The Oil Sands Weekly
IN THE NEWS THIS WEEK . . .
Now that the fires have subsided near the city of Fort McMurray, attention shifts to getting the oil sands up and running. The miners are first out of the gate, with Shell reporting their mine has resumed operations and Suncor is re-mobilizing staff at their base plant. Imperial Oil has yet to confirm plans to restart. The company was forced to shutdown their Kearl mine earlier in the week due to the closure of Highway 63. Imperial donated 20,000 litres of fuel to the Fort McMurray fire department.
Syncrude has confirmed power has been established at the Aurora mine but has yet to provide a timetable for the re-start of the Mildred Lake mine and upgrading facility. The company is in the process of coordinating the return of staff to their operations. CEO Mark Ward took the time to thank employees and Albertans in general for their support during this difficult period. For the first time in the company's history, all 3 cokers were taken offline during the evacuation. The company was also forced to abandon their herd of 300 bison. The Wood Bison were first introduced onto an area of reclaimed land in 1993 in a partnership with Fort MacKay. Syncrude has since confirmed the bison are doing fine.
Nexen's Long Lake facility is the only operation reporting damage from the wildfires. The company has declared force majeure and will likely not be making any product deliveries for the month of May. Prior to the forest fires, the Long Lake facility was operating at reduced rates due to a fatal explosion at their upgrading operations.
According to latest estimates, 1.1 million bbl/day of oil sands production remains offline, or 40% of the area's total capacity. The US Energy Information Agency (EIA) expects that Canada's production in the second quarter will decline by an average of 500,000 bbl/day versus the first quarter production, but will rebound by the third quarter.
Camp operators and airlines are gearing up for what is expected to be a busy summer in Fort McMurray. On top of rebuilding the city, many operators, including Suncor, are planning major maintenance turnarounds for their oil sands facilities.
AECO natural gas prices plummeted on news of the widespread outages in the oil sands. Prices fell to an intra-day low of just $0.05/GJ before rebounding to about $0.50/GJ. Prices are now back above $1 as oil sands production comes back on line. The oil sands are one of the largest consumers of Alberta's natural gas. Alberta's gas inventories will likely reach maximum capacityin the summer, forcing producers to either shut-in production or pay extra to ship their gas to a US storage hub. However, US storage levels are also at record highs due to an unseasonably warm winter. The AECO Hub refers to the Niska Gas Storage facilities in southern Alberta and represents Alberta's natural gas selling price.
Husky Energy announced the sale of select assets in the southwestern region of Saskatchewan to Whitecap Resources for $595 million. The divested assets produce 11,600 boe/day. The company also announced steaming has begun at its Vawn Lloyd Thermal Project in Saskatchewan, with first oil expected early in the third quarter.
Despite the pain and suffering endured by oil producers, midstream players in the storage and transportation business remain bright spots in the Canadain energy sector:
- Inter Pipeline reported a first quarter profit of $105 million, down 15% yr/yr and slightly lower than analysts were expecting. The Calgary-based company sees strong demand for diluent from oil sands producers and will expand their Polaris diluent network over the next year. Inter Pipeline also entered into an agreement with the new Sturgeon Refinery to deliver feedstock from the Cold Lake area.
- Enbridge announced better than expected earnings this week, reporting a profit of $663 million in the first quarter. The company estimates deliveries on its network have been cut by 900,000 bbl/day due to the wildfires, but Q2 earnings should not be materially impacted. Enbridge crews are busy getting the Cheecham and Athabasca terminals up and running so diluent and product can begin flowing to/from the oil sands facilities.
- Keyera reported a Q1 profit of $70 million, up from $57 million for the same period last year. The company's Liquids Infrastructure business saw a record quarter, powered by strong demand for diluent from heavy oil producers. Keyera has numerous capital projects planned over the next 2 years to grow its diluent storage and transportation network.
