Crude price drop top of mind as oilpatch reporting season begins

The recent drop in oil prices will likely be top ofmind for investors as Canada's top oilpatch players release their third-quarter results over the next few weeks.

The steep drop in the key U.S. benchmark crude to about $80 US a barrel from around $95 US just a month agowon't be evident in companies' financial reports for the quarter ended Sept. 30.

But oil and gas producers are currently hammering out their budgets for 2015, soanalysts and investors will be paying keen attention to the mood of top brass on quarterly conference calls and looking for signals about how oil market volatility may affect future plans, said Lanny Pendill, an analyst with Edward Jones in St. Louis, Mo.

"As a whole, we're probably at the price point where I think many of the companies are going to approach the budget season with alittle more caution," he said.

"Just the tone and the overall impression that they leave withus ... I think will be key. So we will certainly be focusing on thego-forward comments more than anything."

Unapproved projects eyed by investors

Projects under construction in northern Alberta should be in goodshape, but prospects are less certain for some that haven't yetreceived a final board approval, said Pendill.

In recent months, Canadian units of France's Total and Norway's Statoil have opted notto proceed with their Joslyn and Corner oilsands projects,respectively.

Cenovus Energy Inc. (TSX:CVE), one of Canada's top oilsandsproducers, will be reporting on Thursday. That company has developeda reputation as being one of the lowest-cost producers in the industry, and Pendill expects it to continue to thrive in thecurrent oil price environment. Supply costs for its projects rangebetween $35 US and $65 US a barrel, meaning even its most priceyprojects can generate a decent profit.

Cenovus extracts bitumen using steam-assisted gravity drainage,or SAGD, technology. Steam is pumped underground through a well,where it softens the tarry bitumen enough that it can be drawn tothe surface through a second pipe.

Steam-driven, or in-situ, projects are generally much more costeffective than the more traditional surface mining operations. Since manyof the remaining oilsands resources in northern Alberta aretoodeep to be mined, most futureprojects will employ in-situtechniques.

Husky Energy Inc. (TSX:HSE), also on deck to report Thursday, isclose to starting the first phase of its Sunrise steam-assisted gravity drainage (SAGD) project, partof a partnership with BP. The company has signalled that costs wouldbe higher than its most recent estimate of $2.7 billion, but hasn'tyet said by how much.

Steam-assisted gravity drainage is one method of in-situ extraction.

Producers cautious of debt

Oilsands producers learned some hard lessons during the financialcrisis of 2008 and 2009, said Pendill. The oilpatch saw a spate ofhigh-profile project deferrals as crude prices cratered to levels that were at times less than half of what they are today.

Those companies have since done a better job managing their debt.

They've also become reluctant to undertake multiple billion-dollarmega-projects. Instead, companies like Cenovus and Suncor Energy Inc.(TSX:SU) are building SAGD projects in bite-sized increments,essentially copying and pasting the design with each new phase.

Miners, like Canadian Natural Resources Ltd. (TSX:CNQ) and Suncor,are boosting output through "de-bottlenecking" squeezing morecrude out of existing projects by tweaking equipment, rather thanbuilding something new from scratch.

Oilsands projects, many operated by deep-pocketed multinationalgiants, are planned with a time horizon of 50 years or more in mind,said Sonny Mottahed, CEO and managing partner at Black SpruceMerchant Capital in Calgary.

The industry pays attention to the long-term supply-demand trendsin oil prices, not the reactions of traders on any given day, hesaid.

"Generally speaking, I don't think that there's anybody outthere that believes that there is a true fundamental reason for the sell-off in the commodity," he said.

Smaller firms could suffer

It's a gloomier story for smaller firms elsewhere in theoilpatch, said Mottahed. Lower prices are going to hit cash flow,which is bad news for companies that need to recycle capital backinto their business quickly in order to keep drilling.

Oilsands producers have been cushioned from the crude priceplunge on a couple of fronts.

Currency fluctuations have been to thebenefit of Canada's oilpatch, as the loonie has weakened against theU.S. dollar.

As well, the price gap between heavy and light oil hasnarrowed as more Canadian heavy crude has been able to find its wayto market by pipeline, rail and even tanker, Scotiabank commoditymarket specialist Patricia Mohr noted in a report last week.

While U.S. light oil production surges from shale deposits in Texas and North Dakota, the country's imports of heavier crudescontinues to climb, Mohr wrote in her latest Commodity Price Index.

Canada has supplied 43 per cent of U.S. heavy crude imports so farin 2014 and further gains are likely to the U.S. Gulf Coast in 2015.