The harsh operating environment for energy companies that was triggered by the sharp collapse in oil prices continues to have a marked impact on the energy patch. Even some of the biggest names in the patch are having a hard time.
However, Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) continues to perform strongly, although its latest results highlight that sub-$50 oil may now be the new normal.
Now what?
Despite a strong operational quarter that saw oil production rise by 5% quarter over quarter and 6% year over year, CNRL reported a net loss of $0.10 per share. Nonetheless, this was still a less than a third of the net loss reported in the previous quarter and can be attributed to weak crude prices.
The significantly smaller loss can be attributed to CNRL’s cost cutting program that saw it reduce production expenses by 5% quarter over quarter and 4% year over year.
Impressively, the marked increase in oil production came about on the back of a significant reduction in capital expenditures, which are now almost half of what they were a year ago. This is important because it highlights the increased efficiency of CNRL’s operations. It also indicates that CNRL is working hard to adapt its operations to the harsh operating environment.
Despite this environment, CNRL remains focused on developing its oil assets. The Horizon expansion is on track for completion at the end of 2017. The completion of this project will require an additional $3.4 billion investment over the course of 2016 and 2017, but it will boost production, leaving CNRL well positioned to take advantage of the anticipated rebound in crude.
Like the majority of oil sands operations, CNRL’s existing oil sands projects have relatively low break-even costs, which means that even with oil poised to remain below US$50 per barrel for the foreseeable future, they can remain profitable. This is a tremendous boon for the company, but CNRL acknowledges it won’t be clear sailing for some time to come.
CNRL has slashed its planned 2015 capital expenditures five times as it adjusts its operations to the current operating environment. CNRL has also set a 2016 capital budget that is even lower than the current budget. This indicates that CNRL is battening down the hatches and recognizing that weak oil prices are here to stay.
It isn’t just CNRL that is taking such measures. Integrated energy majors such as Suncor Energy Inc. and Imperial Oil Ltd. have taken similar actions. They also have the advantage of their refining operations becoming more profitable in an operating environment dominated by weak crude prices, and, as a result, have boosted refinery throughput and utilization rates.
So what?
Even though CNRL remains focused on developing its oil assets and expanding its operations, one thing is becoming increasingly clear: sub-US$50 oil is here to stay. This may have little overall impact on CNRL, Suncor, or Imperial Oil because all three have deep pockets, solid balance sheets, and low operating costs, but it is a completely different story for smaller oil producers.
