Bank of Canada survey shows oil and gas companies slashing spending

Energy producers setting aside just 40% of cash flow for investment, down from 100% before pandemic

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The steep decline in capital spending by Canadian oil and gas companies continues.

In its business outlook survey released Monday, the Bank of Canada reports that energy producers are setting aside just 40 per cent of estimated cash flow for capital expenditures, compared with an average above 100 per cent in the years prior to the pandemic.

Crude and gas prices have soared over the past year, but Canadian energy companies have not been using that revenue bonanza to invest in new projects or sites to the same extent as during previous booms. Instead they are using cash flows to shore up balance sheets and reward shareholders.

The curtailment in capital spending follows last year’s decline that saw the sector’s capital expenditures drop to 60 per cent of cash flow.

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“Financial discipline remains a top priority for firms,” the bank said in its report. “After many years of financial stress, most producers are using the current revenue windfall to improve their balance sheets, reduce their debt and pay dividends to shareholders.”

Where companies reported they were investing in production, it was largely at the margins of existing projects.

“Many conventional oil and natural gas producers are focusing on expanding drilling in areas where supporting infrastructure is readily available,” the bank said in its report which also noted that producers of heavy oil are improving efficiency and maximizing capacity utilization for existing oilsands projects.

The central bank consulted with a number of oil and gas firms and industry analysts who reported that high commodity prices driven by a global supply shortage have improved profit margins, heightened activity in the sector and contributed to positive sentiment overall.

But concerns over the transition to low-carbon energy, future limitations on pipeline capacity and infrastructure development continue to weigh on the industry which expects just modest growth in capital investment over the medium term.

Labour shortages and supply chain issues have also made investment more challenging and the industry faces significant cost increases.

“Drilling and other well-service pricing was reported to be up by 10 to 15 per cent over the 2021-22 winter season,” the bank said. “Some participants anticipate further increases by the end of the year.”

More to come…

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