A New Era For Canadian Oil And Gas, For Better Or Worse
Canadian voters kicked out the conservative government in the October 19 election, a party that had been in power for a decade. Polls had predicted a slight lead for the Liberal Party, but in a surprise result, the Liberals actually won a majority of seats in parliament and will form a majority government. Most analysts had expected the Liberal Party would have had to form a coalition government, but many voters appeared to strategically vote for the frontrunner in order to ensure a loss for the conservatives. The new government of Prime Minister-designate Justin Trudeau will almost certainly be much less friendly to the oil and gas industry in Canada, though to what extent remains uncertain. Trudeau opposes Enbridge’s (NYSE: ENB) Northern Gateway Pipeline, but also backs TransCanada’s (NYSE: TRP) Keystone XL Pipeline – the latter of which could be blocked by the U.S. government. More will be known in the coming weeks. However, one clear promise from Trudeau was his plan to engage in deficit spending to goose the economy through higher investments in infrastructure.
The U.S. Department of Interior cancelled two lease sales for the Arctic, effectively ruling out new drilling for several years. The agency said that there was almost no interest from potential buyers for acreage in the Chukchi and Beaufort Seas, so it decided to scrap the lease sales. The move follows the decision from Royal Dutch Shell (NYSE: RDS.A) to abandon Arctic drilling, and without any other companies positioned to move forward, offshore drilling in the U.S. Arctic may not happen for years. In addition to cancelling the lease sales, the Obama administration also denied a request from Statoil (NYSE: STO) and Shell to allow an extension of their leases. They are set to expire in 2017 (Beaufort Sea) and 2020 (Chukchi Sea).
The first nuclear reactor to come online in the U.S. since 1996 could begin operations before the end of the year. The Tennessee Valley Authority began construction on the Watts Bar-2 reactor in 1972, but construction was suspended after problems arose during construction. Construction then resumed in 2007. The 1,150-MW reactor has finally reached completion, and is awaiting an operating license from the Nuclear Regulatory Commission, which Platts says could come within a few weeks. Despite the hype around a potential “nuclear renaissance” in recent years, the Watts Bar reactor will be the first to come online in two decades.
Halliburton slashed another 2,000 workers from its payroll, bringing total job cuts to 18,000 for the company, or one-fifth of its workforce. With new drilling slowing to a crawl, the Houston-based oilfield services giant is struggling amid falling profits. Halliburton lost $54 million in the third quarter. The company is in the process of taking over Baker Hughes, and predicts that it will benefit from a turnaround once drilling picks up. Of course, that depends on a strong rebound in oil prices, which doesn’t appear imminent. For its part, rival Schlumberger (NYSE: SLB) said that the ongoing slump will force another round of job cuts in the fourth quarter. “The likely recovery in our activity levels now seems to be a 2017 event,” CEO Paal Kibsgaard said.
Canadian Oil Sands (TSE: COS) rejected a CAD$4.47 billion hostile takeover bid from Suncor Energy (NYSE: SU), arguing that the bid was too low and undervalued the Canadian oil producer. Canadian Oil Sands controls a percentage of the large Syncrude project in Alberta. The takeover bid is being watched by energy market analysts who are trying to figure out if company valuations and asset prices have bottomed out. The bid offered a significant premium over COS’ share price before the original offer but COS appears to be holding out for more.
Gasoline futures fell sharply on October 19, dropping to a six-year low on concerns over swelling inventories. Futures prices are now down 10 percent in October as the markets come to grips with a glut of supplies, despite relatively strong demand for refined products. Also, China reported a GDP growth rate of 6.9 percent for the third quarter, which is its lowest growth rate since the aftermath of the 2008-2009 financial crisis. To be sure, the figure beat analysts’ estimates, but many economists questioned the veracity of the number, raising concerns that China’s economy is actually performing much weaker than its already slowing GDP suggests. For example, Capital Economics estimates that China’s GDP is actually expanding at just 4.5 percent. Economic fissures in China are weighing on global commodity prices as well as equity markets.
Occidental Petroleum (NYSE: OXY) is pulling out of the Bakken, according toReuters, a notable move in one of the U.S.’ most prolific shale regions. Occidental will sell all of its acreage in North Dakota to private equity firm Lime Rock Resources, a deal that could be worth $500 million. Occidental is the country’s fourth-largest oil producer, and its exit from the Bakken is a sign of the times. The company’s North Dakota assets were worth around $3 billion as recently as a year ago. Occidental is slimming down and wants to refocus its capital on its more productive assets in the Permian basin.
OPEC is meeting this week and officials from Russia and Mexico will be in attendance. The meeting has raised a bit of speculation about the possibility of coordinated production cuts, which would theoretically have an enormous impact on the price of crude. However, despite the hype in some circles, few are predicting any news to emerge from the meeting. The group may issue a statement about trying to work together, but investors should probably not read too much into it. There is a very remote chance that OPEC will alter its course for the foreseeable future.
At the same time, however, Iran is making a bit of news. A top Iranian official has said that Iran has lined up buyers for 500,000 barrels per day of new oil exports, a figure that the country is targeting soon after the removal of sanctions. “This is only the start of making the deal—and the removal of sanctions—a reality, but with about 0.5 million barrels a day of additional Iranian crude expected to hit the market early next year, it further raises the odds of the extreme Asian congestion spilling over into Europe over the next few months,” Citi Research wrote in an investors note.