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The Oil Sands Weekly

The Oil Sands Weekly

IN THE NEWS THIS WEEK . . . 

Canadians were glued to their TV sets watching forest fires consume the city of Fort McMurray, home to 88,000 people. Residents were reportedly given less than 20 minutes to evacuate their homes, many fleeing while flames engulfed their neighbourhoods. Most headed south towards Edmonton (normally a 5 hour drive) but 25,000 residents headed north towards the oil sands facilities, who opened their camps to those seeking refuge. As it now becomes evident no one will be going home anytime soon, oil sands operators have begun evacuating all non-essential staff and the thousands of refugees, as the camps are quickly running out of fuel, water and food.

None of the oil sands facilities are physically threatened by the wildfires at this time. Operators generally clearcut a wide berth around process plants, tank farms and well pads for fire prevention. However, most facilities only have a few days worth of storage capacity on-site and therefore rely on pipelines to move product and condensate in and out of hubs in Edmonton and Fort McMurray, some of which have been taken out of service for precautionary measures. 

As of Friday afternoon, here's the status of the oil sands operations near Fort McMurray:

  • The Suncor, Syncrude and Albian Sands mines were the first to wind down operations out of consideration for their employees, who all reside in Fort McMurray. Closure of the 3 mines will take 900,000 bbl/day of light upgraded oil off the market.
  • The Cheecham storage terminal, located just south of Anzac, was evacuated on Thursday as winds shifted to the south of Fort McMurray. Cheecham is operated by Keyera and supplies diluent to the many in-situ facilities located in the area. Enbridge has also shutdown most diluted bitumen pipelines in and out of the Cheecham terminal.
  • CNRL's Horizon Mine and Imperial Oil's Kearl Mine are both fly-in/fly-out operations and therefore not directly affected by staffing issues. However, Kearl is operating at reduced rates due to lack of diluent. CNRL noted Horizon's operation is "stable" for the moment. Product from Horizon is shipped via Pembina's Horizon Pipeline, which is reporting normal operation at this time.
  • SAGD facilities to the north of Fort McMurray have been shutdown due to lack of diluent, taking 220,000 bbl/day of oil production offline. This includes Suncor's Firebag operation and Husky's Sunrise facility. 
  • Athabasca Oil Sands' Hangingstone in-situ facility is the closest to Fort McMurray and was shutdown on Thursday due to encroaching fires in the Anzac area. Hangingstone normally produces about 7,000 bbl/day. Nexen's neighbouring Long Lake facility has also been shutdown and evacuated.
  • The Surmont SAGD facility operated by ConocoPhillips was shutdown and evacuated on Thursday. Suncor's MacKay River facility is also shutdown. Surmont and MacKay River produce about 80,000 bbl/day. 
  • Statoil's Leismer facility is operating at reduced rates due to lack of diluent, taking another 10,000 bbl/day of heavy oil off the market.
  • Connacher's Great Divide, located south of Hangingstone, is now back online after a brief shutdown on Wednesday.
  • The Christina Lake and Foster Creek SAGD facilities operated by MEG Energy and Cenovus are much further south and operating normally. 
  • Thermal in-situ operations near Cold Lake are also not affected.

That brings the total estimate of offline production to approximately 1.2 million bbl/day, or 30% of Canada's total oil production. The latest estimates put the burn zone at 100,000 hectares (roughly the size of New York city) with no signs of relief. There is no indication at this point when normal operations will resume. Stocks of several camp operators in the Fort McMurray area (which include Black Diamond Group, Horizon North Logistics and Texas-based Civeo) jumped higher this week on anticipation that work camps will be used to temporarily house employees and residents during rebuilding efforts. BMO expects Canada's second quarter GDP will be zero if the outages stretch out into a few weeks.

We will be posting operational updates on our site as more information comes in over the next few days (click here for link to latest updates). Cooler temperatures are not expected until Monday. A map of all the oil sands facilities near Fort McMurray can be found under the "Projects" menu.

