A Bank of Canada survey in mid-March indicates many Canadian oil and gas firms are facing financing and liquidity issues as a result of low oil prices forcing them to reduce costs and operations.
“The majority of firms viewed the current oil price shock as worse than the episodes of significant oil price declines in 2008 or 2015. This is because accessing financing has been more difficult and many businesses had been anticipating a bottoming-out in the sector rather than a negative shock,” said the Bank.
“At the time of the consultations, the financial health across the sector had deteriorated significantly. Most businesses consulted had already experienced a tightening of financing conditions: equity prices had plunged, credit spreads had widened and risk appetite had disappeared. While some firms reported being able to withstand a period of low oil prices (e.g., they have strong hedging positions, a healthy balance sheet or low-cost operations), many had concerns about their ability to access financing. For their part, natural gas producers were partially insulated from the shock because natural gas prices were holding up.
“In this context, most firms reported major cuts to their capital budgets. On average, companies had revised their 2020 capital spending plans down 30 percent compared with 2019. In addition, significant staffing reductions were imminent, especially among oil-field service companies that employ a large share of the sector’s workforce. In contrast, at the time of the survey, most producers expected few layoffs because they were already very lean and it would be difficult to find additional efficiencies in the near term. Still, some producers anticipated having to cut their workforces if low oil prices persisted and, correspondingly, their production was reduced for an extended period of time.”
The Bank said the sector’s production response was expected to be somewhat delayed. Many conventional oil producers anticipated production to fall off quickly as capital expenditures decline. However, some larger producers were expecting to bring previously planned projects online, partially offsetting those declines in the near term, it said.
“Most respondents expected prices for West Texas Intermediate to remain depressed for the remainder of 2020, averaging in the range of US$30–$35 per barrel. Businesses generally anticipated a modest price recovery in 2021 to US$40–$45 per barrel. Firms with lower price expectations referred to persistent uncertainty around COVID‑19 and the ongoing crude-oil price wars as key factors exerting significant and lasting downward pressure,” it said.