In their latest Capital and Repair Expenditures Survey, Statistics Canada estimates spending in the mining and energy sector will decline by another 23% this year, to $47 billion (down $14 billion yr/yr):
- The bulk of the decline is spending in Alberta's conventional and non-conventional oil and gas extraction. Across the province, Alberta is expected to see a 12% decline in total capex spending.
- Saskatchewan will also see a $2.3 billion drop in oil and gas expenditures. Capex spending across all sectors is forecasted to decline 18%.
- Spending in all sectors are expected to be lower across the board, including manufacturing. Public spending is the best performing sector, forecasted to increase 5% yr/yr. Mining in Quebec, Ontario and BC are also expecting a small increase in spending this year.
The International Monetary Fund (IMF) recommends the Bank of Canada cut interest rates again if the economy falters. The IMF flagged concerns that a weak economy could destabilize the housing market, which now represents a large proportion of the Canadian economy. The IMF also points out that Alberta is in a relatively good fiscal position despite sharply lower oil prices due to their low debt load compared to the rest of the country.
The federal government announced that Edmonton, southern Saskatchewan and people living in the BC interior now qualify for extended Employment Insurance (EI) benefits announced in the last federal budget. The feds have also pledged quicker EI access for those who have been displaced by the Fort McMurray fire.
In this week's random global energy news:
- Royal Dutch Shell is reporting about 2,100 barrels of oil have been spilled into the Gulf of Mexico. The company has isolated the leak and shut-in production at its oil fields.
- France's CGT union (Confédération Générale du Travail) is planning a national strike against the government's plans to reform the country's labour code. The strike will include France's oil workers, who are calling on all refineries to be shutdown from May 17 to May 20. The French government is introducing legislation to make it easier to lay off workers during hard times and is promising labour reform on wages, pensions and benefits.
- Nigeria's oil output fell to a 22 year low as militant rebels continue to attack oil infrastructure in the oil producing Delta region. Shell, Exxon and Chevon have evacuated their facilities. Exxon and Shell declared force majeure due to inability to deliver product to its customers. The country's oil output has been reduced to about 1.6 million bbl/day, down from a normal level of 2.2 million.
- Rosneft CEO Igor Sechin has apparently lost faith in OPEC to control the oil markets. In an interview with Reuters, Sechin noted OPEC is no longer a united organization and that the Russian superpower should not participate in any alliance with the cartel.
- Saudi Arabia's oil minister, Ali al-Naimi, was fired and replaced by Saudi Aramco chairman, Khalid-al Falih. Al-Falih has vowed to maintain his country's market share, keeping production near record highs.
The EIA estimates that 2.8 million bbl/day of production came offline globally due to military conflicts, natural disasters, and technical difficulties. Affected countries include Venezuela, Brazil, Nigeria, Libya and of course, Canada.
- Western Canadian Select (WCS) continued to power higher for the fourth week in a row. WCS reached a new high this week, back to the level of July 2015.
- The heavy oil discount narrowed to just under $12/bbl, down from a peak of almost $16 in early February. WCS now trades at a 25% discount to WTI, much lower than the January average of 45%.
- WTI and Brent have yet to break the highs of last October.
- The US dollar gained for the second consecutive week after dipping to a 1 year low at the end of April.
- The Canadian dollar declined again this week despite the increase in oil prices. The drop is likely due to a big hit to GDP expected during the second quarter on account of Alberta's forest fires.
+93 ▲ 3.2%
BBL/D CDN IMPORTS TO US
-23 ▼ 0.3%
BBL/D US PROD'N
-3.4 ▼ 0.6%
BBL US INVENTORY
-10 ▼ 3.0%
US RIG COUNT
- US inventories declined by 3.4 million barrels last week, the first decline since the end of March. US production continues to tick lower as more oil rigs reportedly came offline.
- Genscape is reporting Canadian crude oil stockpiles in Hardisty, Edmonton and Kerrobert declined by 4% after hitting record highs last month.
