Oil industry teetered 'close to bankruptcy,' but experts see signs of hope

As the Canadian oilpatch slowly emerges from a two-year price collapse, one investor suggests the industry would have gone belly up if the downturn dragged on for another year.

Energy financier Rick Grafton is confident the worst is over.

"The last two years has been among the most challenging in the history of the Canadian oil and gas industry. The energy business was close to bankruptcy," said Grafton, the CEO of Grafton Asset Management and co-founder of FirstEnergy. 

The last two years has been among the most challenging in the history of the Canadian oil and gas industry- Rick Grafton, Calgary energy investor

Oil toppled from more than $100 US a barrel in 2014 to under $30 earlier this year. Companies drastically slashed spending and more than 40,000 jobs were lost in Alberta.

"It was really bad," said Grafton, speaking at a recent Chartered Financial Analyst Society event in Calgary. "The industry is resilient, but they were on the cusp. I think $25 oil and $1.50 natural gas for 12 more months would have been a disaster."

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The oilpatch was pushed to the brink because revenues plummeted and banks began pulling back on loans. Oil and gas companies survived by cutting costs and boosting production. Not everyone was able to survive though, as several companies entered bankruptcy protection.  

$50 US a barrel a tipping point

Oil prices continue to hover around $50 a barrel, which has helped some oil companies turn a profit in recent months. For instance, Suncor surprised analysts by posting a $392 million net profit in the most recent quarter. Service company Precision Drilling said its rig activity is up 70 per cent in the latest quarter compared to the previous quarter.

Despite recent optimism, Grafton suggests the industry could quickly slip back into trouble if prices start to slide downward again.

"The industry doesn't work under $50 oil and when oil is under $50, we have major capital expenditure cuts, we have major outflows of money, and this industry, if it doesn't have money, it doesn't grow."

Most experts are forecasting prices to climb in the next year, albeit at a sluggish pace.

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"We expect prices to really grind slowly higher," said Michael Tran, the director of commodity strategy at RBC Capital Markets. He's forecasting West Texas Intermediate crude prices to stay around $51 US a barrel to end 2016 and average about $57 next year. 

OPEC next move will set price

Oil prices are fickle and Monday was an example, as crude dropped four per cent to $46.86 over suggestions OPEC countries were disagreeing over a plan to cut production.

Prices could still fall to $40 US, but that's the floor, according to Martin Pelletier, with TriVest Wealth Management in Calgary. He suggests OPEC countries won't let the price fall any lower beyond that mark considering Saudi Arabia's state-owned oil company, Saudi Aramco, is planning an IPO in 2018.

The higher the price of oil, the more the company will fetch on the open market.

"They need to get support there to maximize the amount of money they're going to get on the IPO. We're a year and a half ahead of that and they have to start the process soon, so they want to support the oil price," said Pelletier in an interview. "That's a game-changing event and that's going to provide a floor on oil." 

Feeling bullish

Oil prices will have to climb to $60 or $70 US a barrel for the Canadian oilpatch to start attracting significant investment dollars once again, says Grafton, the veteran energy financier. Still, he's optimistic the industry is positioned well for the future because of all the changes over the last two years, such as productivity advances, restructuring, and cost cutting.

"We are setting up for an impressive bull market in the energy business," he said.

It's a welcome outlook in the oilpatch after two painful years trying to stay afloat.