Page 5 - NorthAmOil Week 17

NorthAmOil COMMENTARY NorthAmOil
collapse in crude prices, some companies are starting to report their earnings for the first quarter of this year. And while market condi- tions were more favourable in the first quarter than they are likely to be in the second quarter, two prominent sets of results released this week paint a bleak picture.
On April 28, Vermilion Energy, which has operations in North America, Europe and Australia, reported a net loss of CAD1.3bn ($934mn), attributed to a CAD1.2bn ($862mn) write-down of the value of its assets globally. This compares with a net gain of CAD39.5mn ($28.4mn) in the first quarter of 2019. Citing financial markets data firm Refinitiv, the Cana- dian Press reported that analysts had expected a net loss of about CAD43mn ($31mn).
About 75% of the impairment charge was related to Vermilion’s Canadian operations, illus- trating how vulnerable the country’s oil industry is to such dramatic price declines.
The result comes after the company cut its dividend in half in March, and suspended it alto- gether in mid-April, saving about CAD420mn ($302mn) on an annual basis. Vermilion also said in March that it would cut its capex budget for the year by CAD80-100mn ($57-72mn). This week, the company noted that it now expects to reach the upper end of this capital reduction range.
Another Canadian producer reporting a heavy loss this week was Husky Energy. The company said on April 29 that it had a net loss of CAD1.7bn ($1.2bn) in the first quarter of 2020, compared with a profit of CAD328mn ($236mn) in the same quarter of 2019.
Husky reported impairments of CAD1.1bn ($791mn) primarily related to lower crude price assumptions, as well as an inventory realisable
value write-down of CAD274mn ($197mn), primarily across its US refining, Lloydminster heavy oil value chain, oil sands and Atlantic segments.
Husky’s CEO, Rob Peabody, said on the com- pany’s earnings call that it had shut in 80,000 bar- rels per day of Canadian upstream oil, while its US refineries were processing about 100,000 bpd less because of lower fuel demand.
“It was clear from what we were seeing on the product demand side in North America that we were going to see supply and demand collide in a very messy way this quarter,” Peabody said. “Our strategy is to keep as many barrels away from the train wreck as possible to minimise negative cash margin.”
What next?
More heavy losses are set to come as other com- panies write down the value of their assets in response to the low oil price. While Peabody expressed hope that oil supply and demand in North America would balance soon “because they have to”, there appears to be little reason for Canada’s producers to be optimistic right now – unless they are gas-focused and anticipating an uptick in the natural gas price.
“Structurally, there seems to be some opti- mism across the natural gas landscape, helped by the expectation for declining associated gas,” National Bank said in a note last week.
However, even this bright spot needs to be viewed with caution, as higher gas prices will lead to dry gas production ramping up, putting downward pressure on the price once again. Thus there can be gains for dry gas producers, and in the current market any gains will be wel- come. However, there are limits to how far such gains can go.™
About 75% of the impairment charge was related to Vermilion’s Canadian operations.
Dry gas producers would benefit from
a price boost as associated gas output falls, though there are limits to how far such gains could go.
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