Prior to the COVID-19 pandemic, the Western Canadian oil and gas industry faced daunting challenges.
Stalled or cancelled infrastructure projects prevented producers from obtaining fair market value for their products and shook investor confidence.
The COVID-19 pandemic amplified these challenges by almost instantly obliterating 20-30 million barrels per day of oil demand, creating an over-supplied market that ultimately saw commodity prices sink to unprecedented negative numbers (i.e., for some of the May contracts, producers had to pay traders to take their barrels due to storage and demand shortages). Partially aided by
Needless to say, if prolonged, the cumulative impact of these challenges and their disproportionate impact on Canadian producers present an existential threat to the domestic oil and gas industry.
The ripple effect to the Canadian economy as a whole should not be underestimated. The energy sector contributes about 10% to
Initial reaction to COVID-19
The dumping of stocks caused by COVID-19 wiped out a significant portion of the market capitalization of virtually all oil and gas participants. While market capitalization has to an extent generally recovered outside of the oil and gas sector, performance of oil and gas stocks has languished behind alternative investment choices, such as those in the technology, financial, pharma and other sectors. The effect of COVID-19 has thus been to compound the precipitous drop in oil and gas stock performance over the last 10 years.
To preserve shareholder value and protect balance sheets, boards have been forced to very quickly make decisions designed to address liquidity and solvency concerns, including storing and shutting-in production (rather than giving it away for nothing or, shockingly, having to pay for it to be taken away), slashing capital budgets and dividends, suspending buybacks, cutting executive compensation, laying off employees and ensuring their companies have access to cash via lines of credit and otherwise.
Measures from the Canadian and
However, industry executives maintain that these programs do not go far enough to address the effects of the pandemic and the operational issues affecting the industry and have encouraged governments to announce further lines of credit or other support programs in addition to the lending programs currently offered by EDC and BDC
Looking ahead
Acknowledging that crystal ball gazing is difficult in the best circumstances, and that the ultimate outcomes of the pandemic and economic recovery remain uncertain, we expect the Canadian oil and gas industry to experience a combination of the following in the coming months:
1. Increased public support for job-creating oil and gas projects.
Oil and gas stocks were once investors' darling, comprising more than 10% of the S&P 500 Index in 2009. Today, they make up less than 3%. Conventional thinking is that the trend will not reverse itself in a material way, as societal pressures heeded by a Liberal government in
However, as the economic effects of the pandemic deepen and drag out, a sea change in societal pressures could be at hand with public opposition to oil and gas infrastructure projects yielding to overwhelming pressure for accelerated job creation and economic stabilization, both of which can be offered by the oil and gas industry with a host of high-value, shovel-ready oil and gas infrastructure projects.
Effectively, the impacts of the pandemic may encourage public support for industry-transforming oil and gas projects on an expedited basis. Environmental and technological improvements over the last decade, as well as concerns regarding foreign supply chains, should position the Canadian sector as a supplier of choice for North American markets and investment, offering a reliable and secure energy source from a jurisdiction with high environmental and social standards.
2. Continued flight of foreign investment.
Massive oil sands reserves in northern
3. Balance sheet recovery transactions.
In the face of decreased revenues associated with depressed commodity prices, demand and production and resultant downward pressure on credit ratings and balance sheets, industry participants can be expected to improve their balance sheets by seeking out (a) partnering arrangements on existing and proposed capital projects, (b) off-balance sheet financing transactions, such as granting royalties over future production in exchange for upfront liquidity, and (c) the continued spin-out of non-core producing properties and midstream assets which has been in vogue since 2014.
The pressures faced by industry executives will surely also lead to seeking out governmental support, though the willingness of the government to provide support, the form that support might take and the strings attached, are all far from certain.
4. Opportunity knocks.
Well-heeled investors and strategics with a long-term, optimistic view of the oil and gas industry driven by rising demand—due to population and economic growth and rising standards of living—may view the current low-price environment as an excellent opportunity to acquire and/or consolidate assets at a once-in-a-lifetime valuation. As was experienced following the 2014 price crash, we should expect that any such investment activity will be concentrated on high-margin assets (following commodity price recovery).
Eventually, the pandemic will pass and demand will return. Fossil fuels are not going away as part of the energy mix, notwithstanding continued pressure for energy transition. Less supply on the market due to
Prior to the COVID-19 pandemic, the Western Canadian oil and gas industry faced daunting challenges.