- In their monthly Short Term Energy Outlook, the EIA is forecasting US production will average 8.6 million bbl/day in 2016, not much lower than last week's production but substantially lower than last year's peak of 9.6 million bbl/day.
- The EIA reported that US imports of Canadian crude rose to 2.95 million bbl/day last week. Those figures are down from record highs of 3.55 million recorded in February, and expected to fall further due to production cuts in the oil sands.
- The International Energy Agency (IEA) estimates total Canadian oil production will fall by 660,000 bbl/day in May, to just over 3.7 million, down 1 million bbl/day from the start of 2016. The Alberta wildfires will likely completely wipe out the previously forecast annual gains. The Paris-based agency estimates that global oil demand has risen by 1.4 million bbl/day in the first quarter of 2016, to 95 million barrels per day.
- OPEC production rose to 32.8 million bbl/day, thanks to increased supply from Iran, now pumping oil at pre-sanction levels.
- The TSX energy sector regained some of its losses from the previous week. The US energy sector, however, continued its decline this week, dragged down by big losses from energy service providers.
- Canadian small cap energy names were the best performing stocks on the TSX, including Bonavista Energy (+16.9%), NuVista Energy (+11.5%) and Athabasca Oil Sands (+11.0%).
- Encana was also a big winner on the TSX this week (+7.8%) on rumours the company has put several shale assets in Western Canada up for sale.
- Athabasca Oil (TSX:ATH): Upgraded from Hold to Buy at Canaccord Genuity with a price target increase from C$1.50 to C$2.
- Enerplus (TSX:ERF): Upgraded from Sector Perform to Outperform at National Bank Financial. Price target increased from C$7 to C$9.
- Schlumberger (NYSE:SLB): Upgraded from Sell to Neutral at Griffen Securities.
- Vermilion Energy (TSX:VET): Downgraded from Outperform to Sector Perform at RBC Capital. Price target at C$42.
- CNOOC (NYSE:CEO): Downgraded from Overweight to Equal Weight at Morgan Stanley.
- Schlumberger (NYSE:SLB): Downgraded from Focus Stock to Sector Outperform at Howard Weil with a price target of US$80.
- Valero Energy (NYSE:VLO): Downgraded from Buy to Hold at Erste Group.
PRICE TARGET CHANGES
- Canadian Natural Resources (TSX:CNQ): Price target increased from C$36 to C$39 at Barclays.
- Enbridge (TSX:ENB): Price target increased from C$55 to C$58 at TD Securities.
- Enerplus (TSX:ERF): Price target increased from C$5.50 to C$7.25 at FirstEnergy Capital, from C$7.25 to C$9.25 at Raymond James and from C$8 to C$9 at RBC Capital.
- Ensign Energy Services (TSX:ESI): Price target increased from C$6 to C$7 at TD Securities, from C$6.50 to C$7.50 at Canaccord Genuity and from C$7.50 to C$8 at CIBC. Price target decreased from C$9 to C$8 at RBC Capital.
- Husky Energy (TSX:HSE): Price target decreased from C$18 to C$17.50 at FirstEnergy Captial.
- Keyera (TSX:KEY): Price target decreased from C$46 to C$45 at RBC Capital and from C$43 to C$42 at TD Securities.
- Pembina Pipeline (TSX:PPL): Price target increased from C$40 to C$41 at TD Securities and from C$39 to C$41 at Canaccord Genuity.
- Baker Hughes (NYSE:BHI): Price target decreased from US$56 to US$54 at Susquehanna.
NEXT WEEK'S EVENTS
- US oil production by region (data by EIA)
- Penn West Petroleum first quarter earnings release
- API Weekly Statistics Bulletin released @ 4:30pm ET
- Argus Canadian Crude Summit in Calgary, AB
- EIA Petroleum Status Report released @ 10:30am ET
- EIA Natural Gas Report released @ 10:30am ET
- Bank of Canada April inflation data
- Baker-Hughes Rig Count released @ 1:00pm ET