WEEKLY PUBLICATIONS
The Oil Sands Weekly
Energy Market Review
US Inventory Report


WEEKLY NEWSLETTER
Sign-up for the latest oil sands news, site updates and what's moving energy markets, delivered to your inbox every week-end:

WE RESPECT YOUR PRIVACY
Opt out anytime by clicking "UNSUBSCRIBE" at the bottom of the newsletter.
The Oil Sands Weekly

The Oil Sands Weekly

Oil sands operators take a step back . . . 

Restart of the oil sands was halted this week as wildfires move to the north of Fort McMurray towards the massive Syncrude and Suncor mining operations:

  • Although the facilities were not directly threatened, the fires forced the evacuation of 19 work camps which housed mainly Suncor and Syncrude employees. Both facilities were also placed under mandatory evacuation order, preventing the restart of both mines.
  • The Blacksand Executive Lodge located southwest of Suncor was destroyed by fire. The 665-room lodge is operated by Horizon North Logistics who noted the facility was insured and the company will rebuild. No other camps were damaged.
  • The province has outlined a schedule for residents to re-enter the community, expected to begin June 1st.
  • The Regional Municipality of Wood Buffalo has also published an interactive map of the city so residents can survey the fire damage in their neighbourhoods.

CNRL's Horizon Mine is returning to normal operation after minor repairs were made to the Horizon upgrader, unrelated to the wild fires. Horizon is located on the west side of the Athabasca River about 100km north of Fort McMurray and is the only oil sands mining facility not impacted by the wildfires. The latest updates on the production outages near Fort McMurray can be found on our site.

Fallout continues from the wildfires . . .

The Conference Board of Canada (CBOC) estimates the Alberta wildfires will chop $1 billion off Canada's GDP assuming production comes back online by the end of May. The CBOC estimates it will take 3 years to replace the 2,400 homes that were destroyed but the Alberta economy will improve in 2017 due to the rebuilding effort.

BMO is projecting Canada's GDP will contract by 1% in the second quarter due to the loss of oil production, but sees a strong recovery into the second half of the year. Barclays estimates Alberta's oil sands producers are losing up to $50 million a day in pre-tax revenues.

The estimated 1.2 million bbl/day of offline production is putting a big dent in CN and CP's crude-by-rail business. The rail companies have idled 1065 rail tankers, forcing the layoff of hundreds of employees. Crude-by-rail is already down 50% year/year due to extra pipeline capacity that came online late last year. Although oil transport is not a huge portion of rail volumes, crude-by-rail earns more revenue by volume, making it a lucrative business segment for both CN and CP. Companies have been scrambling to build dozens of rail loading terminals across Alberta and Saskatchewan as a hedge against future pipeline constraints.

The crimp in oil sands output is also forcing Suncor to import crude from the North Sea into its Montreal East refinery. The refinery recently switched to Alberta crude earlier this year thanks to the reversal of Enbridge's Line 9B. The 1 million barrel shipment of Ekofisk Blend crude will be shipped to Portland, Maine and pipelined to the Quebec refinery via the 236 mile Portland-Montreal Pipe Line.

Financial distress in Alberta's energy patch . . .

A number of Alberta companies reported financial difficulties this week:

  • Connacher Oil & Gas filed for creditor protection after failing to meet its debt obligations. The company has secured interim financing to help support day-to-day operations and has put its assets up for sale. Connacher's Great Divide SAGD operation was temporarily disrupted by the wildfires but has been operating at reduced rates since January in order to conserve cash.
  • Penn West Petroleum is also in danger of defaulting on debt payments due in June. The company grew aggressively through acquisition in the past decade resulting in a heavy debt load. Former Suncor CEO Rick George was appointed as board chairman in 2013 after his firm Novo Investment Group took a large stake in the company. Accounting irregularities discovered in 2014 and low oil prices has taken a toll on share prices, now falling into penny-stock status. Penn West is looking at selling some assets and restructuring its $1.9 billion debt load.
  • Tervita missed an interest payment earlier in the week and is in the process of re-negotiating terms with its lenders. Tervita is in the waste management business with significant operations in the oil sands. The company has approximately $3 billion in debt

EI recipients in Alberta approaching all-time highs . . . 

The number of Albertans receiving Employment Insurance (EI) benefits rose another 3.3% in March (versus February). That number has been rising since late 2014 driven by heavy job losses in Calgary and Edmonton. The number of new EI claims is down 2.3% in the province (month/month). However, the federal government's extension of EI benefits for Alberta and impact of the Fort McMurray fires has yet to be factored in. 

Year over year, the number of EI recipients in Alberta now totals 67,600, up 68%. The record high for the province is about 70,000 recipients, which occurred in the summer of 2009.

Trans Mountain Expansion Pipeline clears the first hurdle . . . 

