With massive growth and industrialization of emerging economies, particularly China and India, the global demand for oil and gas have tremendously increased. Major developments in oil drilling technologies created opportunities to exploit shale gas and oil. Massive reserves have been identified in various parts of the world, including North America, which created massive growth opportunities in the oil and gas sector.
During 2012, the oil and gas sector in Canada witnessed some of the largest mergers and acquisitions in the history of the country. The two key acquisitions were Nexen by Chinese state-controlled CNOOC for a mammoth $15 billion and Progress Energy by Malaysian state-controlled Petronas for $5 billion.
The company is actively involved in reconnaissance for asset resources across the globe in order to increase its global share in the oil and gas sector.
It has robust operating experience, therefore, it now plans to increase its production in order to meet the global demand. It aims to elevate its production in a horizon oil sands project to 250,000 barrels/day from a 110,000 barrels/day. In addition, it plans to commission 40,000 barrels/day from the Kirby South Steam Assisted Gravity Drainage project and steadily advance its deepwater exploration projects in South Africa.
The company has a focused objective on increasing its production of oil and gas consistently in order to generate and maintain high cash flow. It is also focused on increasing its reserves and net asset value by both organic and inorganic means.
Industry outlook
With robust production of oil in the U.S. and Canada coupled with the overall declining demand in the developed regions, the global oil market is set to undergo a major change.
On the back of sluggish economic progress and improved technological framework, North America is expected to be self-sustained and meet its oil demand, resulting in significant reductions in oil imports.
In contrast, the Middle East and Asia regions are estimated to drive the demand of oil in the near to medium term, owing to rapid growth in economies, virtually inverting the whole supply-demand equation. Interestingly, for the very first time, the developing markets are expected to consume more oil than the developed world.
As per the estimates made available on oil consumption by the International Energy Agency (IEA) covering the next five years, the supply of oil in the global markets will far outdo the demand, leading to a sharp fall in the price of oil and gasoline.
The primary reason that underpins a drastic shift in the oil market is the growing capability of the U.S. to produce oil and its ever-lessening dependency on the Middle East for its oil needs. This is because the U.S. has access to superior technology.
On the back of its new-found technology, the U.S. managed to enhance its oil production capacity to 7.4 million barrels per day year-to-date, which is an impressive 48% increase in average production capacity relative to 2008.
It is also noteworthy that this is the highest level of oil production the U.S has marked since February 1992. In addition, as per the report issued by IEA, U.S. production capacity is expected to reach 9.1 million barrels per day by 2018.
Moreover, according to a recent report published by PWC, reduced oil prices due to the production of shale oil has the potential to propel global GDP by a phenomenal $2.7 trillion by the end of 2035.
The significant downward trend in oil prices would greatly benefit the oil-importing countries such as India and Japan in terms expected GDP growth. The leading oil exporters, however, such as Russia and the Middle East, will suffer serious losses in a scenario where they are unable to develop in-house shale-oil resources .
This calls for oil companies having to remodel business processes to meet the upcoming challenge of lower oil prices. Additionally, oil and energy companies must reevaluate ongoing and future projects in order to adjust for the shifting industry structure
Competitive landscape
Imperial Oil Limited (USA) (NYSEMKT:IMO) is one of the largest companies in the North American oil and gas market. The company recently acquired a 50% stake in Celtic Exploration along with Exxon Mobil Corporation (NYSE:XOM) Canada. The acquisition will help Imperial Oil Limited (USA) (NYSEMKT:IMO) to further diversify its resource base and add rich natural gas.
However, during the first quarter of 2013, Imperial Oil Limited (USA) (NYSEMKT:IMO) struggled as profits dropped 21% predominantly due to declines in global crude oil prices and increased refinery maintenance costs.
A $12.9 billion Kearl oil sands project has been a major cause of concern for the company. This venture was expected to start producing bitumen by the end of 2012, however there are no signs of this production to date.
Nonetheless, reasonable cash reserves of approximately $330 million should provide the company sufficient cushion to face the headwinds in the near term. However, it’s absolutely essential that the company pursues a restructuring in order to sustain long-term growth.
Suncor Energy Inc. (USA) (NYSE:SU) is another key competitor to Canadian Natural Resource Ltd (USA) (NYSE:CNQ). At present, Suncor Energy Inc. (USA) (NYSE:SU) possesses the largest reserves in oil sands. Of late, the company has only focused on improving shareholder value through an integrated approach of share buybacks, capital investments and dividend growth.
During the fiscal 2013, dividends increased 54%(30% CAGR in the last five years) and the company planned a $2 billion share-buyback extension. The company plans to increase R&D spending by a whopping $175 million in order to be at par with its competition.
It should of course be noted that during the first quarter of fiscal 2013, Suncor Energy Inc. (USA) (NYSE:SU) acquired Total E&P’s interest in the Voyageur Upgrader Limited Partnership (VULP) for a whopping $515 million in order to have full access to partnership assets.
These assets primarily include a hot bitumen blending facility and tankage that enable it a high level of logistics flexibility and increase storage capacity to facilitate Suncor Energy’s growing oil sands operations.
This was part of Suncor Energy’s integrated strategy, which will facilitate the company to exhibit robust results in spite of an extremely price-challenging environment.
Should you invest in this sector?
With massive growth and industrialization of emerging economies, energy demand is expected to grow. In addition, rapid technology development in the shale-gas and oil business has created a new opportunities for companies to exploit resources.
Even though oil prices are on a downward trend, I believe Canadian Natural Resource Ltd (USA) (NYSE:CNQ) is a buy from a long-term perspective as consistent investments in resources will eventually enable it to sustain growth in the long run.
The article A Deeper Look at Oil and Gas Production in Canada originally appeared on Fool.com.
Ashit Gulati and Equity Dimensions have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ashit is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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