Nalcor assets take a beating from pandemic-fuelled oil collapse

Nalcor Energy has been hit hard by a collapse in the oil sector, resulting in a big write-down in the future value of its oil and gas investments.

The corporation's oil and gas division has recorded what's called a non-cash impairment charge of $225 million on its White Rose and Hibernia South Extension assets.

Nalcor, which is Newfoundland and Labrador's energy corporation, has a minority stake in both projects.

The writedown has resulted in a loss of $171 million for Nalcor for the first quarter of 2020, compared with a quarterly profit of $92 million last year.

Carla Russell, Nalcor's chief financial officer, revealed the information during a virtual annual general meeting on Tuesday.

Oil companies throughout the world have reported similar hits from a collapse in oil prices driven by the COVID-19 virus and a production dispute between oil giants Russia and Saudi Arabia.

"What this impairment charge really reflects is the future outlook for prices. It has nothing to do with historical performance of the assets, which have all been performing well," said Russell.

Nalcor also has a five per cent equity stake in the Hebron project, which began producing oil in late 2017, but Russell did not mention that project when referencing the non-cash charge.

Despite the loss in value, however, she said oil and gas continues to generate "significant cash" for the province, both from the sale of oil and gas, and royalties to the government.

In the first quarter, Nalcor's oil division reported funds from operations of $116 million, the best quarter on record, and $16 million more than last year.

That's because production is soaring at the Hebron field, with more wells coming online, with Nalcor projecting 2020 to be a record year for production, with a year-over-year surge of 64 per cent.

Last year, Nalcor's assets averaged daily production of 10,000 barrels.

But the price of oil is eating into that important revenue stream, with the price-per-barrel averaging $68 Cdn in the first quarter, compared with$83 Cdn last year.

"We expect prices to continue to be below 2019 for the remainder of the year," said Russell.

Nalcor has made significant investments — more than $2.3 billion — since its creation in 2007 in order to become equity partners in three offshore oil projects.

It has recovered about half that investment in revenues, but a sustained period of low oil prices, which many analysts predict, would significantly reduce its earning potential, and therefore its returns to the government.

Meanwhile, future investment in exploration and production will be handled by a new stand-alone oil and gas corporation — known for now as OilCo — that was officially established on Jan. 1.

Nalcor, however, will continue to own the existing assets.

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