Cautious optimism in Canada energy patch favours light oil producers

Canadian light oil producers are in a better position than oil sands heavyweights to benefit from the cautious optimism trickling into the energy industry, thanks to improvements in operating efficiency and two years of steep cost cutting. Companies including Crescent Point Energy and ARC Resources - light oil and natural gas producers - have already upped 2017 capital budgets from this year and others including Encana Corp are expected to follow.
The increases come amid signs the siege mentality that permeated all parts of Canada's energy industry is lifting after more than two and a half years of slumping prices. US crude is hovering around $50 a barrel, the weekly western Canadian drilling rig count is up 30 percent on last year, and Calgary's commercial real estate market just posted its best third quarter in two years.
Increased spending, however, is likely to be concentrated among light oil drilling programs with rapid returns and lower carbon emissions, rather than the multi-billion dollar mega projects in Alberta's oil sands that drove the last western Canadian energy, analysts say. "In western Canada outside of oil sands we expect to see activity increase year over year," said FirstEnergy Capital analyst Mike Dunn. "Their (light oil producers') spending and activity levels are much more reactive to near-term prices ... the outlook right now is for 2017 to be better than 2016."
Light oil producers have cut costs around 30 percent by squeezing service providers and improving well completion designs to speed up drilling, according to Wood Mackenzie analyst Mark Oberstoetter, and wells that once cost C$6 million ($4.5 million) to C$7 million to drill can now cost as little as C$4 million. They can also extract oil from a well in a matter of months, offering more scope to hedge, whereas oil sands projects take two or three years to build.
The oil sands produce 2.4 million barrels per day, 65 percent of Canada's total crude output, but ARC Financial economist Peter Tertzakian estimates 2017 spending will be down 20 percent on an already weak 2016. In a note he said capital investment will favour light oil and natural gas producers that offer "bite-sized development, fast investment payback and lower carbon".