Biggest oilpatch companies have best chance to survive
To survive a long downturn in the oil sector, it pays to be big
With no recovery in oil prices in sight, Alberta's oilpatch is trying to figure out how it will survive 2016, yet another year of struggle for an industry that lost a collective $1.5 billion in the first half of 2015.
With so much financial pain, it's likely the large players that have the best odds of enduring the oil price collapse.
That's the belief of Drew Ross, managing director of Scotia Waterous, the arm of Scotiabank that focuses on oil and gas deals. He's crunched the numbers during this downturn and found it's the big-name companies, such as Suncor and Cenovus, that are faring the best.
'Welcome to the hospital, I'm the chief surgeon.' - Bruce Edgelow, a banker who helps companies in duress
"There is a huge correlation between performance and size of companies," said Ross. "What you need to be in this environment? You need to be big and diversified, that's what the market is telling you and its across the globe."
That's why he suggests the downturn could lead to the creation of fewer, but larger companies.
"Those are the ones that are going to survive," said Ross.
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Already in Alberta, the industry is highly concentrated among giant firms. Approximately half of all conventional oil and natural gas production comes from about a dozen operators.
Big company, low costs
The big firms generally have economies of scale. They are able to raise more capital, they have large projects with lower costs, and tend to be more diversified. Often, they operate in different basins around the world and not only produce oil and gas, but likely also refine products such as gasoline.
The oil downturn is putting pressure on all companies, big and small. Firms are laying off workers, slashing spending, pulling back salaries and focusing operations where margins are best. Now is not the time to venture into unexplored areas.
Hundreds of financial executives from the sector gathered at a conference last week in Calgary to hear about all the challenges, pressures and strategies during this prolonged downturn.
"There's an increased focus for the industry to work together to get over the cycle," said Alex Fisher, of Chartered Professional Accountants of Canada.
The decisions made in downtown Calgary boardrooms all come with consequences, but executives can't sit still and watch the erosion of cash flow.
"There's very difficult discussions because the visibility of the layoffs in town has been paramount," said Bruce Edgelow, a vice-president with ATB Financial. "We may see as much as 50,000 layoffs in this town for the calendar year, 2015."
"Welcome to the hospital, I'm the chief surgeon," Edgelow said about his first words to executives of companies in duress. "I've got lots of grey hair. Our hope is to move you out of the recovery ward and back to full health. We're not here to move you to the morgue, which is our asset realization team."
Uncertainty for 2016
Executives can't bank on price recovery as part of their financial plans because that's hoping for something that may not happen anytime soon. Companies with the most uncertainty are likely those in the oilfield service sector. They're calling the oil and gas producers to see what kind of work they can expect to see next year.
"Can I give you a call back? I'm just not quite sure what my program is for 2016," said Edgelow, describing how producers are responding. "The oilfield services companies are absolutely reeling with this uncertainty."
That's why just about weekly some of the large service companies are asking to renegotiate loan agreements.
A saving grace for much of the sector has been the loonie. Companies operating north of the border pay Canadian dollars for most of their expenses, but sell their oil in U.S. dollars. With the loonie around 75 cents compared to the American greenback, it's working in favour of Canadian companies.
ATB Financial is also feeling the effects of the oil price collapse and Alberta's recession. The bank's profits are down largely because of provisions for credit losses. In the latest quarter, that amounted to $48.1 million, up from just $10.3 million a year ago.
"The 2015 period, we have moved from an absolute price collapse to a point in time where we are really trying hard to find where does 2016 fit?" said Edgelow.
"Unfortunately, sitting here today, there are still more questions around this than there are answers, which continues to speak to the gut-wrenching decisions that are made in the boardrooms."