Global credit ratings agency warns of downgrades in Canadian oilpatch if crude price woes persist

Global credit rating agency DBRS is warning that if Canada's crude oil price woes drag on without improvement, it could negatively affect the credit ratings of energy companies that rely on Western Canadian oil.

The Toronto-based firm said in a commentary Wednesday that while global and U.S. oil prices have dropped, Western Canadian producers have been under even "greater duress" as Canadian benchmark prices have fallen even more.

Generally, integrated energy companies — those that own refineries and gas stations — have been able to weather the steep price discounts. But other, less diversified producers have struggled.

If the bottlenecks making it difficult to get more oil to U.S. markets continue unabated, DBRS says producers that rely on Western Canadian energy production are at risk of  "a material degradation in cash flow and resulting key credit metrics."

"This has happened quickly and it is of concern," Victor Vallance, senior vice president of energy at DBRS said in an interview.  "And if it stays this way for some period of time, it will likely cause us to take action on our ratings and lead to downgrades."

A shortage of pipeline capacity and oilsands production growth has led to bottlenecks that widened the usual price gap between Canadian crude and the American benchmark.

For weeks, the price of Western Canadian Select (WCS) has been tracking roughly $40 US a barrel less than West Texas Intermediate (WTI). In better times, it might track around $15 below.

The widened oil price discount is costing some companies and the government dearly. Analysts have said both are losing tens of millions of dollars every day because of the discounts.

DBRS didn't name any particular companies that could come under credit scrutiny as a result of the Canadian price discounts.

But Vallance said the agency would determine within six months whether action would be necessary.

"It really comes down to seeing an improvement in pricing and that would be related to getting more transportation capacity in place and/or seeing additional production being shut in beyond what's shut in currently," Vallance said.

Vallance said the discounts themselves weren't unexpected given the sector's challenges in getting market access.

"But I think it's the level of discounting that's surprised most people in the industry and I think in the investment industry as well," he added.

Vallance said it remains to be seen how long the discounts will continue.

Some analysts expect the discount to fall once the situation returns to more normal conditions next year.

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Scotiabank economists expect the gap will average about $24 US a barrel through 2019 as oil production throttles back, U.S. refineries complete maintenance work and crude shipments by rail ramp up.

But Samir Kayande, director at RS Energy Group, isn't looking for the discounts to return to normal until this time next year. That's roughly when the Enbridge Line 3 pipeline project from Alberta to Wisconsin is expected to be complete. 

Kayande said rail shipments of crude should ramp up slowly but steadily, which should help. He said improvements in pipeline efficiencies would also be a positive. But he's not counting on a quick fix.

"We've seen some small improvement in [price differentials] but it looks as though it's related to just WTI falling, which is of course not bullish," Kayande said. 

The Alberta government is looking for a short-term fix, appointing three envoys to work with industry on finding solutions.

Some companies — and now Alberta's United Conservative Party Leader Jason Kenney — are calling on the provincial government to enact mandatory production cuts to correct the supply glut that's weighing down prices. 

But large integrated companies — like Suncor, Husky Energy and Imperial Oil — reject the idea because they say the market is working and that mandatory cuts also pose trade risks. 

On Wednesday, Alberta Premier Rachel Notley announced her government will buy two new unit trains that can transport an additional 120,000 barrels a day, increasing the amount of oil being moved by rail in Canada by a third. 

Kenney said the rail car purchase might be useful in the "midterm" but does little to help immediately close the price gap.