Canada's oilpatch is flush with cash — so what are they going to do with it?
Record profits for the oilpatch will boost government revenues too
The Canadian oilpatch is basking in its most lucrative year ever. Hefty prices for both oil and natural gas that have pained consumers are delivering a bounty of riches for the industry.
That bounty was reinforced over the past few weeks as companies again posted extraordinary profits. While commodity prices have softened slightly, there is a growing consensus that prices will remain above average for some time.
The massive windfall for the industry is having many impacts on the sector as debt levels plummet, shareholders benefit and government coffers in Alberta, Saskatchewan and Newfoundland fill up.
At the same time, the industry will likely have little public support in its opposition to a barrage of new environmental regulations aimed at curbing climate change.
Historically, the largest oil producers in the country were always developing new multi-billion projects to grow their operations. However, as the companies have shifted away from prioritizing growth, there are billions of dollars available to spend elsewhere.
Oodles of profit
At the outset, 2022 was already shaping up to be a blockbuster for the oilpatch with some analysts expecting record profit levels since commodity prices were pretty strong and oil companies had spent much of the last seven years cutting costs. But, in the aftermath of the Russian invasion of Ukraine and as the global economy emerged from pandemic restrictions, the oilpatch has benefited greatly. Those early forecasts, as hefty as they were, have been revised up significantly.
In January, the oilpatch was expected to produce record-high after-tax cash flow of $99 billion this year, according to a report by the ARC Energy Research Institute. That same organization is now expecting the Canadian oilpatch to rake in $147 billion.
During the latest quarterly earnings, Imperial Oil posted a $2.4 billion profit, which was a six-fold increase compared to the same three-month period a year ago. Suncor Energy had a $4 billion profit, which was a four-fold increase. Cenovus Energy and Canadian Natural Resources both also collected billions in profit too.
This is biblical, what's happening- Canoe Financial's Rafi Tahmazian
"Suncor, CNRL, Cenovus — wow. Big, big windfall," said Rafi Tahmazian, a senior portfolio manager at Canoe Financial in Calgary.
"Imagine a bank machine that's broken and it's spitting out $100 bills and there's not enough people to pick them up and there's $100 bills gathering on the ground. This is how profitable these businesses are right now," he said.
That's why oilpatch stock prices are up and investors are benefiting from higher dividends and share buybacks.
Gushing cash is also helping companies pay off large swaths of debt. It's a remarkable turnaround for a sector that was largely in a downturn for much of the last decade.
Suncor had set a target to reduce its debt to between $12 and $15 billion by 2025. Recently, executives said they will already reach the lower range of that target in the next six months.
Advantage Energy, an oil and natural gas producer, is one of a few companies that expects to be able to wipe out its debt by the end of the year.
"We're at a point of having very little debt, if any," said Andy Mah, a member of the board of directors.
"I think we're into a stage now when the next two year or more is going to be a stronger commodity pricing cycle," he said.
Reducing the amount debt levels will aid the industry in coping with the next commodity price crash, whenever it will come.
"We need to have more ability to absorb these volatile periods, which can come and go quickly. And we need to be resilient," he said.
For now, those hefty oil and natural gas prices could provide a major revenue boost for the Alberta, Saskatchewan and Newfoundland governments, in addition to the federal government. Provincial governments collect royalty payments on oil and natural gas production.
Newfoundland projected a $351 million deficit for its current budget based on Brent crude prices of $86 US. Brent is now expected to average about $105 per barrel this year, according to the U.S. Energy Information Administration. For every $1 difference in the oil price, Newfoundland's revenues jump about $13 million, which is why the province could end up much closer to a balanced budget, although the value of the loonie, among other factors, will have an impact too.
The same could be said for Saskatchewan, which had projected a $463 million deficit based on West Texas Intermediate (WTI) averaging $76 US per barrel. WTI is projected to average about $99 this year. Add in higher potash prices and the "province could easily post a budget surplus," said BMO senior economist Robert Kavcic in a research note.
As the largest oil producing province, Alberta's benefit will be measured in the billions, especially after basing its budget on $70 US oil. Royalty revenue could jump to between $15-20 billion. Some of that money is already being spent to lower fuel and energy prices for residents.
"We've always talked about the Alberta Advantage. This is biblical, what's happening," said Tahmazian, with Canoe Financial, about the Alberta government's oil windfall.
The federal government is also benefiting financially, although it's much more difficult to measure. Ballooning oil prices could increase corporate taxes by about $5 billion, according to one economist. There's also higher income tax revenue too.
Generally, every one Canadian dollar gain in the price of WTI results in about a $1.7 billion boost to the country's GDP, according to a 2016 report by the Canadian Energy Research Institute.
Oil prices have been a major driver of rampant inflation in the country and the corporate tax benefit to the federal government will partially be offset by lower tax revenue from other sectors of the economy that were negatively impacted by higher fuel expenses. The federal government will provide revised projections for corporate income tax revenue as part of the fall fiscal update, a spokesperson for the finance department said in an e-mail.
This year's corporate taxes paid by the oilpatch could be much higher than normal because the industry isn't spending like it used to, and thus won't have as many expenses to offset its revenues. In recent years, the industry hasn't spent as much money on growing production of oil and natural gas, but chosen to instead disperse more money to investors.
In 2012, for every dollar of after-tax cash flow, the Canadian oilpatch was reinvesting $1.22 in oil and gas production, according to the ARC Energy Research Institute. This year, the ratio of reinvestment is estimated to fall all the way down to just 29 cents.
Besides finances, the oilpatch's soaring profits come at a time when the federal government is pledging substantial changes to policies impacting the sector. Environmental advocates are also expecting more action by the industry to reduce harmful greenhouse gas emissions that contribute to climate change.
The federal government is proposing to cap on oilpatch emissions and to cut some subsidies. Recently, Ottawa introduced a clean fuel standard and cut a tax break for investing in small-sized oil companies.
Although several of the large oilpatch companies have set goals to achieve net-zero emission goals by 2050, the sector as a whole has lobbied against most of these changes, especially recent criticism of the emissions cap from top executives.
"It's disingenuous, to be honest. It is certainly not consistent with what it means to have a credible net-zero plan," said Duncan Kenyon, a director with Investors for Paris Compliance, a advocacy group which works with investors to lobby corporations to improve their climate performance.
There's also pressure from the federal government for the industry to move quicker on developing large-scale carbon capture and storage projects, which could help the country meet its climate goals.
Considering the sector's profit levels, it may be much more difficult to gain government or public support to oppose new environmental policies.
"We would expect they have the resources now to start putting it toward the investments they need to do for the transition [toward net-zero emissions]," said Kenyon.
The current boom is an ideal opportunity for the oilpatch to invest in the technology and facilities required to reduce emissions, including methane gases, he said, while also investing in low-emission sources of energy like hydrogen.
The oilsands produces about 11 per cent of Canada's total emissions and the rest of the oilpatch is responsible for about another 15 per cent. That doesn't include emissions from any eventual burning of the fuels, whether in transportation — which is responsible for another 25 per cent of Canada's emissions — or elsewhere.
With files from the CBC's Meegan Read