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The Oil Sands Weekly

The Oil Sands Weekly

Restart of the oil sands progressing as fire recedes . . .

Cooler temperatures were a big help this week as evacuation orders for oil sands operators and work camps were lifted throughout the Wood Buffalo area. Enbridge and Inter Pipeline are reporting normal operation for all their product/diluent pipelines in and out of Fort McMurray.

Most companies are in the process of restarting operations. By the first week of June, production should slowly start coming back online. Wednesday June 1st also marks the first day Fort McMurray residents are allowed back into the city.

Alberta wages begin to recover after a dismal 2015 . . . 

Statistics Canada's latest payroll survey for the month of March showed that salaries in Alberta rose again for the second month in a row after declining throughout all of 2015. Weekly salaries in the province averaged $1,129, much higher than the national average of $960/week. Most surprising is the strong wage gains made in Alberta's energy patch. Oil & gas workers in the province reached a record $2,371/week despite the heavy job losses in the sector. The data would suggest that less-experienced workers have been harder hit by the layoffs in the energy patch.

Wages across Canada grew only 0.7% in March (year/year), much lower than the rate of inflation which is tracking closer to 2%. Most of the new jobs created in the past year are weighted towards lower paying, part-time positions.

Creditors not on the hook for abandoned wells . . .

An Alberta judge ruled that insolvent companies will not be responsible for cleaning up old wells, instead deferring that responsibility to the government of Alberta. The ruling was in reference to the bankruptcy of Redwater Energy, whose creditors argued environmental liabilities rendered the company's assets worthless.

The Alberta Energy Regulator (AER) argued proceeds from asset sales should go towards remediation of their 70 inactive wells. The decision could push more companies into bankruptcy just to avoid well clean-up costs. There are 700 abandoned wells in Alberta. The oil industry pays into a clean-up fund managed by the government. The AER will be appealing the ruling.

Other news in the Alberta energy patch . . . 

  • Keyera announced the closing of $345 million in new shares.
  • Gibson Energy announced $200 million in equity financing and $100 million in debt issuances. Proceeds will be used to pay down short-term debt and finance the company's growth plans.
  • AltaGas also raised $400 million through bought deal share offerings. The company also announced it has reached an agreement with a Japanese firm to sell 50% of the propane to be exported from the new Ridley Island Propane Export Terminal near Prince Rupert, BC. Propane is widely used in Asia for heating and cooking, replacing more volatile kerosene. The brownfield project has an estimated price tag of $500 million and could be operational by 2018 if a final investment decision is made by year-end. Propane prices are at record lows in Western Canada due to huge oversupply of LPGs (liquid petroleum gases).  

Canadian banks holding $2 billion in dodgy oil & gas loans . . .

Canadian banks began reporting second quarter earnings this week:

  • Loan loss provisions at BMO increased by 25% to $201 million while the value of impaired oil & gas loans more than doubled to $410 million during the second quarter. Alberta accounts for 6% of BMO's total loans, with 2% directly invested in the energy patch. The bank also warned more losses might be written-off later in the year.
  • CIBC set aside $284 million to cover bad loans in Q2, revised 44% higher than last year. Most of the sour loans are concentrated in the energy sector. The company noted most of its losses were attributed to a single client, but did not name the company.  About one-third of CIBC's energy loans are now considered below investment grade. 
  • RBC reported a 19% increase in bad loans in the second quarter, rising to $583 million.

Both RBC and CIBC see little contagion outside of Alberta. Equifax also reported that delinquency rates in Alberta have shot up 36% in the first quarter of this year. Delinquency refers to debt payments that are more than 90 days past-due.

BC could be the next North Dakota . . . 

BC's crude oil production hit a nine-year high this week, topping 26,000 bbl/day. Hydraulic fracturing technology has enabled exploitation of the gas-heavy Montney Formation in northwestern BC. The National Energy Board estimates the Montney Formation contains 500 billion cubic feet of natural gas, 20 billion barrels of NGLs and 1 billion barrels of recoverable oil.

