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Private Equity Is Bargain Hunting In Canada’s Oil Patch

September 10, 2020

Private Equity Is Bargain Hunting In Canada’s Oil Patch

After two months of an encouraging—if not half-hearted–rebound, oil prices have gone into reverse gear once again. Futures tied to WTI crude were down a whopping 8% on Monday morning to trade at $36.35/barrel, a level they last touched two months ago as the markets come under a fresh wave of pressure from a stalling recovery in demand as well as a mistimed expansion of production by OPEC that threatens to reverse the gains by the cartel’s latest production cuts.  The latest rout has elicited another round of price cuts by Saudi Arabia in a situation eerily reminiscent of the oil price war that sent the markets crashing into negative territory for the first time ever.

But as the debt-riddled U.S. shale patch braces for a new reality of ‘Lower Forever’ with massive asset writeoffs amid a growing wave of bankruptcies, its equally distressed neighbor further north has resorted to a different trick: Mergers and Acquisitions.

Starved of vital capital by weary banks and shareholders, small- and mid-sized oil and gas companies in Canada are scrambling to find partners in a bid to become bigger and– hopefully–more solvent.

Meanwhile, bargain-hunting private equity firms have pounced on the opportunity, hoping to buy distressed assets for pennies on the dollar.

WTI Oil Price 30-Days Change

Source: Business Insider

Source: Visual Capitalist

Orphaned Businesses

After years of continuous underperformance and paltry returns following a six-year downturn by the sector, cheap credit for Canada’s oil and gas companies has dried up, forcing them to look for less conventional means to survive.

The Covid-19 crisis has only served to worsen the situation, with the S&P/TSX Capped Energy–Canada’s equivalent of the U.S.’ Energy Select Sector SPDR Fund (XLE)–down 46.8% in the year-to-date vs. -41.9% return by XLE.

…click on the above link to read the rest of the article…

Husky layoffs confirmed as Calgary company continues cost-cutting

February 10, 2016

Husky layoffs confirmed as Calgary company continues cost-cutting

Latest round of cuts hits Alberta’s energy industry as oil prices remain low

More job cuts were announced for Husky Energy on Tuesday as the company looks to weather the current downturn.

More job cuts were announced for Husky Energy on Tuesday as the company looks to weather the current downturn. (CBC)

Calgary-based Husky Energy says layoffs were announced today to ensure the company’s resilience during low oil prices.

The company did not provide any specific numbers, but says the staff reductions were across its operations.

“These are difficult decisions and we will continue to take the steps necessary to ensure the company’s resilience through this cycle and beyond,” said company spokesperson Mel Duvall in an email.

Staff tell CBC News layoffs include full-time staff and contractors.

Late last year, Husky said it was looking to sell some of its conventional oil and natural gas assets in Western Canada.

That includes producing wells from northeastern B.C. to southeastern Saskatchewan, as well as pipelines and storage tanks in the Lloydminster area, but no oilsands or heavy oil assets.

Social media postings suggest that many of the positions cut were related to those assets on the block.

…click on the above link to read the rest of the article…

Alberta Loses Most Jobs In 34 Years As Oil Crunch Cripples Labor Market

January 27, 2016

Alberta Loses Most Jobs In 34 Years As Oil Crunch Cripples Labor Market

Times are tough in Alberta and to be sure, we’ve piled it on heavy when it comes to cataloguing the long list of pitiable outcomes that have accompanied crude’s steep slide.

The province is at the center of Canada’s dying oil patch and as crude extended its seemingly endless decline last year, Alberta saw oil and gas investment plunge by a third. That’s bad news for authorities who count on resources for 30% of provincial revenues.

Rig activity fell by half in the first seven months of 2015 and as the job losses mounted, the sorrow deepened – literally. Suicide rates jumped by 30% and in Calgary commercial break-ins almost doubled from a year earlier, while bank robberies were up 65% and home invasions increased 52% (read more here).

Meanwhile, food bank usage spiked as those who used to be donors found themselves depending on the free meals for subsistence.

