Published on Tuesday, June 2 2020
Authors : Sam Davis and John Auers

We continue our blog series from the past few weeks covering first quarter earnings reports of the various segments of the petroleum industry, with today’s focus on the Canadian integrated companies.  We’ll start by giving them kudos for the way they have stepped up in a big way in support of the response to the COVID-19 pandemic, making donations to community support groups, purchasing and delivering N95 masks to medical facilities, and donation of fuel to assist in the transportation of critical supplies and goods across Canada.  They have done this, just as their U.S. counterparts did, even as revenues and margins have been decimated due to the impacts of the COVID-19 lockdowns.

Moving past their actions and responses to COVID-19, including announcements of reductions in 2020 capex and opex budgets, the focus on the earnings calls shifted to the potential for further government mandated production cuts in the face of the massive declines in oil demand.  While executives on the call were already taking steps to curtail their own production, many were calling for the government not to enact such measures to regulate cuts (similar to what had occurred in January 2019) though there was broad acknowledgement that some level of consolidation may be necessitated across the industry. Executives also called for liquidity support from the government particularly for smaller companies in the service sector, to deal with the crisis of low oil prices, given the industry’s contribution to the Canadian economy.

A key theme of the earnings calls was to call attention to the benefits Canadian integrated companies were counting on from their ownership of refinery assets.  They clearly are planning on their downstream operations to lead their recoveries as signs of increasing consumer demand appear and are expected to continue as lockdown restrictions are removed.


In response to COVID-19, Suncor announced a reduction in capex of $1.9 billion, by deferring and cancelling projects, while focusing on low capital requirement, high return projects and a 10% reduction in operating costs. The company also announced a 55% reduction in its dividend and issued 10-year medium notes while securing additional access to credit facilities to increase liquidity.

Suncor also announced it had delayed progress by two years on two key renewable fuels projects – 40-mile wind farm and the co-gen at base plant.  This is noteworthy given just how much executives touted the progress it was making on achieving the next 10% target on its goal to curb carbon emissions by 30% by the year 2030. The co-gen project was set to replace the coke-fired boilers at its oil sands base plant with two cogeneration units and originally expected to be completed by 2023. Meanwhile, the 200 MW wind farm project was expected to be developed in two phases with the first phase kicking off construction this year and expected to be completed by the end of 2021. Although both these are now delayed, Suncor indicated on the call that the strategy of the company and its commitment to ESG had not changed.


Cenovus announced on the call that it has reduced capital spending by $600 million, suspended dividend payments, deferred final investment decision on growth projects and decided to ramp down their crude-by-rail program. With Canadian crude production declining, differentials narrowed which reduced the call on rail, and Cenovus decided in April that it was in the company’s best interest to store railcars at their Bruderheim facility and significantly reduce operating costs. This is a rapid turn of events from just a few months ago when Cenovus announced plans to expand its crude-by-rail capacity to 100 MBPD by year end, from the 15-20 MBPD it began with during Q1 2019.

Last quarter, Cenovus announced it was considering investing in the construction of a Diluent Recovery Unit (DRU) at the Bruderheim Rail Terminal to reduce diluent requirements and free up pipeline space out of Alberta, following the filing it had made for regulatory approval with the Alberta Energy Regulator. While no mention of the DRU was made on the call, we suspect the company is considering whether to proceed especially in light of increasing spare pipeline capacity resulting from the recent production cuts and a more favorable outlook for Keystone XL with the decision by the Alberta Government to invest in that project.


Husky announced that it cut its 2020 capital spending by $1.6 billion, about 50% from original guidance, reduced its dividend payment and also took steps to increase liquidity with a $500 million term loan. The company also announced that it was delaying the project to increase diesel capacity at its Lloydminster Upgrader to the end of Q3 2020. Work on the rebuild of the 45 MBPD Superior refinery has also been suspended due to safety and public health risks. The refinery had been on pace to be fully operational in 2021, but this work stoppage will now certainly push back that timing. Husky has also suspended the strategic review of its Canadian retail and commercial fuels business in the wake of the weak market environment.

