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Mar 10, 2020

'Not investible': Bay Street warns on Cenovus, budget cuts impact

Jason Mann discusses Cenovus Energy


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CALGARY -- Analysts expect to see lower Canadian oil production this year as producers follow the example of Cenovus Energy Inc. in slashing capital spending budgets amid tumbling oil prices.

After seeing its shares lose more than half their value on Monday, Calgary-based Cenovus announced Tuesday it would cut its capital spending plan for 2020 by 32 per cent.

It now aims for between $900 million and $1 billion in total capital spending, down from earlier plans for between $1.3 billion and $1.5 billion.

One portfolio manager told BNN Bloomberg on Tuesday that Cenovus is “not investible” under the current market conditions.

“They’re not investible, in our opinion, today,” Jason Mann, chief investment officer at Edgehill Partners, said on BNN Bloomberg’s Market Call. “We were short Cenovus; it’s too dangerous to even be a short anymore. Stocks that drop this far become call options on survivability of the business, and that’s just not what we do.”

“For us it’s a no-man’s land.”

Financial observers were quick to compare the oil price meltdown Monday, linked to a dispute between Russia and Saudi Arabia over plans to cut oil production, with a similar situation in 2014 that also involved the Saudis trying to assert control over global oil markets.

"Back in 2014 when the Saudis last decided to wage a market share battle, (West Texas Intermediate crude) fell from US$80 per barrel on U.S. Thanksgiving to a low of US$28 per barrel in 2016," pointed out analyst Robert Catellier of CIBC in a report.

"The result was a cancellation of as many as nine oil sands projects."

One-on-one with Cenovus CEO Alex Pourbaix

Cenovus posted an operating loss in its fourth quarter, saying it cut its net debt by a further $289 million. BNN Bloomberg’s Tara Weber spoke with the company’s CEO, Alex Pourbaix, about that debt, crude-by-rail increases and the Coastal GasLink blockade protests.

On Monday, the April crude contract fell US$10.15 to US$31.13 per barrel. It rebounded by US$2.53 on Tuesday morning.

Tudor Pickering Holt & Co. analysts pointed out in a note that non-oil sands oil production in Western Canada fell by about 140,000 barrels per day from the end of 2015 to the summer of 2016 as companies halted spending on new wells.

"Given prevailing rhetoric that Canadian barrels trend along the higher end of the cash cost spectrum, particularly those from the oil sands, investor interest has perked up on the potential for Canada to be among the first to shut-in or decline given the rapid decline in crude prices," they said.

Mann said that if oil prices remain where they are for a sustained period, Cenovus’ debt puts the company at risk.

“These companies are now starting to price for bankruptcy,” Mann said.

“So, if we get sustained energy pricing at the levels we’re seeing today – and I’m not saying that’s the base-case, but if that occurs for a long period of time – companies like Cenovus are going to be at risk because of their debt load.”

The fight between the Saudis and Russia is being compounded by worries about lower global demand due to slower economic growth as a result of the novel coronavirus outbreak.

The COVID-19 situation will likely dissipate over time, Catellier said, but its presence in combination with volatile Saudi oil policy adds "considerable uncertainty" to the market.

Cenovus also said Tuesday it will temporarily suspend its crude-by-rail program and defer final investment decisions on major growth projects.

Under an Alberta program to give relief from its mandated oil production curtailments to companies that add crude-by-rail capacity, Cenovus had been increasing output in recent months.

Production this year, however, is now expected to total between 432,000 and 486,000 barrels of oil equivalent per day, down from its earlier forecast of between 472,000 and 496,000 barrels of oil equivalent per day.

Lower oil price forecasts had already resulted in spending cuts in the oilpatch before Monday.

Last week, Canadian Natural Resources Ltd. trimmed $100 million from its 2020 capital spending budget while warning it could cut another $300 million to $400 million if market turmoil continues.

- with files from BNN Bloomberg