Last week, the biggest news out of the oil patch was that OPEC agreed to hike its output by 1 million barrels per day (BPD) starting next month. That announcement drove oil prices higher because OPEC didn’t boost production as much as some thought it might. However, while that news grabbed headlines, an under-the-radar report about issues at Suncor Energy‘s (NYSE: SU) Syncrude oil sands facility in Canada could have an even bigger impact on oil prices in the U.S. over the next few months.
Drilling down into the report
On Wednesday, Syncrude Canada, which is jointly owned by Suncor Energy and some other producers, reported that a tripped power transformer caused the complete shutdown of the complex. Furthermore, they estimate that the 360,000 BPD facility could be offline through at least the end of July as they evaluate and address the issue. That’s disappointing news for Suncor, which earlier in the month reported that it was set up to deliver strong production for the remainder of this year after finishing some maintenance projects at that plant. Now, it’s unclear if the company will hit its production targets.
Not only was that news a blow to Suncor, but it marks another setback for global oil supplies, which were already running lower than expected this year due to production problems in Venezuela, Nigeria, and Libya. Meanwhile, new sanctions on Iran, as well as pipeline issues in Western Texas, threatened to impact oil supplies further in the coming months.
Because of that, Syncrude’s shutdown could have a significant effect on the oil market in the near term. According to analysts at Goldman Sachs, the loss of the facility’s supply for more than a month could quickly reduce oil storage levels at America’s key oil hub in Cushing, Oklahoma. That would significantly tighten supplies in North America, which could drive the price of the U.S. oil benchmark, WTI, up closer to the global benchmark Brent.
If that happens, producers that sell their oil at WTI-based prices will see an immediate boost to profitability.
What’s bad news for some is a boon to others
Leading U.S. shale driller EOG Resources (NYSE: EOG) is one of many that would benefit from a hike in the price of WTI. The company based its budget on WTI averaging $50 a barrel this year, which would enable it to generate enough money to invest about $5.6 billion into drilling new wells so that it could increase its U.S. oil output 16% to 20%. Also, at that price point, EOG could bolster its dividend by 10% from last year’s level and still produce a little bit of free cash to pay down debt. Anything over that level would be gravy, with EOG estimating that it would generate as much as $1.5 billion in free cash at $60 WTI. That number would be even higher if WTI heads toward $75 a barrel due to the issues at Syncrude, which could enable the company to achieve its debt reduction target even faster.
Devon Energy (NYSE: DVN), in the meantime, is on pace to expand quarterly cash flow by 35% over the course of the year due to its growing oil production, assuming WTI averages $65 per barrel. However, Devon’s cash flow would rise at an even faster pace this year if WTI moves higher due to the outage at Syncrude. That would give Devon even more money to buy back its dirt-cheap stock.
Many other North American-focused oil companies would also see an immediate boost to cash flow if WTI climbed as a result of the issues at Syncrude. That would provide them with an unexpected gusher of excess cash, which they could use in a variety of ways to create value for investors.
An even bigger gusher could be on the way
Because OPEC’s decision to increase output grabbed the headlines last week, the market has yet to catch on to the potential impact of the outage at Suncor’s Syncrude facility. If it’s offline for the next month, it will cause oil stockpiles in North America to quickly drain, which could drive the price of WTI up to Brent’s level. That would enable oil drillers in the U.S. to earn an even larger windfall profit this year, which would likely do wonders for their stock prices.
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