Oilpatch is living in limbo with oil at $40 US per barrel

After the brutal price crash in March and April, the mood in the oilpatch is noticeably improved as prices stabilize around $40 US per barrel. Still, that price means different things to different companies, with some beginning to turn on the taps to produce more oil, some barely able to break even, and others still struggling mightily.

At Calgary-based Bonterra Energy, the price is high enough to turn a modest profit, but still too low to start drilling for oil again.

For now, executives are holding tight. They don't want to be caught committing big dollars and have oil prices collapse again, especially after they fell into negative territory in April.

"We're sitting on it and watching it almost on a day-by-day basis," said George Fink, the company's chief executive, in an interview.

"We're all set up to go back to drilling, but right now we're still just a little bit, being shy."

The company also temporarily closed many of its higher-cost wells, which Fink wants to bring back online if prices rise above $40.

"You can certainly maintain and grow a little bit at this price, for most of us. But you can't grow aggressively or do acquisitions," he said.

Bonterra is a conventional oil producer that receives a price for its oil close to West Texas Intermediate (WTI), the North American benchmark. Heavy oil producers in Alberta, which include many oilsands players, are receiving a price in the low $30s US per barrel.

Commodity prices are high enough for several oilsands companies to begin restoring thousands of barrels of production.

Cenovus Energy had cut production by 60,000 barrels per day and has brought back 50 per cent of it already. Husky Energy has revived half of the 80,000 barrels per day it had taken offline.

Prices will have to strengthen further before companies ponder major investment in the oilsands or an offshore project near Newfoundland and Labrador.

There is still uncertainty about how the rest of the year will unfold as the $40 WTI price is being supported by significant production cuts by the Organization of Petroleum Exporting Countries (OPEC) and other oil-producing countries.

In addition, oil storage levels remain high in North America.

And as the number of COVID-19 cases spikes in some U.S. states, there could also be impacts on fuel demand as lockdown measures are re-introduced.

The outlook for several major pipeline projects is also on shaky ground across North America after several recent court decisions and announcements. 

MEG Energy has hedged its bets and pre-sold some of the production at its oilsands facility at fixed prices. Still, all of the unknowns aren't lost on chief executive Derek Evans.

"We would like to understand and have a little more clarity on what that supply-demand picture looks like," he said during a recent virtual investor conference.

Evans said MEG will likely be one of only a few companies to reduce its debt in 2020.

Some companies have filed for creditor protection, with more expected to follow.

If life at $40 per barrel in the oilpatch doesn't translate into much spending and growth for oil producers, that means there is little work for the oilfield service sector.

Indeed, that part of the oilpatch food chain is in dire straits, especially as an Alberta government program to clean up old oil and gas wells has been plagued with delays, leaving producers to hold back on their own spending as they try to get a piece of the government money.

It's shaping up to be a long summer for many of the companies.

"We're still in the trough of this recession. There's still a ton of unknowns," said Marc Rossiter, chief executive of Enerflex, a Calgary-based oil and gas service company.

"The [capital spending] from the producers is slow."

Three weeks ago, Calfrac Well Services posted a $123-million first quarter loss as revenue plunged 36 per cent compared to the same period in 2019.

The company has since said the recovery will still take some time.

"As you get into September, there seems to be more discussion around what the last part of the year looks like, maybe setting up for some producers to have a good start to 2021. But it's kind of weeks and months away at this point," said Scott Treadwell, Calfrac's vice-president of capital markets and strategy.

Last week, the company announced it was restructuring some of its debt under the Canada Business Corporations Act.

Further losses are expected in the next few weeks as companies begin reporting their second quarter results, since prices were very low in April, in particular.

With so much uncertainty in the industry and the spike in COVID-19 cases south of the border, investors will be looking for companies to continue keeping a tight lid on costs.

$40 oil has provided some level of stability, but the sector still isn't out of the woods yet.

"This could be a little bit of a tough slog for at least the next six to 12 months," said Martin Pelletier, a Calgary-based analyst with Wellington-Altus Private Counsel, an investment and wealth management firm.

"Beyond that is anyone's guess."