October 17, 2008 / 9:03 PM / 11 years ago

Credit crunch forces Canada oils to make cuts

CALGARY, Alberta (Reuters) - EnCana Corp (ECA.TO) was first off the mark, warning earlier this week it plans to husband its cash next year, signaling the end of a spending boom among Canada’s energy companies as the credit crunch forces them to live within its means.

The economic turmoil has pushed oil prices to less than half their July peak, lowered access to capital and cut the share prices of Canadian oil and gas producers across the board.

As a consequence, most of the sector is likely to hunker down during the current lean patch. Most Canadian oil companies will detail their 2009 spending plans later this year. Expect them to restrain drilling, slow expensive projects and to spend only cash raised from operations. That would help them avoid the need to search for expensive and increasingly scarce debt funding.

“Commodities have fallen off but costs are still high,” said Dragan Trajkov, an analyst with Salman Partners. “It’s more likely than not companies will cut (capital spending) and we’ve already seen several in the U.S. announcing cuts”

Indeed, U.S. natural-gas producer Chesapeake Energy Corp (CHK.N) has cut its spending plans three times in the past month.

As of now, Canadian companies have shied away from making any announcements in part because they are now readying to release their third-quarter financial results.

But EnCana, the biggest Canadian oil and gas producer, warned earlier this week that it planned to be tight with its cash. As it canceled a planned spinoff of its oil sands and refining arm it said. “We will be even more focused on capital preservation in these uncertain times.”

EnCana’s Canadian peers will likely be just as tight-fisted with credit dear, likely focusing spending next year on only their most profitable projects, leaving marginal and expensive operations for more flush times.

“Even companies with significant cash flows are going to be judicious,” said Kevin Lo, an analyst at FirstEnergy Capital. “What’s the rush? There’s no point in blowing out the balance sheet.”

Until this year, Canada’s oil sector had little incentive to rein in spending. With oil prices going through a multi-year winning streak and even battered natural gas prices looking more solid, there was money to increase conventional exploration, boost spending on unconventional sources like shale gas and toss billions of dollars toward big-ticket oil sands projects.

Now, new oil sands projects may soon be rejigged or delayed by the drop in oil prices, along with other conventional oil projects

“At today’s prices ...(oil) projects are marginal, if economic at all, for investment,” Murray Edwards, one of Canada’s wealthiest oil investors and vice-chairman of Canadian Natural Resources Ltd (CNQ.TO) told reporters on Thursday.

While bigger companies are likely to cut capital spending back to conserve their cash, the smaller operators that depend on credit to finance their drilling programs are going to have a very rough year.

“Debt is hard to come by right now and what is available is most likely very high cost,” Trajkov said. “Small companies will do what they can with their cash flow and like won’t show the high rate of growth we expect from the juniors. They may have to find partners or consolidate with companies that do have cash flow.”

Reporting by Scott Haggett; Editing by Frank McGurty

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