Other news from the Canadian energy patch this week:

  • Production at Albian Sands declined to 245,000 bbl/day in the first quarter, down 2% from Q4/2015. The drop was blamed on a maintenance turnaround at the Jackpine expansion. Operating costs fell to $39.50/bbl, an 11% decrease yr/yr. Production at Albian is expected to average 200 to 225,000 bbl/day due to additional maintenance activities planned during the second quarter.
  • In contrast, Devon Energy reported that production at the Jackfish SAGD facility continues to exceed expectations, producing well above nameplate capacity. The 105,000 bbl/day SAGD operation produced an average of 126,000 bbl/day in the first quarter. Operating costs declined to US$7.87/bbl (roughly $11/bbl).
  • Husky Energy announced the sale of royalty lands to Calgary-based Freehold Royalties for a total of $165 million. Royalty lands are privately held oil & gas properties that are not subject to government royalties (which only apply to leases purchased from the Alberta government). Producers still pay a mineral tax but royalties go to the property owners.
  • Connacher Oil & Gas entered into a Second Forbearance Agreement on the default of principal and interest payments due back in March. The new agreement extends creditor protection until May 16. Connacher operates the Great Divide thermal in-situ operation which has a rated capacity of 15,000 bbl/day. Great Divide has been operating at reduced rates (approximately 3,500 bbl/day) in order to preserve cash.
  • Logistics and energy services provider Gibson Energy reported a first quarter profit of $44 million on revenues of $959 million. Gibson also announced it recently completed commissioning of the Edmonton East Terminal Expansion, increasing their storage and blending capacity at the Edmonton Storage Terminal. 
  • Pengrowth Energy reported a $25 million profit in the first quarter thanks to a "realized commodity risk management gain" of $125 million. Seymour Schulich disclosed his fund acquired an additional 5 million shares of Pengrowth stock, now owning 15.7% of the company.
  • Pembina Pipelines reported a $237 million profit in the first quarter on record liquids volumes. Pembina commissioned a second ethane-plus fractionator at the Redwater site in early April, increasing the company's fractionation capacity to 146,000 bbl/day. The company also commissioned three new storage tanks at its Edmonton North Terminal, adding another 550,000 barrels of storage capacity to the facility.
  • Enbridge filed a request with the NEB to extend its permit for the Northern Gateway pipeline as it continues talks with communities in northwestern BC. The existing permit is set to expire by year-end unless construction of the pipeline or the Kitimat terminal is started. Northern Gateway was approved with 209 conditions by the Harper government in 2013. Prime Minister Trudeau has vowed to reverse that decision, but declined to comment on whether a new routing would change his mind.
  • Encana posted worse than expected first quarter results on lower production and much lower natural gas prices. The company lost $130 million in Q1 despite a sharp drop in operating costs. Encana has hedged about 75% of its oil and condensate production through the end of 2016.
  • Secure Energy Services (SES) purchased Calgary-based PetroLama, a privately held midstream player. The deal gives SES a crude terminal in Alida, SK enabling marketing and transportation of NGLs and condensate, as well as additional oil storage capacity at Cushing, OK. The transaction was reported to be worth $53.5 million. SES raised almost $150 million in bought deal financing in the first quarter and reported a $10 million loss on revenues of $209 million (down 43% yr/yr).
  • Steelmaker Evraz announced hundred of layoffs in Regina and Calgary on weak demand from the energy sector. Evraz Regina Steel is the largest steel mill in Canada, formerly owned by Ipsco. The steel industry has been hit hard by alleged dumping of cheap steel by the Chinese and the downturn in the oil and gas industry.
  • National Bank spooked investors and warned second quarter earnings will be sharply lower thanks to a $183 million provision for "dodgy" loans made to the oil and gas sector. Results from Canadian Western Bank weren't much better, suffering a 10% drop in share price this week. Heavy write-offs for bad energy loans are expected to negatively impact earnings for CIBC and Bank of Nova Scotia. Canadian banks begin reporting second quarter results at the end of May.

