Full steam ahead in Canada’s oil sands

Lower crude prices are weighing on US shale producers' ability to maintain profitable production, but Canadian oil sands companies are shrugging off the price drops and forging ahead with growth plans.

Prices have hovered around $60/bl since early April, but this is much less of a concern for oil sands executives after they were forced over decades to drive down their costs to weather deeply discounted local crude prices brought on by insufficient pipeline egress. Higher prices are always welcome, but the low-cost, long-life, low-decline business model that is a hallmark of producers in northeast Alberta could woo investors at a time when other basins are stumbling.

For Canada's two largest oil producers, Cenovus and Canadian Natural Resources (CNRL), growth capital and dividends are still intact with WTI prices at $45/bl or lower, while fellow oil sands-focused firms Suncor and Imperial Oil can maintain production and dividends at $35/bl, the companies said in recent earnings calls. The four companies produced a combined 3.1mn b/d of liquids in the first quarter, with most of this from the oil sands — the world's third-largest deposit, at 166bn bl of proven reserves, according to federal agency Natural Resources Canada.

The quartet made a combined C$6.3bn ($4.4bn)profit in the first quarter, as a narrowing Western Canadian Select discount helped to offset falling WTI prices. Oil sands operators hardly flinched when benchmark prices slid to near $57/bl on 5 May, while peers in the US' Permian and Bakken plays started to cut activity and idle rigs. "If you've been in this business long enough, you've seen this movie, it's not new," Suncor chief executive Rich Kruger said on 7 May. "It all starts with a rock-solid balance sheet, a low and very, very competitive WTI breakeven."

Smaller oil sands players may not boast the same synergies as their larger neighbours, but they too are resilient, including Athabasca Oil, which says it can still fund its growth plans with WTI at $48/bl. An expansion of pure-play producer MEG Energy's Christina Lake project is also not at risk despite the sliding prices, so long as WTI remains at $53/bl or higher. "You don't roll out projects without stress-testing them under various price environments," MEG chief executive Darlene Gates said of the firm's plans to grow production at Christina Lake — which uses steam-assisted gravity drainage (SAGD) — by 23pc to 135,000 b/d.

MEG me an offer

But falling oil prices are weighing on MEG's share price, potentially leaving it vulnerable to being taken over by another oil sands player. Calgary-based Strathcona Resources wants to double-down on its oil sands exposure by making a near C$6bn pitch for MEG, it said on 16 May. Majority owned by private equity firm Waterous Energy Fund (WEF), Strathcona is no stranger to consolidation, and has signed nearly C$3bn worth of deals to divest its liquids-rich Montney assets in preparation for the hostile takeover.

"These are doppelgangers... identical twins," WEF chief executive Adam Waterous says, as rationale for the potential tie-up. The two companies combined would create Canada's fifth-largest oil producer, with oil reserves comparable to US independents Occidental, Diamondback and EOG.

Analysts say Strathcona's bid for MEG will likely not be the last. "We anticipate stiff competition for MEG," brokerage firm Desjardins Securities oil and gas research director Chris MacCulloch says, indicating that any of the other five partners in the Pathways Alliance consortium — CNRL, Cenovus, Suncor, Imperial Oil and ConocoPhillips — could take a run at the smaller firm. Christina Lake is closest to SAGD assets operated by Cenovus and CNRL, while MEG's proposed but currently shelved 120,000 b/d Surmont asset is adjacent to ConocoPhillips' Surmont project.

By Brett Holmes