Stalled or cancelled infrastructure projects prevented producers from obtaining fair market value for their products and shook investor confidence.
The COVID-19 pandemic amplified these challenges by almost instantly obliterating 20-30 million barrels per day of oil demand, creating an over-supplied market that ultimately saw commodity prices sink to unprecedented negative numbers (i.e., for some of the May contracts, producers had to pay traders to take their barrels due to storage and demand shortages). Partially aided by
Needless to say, if prolonged, the cumulative impact of these challenges and their disproportionate impact on Canadian producers present an existential threat to the domestic oil and gas industry.
The ripple effect to the Canadian economy as a whole should not be underestimated. The energy sector contributes about 10% to
Initial reaction to COVID-19
The dumping of stocks caused by COVID-19 wiped out a significant portion of the market capitalization of virtually all oil and gas participants. While market capitalization has to an extent generally recovered outside of the oil and gas sector, performance of oil and gas stocks has languished behind alternative investment choices, such as those in the technology, financial, pharma and other sectors. The effect of COVID-19 has thus been to compound the precipitous drop in oil and gas stock performance over the last 10 years.
To preserve shareholder value and protect balance sheets, boards have been forced to very quickly make decisions designed to address liquidity and solvency concerns, including storing and shutting-in production (rather than giving it away for nothing or, shockingly, having to pay for it to be taken away), slashing capital budgets and dividends, suspending buybacks, cutting executive compensation, laying off employees and ensuring their companies have access to cash via lines of credit and otherwise.
Measures from the Canadian and
However, industry executives maintain that these programs do not go far enough to address the effects of the pandemic and the operational issues affecting the industry and have encouraged governments to announce further lines of credit or other support programs in addition to the lending programs currently offered by EDC and BDC
Looking ahead
Acknowledging that crystal ball gazing is difficult in the best circumstances, and that the ultimate outcomes of the pandemic and economic recovery remain uncertain, we expect the Canadian oil and gas industry to experience a combination of the following in the coming months:
1. Increased public support for job-creating oil and gas projects.
Oil and gas stocks were once investors' darling, comprising more than 10% of the S&P 500 Index in 2009. Today, they make up less than 3%. Conventional thinking is that the trend will not reverse itself in a material way, as societal pressures heeded by a Liberal government in
However, as the economic effects of the pandemic deepen and drag out, a sea change in societal pressures could be at hand with public opposition to oil and gas infrastructure projects yielding to overwhelming pressure for accelerated job creation and economic stabilization, both of which can be offered by the oil and gas industry with a host of high-value, shovel-ready oil and gas infrastructure projects.
Effectively, the impacts of the pandemic may encourage public support for industry-transforming oil and gas projects on an expedited basis. Environmental and technological improvements over the last decade, as well as concerns regarding foreign supply chains, should position the Canadian sector as a supplier of choice for North American markets and investment, offering a reliable and secure energy source from a jurisdiction with high environmental and social standards.
2. Continued flight of foreign investment.
Massive oil sands reserves in northern
3. Balance sheet recovery transactions.
In the face of decreased revenues associated with depressed commodity prices, demand and production and resultant downward pressure on credit ratings and balance sheets, industry participants can be expected to improve their balance sheets by seeking out (a) partnering arrangements on existing and proposed capital projects, (b) off-balance sheet financing transactions, such as granting royalties over future production in exchange for upfront liquidity, and (c) the continued spin-out of non-core producing properties and midstream assets which has been in vogue since 2014.
The pressures faced by industry executives will surely also lead to seeking out governmental support, though the willingness of the government to provide support, the form that support might take and the strings attached, are all far from certain.
4. Opportunity knocks.
Well-heeled investors and strategics with a long-term, optimistic view of the oil and gas industry driven by rising demand—due to population and economic growth and rising standards of living—may view the current low-price environment as an excellent opportunity to acquire and/or consolidate assets at a once-in-a-lifetime valuation. As was experienced following the 2014 price crash, we should expect that any such investment activity will be concentrated on high-margin assets (following commodity price recovery).
Eventually, the pandemic will pass and demand will return. Fossil fuels are not going away as part of the energy mix, notwithstanding continued pressure for energy transition. Less supply on the market due to
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