The National Energy Board (NEB) reported a 500,000 bbl/day drop in Canadian crude oil exports in the first quarter of the year. Oddly enough, the Energy Information Agency (EIA) reported a record volume of Canadian crude was imported into the US in the month of February. Although Canadian energy trade balance for Q1 is not yet available, the decline in exports might be attributed to Enbridge's newly reversed Line 9 which began transporting 300,000 bbl/day of Alberta crude to Quebec late last year. Since over 95% of Canada's crude exports are to the US, it is expected the EIA will report a decline in Canadian imports over the next few weeks. 

Statistics Canada reported that Canada's trade deficit widened to a record C$3.4 billion in March, the largest deficit in history:

  • Exports fell 4.8% to $41.0 billion on a 2.9% decline in export volumes and 2.0% drop in prices.
  • The steepest declines were seen in energy exports (down 4.8% for the month), consumer goods (down 4.6%), materials (down 5.4%), precious metals (down 8.2%) and the auto sector (down 6%). For the full year, energy exports declined about 39%.
  • Imports declined 2.4% to $44.4 billion, as prices were down 2.1% and volumes fell 0.3%. The import of energy products rose 13.5% in March.
  • Sales to the US declined 6.3% while imports from the US fell 4.8%. Canada's trade surplus with the US fell to only $1.5 billion in March, the lowest since 1993.

The $3.4 billion deficit in March follows a $2.5 billion deficit in February, dashing any hopes of a resurgence in the Canadian manufacturing sector. Analysts blame the weak data on a strengthening Canadian dollar (which climbed from 69¢ in mid-January to 75¢ in March) and an anemic US economy, which accounts for 75% of Canadian exports.

The dismal trade data translated into a dismal jobs data. StatsCan's Labour Force Survey reported that Alberta lost another 21,000 jobs in April, erasing the 19,000 job gains in March. However, the province's unemployment rate didn't change much due to a 1.1% decline in labour participation. Manufacturing continues to be the weakest sector, accounting for significant losses in Alberta (due to weak demand from the energy patch) and Ontario (due to weak demand from the US). The job market across the country doesn't look much better with the exception of BC, who now has the lowest unemployment rate in Canada for the first time since 1976. The national unemployment rate remains unchanged at 7.1%

Quarterly results for US and global energy players continued to roll out this week:

  • Royal Dutch Shell reported an 89% drop in first quarter income (yr/yr) on a 26% decline in revenues which fell to US$48.6 billion. The company revised expectations lower for the second quarter due to unfavourable LNG contracts.
  • Marathon Oil reported a first quarter loss of US$407 million on revenues of US$730 million.
  • Halliburton reported a US$3.1 billion operating loss in the first quarter on a US$2.8 billion impairment change.
  • Devon Energy reported another loss of US$3.1 billion in the first quarter, the fifth losing quarter in a row. The company lost almost US$21 billion in 2015 and continues to bleed red ink. As of last February, Devon de-staffed an estimated 20% of its global workforce.
  • Weaker refining margins took a toll on Valero Energy who reported a first quarter profit of $495 million, a 50% decline from 2015, on total revenues of almost $15.7 billion.
  • Anadarko Petroleum posted a US$1 billion net loss in the first quarter loss despite aggressive cost cutting. The company lost US$6.7 billion last year and is working towards divesting at least US$2 billion worth of assets. Anadarko reduced its 2016 capital expenditures plan to US$2.8 billion, down 70% from 2014. 

The Energy Information Agency (EIA) reported another build in US crude oil and gasoline inventories, but a significant decline in oil production, falling to 8.8 million bbl/day, a level not seen since October of 2014. West Texas and Brent declined this week on a strengthening US dollar. Western Canadian Select rose slightly on a narrowing heavy oil differential due to the outages in Alberta.

Alberta's NDP government marked one year in office this week. The Trudeau Liberals celebrated their first 6 months on the job. Politicians across the country took a break from their usual bickering to offer support and solidarity for the people of Fort McMurray - the only bright spot in an otherwise sombre week.

Anyone wishing to provide support for rebuilding efforts is being asked to donate to the Canadian Red Cross. The federal and provincial governments will be matching donations.


