Alberta crude production cuts to create winners and losers: analysts
The Suncor Refinery in Edmonton is seen on Tuesday, April 29, 2014. (Jason Franson/THE CANADIAN PRESS)
Dan Healing, The Canadian Press
Published Monday, December 3, 2018 9:18AM EST
Last Updated Monday, December 3, 2018 5:55PM EST
CALGARY -- Oil production cuts announced by the Alberta government will have the desired outcome of reducing steep price discounts on western Canadian crude, but will also create winners and losers, financial analysts say.
Shares in the companies most likely to benefit from the move to curtail crude production starting Jan. 1 soared Monday as oil price differentials plunged.
Meanwhile, shares in oil producers that had been either benefiting or were insulated from the discount prices were little changed.
"There are going to be a number of producers who will shoulder the brunt of the Alberta government's 325,000 barrels per day in mandated production curtailments of raw crude and bitumen (namely the oilsands producers)," Calgary-based AltaCorp Capital said in a report.
"But the broader health of the province is likely to benefit over the medium term from the decision as a result of narrowing differentials and stronger royalty revenue."
Alberta Premier Rachel Notley announced Sunday the province will require companies producing more than 10,000 barrels per day of oil to cut back by about 8.7 per cent (a total of 325,000 bpd) until there is enough shipping space on pipelines to improve prices, expected to take about three months.
After that, the reduction will be lowered to 95,000 bpd through the rest of 2019.
Of the 378 operators with active oil production in Alberta in October, only 25 produce more than 10,000 bpd, AltaCorp noted.
At the end of trading on Monday, Cenovus Energy Inc. shares were trading at $10.99, almost 12 per cent higher than their Friday close, while Canadian Natural Resources Ltd. closed at $36.58, up 9.55 per cent.
On Sunday, both Cenovus and Canadian Natural issued statements of support for the Alberta move, as did Chinese-owned oilsands producer CNOOC-Nexen.
"I think any time that government has to step in to fix a market, it's never a time for celebration," Cenovus CEO Alex Pourbaix said in an interview Monday, adding he's more "relieved" than pleased with Alberta's decision to go along with his call for the cuts last month.
Calgary's major integrated companies -- those that both produce and refine oil -- including Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc., said in statements they remain opposed to the cuts.
Suncor closed at $42.93, nine cents higher, while Imperial ended the day at $38.09, off 1.5 per cent, and Husky shares were at $16.87, a gain of 2.2 per cent.
Imperial CEO Rich Kruger warned of the danger of "unintended consequences" of the production cuts, including to competitiveness and trade.
Husky also mentioned possible "serious negative investment, economic and trade consequences."
But Cenovus consulted experts on the trade issue and believes the cuts are allowed, Pourbaix said.
"This is not targeted at a country," he said. "Every pipeline going to the U.S. was full before this decision and every pipeline will remain full after this decision."
The discount between Western Canadian Select bitumen-blend oil and New York-traded West Texas Intermediate varied between US$19.75 per barrel and US$22.25 on Monday, an improvement over Friday's US$28.50 settlement price, according to Net Energy.
Discounts for upgraded synthetic oil improved to US$13.50 per barrel Monday afternoon from US$18.50 on Friday and Edmonton-priced light oil differentials fell to US$15.25 from US$23.00.
In its report, AltaCorp said winners from the curtailments will include the provincial government (which estimates it will earn $1.1 billion more from royalties in the 2019-20 fiscal year); energy producers in B.C. and Saskatchewan, that will benefit from better prices without having to cut production; condensate producers, as that light oil isn't included in the curtailment; and junior energy producers who are exempt from the program.
The losers include integrated producers who will likely pay more for their refining feedstock and companies that had intended to grow their production in the first half of 2019, it said.
Oilfield service companies are also on the losing side of the equation, GMP FirstEnergy said in a note, because drilling budgets will likely shrink in early 2019.
Companies that previously reduced output voluntarily will receive credit under the Alberta plan.
Analysts said that means the market is already halfway to the provincial goal, estimating that between 130,000 and 160,000 bpd has already been shut in, mainly by Cenovus and Canadian Natural.
Pourbaix said Cenovus estimates voluntary curtailment are higher, at about 200,000 bpd, including more than 40,000 bpd from Cenovus alone.