A flurry of oil earnings on Thursday showed the prolific profitability of the sector with high energy prices, but also some of the pressures to come: the effect of inflation and the drive to spend more capital.
A longer-term concern is also on the horizon: the cap on incoming greenhouse gas emissions in the Canadian oil and gas industry being developed by the federal government.
“I am very concerned that if we continue on this path, it could lead to shutting down production at a time when the world is literally crying out for more oil and gas production,” Cenovus Energy CEO Alex Pourbaix said in a statement. earnings call..
“Those are goals that are much more aggressive than those that are asked of any of the other industrial sectors in the country. . . I don’t think they are possible to hit.”
Oil sands giant Cenovus and the country’s largest gas producer, Tourmaline Oil Corp., posted strong second-quarter results this week that showed strong growth in profit and cash flow.
They also included higher capital budgets for the year.
Tourmaline, which produced an average of 503,000 barrels of oil equivalent (boe) per day in the quarter, generated record levels of cash flow for the April-June period.
Net earnings reached $823 million, up 96 percent from the previous year.
“It’s probably the best quarter we’ve ever had at any of the companies we’ve ever had,” Tourmaline Chief Executive Mike Rose, who previously ran Duvernay Oil Corp. and Berkley Petroleum Corp., said in an interview.
“We really don’t have any debt anymore and we have a tremendous amount of free cash flow and . . . we’re returning a lot of cash to shareholders, but we also believe that shareholders want a certain amount of growth, call it measured growth.”
The company managed both, introduced another special dividend and plans to increase capex to $1.5 billion this year, up from $1.25 billion.
The change reflects an increase in its exploration and production program in the second half of the year, as well as an inflation contingency.
“The $250 million increase, one-third is inflation and two-thirds is incremental growth,” Rose added.
OilPatch’s earnings parade showed the power of supercharged oil and gas prices on the bottom line for Canadian producers.
Benchmark oil prices rose above $100 a barrel earlier this year following Russia’s invasion of Ukraine and closed at $96.42 a barrel on Thursday.
Natural gas prices have also soared, hitting a 14-year high in the US earlier this week.
Whitecap Resources announced second-quarter earnings of $381 million, up from $19 million a year earlier, while Crescent Point Energy on Wednesday reported net earnings for the period of $332 million.
Baytex Energy earned $181 million in the quarter, while MEG Energy reported $225 million in net earnings.
Tourmaline also unveiled a new exploration and production growth plan through 2028, which will increase annual production by six percent.
At Cenovus, the integrated producer reported profits of $2.4 billion, up 50 percent from a year earlier.
This year it increased its capital budget by $400 million to around $3.5 billion, directing more money to its Sunrise oil sands project.
Cenovus is putting $100 million into its conventional oil and gas segment to account for rising labor and equipment costs, along with increased drilling activity.
It is also dedicating an additional $100 million to its offshore division, including money to fund groundwork to restart the West White Rose Project off the coast of Newfoundland and Labrador.
“If you think about that $400 million capital addition, probably about $100 (million) of that represents true inflation,” Pourbaix said.
In the oil sands, where more planning and longer lead times are required, the effect of higher costs has not been as significant as in the conventional side of the business, which is experiencing higher costs for casing and for contracting platforms.
“We are just in the process of developing our budget for 2023 and obviously inflation is going to be something we need to consider. . . but right now, it’s somewhat manageable,” Pourbaix said.
Rising operating costs are becoming a common theme across the industry.
Project costs are also rising.
On Thursday, TC Energy raised the estimated price tag for the Coastal GasLink pipeline to $11.2 billion, from $6.6 billion. Chief Executive Officer Francois Poirier cited project scope changes, inflation, the effect of the pandemic and other extraordinary events for the higher cost.
Analyst Jeremy McCrae at Raymond James said rising costs and supply chain constraints are weighing on the industry, but noted that producers benefit from higher energy prices.
“Inflation is a concern, a very big concern. . . but when you have commodity prices where they are, you’re going to have inflation, there’s just no way around it,” he said.
While inflation is a short-term issue, a longer-term concern is the incoming federal cap on oil and gas emissions.
Last week, the Trudeau government launched consultations on its planned emissions cap for the sector, with draft regulations expected to be developed by the end of the year.
Modeling in the federal government’s emissions reduction plan this spring forecast industry emissions to fall 42 percent by 2030, though details are yet to be finalized.
Cenovus, a member of the Pathways Alliance of oil sands producers who have agreed to collaborate to reach net-zero emissions by 2050, remains concerned about the federal initiative.
“The risk could be a cut in production from Canada at a time when these resources are incredibly and desperately needed around the world,” Pourbaix said.
At Tourmaline, Rose did not go into detail about the Ottawa policy, but said Canadian gas production should increase to displace coal used for power generation in Asia.
From a gas producer’s perspective, you’re also looking at how the cap affects the industry’s future production.
“The world needs more gasoline,” added Rose.
“The entire industry is reducing its emissions. And, you know, that’s the part that seems to be missing with the federal government.”
Chris Varcoe is a columnist for the Calgary Herald.