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The Oil Sands Weekly

The Oil Sands Weekly

Fort Mac wildfires add another $500 million to Alberta's deficit . . .  

Provincial Finance Minister Joe Ceci provided a first quarter update this week on the state of Alberta's budget. In short: 

  • The province's deficit will be $10.9 billion for this fiscal year, $527 million higher than previously estimated due to production outages and evacuations that resulted from the northern Alberta wildfires.
  • The NDP government isn't changing forecasts for spending or oil prices just yet, and remains committed to executing the plan as laid out in the original 2016 budget.

The full cost of the Wood Buffalo wildfires was reported at $647 million, including $300 million in lost royalties and revenues due to production outages around the Fort McMurray area. However, Alberta received $452 million in disaster assistance from the federal government, which helped reduce net loss to the province to $495 million. The wildfires have gone down as the most expensive natural disaster in Canada's history.

Provincial revenues increased by $708 million in the quarter due to better than expected oil prices and the $452 million transfer from the federal government. West Texas Intermediate has averaged US$45/bbl for the first fiscal quarter (which runs from April 1 to June 31), slightly higher than the US$42/bbl that had been projected.

CNOOC blames Canada for its first ever half-year loss . . . 

Hong-Kong based CNOOC Ltd. reported a US$1.2 billion loss for the first 6 months of the year, the first loss since the company became public in 2000. Much of those losses were blamed on a US$1.6 billion impairment charge for idling the Long Lake upgrader. The company's total oil output fell to 241.5 million boe, down 5% from the first half of 2015, the first decline since 1999.

Derailment in Ontario flares up concerns over rail safety . . . 

A train derailment in Ontario has renewed concerns over the transportation of dangerous goods through residential neighbourhoods. An estimated 1,200 litres of diesel was spilled in a Toronto neighbourhood when a westbound CP Rail train struck an eastbound train that was changing tracks. Although a number of new safety initiatives have been put in place for the rail sector, many communities would just prefer to move the rail lines outside of residential neighbourhoods. 

A big part of the problem is that much of Canada was built around the rail lines, which was the primary mode of transport at the turn of the century. The rail companies maintain they were there first and shouldn't shoulder the entire cost of the relocation. The Québec town of Lac Mégantic developed a plan to reroute the rail lines around the downtown core after the deadly disaster in 2013, but there was no agreement on who will pay the estimated $150 million cost.

Loan losses in the energy patch begin to subside . . . 

Better than expected third quarter bank earnings were released this week. The banks seem to be signalling that bad loans in the energy patch seem to be subsiding, or at least not growing as fast. BMO, RBC, CIBC and TD all beat on earnings expectations this week.

The BDC posts a record Q1 . . .

The Business Development Bank of Canada (BDC) reported record net income and loan acceptances for the first quarter of 2016. The BDC earned a net income of $537.7 million, $68.6 million of which will go back to the Government of Canada.

The BDC partnered up with Alberta's ATB Financial earlier this year to make $1 billion available for struggling Alberta-based businesses, helping them to diversify into other sectors of the economy. 

Other Canadian energy news this week . . . 

Reuters is reporting that Imperial Oil is gearing up for a major shutdown at the Kearl Oil Sands mine, north of Fort McMurray. The planned maintenance outage is expected to last about 5 weeks. No word yet on impact to production.

The city of Prince Albert, SK has lifted all water restrictions about a month after one of Husky's pipelines leaked 30,000 barrels of oil into the North Saskatchewan River. Husky reported that almost 50% of the contaminated shorelines have been cleaned up so far. The company has temporarily suspended clean-up efforts due to rising river water levels brought-on by heavy rainfall in the region.

A new report prepared for the province of Newfoundland and Labrador (NL) estimates there are 25.5 billion barrels of oil in the West Orphan Basin, which would make it double the size of the Flemish Pass off the coast of Norway. The NL government will begin bidding for the Orphan Basin in November and hopes to further develop oil production from the region.

This week's Canadian economic data . . . 

Wholesale sales increased for a third consecutive month in June, up 0.7% from the previous month to $56.4 billion. Alberta's wholesale merchants' sales rose by 3% m/m but is still down almost 8% from the same time last year.

Average weekly earnings for non-farm employees was reported at $958 in June, up 0.4% from the previous month. That brings the year/year increase to 0.5%. However, earnings in professional, scientific and technical services decreased 2.3% to $1,299/week, driven lower by heavy employment losses in Alberta's technical and engineering services sector. Earnings in Alberta are now down 2.4% y/y to an average of $1,119/week across all sectors.

Canadian corporations earned a combined profit of $72.9 billion in the second quarter of 2016, down 3.4% from Q1. The oil & gas sector reported a combined operating loss of $4.2 billion in Q2, the sixth consecutive quarterly loss. Profits in the financial services sector also took a big hit in Q2, falling 12.1% to $25.1 billion. Part of the decline was blamed on insurance payouts related to the Fort McMurray wildfires.