OIL PRICES, INVENTORIES & PRODUCTION

45.37
-2.76 ▼ 5.7%
BRENT USD/BBL
44.66
-1.26 ▼ 2.7%
WTI USD/BBL
32.71
+0.34 ▲ 1.1%
WCS USD/BBL
42.26
+1.64 ▲ 4.0%
WCS CAD/BBL
8,825k
-113 ▼ 1.3%
BBL/D US PROD'N
543.4M
+2.8 ▲ 0.5%
BBL US INVENTORIES
328
-4 ▼ 1.2%
US OIL RIG COUNT
93.85
+0.82 ▲ 0.9%
US DOLLAR INDEX
CHANGE WK/WK  

EQUITIES



CURRENCIES

UPGRADES & DOWNGRADES

UPGRADES

  • Canadian Natural Resources (TSX:CNQ): Upgraded from Sector Perform to Outperform at National Bank Financial.
  • Imperial Oil (TSX:IMO): Upgraded from Hold to Buy at TD Securities. TD Securities raised its price target from C$47 to C$51 a share.
  • Halliburton (NYSE:HAL): Upgraded from Neutral to Buy at Citigroup.

DOWNGRADES

  • Gibsons Energy (TSX:GEI): Downgraded from Outperform to Sector Perform at RBC Capital and from from Sector Perform to Outperform at National Bank Financial. RBC Capital lowered its price target from C$23 to C$17. National has a price target of C$17.
  • Royal Dutch Shell (NYSE:RDS.A): Downgraded from Buy to Neutral at Citigroup.

PRICE TARGET CHANGES

  • Imperial Oil (TSX:IMO): Price target increased from C$46 to C$47 at RBC Capital.
  • Canadian Natural Resources (TSX:CNQ): Price target increased from C$37 to C$38 at TD Securities.
  • TransCanada (TSX:TRP): Price target increased from C$42 to C$54 at Barclays.
  • Baytex Energy (TSX:BTE): Price target increased from C$5 to C$5.50 at FirstEnergy Capital, from C$5.50 to C$6 at TD Securities, from C$5.50 to C$6 at Raymond James and from C$6 to C$7 at RBC Capital.
  • Encana (TSX:ECA): Price target increased from C$10 to C$11.25 at RBC Capital.
  • Enerflex (TSX:EFX): Price target increased from C$13 to C$12 at RBC Capital.
  • Gibson Energy (TSX:GEI): Price target decreased from C$17.50 to C$16.50 at TD Securities and from C$18 to C$17 at CIBC.
  • Paramount Resources  (TSX:POU): Price target increased from C$4.50 to C$6.50 at TD Securities and from C$6 to C$7 at Barclays.
  • SECURE Energy Services (TSX:SES): Price target decreased from C$12 to C$11 at Paradigm Capital, from C$10 to C$11 at BMO Capital Markets and from C$10.50 to C$11.25 at Canaccord Genuity.
  • Chevron (NYSE:CVX): Price target increased from US$110 to US$114 at Jefferies Group.
  • Devon Energy (NYSE:DVN): Price target increased from US$32 to US$38 at JPMorgan Chase & Co, from US$36 to US$41 at RBC Capital, from US$26 to US$34 at Barclays, from US$37 to US$40 at Credit Suisse and from US$37 to US$38 at Sanford Bernstein.
  • ExxonMobil (NYSE:XOM): Price target increased from US$73 to US$78 at Credit Suisse.

NEXT WEEK'S EVENTS

Monday:

  • Inter Pipeline Q1/16 earnings release
  • Ensign Energy Services Q1/16 earnings release

Tuesday:

  • EIA Short Term Energy Outlook
  • Keyera Q1/16 earnings release
  • Connacher Oil & Gas Q1/16 earnings release
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday:

  • EIA Petroleum Status Report released @ 10:30am ET
  • Birchcliff Energy Q1/16 earnings release
  • Surge Energy Q1/16 earnings release
  • TORC Oil & Gas Q1/16 earnings release

Thursday:

  • Enbridge Q1/16 earnings release
  • Crescent Point Q1/16 earnings release
  • Canadian Energy Services Q1/16 earnings release
  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday May 13, 2016 @ 6pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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