BUSINESS

Oil Prices Are Sliding Again, But Otherwise 'Everything's Working Pretty Well'

07/07/2015 03:04 EDT | Updated 07/07/2016 05:59 EDT
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CALGARY - With oil prices drifting closer to US$50, energy executives in downtown Calgary are trying to stay positive.

Apart from the crude drop and stock hit, "everything's working pretty well" at Cenovus Energy (TSX:CVE) these days, deadpanned Harbir Chhina, the firm's executive vice-president of oilsands.

MEG Energy (TSX:MEG) vice-president John Rogers echoed Chhina's assessment at an energy conference hosted by TD Securities.

"I think a lot of people in the industry feel that way: that things are going very, very well but we're kind of weathering through this low commodity price environment," said Rogers.

Over the last two trading sessions, the price of U.S. benchmark crude has dropped about eight per cent, settling at US$52.33 and dashing hopes of a quick recovery.

The energy sector took a more than two per cent hit on the Toronto Stock Exchange on Monday but by Tuesday it had regained most of that ground.

Lower oil prices have an upside, often leading to cheaper materials and equipment and a more productive labour force.

In the first quarter of this year, when benchmark oil dipped well below US$50 a barrel, operating costs at Cenovus were down 20 to 25 per cent from the same period of 2014. Sustaining capital — investments made to maintain operations — is dropping by about 30 per cent, Chhina said.

"This environment does force our industry to become more efficient and there's less competition for labour, there's less pressure on equipment and things like that. So this is an opportunity," Chhina said.

"Of course higher oil prices are good and there's more cash flow and all of those things. But you've got to make the best of where you sit today."

Encana (TSX:ECA) — focused on shale oil and gas in Texas and Western Canada this year — is planning for US$50 oil, said vice-president Corey Code.

"As unsettling as it is, the correction in the last couple of days, we still look at it as potential upside. We haven't been counting on US$60 oil to make the books work."

Years before the latest downturn, the massive Syncrude oilsands mine had been focusing on lowering its costs, but the latest drop added a "sense of urgency," said Ryan Kubik, CEO of Canadian Oil Sands Ltd.

Canadian Oil Sands (TSX:COS) owns 37 per cent of Syncrude.

When crude was above US$100, the Fort McMurray, Alta., region saw enormous cost inflation.

"We recognized that costs were rising along with the oil price and that margins were starting to get squeezed in the business," said Kubik.

Nowadays, overtime costs are down "quite significantly" as Syncrude has shifted around schedules. Meanwhile, supplier contracts have been renegotiated and productivity rates are improving by as much as double-digits in some cases.

Companies that provide drilling and other services to oil and gas producers have been hit particularly hard in the downturn.

Dale Dusterhoft, CEO of Trican Well Service (TSX:TCW), said the sector can look forward to an oil price of US$75 or US$80 a few years ago.

"So running a low cost operation's going to be paramount to being successful there because there isn't going to be that much extra money floating around."

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