And speaking of food, prices for fresh fruit and vegetables are seeing double-digit inflation thanks to the plunging loonie.

All in all, a very bad situation indeed and on Tuesday we learned that the picture was actually materially worse than an initial round of statistics led us to believe.

“Statscan’s annual revisions of its national Labour Force Survey data ratcheted up Alberta’s net job losses last year to 19,600, from the 14,600 the statistical agency originally reported in its final 2015 survey released in early January,” The Globe And Mail reports, adding that the losses “exceed the 17,000 jobs Alberta shed in the Great Recession in 2009.”

In fact, 2015 was the worst year for job losses in the province since 1982.

By the end of last year, Alberta’s unemployment rate had risen to 7.1% from just 4.8% at the end of 2014. As The Globe And Mail goes on to note, that’s the highest level in two decades. And it’s projected to get worse. Alberta could see unemployment rise to 7.5% in H1.

…click on the above link to read the rest of the article…

Canada’s “Other” Problem: Record High Household Debt

January 20, 2016

Canada’s “Other” Problem: Record High Household Debt

Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

…click on the above link to read the rest of the article…

Canada’s Oilfield Service Sector Battered By Low Prices

August 31, 2015

Canada’s Oilfield Service Sector Battered By Low Prices

In some ways the numbers don’t look that bad. For a group of 25 diversified, publicly traded Canadian oilfield service (OFS) companies, combined revenue of nearly $9 billion in the first six months of 2015 was only 22.1 percent lower than $11.53 billion for the same period in 2014. With oil prices down 50 percent for the first half of 2015, a revenue decline of 22.1 percent looks misleadingly attractive.

The problem is that at the field level, OFS is nowhere near as profitable as producing oil or gas. When producers fetch $100 for a barrel of oil, direct field lifting and operating costs can be as little as $10, particularly if the production is within a royalty holiday period. Most oil wells that produce without steam or EOR (enhanced oil recovery) only cost $20 or $30 a barrel to operate. Even after paying Crown royalties, it is usually $40 or less. Oilsands operations have cash operating costs of $50 or less per barrel.

Field margins for OFS have never been as high as 90 percent or even 50 percent except for a few select companies. If it does happen, margins that high don’t last long, either because of a down cycle or because high profits attract competition. Any loss of field margin clobbers the bottom line. As a group, OFS gross margins shrank significantly in the first half of 2015.

Related: Some Small But Welcome Relief For WTI

And that was back before July, when oil prices were high compared to current levels. WTI (West Texas Intermediate) averaged US$53.19 a barrel in the first six months of 2015. At the time it looked awful. Now with oil trading near US$39 or nearly 30 percent below that average first half number, it is clear for OFS things could get worse before they get better.

 

The financial performance figures analyzed in the following chart are:

• The ranking order based upon gross margin gain (loss) in 2015 versus 2014 for the six-month period ended June 30, with the order starting at the highest in descending order.

…click on the above link to read the rest of the article…

 

 

Alberta has lost 35,000 oilpatch jobs, petroleum producers say

August 31, 2015

Alberta has lost 35,000 oilpatch jobs, petroleum producers say

With cuts more likely to come in the fall.

Less than a year ago, Alberta was still complaining of a labour shortage.  Schools couldn’t find bus drivers, job vacancy rates were the highest in the country.

It’s no secret that the situation has changed.

The Canadian Association of Petroleum Producers says that 35,000 oilpatch jobs have been cut this year, 25,000 from the oil services sector and 10,000 from exploration and production. CAPP pulled the number together by canvassing its members, reviewing Statistics Canada numbers and working with the Canadian Association of Oilwell Drilling Contractors.

I have CEOs that have pulled free pop out of the office, because they can save $40,000 across the company and that’s half a job.”– Tim McMillan, CAPP

“This is tough, they’ve been struggling to get a workforce, that was always the challenge,” said Tim McMillan, chief executive of CAPP.

“Today they are laying off people that they view as very valuable. I have CEOs that have pulled pop, free pop out of the office, because they can save $40,000 across the company and that’s half a job.”

