Alex Cutulenco | Ubika Research Analyst | January 8, 2016: Canada has one of the highest oil production costs in the world. And seeing that the majority of OPEC nations are the lowest-cost producers, this could mean even more pain for the share prices of Canadian juniors.
With growing stockpiles, countries are running out of storage facilities to house production. This develops a further problem of countries needing to sell reserves at depreciated prices, which inevitably pushed prices even lower. With this is mind, let’s take a look at an interesting chart below (Figure 1), displaying the average cost of oil production (USD/bbl) by country.
Figure 1: Cost of producing a barrel of crude oil by country (USD/bbl)
Source: Recent Development and Prospects of WEO Oct 2015 Chapter 1
It is evident that OPEC nations (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela) are capable of withstanding depressed prices, seeing as 9 of the 12 OPEC members are producing at an average operating cost of 7.3 USD/bbl and below.
On the other hand, Canada is the third on the list, with an average production cost of 23.3 USD/bbl. Now, let’s compare these results with operating profitability of small-cap oil producers in Canada.
Figure 2: Operating Margins of Small-Cap Canadian Oil Producers
Source: Thomson Reuters (01/07/2016)
From the looks of it, only 8 of the 50 companies on the list are seeing profitability, with the rest largely in the red.
In terms of their share price performance over the last year, results are pretty surprising considering their operational performance:
Figure 3: Operating Margins vs. Share Price Performance
Source: Thomson Reuters (01/07/2016)
Of the eight producers who were profitable over the past year, only three of them saw a share price increase. Also interesting to see two outliers: Parex Resources Inc. (TSX: PXT) and Oando Energy Resources Inc. (TSX: OER), which saw their share prices rise 26% and 19%, respectively, despite operating with heavy losses.
Alex can be reach at: alex@gravitasfinancial.com
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