The largest players in BC's oil sector are ARC Resources, Crew Energy and Tourmaline Oil. Analysts estimate drilled wells have a break-even cost of $30/bbl and a payback period of approximately 1 year, making the assets very attractive to investors. However, there is limited oil infrastructure in the region.

BC's oil production peaked at 100,000 bbl/day in 1998 but then declined rapidly as fields became depleted. Alberta's conventional oil reserves were heavily exploited during the 80s and 90s and have also been steadily declining over recent years.

Newfoundlanders pause equalization loan payments . . . 

The federal government is allowing Newfoundland and Labrador (NL) to pause their equalization payment loans due to a collapse of the province's finances.

NL received equalization payments for 51 years, from 1957 to 2008. In 2005, the federal government calculated the province over-collected payments and sent them a bill for $378 million, of which only $107 million has been paid so far. In 2008, NL began offshore oil production and ceased to qualify for equalization payments. Due to the collapse of oil prices, the federal government has deferred the remaining $266 million payments until 2022. NL will use the proceeds to reduce the Temporary Deficit Levy introduced during the 2016 budget.

Japan seeking speedier LNG approval . . . 

Prime Minister Trudeau was in Japan this week, ahead of the big G7 meeting. The PM met with Japanese Prime Minister Shinzo Abe to talk-up Ontario's auto sector. The Japanese PM however, was more interested in discussing LNG, or more specifically, the lack of progress on Canada's LNG exports. The federal government further delayed approval of the $36 billion Pacific Northwest LNG plant, seeking more information on fish habitat that might be impacted. 

The Trudeau Liberals backed themselves into a corner during the last election, promising every special interest group a say in natural resource development. Several First Nations groups are seeking UN support in their request to veto LNG development in BC due to concerns over salmon habitat. The Canadian Environment Assessment Agency estimates that LNG will significantly increase carbon emissions, making it difficult for BC and Canada to reach their climate change targets.

Japan reminded the PM than natural gas helps reduce emissions in Asia who still rely heavily on coal and warned that future delays may force them to secure contracts elsewhere. Japan wants LNG imports to cover 30% of its power needs by 2030 as it moves to shut down coal-fired power plants, which currently supplies 25% of the country's power. 

Pacific Northwest LNG is a consortium that includes Indian, Japanese, Chinese and Brunei national petroleum companies.

Stephen Harper to resign . . .

After serving as Canada's Prime Minister for almost 10 years, Stephen Harper will be resigning his position as MP for Calgary Heritage and seeking work in the private sector. Harper is the son of an Imperial Oil accountant, born and raised in Toronto but later relocated to Edmonton for brighter job prospects. The former PM is expected to announce his resignation sometime in the summer.

The Donald would approve Keystone XL (maybe) . . . 

Donald Trump told a North Dakota audience that he would approve Keystone XL if elected. However, Trump also promised to renegotiate terms and get "a piece of the profits". TransCanada's Keystone XL has a price tag of over $10 billion, to be spent mostly on the US side of the border. The pipeline would transport an extra 510,000 bbl/day to US Gulf Coast refineries, who rely heavily on crude-by-rail for their heavy oil shipments from Alberta.

Earlier in the year, Trump stated that he likes Canada (thankfully) but would seek 25% of profits from Keystone XL in perpetuity in exchange for a presidential approval. However, it's unclear whose "profits" he was referring to.

Royal Dutch Shell expecting "lower for longer" oil prices . . .

Royal Dutch Shell announced another 2,200 jobs will be axed this year, on top of the 3,000 cuts already announced as part of their US$54 billion merger with BG Group. The job cuts were blamed on low oil prices. Shell shed 7,500 jobs in 2015 bringing the grand total to 12,500. The company is trying to chip away at its US$70 billion debt load. Post-merger, Shell now has about 95,000 employees worldwide.

France runs out gas . . . 

French unions are continuing their protest against labour reforms, forcing the shutdown of refineries, transit, LNG and nuclear power plants. Union officials report all 8 of the country's refineries are on strike, resulting in a 50% drop in output.

