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Alberta oil producers Baytex, Husky slowly restart output as outlook improves

Highlights

Baytex aims to restart all but 5,000 b/d in H2 2020

Husky trims shut-ins to 30,000 b/d, ups refining to 85%

Some shut-ins to persist at Alberta heavy crude sites

Washington — Alberta oil producers Baytex Energy and Husky Energy have both started slowly restarting operations shut during this spring's oil price crash.

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After cutting 25,000 b/d of oil production in April, Baytex aims to restart all but 5,000 b/d of those shut-ins during the second half of 2020.

"Should operating netbacks change, we have the ability to shut-in additional volumes or restart wells in short order," Baytex said July 29 in its second-quarter earnings statement.

Baytex announced in May that it had shut 20,000 b/d of heavy crude production in Alberta and 5,000 b/d of light oil production at Eagle Ford Shale wells in Texas in response to the global oil price crash.

"We shut in some production, we suspended drilling operations in Canada, and we moderated our pace of activity in the Eagle Ford," CEO Ed LaFehr said during a July 30 earnings call. "We are now starting to benefit from the actions we have taken as we generated positive free cash flow during the quarter and maintained approximately $300 million of financial liquidity."

In Q2, Baytex pumped 72,508 barrels of oil equivalent a day, down 26% from 98,452 boe/d in Q1.

The Q2 output was 81% oil and NGL, with 37,691 boe/d heavy oil from Canadian operations and 34,817 boe/d of light oil from the Eagle Ford Basin in Texas.

Baytex brought online 17 new Eagle Ford wells in April. It lowered its 2020 guidance for net new wells in the basin from 22 to 16-18.

The coronavirus pandemic has been particularly hard on Canadian producers who started the year betting that increased demand for heavy crude on the US Gulf Coast would incentivize crude-by-rail volumes.

LaFehr said the driller's strategy for 2021 included hedging about 10% of crude volumes on three-way options at $35/b, $45/b, and $55/b.

"It gives us a floor at $45/b and upside participation with the investor up to $55/b," he added. "We think we see the markets leveling out there, but we'll layer in hedges now as we start to see prices moving into that $45/b range."

Husky trims shut-ins

Husky Energy said it is upping production and refinery throughput as demand for crude oil and fuels increases in the wake of the coronavirus pandemic.

It currently has stopped about 30,000 b/d of Canadian production, President CEO and Director Rob Peabody said on a conference call. The amount represents an improvement from the 80,000 b/d Husky had shuttered in March as pandemic-related shutdowns slowed the North American economy.

Throughput at the company's Ohio refineries has also recovered to a utilization rate of about 85%. The company is moving carefully to restart assets as demand improves.

"We are being cautious not to outstrip physical demand and continue to pace our throughput with our product liftings," Peabody said on the company's Q2 earnings call. "We expect the path forward to be bumpy, and we'll continue to respond rapidly."

Husky used its combination of owned transportation, storage and refining assets to match production to demand throughout the downturn, eliminating the need to sell crude at distressed prices during the height of the pandemic. Its so-called "integrated corridor" has also allowed it to quickly increase throughput to respond to rising demand.

The company "moved early to draw down our own inventories to create extra space to manage the supply-demand imbalances we could see were going to emerge," Peabody said. "The collaboration between the upstream and downstream operations in our integrated corridor business has been virtually seamless and allowed us to maximize available value capture as market opportunities arose."

Husky expects capital expenditures in the third quarter to rise to between C$400 million and C$450 million, compared with C$310 million in the second quarter. It spent about C$63 million on the reconstruction of its explosion-damaged refinery in Superior, Wis., in the second quarter, much of which it expects to recover from its insurers. The company could reduce its annual spending to a range of C$1.2 billion to C$1.4 billion in 2021 if needed — excluding the Superior refinery rebuild costs — allowing it to sustain upstream production at about 260,000 b/d.

Separately on July 30, Husky reported a Q2 net loss of C$304 million, or a loss of 31 Canadian cents/share, compared with net earnings of C$370 million, or 36 Canadian cents/share, in the year-ago quarter. Cash flow from operating activities for the second quarter was a loss of C$10 million, compared with a cash flow of C$760 million in the same period a year earlier.