Biggest oilpatch companies have best chance to survive

With no recovery in oil prices in sight, Alberta's oilpatchis trying to figure out how it will survive 2016, yet another year of struggle for an industry that lost a collective $1.5 billion in the first half of 2015.

With so much financial pain, it's likely the large players that have the best odds of enduring the oil price collapse.

That's the belief ofDrew Ross, managing director of Scotia Waterous, the arm of Scotiabank that focuses on oil and gas deals. He's crunched the numbers during this downturn and found it's the big-name companies, such as Suncor and Cenovus, that are faring the best.

Welcome to the hospital, I'm the chief surgeon.- BruceEdgelow, a banker who helpscompanies in duress

"There is a huge correlation between performance and size of companies," said Ross. "What you need to be in this environment? You need to be big and diversified, that's what the market is telling you and its across the globe."

That's why he suggests the downturn could lead to the creation of fewer, but larger companies.

"Those are the ones that are going to survive," said Ross.

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Already in Alberta, the industry is highly concentrated among giantfirms. Approximately halfof all conventional oil and natural gas production comes from about a dozen operators.

Big company, low costs

The big firms generally have economies of scale. They are able to raise more capital, they have large projects with lower costs, and tend to be more diversified. Often, they operate in different basins around the world and not only produce oil and gas, but likely also refine products such as gasoline.

The oil downturn is putting pressure on all companies, big and small. Firms are laying off workers, slashing spending, pulling back salaries and focusing operations where margins are best. Now is not the time to venture into unexplored areas.

"They don't have the budgets to take on new areas," said Ross. "They're just focusing on the core of the core and trying to be profitable in this low oil price environment."

Drew Ross on oilpatch mergers

9 years ago

Duration 0:26

Scotia Waterous' Drew Ross on the type of mergers and acquisitions to expect in the oilpatch

Hundreds of financial executives from the sector gathered at a conference last week in Calgary to hear about all the challenges, pressures and strategies during this prolonged downturn.

"There's an increased focus for the industry to work together to get over the cycle," said Alex Fisher, of Chartered Professional Accountants of Canada.

Hard choices

The decisions made in downtown Calgary boardrooms all come with consequences, but executives can't sit still and watch the erosion ofcash flow.

"There's very difficult discussions because the visibility of the layoffs in town has been paramount," said Bruce Edgelow, a vice-president with ATB Financial."We may see as much as 50,000 layoffs in this town for the calendar year, 2015."

It's part of Edgelow's job to meet face to face with executives to figure out how to keep them operating, even in the worst of times.

"Welcome to the hospital, I'm the chief surgeon," Edgelowsaid about his first words to executives of companies in duress. "I've got lotsof grey hair. Our hope is to move you out of the recovery ward and back to full health. We're not here to move you to the morgue, which is our asset realization team."

Uncertainty for 2016

Executives can't bank on price recovery as part of their financial plans because that's hoping for something that may not happen anytime soon. Companies with the most uncertainty are likely those in the oilfield service sector. They're calling the oil and gas producers to see what kind of work they can expect to see next year.

"Can I give you a call back?I'mjust not quite surewhat my program is for 2016," said Edgelow, describing how producers are responding."Theoilfieldservices companies are absolutely reeling with this uncertainty."

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That's why just about weekly some of the large service companies are asking torenegotiate loan agreements.

A saving grace for much of the sector has been the loonie. Companies operating north of the border pay Canadian dollars for most of their expenses, but sell their oil in U.S. dollars. With the loonie around 75 centscompared to the American greenback, it's working in favour of Canadian companies.

ATB Financial is also feeling the effects of the oil price collapse and Alberta's recession. The bank's profits are down largely because ofprovisions for credit losses. In the latest quarter, that amounted to$48.1 million, up from just$10.3 million a year ago.

"The 2015 period, we have moved from an absolute price collapse to a point in time where we are really trying hard to find where does 2016 fit?" said Edgelow.

"Unfortunately, sitting here today, there are still more questions around this than there are answers, which continues to speak to the gut-wrenching decisions that are made in the boardrooms."