Canada’s biggest oil producers are sitting on a near-record pile of cash amid price rout

Canada’s biggest oil producers are sitting on a near-record pile of cash, providing them with the time to keep investing and manage debt while weathering the worst price rout inside a generation.

The five largest oil producers including Suncor Energy Inc. and Cenovus Energy Inc. possess a combined $8.5 billion in cash and cash equivalents, a rise of seven.6 percent from the year earlier and most twice the amount seen during 2009 downturn. The figures, that are little changed from the record $9 billion in 2014, don’t range from the arises from Imperial Oil Ltd.’s recent sale of their Esso-brand gas stations for $2.8 billion.

“Sitting on cash and a nutritious balance sheet has become a competitive advantage,” Amir Arif, an analyst at Cormark Securities Inc. in Calgary, said by phone. “These guys have lots of capital they need to spend.”

Divestitures, cost cutting, equity raises, and dividend cuts have helped bolster balance sheets as Canadian oil producers buckle down for that “lower for longer”  prices Suncor Chief Executive Officer Steven Williams has described. In contrast to the last downturn when commodity prices made a quick recovery, the industry isn’t betting on the go back to high prices and requires the cash to have their operations expanding.

Having funds are an important survival tactic as commodity markets remain volatile despite the recent recovery that saw oil prices rebound toward US$40 from greater than a 12-year low of about US$26 a barrel in February. West Texas Intermediate is anticipated to average $39.50 this season, based on the estimates compiled by Bloomberg. Its northern border American benchmark advanced around 85 cents US to US$37.19 a barrel around the Ny Mercantile Exchange on Wednesday.

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Steam Technology

Suncor’s Fort Hills bitumen mine alone this season could eat up 1 / 2 of the company’s available cash. Paying for Fort Hills will cost $4.5 billion this season, with Suncor accountable for about 50 % the outlay, the company has stated.

“Our strong balance sheet helped us deliver on our commitments to shareholders including funding our major growth projects, for example Fort Hills and Hebron,” spokeswoman Sneh Seetal said within an e-mail. “We are drawing the money balance down in order to continue funding those projects through this period of low oil prices.”

Imperial and Cenovus must also cash to develop assets using steam technology. Imperial Oil inside a March 11 statement filed an application to have an oil-sands project that would produce 50,000 barrels a day from 2022, while expansions at Cenovus’s Foster Creek and Christina Lake sites will start producing oil in the third quarter, the company said in a Feb. 11 statement.

Financial Resilience

“Our most important during this time period of low oil prices would be to maintain our financial resilience and the strength in our balance sheet,” Brett Harris, a spokesman for Cenovus, said in an e-mail. “We will be going for a very conservative method of make sure that we don’t compromise the balance sheet strength that we’ve worked so difficult to construct over the last year or so.”

Imperial will assess the “pace and scope” of future investments based on market and business conditions, spokeswoman Killeen Kelly said within an e-mailed response.

Canada’s largest oil producers had about $4 billion in cash in March 2009, because the price of crude began to climb from a low of just under US$34 a barrel in 2008. Their funds reserves fell to $1.9 billion by 2011 as the recovery took hold and also the industry started to expand again.

Nix Acquisitions

The spending, combined with the stop by prices, has taken a toll on balance sheets with debt now standing around typically 2.16 times earnings before interest, taxes, depreciation and amortization, compared with 1.08 times this past year, according to data published by Bloomberg.

The cash reserves are a “comfort,” such an environment, said John Stephenson, ceo of Stephenson & Co. Capital Management in Toronto, which oversees $55 million.

While there may be a temptation to make use of the money for acquisitions, the low price and the large undeveloped assets that the companies curently have will keep them from pursuing more large transactions, Stephenson said.

“The appetite for a deal is fairly minimal,” he said, describing the market as “frozen in time.” So-called tuck-in acquisitions is feasible, but they would have to be flowing barrels rather than new projects, based on Stephenson.

‘Step-Change’

Canadian Natural Resources has the smallest cash pile of the five-largest producers. The company’s cash-flow generation, flexible capital expenditure program and available liquidity “all support a powerful budget,” said spokeswoman Julie Woo, within an email. Completing the next phase in the company’s Horizon oilsands mine with result in a “significant step-change” for cash flow later this season, she added.

Husky’s capital expenditures will stay in balance with income this season, said spokeswoman Kim Guttormson in an email. If oil prices go above the company’s assumptions, the priorities includes reducing debt, restoring a sustainable dividend, and investing in capital projects, she added.

Suncor has already spent billions on two large transactions in the past year, including an all-stock takeover of Canadian Oil Sands Ltd., a transaction worth $6.3 billion including debt. The Calgary-based oil producer also bought a 10 per cent stake within the Fort Hills bitumen mining project from Total SA.

Share Price

So far, investors aren’t rewarding Canada’s largest oil companies for that cash moats they’ve created. Shares of those with biggest cash piles are on the most this season through Monday.

Company               Cash & Cash Equivalents         Price Change YTD

Suncor                           $4.05 billion                       -2.6 percent
Imperial                        $203 million                        -1.7 percent
Cenovus                         $4.1 billion                         -0.9 percent
Husky                            $70 million                         +14 percent
Canadian Natural        $69 million                         +19 percent

The Suncors and Canadian Natural Resources “of the world will do relatively well came from here however the commodity is simply so volatile,” Stephenson said. “It’s not for widows and orphans. I don’t think people ought to be chasing these moves.”

Bloomberg News