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Fewer than one in five oil and gas companies would be able to sustain their businesses over the long term if the price stays under US$50 per barrel, said CanOils in a new report.
However, in the short term, the study found that operations can continue as normal and that companies do not yet have incentive to cut production. The longer prices remain low and the lower they go, the more cuts there will be to exploration and new development, which will lead to decreased Canadian oil production.
The report looked at 50 Canadian oil and gas companies (scroll down to see list) and compared the impact of the price of oil sitting at US$60/bbl (per barrel) with US$50/bbl. At US$60, there is little overall incentive to cut production.
If prices stay under US$50 for just a short time, the report said, “companies will aim to maximize output from existing facilities and squeeze every last drop of oil from existing wells.” This is because they will still be able to generate positive cash flow at this price point. But again, this is not sustainable.
“The main difference between the oil producers’ cost metrics at US$50 compared to those at US$60 is that the accounting cost becomes more of an issue,” the report said.
Accounting cost is defined as total cash costs plus depletion, depreciation and amortization – in other words, it is the bottom line that will be used to calculate earnings per share.
“More companies will be in real danger of deficits on their annual and quarterly financial statements and this in turn will lead to negative earnings per share amounts, resulting in greater discontent for shareholders,” said the report.
Unsurprisingly, the study fond that those companies with high debt ratios are particularly vulnerable to changes in price.
As well, those producers with profits more tied to natural gas will be less affected by fluctuations in oil price, providing gas prices don’t slide to the same degree.
As of press time, the price of West Texas Intermediate (WTI) crude oil was $45.81 per barrel.
A link to the report can be found here.
A list of companies in the study (source: CanOils):