The National Energy Board (NEB) recommends Ottawa approve Kinder Morgan's Trans Mountain Expansion Project (TMEP):

  • The NEB concluded the project benefits all Canadians, both economically and socially, with minimal risks to the environment.
  • The NEB outlines 157 conditions around engineering, safety and environmental protection to be met during construction, engineering and operation of the pipeline.
  • Environment and Climate Change Canada (ECCC) also released their report on upstream emissions - i.e., emissions from production and combustion of the crude oil contained in the pipeline. The ECCC concludes that (a) volumes booked on TMEP will be produced regardless of whether the pipeline gets built and (b) expansion of Alberta's oil sands is primarily a function of oil prices and not dependant on a single pipeline. The report is draft and open for public consultation for the next 30 days.
  • Minister of Natural Resources Jim Carr has announced a new 3 member panel consisting of a First Nations leader, an NDP party organizer and the president of the University of Winnipeg. The panel will consult with First Nations groups and affected stakeholders from June to November, after which a full report on TMEP will be released to the public.
  • The federal government has committed to giving their final approval by the end of the year and has promised their decision will be based on science.

The province of BC has outlined several conditions that remain to be met before it can support the project, including better spill response plans and more revenue sharing for the province and aboriginal groups. The province will be undertaking its own environmental review. Vancouver area mayors remain opposed to the project and all fossil fuels in principle and will never provide support for Alberta oil. BC's Lower Mainland imports about half of its gasoline and jet fuel from Edmonton and the other half from refineries just across the border in Washington State.

The existing Trans Mountain line currently transports 300,000 bbl/day of Alberta crude and refined products into Vancouver and Washington State and has been in operation since 1953. The expansion will increase the capacity to 890,000 bbl/day. More details on the NEB's decision and background on the project can be found on our site. The full 533 page report and recommendations can be found on the NEB website (www.neb-one-gc.ca).

It's worthwhile to note Enbridge's Northern Gateway pipeline was also approved by the NEB in 2014 but the project has been stuck in political limbo.

Ontario moves to ban natural gas . . .

The Globe and Mail leaked details of Ontario impending $7 billion Climate Change Action Plan. The province will soon unveil plans to phase out natural gas heating and boost the number of electric vehicles on the road. The goal is to reduce GHG emissions 80% from 1990 levels by 2050. Natural gas and gasoline engines are the largest source of GHGs in Ontario. Key highlights:

  • By 2030, natural gas connections to new homes will be banned. Currently, 76% of Ontario households rely on natural gas for heating.
  • Trucking companies will be provided subsidies to switch from diesel to natural gas.
  • Subsidies for electric vehicles will increase to $14,000 per vehicle. EVs will also be PST exempt and have access to free charging at new stations to be built throughout the province. Low-income families will be offered additional subsidies to trade in their old gas-guzzling clunkers.
  • Gasoline taxes will rise by another 4¢/L.  

The province wants 12% of its vehicle fleet to be electric by 2025, which translates into 1.7 million vehicles (slightly higher that the current 5,800 vehicles). Ontario's auto sector was less than pleased with the new proposal, pointing out (a) global EV production isn't enough to meet Ontario's targets and (b) EVs purchased in Canada are all imported which would be very bad for Ontario's automotive industry. Total global sales of electric vehicles was 550,000 last year.

The province already has one of the highest electricity prices in North America due to the shutdown of coal power plants and restart of old nuclear reactors. The new plan is expected to cost homeowners an average of $2,000-3,000/yr in heating costs. Critics argue the plan will severely crimp the province's economic competitiveness, still struggling to recover from the recession of 2008. Ontario already has massive infrastructure for natural gas. Just last year, the government planned to expand the use of natural gas, noting it was much cheaper and more efficient than electric. More details on the climate change plan are expected in June. 

This week's global energy news . . .

The UN and global environment groups are apparently surprised that presidential candidate Donald Trump isn't a fan of the Paris Agreement on combating climate change and will likely seek to renegotiate (or completely ignore) targets if elected. President Obama has set a goal of cutting US emissions by 28% by 2025 from 2005 levels. The Paris Agreement is non-binding.

Royal Dutch Shell is reportedly looking into spinning off US$40 billion worth of non-core assets to help pay down its US$70 billion debt. CFO Simon Henry has confirmed the company may IPO its more mature assets into a new "Baby Shell" company. 

French energy services and engineering giant Technip announced an all-stock merger with US-based equipment supplier FMC Technologies. The new company, to be named TechnipFMC, will have 49,000 employees across 45 countries and a market cap of US$13 billion. The deal is expected to be approved by European and US regulators since the 2 companies do not have overlapping business units. Once completed, TechnipFMC will be the world's second largest oilfield service company, second to Schlumberger but larger than Halliburton.

