Oil sands players to curtail growth near term: CIBC
Surging light oil production in the U.S. and pipeline constraints is keeping company CEOs up at night
Expect to see some serious shifts in business strategy among Canada’s biggest oil sands players, says CIBC World Markets analyst Andrew Potter.
During a teleconference Friday to answer questions about a report CIBC issued this week entitled: Too Much of a Good Thing … A Deep Dive into the North American Energy Renaissance, Potter says the impact of surging light oil production in the United States (in the report, CIBC says U.S. onshore production could grow by 500,000 to 700,000 barrels per year through 2016), and not enough pipelines to handle it, is being felt by oil sands producers.
“You will see guys rethink over the next 12 to 18 months how they go about their business and start to rethink their growth profiles,” Potter said.
The re-thinking has already started. Potter noted that Canadian Natural Resources Ltd. announced last week that it was reducing its capital spending for 2012 by $680 million due to the what it called “the uncertain outlook in commodity prices.”
Meanwhile, Suncor Energy Inc. president and CEO Steve Williams made it clear in his comments during a July teleconference that the company might put off some of its oil sands growth projects.
“Twelve months ago it was a pretty firm message that they were going to go ahead with everything they had laid out: Fort Hills, Voyageur, Joslyn,” Potter said of Suncor. “Now they are depicting a much more conservative message in terms of how they might go about growth. I think this is going to be a big theme.”
Potter said 2.8 million barrels of long haul pipeline capacity being proposed for North America could help alleviate supply bottlenecks into the United States and open up new markets for discounted oil sands crude. However, Potter isn’t convinced all of those pipelines will be built, giving two West Coast projects, Enbridge Inc.’s Northern Gateway pipeline and Kinder Morgan Canada’s TMX expansion, a “50-50″ chance of ever being built.
In that context, Potter said more conservative growth plans from oil sands companies is actually a good thing:
I can actually make the case that Suncor is worth 50 per cent more if they go to a more conservative growth strategy and just paid out the bulk of free cash flow. But it will take time for them to sort out their strategies and investors to come to grips with it.