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There will be bloodletting and pain as the impact of low oil prices reverberates through the Canadian oilpatch, but the industry is entering the downturn from a position of strength, according to analysts.
“There will be some blood on the streets, but if companies can keep their cash to debt ratios down below three times or in some cases four times at least they are not facing a bankruptcy-type position,” said Jeremy Kaliel, executive director, institutional equity research at CIBC World Markets Inc.
The dramatic decline in oil prices has caught the industry off guard, leaving companies scrambling to cut capital expenditures and dividends and redrawing their 2015 plans.
The U.S. oil and gas industry is already feeling the heat as much of the shale boom was fuelled by a diet of cheap debt that looked affordable at US$100 per barrel. With U.S. crude now edging towards US$55, investors have fled.
“Some of these companies have up to 75% of their market cap wiped out,” said Rick Chamberlain, managing director at Houston-based Berkeley Research Group. “The ones that leveraged didn’t make the right financial decisions.”
UBS AG notes U.S. company defaults may be as high 10% if the West Texas Intermediate crude slides to US$50 a barrel for a considerable period of time.
The situation is not as dire north of the border, but that does not mean immunity from oil market’s worst period since the global financial crisis of 2008.
“Canadian balance sheets are in much better shape than they are in the U.S,” said Jeremy McCrea, analyst at AltaCorp Capital Ltd. “Canadian average debt-to-cash flow runs around 1.9 times to cash flow, 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.”
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