by Ari Charney
With Canadian oil and gas producers cutting dividends and slashing budgets, it may be a surprise to some investors that analysts believe the country's exploration and production (E&P) companies are better positioned to endure crude's downturn than their U.S. counterparts.
North America's energy renaissance has not only created a glut of production, it's also created a glut of borrowing to finance this production. And while there certainly are Canadian E&Ps that are overleveraged, the average firm in Canada's energy sector has managed to uphold the country's reputation for fiscal conservatism.
Jeremy McCrea, an analyst at AltaCorp Capital Ltd told the Financial Post:
“Canadian balance sheets are in much better shape than they are in the U.S. Canadian average debt-to-cash flow runs around 1.9 times, versus many of the U.S. players that are four times, five times debt-to-cash flow. Our companies are likely better to withstand a downturn.”
U.S. companies' fiscal profligacy is best evidenced by the jump in issuance of speculative-grade bonds (otherwise known as “junk”) in the years since the Global Financial Crisis. According to Barclays, the U.S. energy sector now accounts for 14% of the high-yield bond market, up from just 5% in 2007.
At the same time, U.S. companies have done a somewhat better job of hedging their production on average than Canadian firms, though the hedging programs of our favorite Canadian E&Ps should buy these firms some time, at least through mid-2015.
The question is what happens if oil prices persist at current or even lower levels after that? For instance, some OPEC members caused further jitters recently when they said they wouldn't cut production to bolster prices even if global benchmark Brent crude dropped to $40 per barrel.
In a live online discussion hosted by the Financial Post, three energy sector insiders seemed to agree that cuts to capital expenditures would most likely affect exploration, while firms would try to maintain or even ramp up existing production to offset lower prices with higher volumes.