The situation in Venezuela is apparently going from bad to worse as the country is now facing a shortage of water, electricity, food, medicine and basic supplies. Low oil prices have crippled government revenues, resulting in a worthless Bolivar and skyrocketing inflation. The country faces declining production and has been offering discounts to US refineries in order to protect its market share. Venezuela was already in fiscal trouble when oil prices were near $100/bbl due to very high government spending and corporate corruption. China has already provided the country with US$50 billion in loans in an "oil for cash" deal and is reportedly looking at providing more assistance.

Saudi Arabia is considering paying its contractors with IOUs in an effort to defer expenditures. The country faces a huge deficit this year and has been aggressively selling foreign reserves to help support government spending.

Nigera's "Delta Avengers" are threatening a new round of attacks on infrastructure in the oil rich Delta region. The Avengers are seeking better revenue sharing from oil produced in the area, which accounts for 70% of Nigeria's revenues. The crisis has resulted in a jet fuel shortage which has disrupted domestic flights and contracted the country's GDP. Almost 1 million bbl/day remains offline, representing 40% of the country's production.




OIL PRICES • WEEKLY CLOSE
Friday close, $/bbl • data by CME Group
48.72
+0.89 ▲ 1.9%
BRENT USD/BBL
47.75
+1.54 ▲ 3.3%
WTI USD/BBL
35.70
+1.34 ▲ 3.9%
WCS USD/BBL
46.85
+2.41 ▲ 5.4%
WCS CAD/BBL
CHANGE WK/WK  
  • The differential between Brent and West Texas Intermediate is narrowing again, thanks to increased supply from OPEC and falling production in the US.
  • In Canadian dollar terms, Western Canadian Select continues to climb higher, gaining 150% from the January lows.
  • Goldman Sachs has declared an end to the global oil glut and says world oil markets are now in deficit. Pointing to the outages in Venezuela, Nigeria and Canada, Goldman took the bold step of predicting oil prices will average US$50/bbl for the remainder of the year. Energy investors have cause for concern given that Goldman erroneously predicted US$200 oil in 2008 and US$20 oil just last January.



CURRENCIES • WEEKLY CLOSE
Friday close • data by Bank of Canada & ICE

95.29
+0.70 ▲ 0.7%
USD INDEX
76.20
-1.11 ▼ 1.4%
CDN DOLLAR
1.85%
+0.14 ▲ 8.2%
US 10Y Bond
1.35%
+0.08 ▲ 6.2%
CDN 10Y Bond
CHANGE WK/WK  

The US dollar perked up again this week on news that an interest rate hike might be on the table next month. Better than expected jobs data, improving inflation and easing of global concerns may give the US Federal Reserve cause to raise rates at the next meeting on June 15th. The strengthening dollar has slowed the rise in oil prices, which seem unable to clear the US$50/bbl mark.

Statistics Canada reported another decline in Canadian manufacturing sales, the second consecutive decrease in a row. Although sales volumes were higher by 0.1%, lower sale prices led to a 0.9% decline for the month of March, to $50 billion. Key highlights:

  • Sale of petroleum products increased by 11.3% to $3.7 billion. This comes after 9 consecutive months of declines. Prices for petroleum products rose by an average of 5.1%.
  • Alberta managed to eek out a 0.2% gain for the month. However, sales are still down 15% for the year. Saskatchewan is faring much better, gaining 1.5% for the month and only down 6% yr/yr.
  • Manufacturing sales fell in Manitoba, Ontario and Quebec on weakness in the auto, aerospace and transportation sectors.

Wholesale trade data wasn't much better, falling 1% for the month of March. Bank of Canada governor Stephen Poloz estimates the sweet-spot for Canadian manufacturing is 74 cents.

Despite the soft economic data, Canadian inflation continues to run hotter than expected. Declines in natural gas and fuel prices failed to offset increases in food, shelter and electricity. Canada's Consumer Price Index rose 1.7% in April (yr/yr) with the core index (excluding food and fuel costs) gaining 2.2% yr/yr. The Bank of Canada's target for inflation is 2.0%.

Despite higher oil prices, the Canadian dollar continues to decline due to the strengthening US dollar, falling to a 1 month low this week.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • 4-week average • data by EIA (preliminary)
US OIL INVENTORIES
million bbls • data by EIA
US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes
2,933k
-104 ▼ 3.4%
BBL/D CDN IMPORTS TO US
8,791k
-11 ▼ 0.1%
BBL/D US PROD'N
541.3M
+1.3 ▲ 0.2%
BBL US INVENTORY
318
+0 ▲ 0.0%
US RIG COUNT
CHANGE WK/WK  

The EIA reported a 12% decline in imports of Canadian crude into the US last week, declining to 2.6 million bbl/day. The 4-week average of Canadian crude imports fell to 2.9 million bbl/day, down 12% from a peak of 3.3 million bbl/day in late January.

