You wouldn’t know that oil prices were in a bear market by looking at the 2015 spending plans of Canadian oil companies. Not only are producers not cutting spending, but most are planning to increase it in 2015. This is because, as Encana Corporation (TSX: ECA)(NYSE: ECA) CEO Doug Suttles puts it, “We’re looking at this as an environment to accelerate, not to slow down.”
Foot on the accelerator
Suttles company already shifted gears a few years ago away from natural gas to focus on low-cost, high growth oil plays. Because of this the company isn’t about to shift gears again just because oil prices have slipped a bit. Instead, his company is going all in on its new plan. This will see the company double the number of rigs targeting the Permian Basin in Texas now that it has completed its US$5.9 billion purchase of Athlon Energy. That being said, the company isn’t expected to outspend its cash flow next year, so if oil prices do keep falling the company will pull back on some drilling.
However, Encana isn’t alone in its plans to spend more money next year. Suncor Energy Inc. (TSX: SU)(NYSE: SU) is boosting its capex spending next year to $7.2-7.8 billion. That’s up to a billion dollars more than it spent this year as it looks to boost production to as much a 585,000 barrels of oil equivalent per day, or BOE/d, next year. That represents a solid jump from the 519,300 BOE/d the company produced last quarter.
Canadian Natural Resources Ltd (TSX: CNQ)(NYSE: CNQ) is likewise planning to boost both spending and production next year. The company is ratcheting up spending from $8 billion to $8.6 billion, which should push production up by 11% from this year. However, one of the reasons why the company can spend more money next year is because it expects to produce ample cash flow even with weaker oil prices. It sees cash flow hitting $9.4 billion next year so it has a nice margin of safety.
Even Penn West Petroleum Ltd (TSX: PWT)(NYSE: PWE) is focused on growth despite weaker oil prices. The company issued an updated growth plan that projects 13% annual production growth through 2019. The company, which has been focused on turning around its operations over the past few years, is now starting to turn the corner so it’s not about to back down on its new plan. However, it doesn’t hurt that the new plan is expected to deliver 20% annual funds flow growth over that same period even at conservative commodity price assumptions.
Ready to tap the brakes if necessary
While oil companies are putting out bullish projections for 2015, that doesn’t mean the full budgets will be spent. For example, Canadian Natural Resources has said that about $2 billion of its 2015 plan is flexible and could be deferred if oil prices grow much weaker. The company has already said it could defer its Grouse oil sands project if U.S. oil prices drop below $70 per barrel.
We will also likely see energy companies focus spending on projects that can deliver strong returns even if oil prices remain weak. For example, Cenovus Energy Inc. could decide to green light its Telephone Lake oil sands project because the production is expected to have extremely low costs. However, the company might decide to delay work at another emerging project, Grand Rapids, because it’s a smaller scale and higher cost project. Having flexibility like this is important as it gives oil companies options when oil prices plunge.
Investor takeaway
Oil companies aren’t worried about falling oil prices. Instead, Encana’s CEO calls them, “annoying, but not threatening.” This is because these companies can still make plenty of money at today’s oil price, which is why companies have no plans to tap the brakes on spending just yet.