Gas shortages are forcing France to tap into its strategic petroleum reserves for the first time since 2010 (during the last country-wide strike). President Hollande has assured the French people the country has enough fuel reserves to last 3 months.

French oil major Total reported its 2,200 gas stations had either partly or completely run out of fuel earlier in the week. The company began shutting down its 5 refineries and warned it may trim future investment in the country. Exxon Mobil reported minor damage to their Fos-sur-Mer oil terminal in Marseille. However, production was reportedly not impacted.

France has a refining capacity of 1.5 million bbl/day. The last major strike in 2010 caused a spike in Europe's refining margins as the price of gas shot up while crude oil prices tumbled due to refinery outages throughout the country.

The Delta Avengers strike again . . . 

Nigeria's Delta Avengers blew up the main electricity feed to Chevron's Escravos tank farm, forcing the shutdown of Chevron's onshore activities.

In 2009, the Nigerian government negotiated an amnesty deal with similar militants who were attacking oil facilities, offering millions in protection money. However, low oil prices have left the government unable to make its payments. Nigeria relies on oil exports for 70% of its revenues. The terrorist attacks have reduced oil output from 2.2 to 1.4 million.

United Airlines also announced they will cancel flights between Houston and Lagos due to difficulties in collecting money from tickets sold in that country.

Other global energy news . . . 

  • Analysts at Morgan Stanley are warning that 2015 oil discoveries were the lowest since 1952. The company speculates that insufficient exploration may eventually lead to a global shortfall as demand for oil increases in emerging markets. Only 12.1 billon barrels of oil were discovered last year, most of it in the form of US shale.
  • Oil production out of Indonesia continues to climb topping 835,000 bbl/day in the first quarter of 2016. A good portion of that increase is output from Exxon Mobil's Cepu block in the East Java province.
  • Iran continues to ramp up oil production and exports post-sanction. Excluding condensates, Iranian oil exports are expected to reach 2.2 million bbl/day by the summer.
  • Iraq's total oil output has reached a record 4.7 million bbl/day with exports also hitting a record high of 3.9 million bbl/day.
  • The next OPEC meeting is scheduled for June 2nd. Iran is planning to attend this time although production freezes are unlikely to be negotiated. 
  • Cash-strapped Middle-East countries are increasingly turning to bond markets to raise capital. Qatar's latest issuance of US$9 billion worth of Eurobonds is the region's largest ever bond sale and was grossly oversubscribed. The average yield for Middle-East bonds is 4.8% for 10 year notes, making the bonds far more attractive than US treasury. Qatar is planning to spend $200 billion in preparation for the 2022 World Cup. A total of US$30 billion in debt notes have been issued so far in the Middle-East, with Saudi Arabia expected to be next in line.



OIL PRICES • WEEKLY CLOSE
Friday close, $/bbl • data by CME Group
49.32
+0.60 ▲ 1.2%
BRENT USD/BBL
49.33
+1.58 ▲ 3.3%
WTI USD/BBL
37.53
+1.83 ▲ 5.1%
WCS USD/BBL
48.93
+2.08 ▲ 4.4%
WCS CAD/BBL
CHANGE WK/WK  
  • West Texas Intermediate (WT) briefly touched US$50/bbl on Thursday but failed to hold that level by the end of day. Brent and WTI are now trading virtually at par.
  • The heavy oil differential continued to fall this week to $11.80/barrel. The discount was trading closer to $14/bbl before the Alberta wildfires.