Meanwhile, other industries are picking up some of the slack. The monthly labour force survey shows that Alberta’s job growth has been largely flat this year, jobs that have been lost in the natural resource sector seem to have been created elsewhere.

“There are definitely a lot of people from the oilpatch looking right now,”– Murray Glass, Southland Transportation

School bus company inundated with applications

After years of struggling to find drivers, Southland Transportation, which provides school buses to Calgary schools, has been inundated with applications this year, including some from engineers and geologists.

 

 

…click on the above link to read the rest of the article…

It Gets Even Uglier In Canada

August 31, 2015

It Gets Even Uglier In Canada

The Province of Alberta, the epicenter of the Canadian oil bust, may be sliding into something much worse than a plain-vanilla recession. And it’s not exactly perking up the rest of Canada.

Layoffs are already cascading through the oil patch, as companies are retrenching and adjusting to the new reality. New vehicle sales are plummeting. And home sales are taking a broadside.

In August so far, total home sales in Calgary plunged 28% from a year ago, on flat prices. Condo sales collapsed 39%, with the median price down 8%, according to theCalgary Real Estate Board. Year-to-date, total home sales in Calgary are down 25%; condo sales 30%. And those condos that did sell spent 30% longer on the market than condos did a year ago, as sellers hang on by their fingernails to the illusion of wealth, and sales are stalling.

And the Business Barometer Index for all of Canada, which measures the optimism among small businesses, dropped again in August for the third month in a row. An index level between 65 and 70 indicates that the economy is growing at its potential. But now it hit 56.7, the lowest level since April 2009.

The Canadian Federation of Independent Business, which produces the index, blamed the commodity bust but added additional sectors, particularly those that are considered absolutely crucial for the hopefully coming economic recovery in the second half: construction, transportation, and retail.

The index dropped in 7 of 10 provinces, even in British Columbia, which was weighed down by “domestic conditions, coupled with weakening economic prospects in Asia.”

And that feverishly expected rebound of GDP in the second half from recessionary levels in the first half? Small business owners don’t see it. What they see is a continued downturn.

But it’s in Alberta where small business optimism has totally crashed. The Index dropped 3.5 points in August to 40.4, the worst level since March 2009, and just one such step above the historic low of 37, of February 2009, the very bottom of the Financial Crisis.

 

…click on the above link to read the rest of the article…

Canada’s Oil Patch Goes Into Convulsions

June 26, 2015

Canada’s Oil Patch Goes Into Convulsions

Alberta, the province that has become the epicenter of Canada’s oil bust, does not yet have a budget for fiscal 2015-16. Premier Rachel Notley promised delivery by October. But it won’t be easy. Ideas are already floating around and are getting shot down. The problem: a budget crisis has set in after a sudden shortfall of C$7 billion in oil revenue.

There have been layoffs in the oil patch. Companies are retrenching. Home prices are tumbling in Calgary, the oil capital of Canada. In May, they plunged a record 3.3% and are now down 7% from their peak seven months ago.

In commercial real estate, it’s getting ugly. The number of transactions of C$1 million or more in the first quarter plummeted by 21%, and the dollar value of transactions dropped 11%, according to RealNet Canada, cited by the Calgary Herald.

Cushman & Wakefield reported that the premium office market in Calgary is “reeling from the sudden impact of downsizing companies.” Unless a miracle happens in the oil markets that sends prices back into the stratosphere, the premium office market will see vacancy rates climb to 12.4% by the end of this year, and to 15.4% by the end of 2016, the worst since the early 1990s. In the first quarter alone, a record 1.23 million square feet of office space were put back on the market as companies, mauled by the oil-price plunge and trying to stay alive, are slashing operating expenses where they can.

With impeccable timing, a flood of new space is being built and will soon come on the market. Bob McDougall, senior managing director of brokerage for Cushman & Wakefield in Calgary, explained:

“On top of low office demand and companies subletting record amounts of space, we’re in the midst of a major development cycle with about three million square feet under construction downtown. Right now, it’s a perfect storm.”

…click on the above link to read the rest of the article…

 

 

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