Cenovus Energy's huge cut to spending expected to set trend as sector adjusts for oil prices

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 losing 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.

Kevin Birn, an analyst with IHS Markit in Calgary, said the Canadian oilpatch can expect to see other companies also reduce their spending plans in the wake of weaker crude prices.

"Lower prices simply mean they're generating less revenue and so they're going to have to pull back on what they were planning to spend initially in the year," Birn said.

"The implications are that could weigh … probably on the folks that actually do the work in the oilfield — the roads, the pipes and the drilling."

Up to 9 oilsands projects cancelled after similar situation in 2014

The oil price meltdown Monday was linked to a dispute between Russia and Saudi Arabia over plans to cut oil production. Financial observers were quick to compare it 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 $80 US per barrel on U.S. Thanksgiving to a low of $28 US per barrel in 2016," pointed out analyst Robert Catellier of CIBC in a report.

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

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

Suncor's share price dropped down nearly 18 per cent. CNRL plunged more than 29 per cent. And Cenovus lost more than half of its value — 51.65 per cent.

Tudor Pickering Holt & Co. analysts pointed out in a note that non-oilsands 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 oilsands, 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.

The fight between the major oil producers 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 guidance for 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.

The energy sector accounts for more than 11 per cent of Canada's gross domestic product.