decisions until 2022,” the report said.

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Last month, Tourmaline Oil Corp. announced a capital budget of $ 1.13 billion for 2022, which she described as “essentially a maintenance program”.

Canada’s largest gas producer said its investment program for 2021 has been increased to $ 1.38 billion, with increases in the second half of the year focused on higher production and modest acceleration in drilling.

The company also announced an increase in its regular quarterly dividend, as well as a special cash dividend.

All of this comes as there is talk of a global energy crisis, with record natural gas prices in Europe, while a Bank of America report this month said Brent crude could hit $ 100. a barrel though “low inventories and a rebound in air travel collide with a winter cold.”

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Fagerheim said the “energy crisis” the world is currently grappling with is the culmination of underinvestment in production over the past five years, which will not be easy to reverse.

At Whitecap, the company said it would fully fund its 2022 capital program and higher dividend payouts, and that it would still have plenty of cash on hand to sell.

It will devote about half of its discretionary funds to strengthening its balance sheet, while the rest will flow back to investors through share buybacks and dividends.

“Investors don’t want your growth to be more aggressive than five percent. So, at this particular moment, investors prefer a return of capital, ”added Fagerheim.

“We’ll see if behaviors change after the first quarter of next year and into the second half of 2022.”

Chris Varcoe is a columnist for the Calgary Herald.

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