Oilpatch suffering ‘buyer’s strike’ as low prices threaten drilling

Domestic producers have seen stocks fall by average of 15% in last three months

Oil and gas companies are suffering a “buyer’s strike” from investors amid weak commodity prices — with fears the outlook could deteriorate even further, analysts say.

Weeks before energy companies begin reporting their second-quarter earnings, the industry’s outlook has worsened following considerable optimism over an expected recovery earlier this year.

Oil and gas producers have seen their stock prices tumble. And the industry will likely see a decline in the pace of capital spending and drilling, analysts at Raymond James said in a new report.

“There is a bit of a buyer’s strike right now,” said Jeremy McCrea, analyst at the investment bank, noting investors have been frustrated with failed attempts to bet on how low oil prices will go.

“There’s a real hesitation to step into this market.”

OPEC production cuts have failed to trigger a meaningful rebound in oil prices, with West Texas Intermediate oil trading at an average of US$48 per barrel in the past three months, down seven per cent from the previous quarter.

The benchmark crude closed slightly above US$45 on Thursday.

Analysts at the investment bank AltaCorp Capital said in a report that investor sentiment on oil pricing was “among the worst we can remember” in June when crude traded at the low $40-per-barrel range.

As a result, Canadian oil and gas producers saw their share prices fall by an average of 15 per cent in the last three months, while U.S. energy stocks tumbled by slightly more.

AltaCorp analysts said in a separate report that investor views on commodity markets have been “extremely perverse,” arguing global supply and demand levels for crude oil justify higher prices.

Still, the analysts said investors are likely worried U.S. inventories will be high later this year, that OPEC members Libya and Nigeria are growing production, and that global oil markets will be oversupplied once the latest OPEC production agreement expires next year.

“We must also acknowledge that if OPEC (and Saudi Arabia) does not implement an initiative to improve market attitudes quickly, there is risk to the downside from here on deteriorating sentiment — despite physical markets improving,” the report said.

Analysts at Raymond James said Canadian producers will likely respond to depressed oil prices with a slower pace of spending and drilling activity, compared to previous expectations.

The analysts estimate the fleet of active Canadian drilling rigs will fall by 14 per cent over earlier forecasts in the third quarter and by 12 per cent in the last three months of the year.

Similarly, they believe 5,200 oil and gas wells will be drilled in Canada this year, down by 400 wells or seven per cent from earlier estimates.

“With most companies taking a spend-within-cash-flow stance, given the volatility of oil prices, there could be some negative revisions to cap-ex spending this year,” McCrea said.

There’s a real hesitation to step into this market.