Oil-sands crisis hits home as Canadian Natural cuts spending

Canadian Natural Resources Ltd (TSX:CNQ) is the latest major Canadian energy producer to scale back its spending plans as a result of a dramatic decline in crude oil prices, which have fallen below US$50 a barrel from a recent peak of US$107.

The pipeline shortage that has been strangling the Canadian oil industry is weighing on spending plans for next year, with one major producer slashing its capital budget for 2019 by $750 million (C$1 billion).

Falling oil prices have led Canadian Natural Resources Ltd. to cut deeper into its 2015 spending plans than expected as the oil and gas major announced Monday a big revision to its capital budget.

In November, CNRL said it had built $2.05 billion worth of discretionary spending, or “flexible” capital, into its massive budget. Monday’s update shows a larger-than-expected  $2.4 billion reduction in discretionary spending.

CNRL’s new $6.2-billion budget is 28% smaller than it’s previously announced $8.6 billion budget, thanks in large part to the continued fall in oil prices. Of next year’s spending, only 16% is aimed at increasing output, and the remainder is allocated to keeping it flat.

“We’ve cut across the board,” CNRL’s chief financial officer Corey Bieber said in an interview, “but most of the reduction was on the Canadian conventional side.”

Mr. Bieber said that the company would drill 650 fewer wells than it had previously planned in Canada and will defer $470 million worth of spending on the first phase of a new steam-based oilsands project, called Kirby North, until either oil prices rise or costs drop.

He said CNRL had been approaching its oilfield service providers, like the drilling companies and fracking companies that work on CNRL’s wells in recent weeks to discuss ways in which the company could drive down its costs.

The oil-sands producer, which is projecting 2019 output equivalent to as much as 1.12 MMbopd, is the first major Canadian energy company to announce its spending plans for next year.

“All of our investment decisions are based on economic parameters and at today’s cost structure, and at today’s commodity price, our full-cycle returns are not being met,” Mr. Bieber said.

“So that’s the crux of the reason for capital deferrals.” “This should not come as a surprise given that the 2015 budget was originally announced in November, when oil prices were much higher,” FirstEnergy Capital Corp. analyst Michael Dunn said in a research note.

When CNRL first announced its spending plans, the company said it was budgeting based on the assumption that West Texas Intermediate oil prices would average US$81 per barrel and that the company’s 2015 cash flows would be $9.4 billion for 2015.

The company is targeting crude and natural gas liquid production of 782,000 bpd to 861,000 bpd next year, in line with this year’s levels.

In the time since, oil prices have continued to fall and WTI hit US$46.07 per barrel on Monday, as a number of investment banks lowered their oil price forecast for the year.

Mr. Bieber would not provide an updated oil price assumption for 2015, nor would he update the company’s cash flow projections for the coming year, saying that the market and situation was “too fluid” at present.

In a note to clients, National Bank Financial analyst Kyle Preston reduced his cash flow estimate for the company by roughly 1% and reduced his price target for the company to $43 per share, from $50.

CNRL shares fell 4% to $31.81 on Monday. At its most recent investor day, CNRL unveiled a plan to more than triple its free cash flow to over $6 billion per year by 2018.

Mr. Bieber said Monday that deferring Kirby North and scaling back the company’s drilling plans would not affect its ability to hit its free cash flow target. He said that plan was driven by the expansion of the Horizon oilsands mine to 250,000 bpd, which survived the company’s budget cuts.

CNRL plans to spend another $6 billion over the next three years to finish the mine expansion. The company still plans to grow its production 7% over the course of the year, to between 552,000 and 592,000 barrels of oil per day and 1.7 billion cubic feet of natural gas per day.

Shares of the Calgary-based producer rose 4% to $49.75 (C$37.23) at 12:32 p.m. in Toronto. The stock was down 20% this year through Tuesday, compared with a 15% decline for the S&P/TSX Energy Index.

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