Home construction investment in Alberta is back down to levels not seen since June 2009. Construction spending in the province is down 30% y/y to $641 million. Saskatchewan housing is down 18% while new home investments in Newfoundland and Labrador is down 12%. BC has been the biggest beneficiary of Canada's housing boom so far, with construction up 33% over the past 12 months. Ontario is a close second with a 26% gain.

Canada's federal deficit for the first quarter was $1 billion, versus a surplus of $5 billion for the same time last year. Tax revenues are falling while government spending and debt servicing costs are rising.

In Canadian politics this week . . . 

Federal Finance Minister Bill Morneau told reporters he is considering relaxing foreign investment rules in a bid to spur economic growth. It is unclear whether that extends to Canada's natural resources sector, which had been frowned upon by the previous federal government. PM Trudeau heads to China in early September for the G20 Summit.

Morneau also met with a team of federal advisors in Toronto this week to figure out how to revive Canada's anemic economy. The group consists of 14 business leaders and professors, tasked with exploring opportunities around trade, infrastructure, innovation and labour markets. This is the team's second meeting with Morneau. Canada's real GDP is at its lowest since the recession of 2009, in part due to low oil prices and the Alberta wildfires but also a lack of response from the country's manufacturing sector.

Former PM Stephen Harper officially resigned this week, giving up his seat as MP for the riding of Calgary-Heritage. Harper and two of his former advisors have formed a new consulting company, which will advise on international issues. The federal Conservatives are set to appoint a new leader next May.

Elsewhere in the world . . . 

BP's 413,500 bbl/day refinery in Whiting, Indiana returned to normal production this week for the first time since late July. The refinery cut throughput at the end of July when a malfunctioning wastewater plant increased sediment levels in Lake Michigan.

Tanzanian President John Magufuli ordered officials to speed up a long-delayed $30 billion-onshore LNG export terminal. The project is a joint-venture between the government and Statoil, Exxon, Orphir Energy and Royal Dutch Shell. A final investment decision has been delayed to due regulatory uncertainty and issues with land acquisition. Significant oil and gas discoveries made in Uganda and offshore of Tanzania and Mozambique have made the southeast region of Africa a new hotspot in the battle for energy dominance.

The Colombian government and left-wing FARC rebels signed a peace accord after 52 years of conflict. The rebels had been targeting oil assets including pipelines, impacting production and transportation. As a result, Colombia's oil production has been stagnant at about 1 million bbl/day in recent years. Colombia experienced a dramatic rise in energy production since the implementation of regulatory reforms in 2003 and ranks the fifth largest oil exporter to the US.

Wood MacKenzie is reporting that Iran is set to sign major oil and gas deals with several foreign companies in the second half of next year, a first since sanctions were lifted in January. First oil under the new agreements should start to flow in 2020, with an extra 500,000 bbl/day coming online by 2025. Iran pumped 3.55 million bbl/day in July and is targeting 4.8 million bbl/day by 2021.

Iraq has struck agreements with BP, Shell and Lukoil to restart stalled investment in its oil fields. The move should allow oil production to increase next year. The country has also asked foreign oil companies to reduce fees received when oil prices are low. Iraq generates 95% of its budget from oil sales. Revenues have been cut in half in the past few years due to lower oil prices.

The country also announced it will resume exports from the Baba Gorgor, Jambour and Khabbaz fields in Kirkuk, which is controlled by the Kurdistan Regional Government. Exports were halted in March due to payment disputes. The pipeline restart will boost exports by 150,000 bbl/day, to roughly 600,000 bbl/day. Iraq is OPEC's second-largest oil producer and holds the world's fifth largest oil reserves.

News agencies from Iran and Yemen reported that Yemeni forces fired ballistic missiles at Saudi Aramco's facilities in the southwestern region of Saudi Arabia. The kingdom was quick to respond that production was not impacted.

This week's OPEC rumblings . . . 

Kuwaiti officials are openly questioning the need for an OPEC meeting, noting that failure to reach consensus will likely drag oil prices lower.

Saudi Arabian Energy Minister Khalid Al-Falih does not believe any "significant intervention" in oil markets is currently necessary.

Iraq's prime minister said the country has not yet reached its full oil market share, suggesting his government would not restrain crude output as part of any possible OPEC agreement to lift prices.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • preliminary data by EIA
US OIL INVENTORIES
million bbls • data by EIA

US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes

3,015k
-287 ▼ 8.7%
BBL/D CDN IMPORTS TO US
8,548k
-49 ▼ 0.6%
BBL/D US PROD'N
524.0M
+2.9 ▲ 0.5%
BBL US INVENTORY
406
0 ▲ 0.0%
US RIG COUNT
CHANGE WK/WK  

Oil rig counts in the US were unchanged this week, halting a 8 week increase. However, Baker Hughes reported that the number of Canadian oil rig in service rose 19 to a total of 84.




