Oil patch seeing companies cut spending plans

Reports are beginning to come in about cutbacks in Canada’s oil patch because of low oil prices but the real pain will play out over the next six months, analysts say.

Pain is just starting for the sector with oil prices down 35%

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Reports are beginning to come in about cutbacks in Canada’s oil patch because of low oil prices but the real pain will play out over the next six months, analysts say.

The WTI crude contract is trading at $63.46 US a barrel today, down 35 per cent on the year, and Western Canada Select, the price received by many Canadian producers, is at $45.95.

For companies planning their spending for 2015, this is a signal to cut back. There is no prospect yet of oil prices rising, after OPEC announced it would not cut its production rates.

Baytex Energy Corp. is cutting its 2015 spending plans by 30 per cent to between $575 and $650 million.

"Given the recent collapse in world oil prices, we believe our 2015 budget strikes the right balance between preserving our operational momentum in delivering organic production growth and managing our dividends prudently to maintain strong levels of financial liquidity," James Bowzer, the company's president and CEO, said in a statement issued late Monday.

Precision Drilling Corp. said its 2015 capital spending will be about 45 per cent lower that its 2014 spending on new rigs.

The Calgary-based company has cut its 2014 capital spending plan by another $23 million to $885 million, after reducing it earlier this year from $934 million. Precision Drilling has one of North America's biggest fleets of rigs and other equipment used by oil and gas producers and is already seeing lower demand.

Vermilion Energy Inc., Trilogy Energy Corp. and Canadian Oil Sands have also announced cuts to their anticipated spending.

The pullback is not universal. Many Calgary-based companies are forging ahead with ambitious capital investments. 

Tim McMillan, new head of the Canadian Association of Petroleum Producers, says oil and gas companies are watching prices closely, but most of them make their plans for the long term.

New exploration most affected

Helmut Pastrick, chief economist of Central 1 credit union, says only a cut in supply will bring prices higher. He doesn’t expect low oil prices to have an immediate effect on North American production, as oil and gas is developed over a long time horizon.

“We should expect to see production hold up but not increase and potentially slow. New exploration and new development would eventually taper off particularly if we see oil remain at these low levels for a period of time,” he told CBC News.

He predicted oil could stay below $70 US a barrel for a year or two.

That will eventually mean less oil is produced as companies adapt to the new market economics.

Demand from the world economy is slowing and no one expects it to recover in the next few years.

A geopolitical shock could make oil rise again, but the most likely scenario is a lower price for the medium-term, until there is less supply. OPEC has signalled it is willing to wait out low prices without cutting its production, but North American producers may not have that luxury.

Some shale producers could pull back

Jan Stuart, managing director of commodities research at Credit Suisse, said the oversupply of oil from the U.S. shale producers will eventually be cut because of lower prices.

“By the end of the first quarter we will have a much better idea what individual spending plans for 2015 are going to be what does that mean in terms of the number of wells they’re going to be able to drill and will they drill those wells,” Stuart said in an interview with CBC’s The Exchange with Amanda Lang.

He said many of the U.S. producers with the best assets can produce their oil economically at $50 to $60. It may take a price closer to $40 to see a pullback.

“We think that the greatest pain will be in the first quarter and by March/April we’re going to see real indications that will allow us to plot what the upstroke is going to look like in terms of gas,” he said.

Stuart is also predicting consolidation in the oil world as companies abandon uneconomic assets and seek out troubled competitors.