Despite the current market crisis, company executives reiterated that they have not lost sight of efforts to improve environmental footprint and reporting on ESG performance. Referring to its climate task force it setup last year to look at Husky’s carbon related risks and opportunities, executives mentioned they are completing this work and expect to announce new targets in the near future.


Imperial highlighted on the earnings call that although the company had to respond to the current market environment by reducing 2020 capex by $500 million and opex also by $500 million, Q1 2020 presented some bright spots with record production and throughput rates at its Kearl operations and Strathcona refinery respectively. The Kearl production record especially was highly touted by executives as it demonstrated the impact of the investment in the supplemental crushers.  In addition to setting record throughput rates at Strathcona, the refinery also had record asphalt production, a business that Imperial is focused on growing market share in with the planned asphalt 190 MBPD expansion project.

Imperial announced on the call that it had ramped down its crude-by-rail program in response to declining global demand, reduced production rates across the industry, and narrow crude transportation differentials. The company began Q1 2020 with rail movements of 100 MBPD and in March began ramping down throughputs at its Edmonton Rail terminal to about 10 MBPD in April.

Some Takeaways from the Earnings Calls

With progress being made on pipeline construction projects such as Enbridge’s Line 3 Replacement, the TransMountain Expansion (TMX), and Keystone XL (KXL), prospects for market access seems to be much improved. However, while crude-by-rail has certainly emerged as a viable means of evacuating heavy crude from Western Canada, the recent narrowing of crude transportation differentials has made rail economics unattractive, leading to the ramp down of crude-by-rail programs. In the medium term, these slowdowns in crude-by-rail could be reversed when crude demand returns as refinery utilization rates rise in response to demand recovery.  Longer term, however, the viability of these projects will hinge on the ultimate success (or lack thereof) of the major pipeline takeaway projects (TMX, KXL, and Enbridge Line 3 replacement).

On a number of the earnings calls, executives were asked to comment on whether the Canadian government will intervene on further production cuts in the wake of the weak market environment and low oil prices. Interestingly, there was a consensus from executives that intervention was not necessary given the production cuts being made by individual companies in response to lower crude demand. However, uncertainty exists on whether the existing curtailment, enacted in January 2019, will actually be lifted at the end of the year as planned. We believe this uncertainty has led to delays in commitment on investment projects. Even though companies have deferred or in some cases cancelled projects in response to the events of COVID-19, the ongoing curtailment in production adds to further lack of clarity and commitment on some of these investments.  Some companies have called for the government to drop the curtailment program altogether, and we agree with that. This would provide the industry the ability to adjust to market conditions in more efficient ways using the flexibility afforded by a competitive, free market system.

Finally, executives expressed their belief that the Canadian industry will eventually recover from the effects of COVID-19 demand destruction.  They expect the downstream recovery to take place quicker, as economic activity grows with further easing in lockdown restrictions and hopefully growing consumer confidence in response to reduced fear of the COVID-19 virus. They are less optimistic about a quick bounce back in their upstream segments, with the huge build up in crude inventories acting as a force keeping oil prices relatively low even as demand recovery and production cuts make progress towards rebalancing global markets.

Turner, Mason & Company will continue to closely monitor developments related to the COVID-19 pandemic, the progress made by states and countries to reopen their economies, crude and refined product supply/demand dynamics, the worsening U.S./China relationship and all other events that could impact the various segments of the oil industry.  Potential impacts on the economy of the current civil unrest in the U.S. is a new issue to consider and with the Hurricane season kicking off and expected to be more active, there are certainly no shortage of things to worry about.  We will continue to comment on our changing views on all these issues in upcoming blogs over the next several weeks and incorporating our updated market forecasts into the next edition of our Crude & Refined Products Outlook which will be published to clients in late July.  If you would like more information on this publication or for any specific consulting engagements with which we may be able to assist, please visit our website: and send us a note under ‘Contact’ or give us a call at 214-754-0898.

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