TORONTO — A wave of cost-cutting in Canada's oil patch is prompting bond investors to pick which companies will best withstand the collapse in crude prices.
After the cost to insure the debt of some of Canada's largest energy producers soared to multiyear highs, those premiums have started to come down in the last week as companies shore up their balance sheets to survive the slump by cutting capital spending and jobs.
The cost to insure debt of Suncor Energy, Canada's largest oil producer, has fallen from a two-year high and the premium to protect against defaults by Canadian Natural Resources and Husky Energy have fallen from levels not seen since the 2009 recession. Suncor said Tuesday it will spend C$1 billion ($836 million) less this year than originally forecast in November and eliminate 1,000 positions.
"This is really them taking positive action so that they can weather the lower oil prices," John Braive, vice chairman at Canadian Imperial Bank of Commerce's CIBC Asset Management, who owns bonds of all three firms, said by phone Tuesday from Toronto. "That gives you confidence as a bond holder."
Oil continued its slide this week, with prices for the U.S. benchmark touching $44.20 per barrel Tuesday, down almost 60 percent since its June high and the lowest level in 5 1/2 years. Goldman Sachs said this week the price will fall to $39 per barrel and stay there for the first half of the year.
Companies may spend as much as 35 percent less in 2015 and some are likely to revise initial budgets lower, according to a Jan. 7 note from Raymond James Ltd. research analysts led by Chris Cox.
Canadian Natural this week lowered its 2015 spending plan by 28 percent from the initial forecast and deferred investment on a C$1.4 billion oil-sands project. Husky said last month that it will spend 33 percent less in 2015 than the prior year.
"What we have to do is hunker down and get our costs in line and the rest will take care of itself," Corey Bieber, chief financial officer of Canadian Natural, said in a Jan. 12 phone interview. "We still have significant flexibility in the budget." He said the company was open to further cost cuts.
Investors demand 138 basis points for a credit default swap protecting Suncor debt, down from 146 basis points Jan. 5, the highest level since June 2012. Investors demand 232 basis points for CDS protecting Canadian Natural debt, down from 241 basis points Jan. 6 and 180 basis points to protect Husky's bonds from default, down from a 195 basis point premium Dec. 16, data compiled by Bloomberg show.
"Any time you see a company coming out with information that would provide guidance on how they will weather the current natural-resource stupor cycle, you could see why that would be a positive for investors," said Robert Pemberton, who helps manage about C$145 billion in debt as head of fixed income at TD Asset Management. "It's starting to seem like it has better fundamentals from a cost perspective as we see these types of announcements coming out."
Credit investors are focusing on the ability of energy companies to cover costs on existing operations, rather than increase output. While developing new oil-sands projects isn't profitable at today's prices, companies can make money at sites that are already producing.
"A lot of these players, their operating cash profitability can withstand this price," said James Dutkiewicz, fund manager and chief investment strategist at Sentry Investments Inc., which oversees C$1.5 billion in fixed income.
Oil-sands projects run by Suncor and Canadian Natural have operating costs lower than C$40 a barrel, according to a November report by Standard & Poor's.
Dutkiewicz expects any rebound in oil prices to top out at $55 per barrel for the next three to six months.
"A lot of people are feeling at these levels we're starting to get near a bottom," Matthew Duch, a money manager at Calvert Investments in Bethesda, Maryland, which oversees more than $13 billion in assets, said in a Jan. 12 phone interview. "So you're starting to see people dip in."
SOURCE: Bloomberg News