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

95.54
+1.06 ▲ 1.1%
USD INDEX
76.92
-0.86 ▼ 1.1%
CDN DOLLAR
1.62%
+0.04 ▲ 2.5%
US 10Y Bond
1.08%
+0.00 ▲ 0.0%
CDN 10Y Bond
CHANGE WK/WK  

Federal Reserve vice chair Stanley Fischer is confident the US economy has met all the requirements (i.e., full employment and 2% inflation) for another rate hike by the end of the year. Janet Yellen gave a rather optimistic speech in Jackson Hole, but reiterated that rate increases will be executed very slowly (very, very slowly). Second quarter GDP in the US was revised lower to 1.1% from a prior estimate of 1.2%. Personal consumption rose by 4.4% for the quarter, slightly better than expected. The US dollar and longer-duration bonds all gained ground this week, dragging commodity prices lower.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
49.92
-0.96 ▼ 1.9%
BRENT USD/BBL
47.64
-0.88 ▼ 1.8%
WTI USD/BBL
44.54
-0.78 ▼ 1.7%
CDN LT USD/BBL
33.09
-0.88 ▼ 2.6%
WCS USD/BBL
CHANGE WK/WK  

Goldman Sachs is warning that August's price rally had been overdone and that even a OPEC production freeze would not help rein in an oversupplied market. The investment firm is maintaining its US$45-$50/bbl forecast through the middle of next year.

Meanwhile over at Citigroup, the bank's Global Head of Commodities Research Ed Morse says the oil market is slowly moving into balance (very slowly) and sees WTI averaging US$47/bbl in Q3, rising to US$50 in Q4. Morse is best known for 2015 prediction oil prices would fall into the US$20/bbl range.

Russia expects crude oil prices to remain stable at their current range of US$45-50 over the next two years, and expects oil prices to begin rising at the end of 2017. Russia's Economy Minister has called the recent rally "speculative" in nature.




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

Enbridge (TSX:ENB -2.9%) has filed a mixed shelf offering of up to US$7 billion with the SEC. Proceeds from the sale of the common shares, preferred shares and bonds will go into the company's general slush fund.

Spartan Energy (TSX:SPE +1.5%) has completed the sale of $81 million worth of shares trough bought deal financing.

Marathon Oil (NYSE:MRO -5.1%) shares declined sharply this week after the company's Chief Financial Officer (CFO) suddenly quit for personal reasons. The company is currently on the hunt for a new CFO.

Valero Energy Partners (NYSE:VLP +2.2%) has acquired terminals in Louisiana and Texas from a subsidiary of Valero Energy (NYSE:VLO +0.8%) for US$325 million.

Red Deer-based Parkland Fuel (PKI +14.4%) was the big gainer in the TSX energy sector this week on an agreement to purchase CST Brand's Canadian business from Alimentation Couche-Tard. The deal gives Parkland exclusive rights to the Ultramar brand gas stations, giving it a larger presence in Quebec. Parkland stock hit an all-time record high this week, gaining 26% in the past month alone.

Other 52-week highs on the TSX this week include: Encana (ECA -1.0%), Inter Pipeline (IPL +3.6%), Veresen (VSN +0.1%), Crew Energy (CR +4.8%), Parex Resources (+0.6%), NuVista Energy (NVA + 1.7%) and Peyto Exploration (PEY +0.1%).

UPGRADES

  • Marquee Energy (TSX.V:MQL): Upgraded from Hold to Speculative Buy at Acumen Capital. 
  • Petrobras (NYSE:PBR): Upgraded from Underperform to Neutral at Credit Suisse.

DOWNGRADES

  • Oasis Petroleum (NYSE:OAS): Downgraded from Outperform to Market Perform at BMO Capital. The company maintained its price target of US$24 a share.

PRICE TARGET CHANGES

  • Devon Energy (NYSE:DVN): Price target increased from US$51 to US$61 at Argus.
  • Imperial Oil (TSX:IMO): Price target increased from $46 to $48 at Credit Suisse.
  • Parkland Fuel Corp (TSX:PKI): Price target increased from $26.50 to $29.25 at Haywood Securities.
  • Phillips 66 (NYSE:PSX): Price target increased from US$68 to US$74 at Piper Jaffray.
  • Valero Energy (NYSE:VLO): Price target increased from US$48 to US$54 at Piper Jaffray.

NEXT WEEK'S EVENTS

Monday:

  • NEB's Energy East hearing head to Montreal, QC

Tuesday:

  • July PPI data released by Statistics Canada @ 8:30am
  • PM Trudeau arrives in China ahead of G20 Summit
  • Industrial product & raw materials price indexes released by Statistics Canada @ 8:30am
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday

  • Q2 and June GDP data released by Statistics Canada @ 8:30am
  • EIA Petroleum Status Report released @ 8:30am ET
  • Brent October contract expiry

Thursday:

  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • July Balance of Trade released by Statistics Canada @ 8:30am
  • Labour productivity released by Statistics Canada @ 8:30am
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday September 2, 2016 @ 7pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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