Analysis: Tax rise hits Canadian producers

OREANDA-NEWS. August 28, 2015. A tax rise in the Canadian province of Alberta is raising the pressure on the country's embattled oil sands producers, prompting some to warn of a further slowdown in investment.

The New Democratic Party won a landslide victory in Alberta's provincial elections in May, after campaigning on raising corporation tax. The party kept its promise, increasing the tax rate to 12pc from 10pc, effective from 1 July.

The move led to some hefty deferred tax liability charges in the second quarter. Upstream independent Canadian Natural Resources' (CNRL) deferred income tax liability increased by C\\$579mn (\\$442mn), pushing the firm to a second-quarter loss of C\\$405mn from a \\$1.1bn profit a year earlier. "This charge effectively translates into lower future cash flows and, therefore, lowers reinvestment in the business," CNRL chief financial officer Corey Bieber says.

Other companies were also hit hard. Canadian integrated firm Husky Energy took a one-off charge of C\\$157mn and ExxonMobil subsidiary Imperial Oil booked a C\\$320mn charge. And Canadian integrated companies Cenovus and Suncor took charges of C\\$315mn and C\\$423mn, respectively.

Suncor is seeking a review of the taxes to ensure that the oil industry is "not competitively disadvantaged", chief executive Steve Williams says. "The new government has made it clear that they share our goal of a competitive and growing oil sands sector with improving access to global markets. We are working closely with the new government."

A fall in operating costs partially offset the twin impact of lower oil prices and higher taxes in the second quarter. Suncor's operating costs were 18pc lower than a year earlier at C\\$28/bl, "trending well below our original guidance range of C\\$30-33/bl", chief financial officer Alister Cowan says.

Cenovus is on track to lower its operating costs by C\\$280mn this year from 2014. "We expect about half of these cost savings to be sustainable at higher commodity prices," chief executive Brian Ferguson says. Cenovus is targeting further savings of C\\$100mn/yr as a result of 300-400 further job cuts, on top of the 800 positions cut in February because of project deferrals. Husky's second-quarter operating costs in western Canada declined to C\\$17.23/bl of oil equivalent (boe) from C\\$17.44/boe a year earlier, while CNRL achieved savings in Canada of up to 22pc.

The firms are making progress on cutting capital expenditure (capex), helped by project deferrals. Suncor has lowered its full-year capex guidance to C\\$5.8bn-6.4bn from an April target of C\\$6.2bn-6.8bn. "Non-essential projects have been re-evaluated as part of the company's cost reduction initiatives," it says. CNRL has trimmed its 2015 capex budget for the fourth time this year — its new guidance is for about C\\$5.5bn, compared with a C\\$5.7bn target in May. Husky's capex budget, which includes its downstream operations, is C\\$3bn-3.1bn compared with C\\$5.1bn last year. Cenovus is holding capex at a previously announced C\\$1.8bn-2bn, almost 40pc lower than 2014 spending.

The capex cuts could hamper output growth in the longer term. But new oil sands projects that were approved before oil prices started declining last year will help sustain growth in the shorter term. Imperial brought on stream a further 150,000 b/d of combined production capacity at its Kearl and Cold Lake projects in the second quarter. Cenovus plans to start production from phase G of its Foster Creek project later this year and phase H next year, while Suncor's 180,000 b/d Fort Hills project is on track to come on stream in the fourth quarter of 2017.