US inventories unexpectedly rose last week despite numerous predictions of a drawdown. However, gasoline and distillate inventories appear to be easing as the summer driving season ramps up. US oil production declined slightly but the number of oil rigs in service held steady at 318 this week.

More and more oil producers are locking in current oil prices and hedging their forward production to help secure loans. This should slow declines in US production through the second half of the year. Most analysts estimate drilled but uncompleted wells (DUCs) among US shale producers become cost competitive at about US$45/bbl and should start to come back online as prices cross the US$50/bbl mark. Rystad Energy estimates there are 3,900 DUCs in the US representing a production capacity of over 1 million bbl/day

Reuters is reporting that China's frenzied oil stockpiling might be slowing as the price of oil rises. The country is rumoured to have stockpiled as much as 105 million barrels in the first four months of the year, taking advantage of depressed oil prices. China's Strategic Petroleum reserve (SPR) has a capacity of 245 million barrels. The country is building vast underground caverns to build its inventory capacity to 90 days (or 550 million barrels). As a point of comparison, US SPR capacity is about 714 million barrels, representing about 5 weeks of domestic consumption.




ENERGY SECTOR PERFORMANCE
Friday close • data by TSX & NYSE

CANADIAN & US EQUITIES
Friday close • data by TSX & NYSE

SECTOR SUMMARY
Friday close • data by TSX & NYSE
TSX ENERGY STOCKS • WEEKLY CHANGE
NYSE ENERGY STOCKS • WEEKLY CHANGE
  • Natural gas players Painted Pony (TSX: PPY + 14.5%) and Encana (TSX:ECA +12%) were the big winners in the TSX Energy Sector this week. AECO spot prices have recovered to over $1.20/GJ late this week after plunging to historic lows during the initial shutdown of oil sands producers.
  • Beaten-down energy service stocks also outperformed this week, including Precision Drilling (TSX:PD +11%) and Secure Energy Services (TSX:SES +9.3%).
  • Penn West Petroleum sunk to penny stock status, declining to $0.91 (TSX:PWT -13%)
  • Warren Buffett's Berkshire Hathaway increased its stake in Phillips 66 by 23% to 75.6 million shares (NYSE: PSX +0.2%).
  • Chesapeake Energy continued its downward slide on renewed fears the company doesn't have enough cash to to cover debt payments due over the next few years (NYSE:CHK -8%). The company has put its gas fields, derivatives contracts and even office real-estate up for sale in a desperate attempt to avoid bankruptcy. Chesapeake stock is down 90% from the highs of 2014.


UPGRADES

  • Enbridge (TSX:ENB): Upgraded from Outperform to Market Perform at FirstEnergy Capital with a price target increase from C$23 to C$55.
  • Devon Energy (NYSE:DVN): Upgraded from Hold to Accumulate at Johnson Rice.
  • Exxon Mobil (NYSE:XOM): Upgraded from Hold to Buy at Argus.
  • Halliburton (NYSE:HAL): Upgraded from Market Perform to Outperform at FBR & Co. and from Neutral to Buy at Griffin Securities. FBR increased their price target from US$44 to US$49

DOWNGRADES

  • Teck Resources (TSX:TCK.B): Downgraded from Outperform to Market Perform at Raymond James.
  • Valero Energy (NYSE:VLO): Downgraded from Buy to Hold at Tudor Pickering.

PRICE TARGET CHANGES

  • Athabasca Oil Corp (TSX:ATH): Price target increased from C$2.50 to C$2.75 at TD Securities.
  • Encana (TSX:ECA): Price target increased from C$11 to C$12 at Jefferies Group.
  • Penn West Petroleum (TSX:PWT): Price target decreased from C$1.40 to C$0.90 at RBC Capital.
  • Baker Hughes (NYSE:BHI): Price target increased from US$53 to US$54 at Citigroup.
  • Halliburton (NYSE:HAL): Price target decreased from US$53 to US$38 at Argus Research.

NEXT WEEK'S EVENTS

Mon | TSX closed for Victoria Day Holiday
Mon | EIA International Energy Outlook 2016
Tue | API Weekly Statistics Bulletin released @ 4:30pm ET
Wed | Bank of Canada Interest Rate Decision released @ 9:00am ET
Wed | EIA Petroleum Status Report released @ 10:30am ET
Thu | Oil & Gas Council - Canada Oil & Gas Assembly in Calgary, AB
Thu | EIA Natural Gas Report released @ 10:30am ET
Fri | US Q1 Gross Domestic Product (GPD) estimate released @ 8:30pm ET
Fri | Baker-Hughes Rig Count released @ 1:00pm ET
Fri | Cenovus CEO Brian Ferguson speaks at the Canadian Club in Toronto
Fri | Ontario Premier Kathleen Wynne speaks at the Calgary Chamber of Commerce


Next edition of the Oil Sands Weekly: Friday May 27, 2016 @ 7pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

0