Editor’s note: This is an excerpt from the 2024 Top Operators Report, brought to you by KPMG in Canada & geoLOGIC systems ltd. Download a free copy of the full report here.

While oil and gas prices deteriorated from peaks in 2022, Canada’s publicly traded oil and gas operators continued generating strong cash flows in 2023 and used the money to increase spending in anticipation of improved market access from the launch of the TMX pipeline and the startup of LNG Canada in 2025.

A rapid decrease in natural gas prices in the first half of 2024 has slowed some development, but gas weighted operators remain positive that beginning in 2025 markets will turn positive allowing for future growth.

Operating cash flows of the almost 70 operators tracked for the 2024 Top Operators Report were a combined $60.8 billion in 2023, down approximately 30% compared with 2022. Free cash flow was slightly over $31.6 billion, down almost 45%.

“These are still very healthy numbers. Operating cash flows were up almost 16% compared to 2021, with free cash flow up 19%,” said Mark Young, Senior Analyst, Evaluate Energy.

“Last year was more similar to 2021 than 2022, when commodity prices skyrocketed after Russian supply was curtailed. As commodity markets returned to earth in 2023 operating and free cash flows followed the same trajectory.”

How operators spent their cash flows shifted in 2023

The percentage of cash used for capital expenditures increased 12 points to 43%. Operators invested almost $32.7 billion in capital expenditures in 2023, up from $27.8 billion in 2022.

In 2023 and into 2024 operators have been continually adjusting capital spending, which at times outpaced cashflows due to pricing volatility, said Tim Richards, Partner, Audit, for KPMG in Canada.

“They are still focused on achieving a balanced capital structure that maintains production levels with capital spending primarily funded with cashflows from operations and maintaining shareholder returns.”

The percentage of cash used for buybacks declined from 24% to 17%, while the percentage of cash used to maintain or increase dividends jumped from 15% to 21%.

The volatility in commodity prices resulted in reduced cash flows in 2023, making it a challenge to meet investor expectations for stable yield models, said Richards.

“Producers worked to maintain current yields to investors through maintaining dividends by cutting back on share buybacks. They are continually evaluating the appropriate capital structures and allocation of cashflows.”

Only 8% of cash was used for debt repayments, compared with 23% in 2022. Operators paid down $20.7 billion in debt in 2022 compared to $6.3 billion last year. Overall debt loads increased in 2023 over 2022 due to a few large acquisitions.

Debt will continue to be a key part of operators’ capital structures, but Richards said protecting the balance sheet remains a top priority and he doesn’t expect a return to the higher debt levels of the past.

“Debt will continue to be one of the tools used to fund acquisitions but that being said management will continue to maintain debt levels significantly less than we have seen historically.”

Consolidation and integration pay off for big oilsands operators

A decade of consolidation and vertical integration within the four big oilsands operators has restructured the Canadian oil sector.

These top four operators generated $25.5 billion in net income in 2023, almost three quarters of total earnings of the 70 operators tracked.

“Net earnings are up almost 72% compared to 2021 in this cohort,” said Evaluate Energy’s Mark Young. “These four operators benefited greatly from the exodus of the international players from the oilsands.

They have also executed on diversifying their markets, whether through downstream consolidation and integration of refining assets or through moving production to markets off the Gulf Coast of the U.S.”

The big integrated players have also tightly managed capital expenditures in an inflationary environment, Young added. Spending, excluding acquisitions and divestitures, increased 12% year-over-year in 2023.

Aside from cost inflation, operators also began a few long cycle projects in anticipation of increased egress through the TMX.

Conventional operators increase spending while awaiting LNG Canada

Non-integrated operators also saw operating and free cash flows deeply decline compared to 2022, with operating cash flows down 15% to slightly under $25 billion and free cash flows down 55% to $6.65 billion.

Capital expenditures, excluding acquisitions and divestitures, was up 25%.

Western Canadian operators spud slightly over 1,500 wells targeting natural gas in 2023, a 10% increase over the previous year.

Operators drilled 3,724 oil and bitumen wells in 2023, down 10% from 4,152 wells in 2022 as activity declined as prices retreated from 2022 highs.

Average WTI oil prices dropped 14% in 2023 compared to 2022. Prices in Canadian dollars averaged $122.32/bbl in 2022 and $104.76 in 2023. Prices remained well above the five-year average of $75.66/bbl.

Average WCS prices dropped 17% year-over-year, from slightly over $97/bbl in 2022 to approximately $80.50/bbl in 2023. The five-year average WCS price was $57.67/bbl.

The jump in gas drilling over 2022 occurred despite a 54% decline in year-over-year average AECO gas prices.

The positive impact of gas market diversification and hedging helped maintain natural gas economics during the year, keeping rigs in the field, said Young.

“Average annual benchmark AECO prices declined from $5.64/MMBtu in 2022 to $2.60/MMBtu in 2023. But the AECO benchmark has less impact on drilling activity than in the past as operators have moved pricing points for ever increasing volumes downstream and fine-tuned hedging programs to manage pricing volatility.”

Operators also remained focused on liquids-rich targets to take advantage of strong condensate prices.

While NGL and condensate prices declined in 2023 compared to 2022, prices for higher value NGLs and condensate remain well above five-year averages.

Butane prices averaged $48.30/bbl in 2023 compared with the five-year average of $39.16/bbl. Pentane and condensate averaged $99.46/bbl in the same period compared to the five-year average of $83.06/bbl.

To learn more about the Canadian operator financial performance in 2023 and the outlook for 2024 download your free copy of the 2024 Top Operators Report here.