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

95.50
+0.21 ▲ 0.2%
USD INDEX
76.70
+0.50 ▲ 0.7%
CDN DOLLAR
1.85%
+0.00 ▲ 0.0%
US 10Y Bond
1.36%
+0.01 ▲ 0.6%
CDN 10Y Bond
CHANGE WK/WK  
  • The Bank of Canada held interest rates at 0.5% this week. The bank estimates the Alberta wildfires will take 1.25% off the second quarter GDP, potentially leading to a Q2 contraction. However, rebuilding efforts should boost economic activity in the third quarter.
  • Strong housing and jobs data south of the border has increased the probability of a US rate hike in the summer. If the US does raise rates again, this will be only the second rate hike in a decade. US GDP in Q1 was revised higher to 0.8%, from an original estimate of 0.5%.
  • The government of Saudi Arabia is reportedly unhappy with all the short bets placed against the country's currency. Many large hedge funds have taken big short positions on the riyal, calling the current "massively overvalued". The riyal was pegged to the US dollar in 1986 (during the last oil market crash) to provide financial stability. De-pegging the riyal would cause the currency to crash, creating a ripple effect across energy markets. A lower riyal would help the country's fiscal problems since oil prices trade in US dollars but expenses are in local currency.



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
2,888k
-45 ▼ 1.5%
BBL/D CDN IMPORTS TO US
8,767k
-24 ▼ 0.3%
BBL/D US PROD'N
537.1M
-4.2 ▼ 0.8%
BBL US INVENTORY
316
-2 ▼ 0.6%
US RIG COUNT
CHANGE WK/WK  
  • US inventories finally pulled back last week, falling 4.2 million barrels. Inventories are down 6.3 million barrels from the highs of late April, but still remain at all-time highs.
  • US oil production declined to 8.8 million bbl/day as another 2 oil rigs came offline this week.
  • US imports of Canadian crude unexpectedly rose by 500,000 bbl/day last week although the 4-week average is still declining. Weekly data released by the EIA is preliminary and can be quite volatile. Finalized import figures for the month of March will be released by the EIA on May 31st and will be posted to our Energy Statistics page.



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
  • North American markets had a good week, with all sectors (except materials) powering higher.
  • The TSX crossed the 14,000 mark for the first time since August 2015. The TSX has been held back by sinking gold prices blamed on a stronger US dollar.
  • Big winners on the TSX this week include small-cap energy names such as Athabasca Oil Sands (ATH +8.3%), Paramount Resources (POU +7.8%) and Gran Tierra Energy (GTE + 5.8%).
  • Service companies also had a good week, including Calfrac (CFW +9%), Trican (TCW +6.4%), Canadian Energy Services (CEU +6.2%) and Enerflex (EFX +5.6%). 
  • TransCanada (TRP) and BlackPearl Resources (PXX) hit new 52-week highs on the TSX.

UPGRADES

  • Petrobras (NYSE:PBR): Upgraded from Underweight to Neutral at JPMorgan.
  • Schlumberger (NYSE:SLB): Upgraded from Buy to Conviction Buy at Goldman Sachs. Analysts' consensus target price is US$91.50 a share.

DOWNGRADES

  • StatoilHydro (NYSE:STO): Downgraded from Buy to Hold at HSBC. Analysts' consensus target price is US$20.50 a share.
  • PetroChina (NYSE:PTR): Downgraded from Overweight to Neutral at JP Morgan. Analysts' consensus target price is US$93 a share.

PRICE TARGET CHANGES

  • Husky Energy (TSX:HSE): Price target decreased from $21 to $20 at TD Securities.
  • Devon Energy (NYSE:DVN): Price target increased from US$34 to US$38 at Barclays.
  • Suncor Energy (TSX:SU): Price target decreased from $41 to $40 at RBC Capital.

NEXT WEEK'S EVENTS

Monday:

  • US markets closed for Memorial Day Holiday; UK markets also closed
  • Canadian Producer Price Index (PPI) released by Statistics Canada

Tuesday:

  • Canadian GDP estimates for Q1 released @ 8:30am ET by Statistics Canada.
  • Wood Buffalo Mayor Melissa Blake delivers keynote speech @ The 200 Luncheon in Calgary, AB

Wednesday

  • Husky Energy Investor Day @ 9:00am ET in Toronto, Ontario
  • Saskatchewan government tables 2016/17 budget
  • API Weekly Statistics Bulletin released @ 4:30pm ET (delayed due to Monday holiday)

Thursday:

Friday:

  • Canadian trade balance data from Statistics Canada
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday June 3, 2016 @ 7pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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