Oil giants look to invest despite losses and price collapse

Since oil prices began to nosedive two years ago, Cenovus Energy has been on its heels, desperately trying to cut costs. Management slashedcapital spending, delayed projects and cut the workforce, among other measures.

The latest quarterly results this week had the company post a$267-million loss. Oil prices have slid recently by about18 per centfrom a peak in early June. Still, the company's management is optimistic and ready to start investing again.

"We've been playing defence for the last 18 months and we are now well positioned to resume value-added growth in the months ahead," said CEO Brian Ferguson during a conference call with analysts on Thursday.

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Spending right now would follow the traditional oilpatch playbook of using a bust to gear up for the next boom. It's a cyclical business, and anyone who's spent time in the industry knows the roller-coasteralways rises and falls.

However, this downturn is different. CEOshave described it as unprecedented and repeated the phrase "lower for longer" when speculating when prices will rise and return healthy margins to the industry.

Thus, spending now will require a certain level of mettle.

"I think it's prudent that management teams scrutinize these projects very thoroughly and that they are very careful how they invest capital and that they are planning on the current situation to stay around for a while," saidLannyPendill, a senior analyst with Edward Jones.

Cenovus expansion

Like many oil companies,Cenovus deferred some expansion projects to conserve cash as a result of theslump in oil prices. The company now says it is completing engineering work at its Christina Lake operations, south of Fort McMurray, for the possible restart of aproject that was halted in 2014.

"I want to take advantage of low industry activity and a better cost environment to now start re-deploying some of the cash we have on the balance sheet," said Ferguson.

Cenovus has cut about 31 per cent of its workforce since the start of the downturn and slashed operating costs by 24 per cent per barrel at its oilsands operations.

"We stress-tested our current capital program and can fully fund all of those obligations, including the dividend, if prices were to remain at for example 40 bucks WTI for an extended period of time," said Ferguson.

Invest during the bust

Spending big during a downturn has served some large oil companies well. Suncorbought two U.S. refineries in 2003 and 2005 and acquired Petro-Canadaduring another slump in 2009.

This price crash, it's betting big again.

Suncor spent about $9billion in the last year to increase its ownership stake in oilsands operations Syncrude and Fort Hills.

Add in other projects under development such as Hebron off Canada's East Coast,and Suncor expects to boost its production by 40 per cent overfour years. Production could hit 800,000barrels per day by 2019.

"These transactions build on a well established track record of counter-cyclical acquisitions," said CEO Steve Williams on Thursday to analysts.

Further acquisitions

The company isn't necessarily done, either. It's looking for acquisitionsin North Americaand the North Sea.

"You'll see us looking at oilsands possibilities and you'll see us looking at, potentially, refining opportunities," he said.

Elsewhere,Suncoris one of the 21 companies signed up to bid for some of Mexico's deepwater properties.

'You'll see us looking atoilsandspossibilities and you'll see us looking at, potentially, refining opportunities'Steve Williams, SuncorCEO

This week, Suncor posted a$735-million net loss in the latest quarter, largely due to the Fort McMurraywildfire. Meanwhile,Royal Dutch Shellreported itslowest quarterly earnings in 11 years as profits fell72 per cent from a year earlier.Total'sprofit fell 30 per cent.

While some large oilpatch players are willing to spend, not everyone has the financial flexibility. Many Alberta oil and gas companies are still trying to straighten out their balance sheets after suffering heavy financial losses.

"Some are able to raise money, but in general, they are not generating enough cashflow in their operations to spend very much,"said Jackie Forrest, vice-president of energy research with ARC Financial.

When they do start to invest, she suggests we won't see large greenfield megaprojectsin the oilsandslike those ofthe last five or six years. Instead, there will be much smaller expansions to existing projects.

"We expect the spending in the oilsands this year to be less than half of what it was a few years ago, so there's not a lot of spending," said Forrest. "At the macro level, spending is still trending down."

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