MORNING NEWS CALL REUTERS Canada Edition Wednesday, January 18, 2017

COLUMN

U.S. oil and gas industry has turned the corner

U.S. petroleum producers are look-

ing forward to better times in 2017

as the industry has passed the low- TOP NEWS point in the cycle and embarked on • Goldman Sachs profit soars on post-election surge in trading the road to renewed expansion. Goldman Sachs Group Inc reported a nearly four-fold rise in quarterly profit as Domestic oil and gas production hit a it benefited, like other big banks, from a surge in trading following Donald trough in the first half of 2016 and Trump's surprise win in November's presidential election. showed signs of rising in the second • HSBC to shift staff from Britain to Paris after Brexit half as drilling picked up in response HSBC will move staff responsible for generating around a fifth of its UK-based to higher prices. trading revenue to Paris following Britain's exit from the European Union, Chief U.S. oil output was essentially flat Executive Stuart Gulliver said. between July and October 2016, • Samsung chief questioned behind closed doors in arrest warrant hear- after sliding between April 2015 and ing June 2016. A South Korean judge questioned Samsung Group leader Jay Y. Lee behind Gas output also held steady be- closed doors to decide whether he should be arrested over his alleged role in tween July and October, after declin- a corruption scandal that led parliament to impeach President Park Geun-hye. ing earlier in the year, according to • Trump tax cuts could mean more Novartis investment in U.S. the U.S. Energy Information Admin- Donald Trump's plans to cut U.S. corporate tax rates could trigger increased istration. investment in the United States by Novartis, its chief executive told Reuters, The downward trend in oil and gas despite the president-elect's recent harsh words on drug prices. output has been arrested by a signif- • Canada's Royal Bank boosts focus on AI with new research lab icant upturn in the number of rigs Royal Bank of Canada is hiring a pioneer in artificial intelligence as an advisor drilling onshore, especially in West to a new research lab the bank is establishing as part of its investment in AI Texas. and machine learning, Canada's largest bank said. The number of rigs drilling oil-rich

formations across the United States

has risen by more than 200, or 65 BEFORE THE BELL percent, from its low at the end of Stock futures pointed to a lower opening for Canada's main stock index as May. investors awaited the Bank of Canada's decision on interest rates. The cen- The number of gas rigs is up by 55, tral bank is widely expected to hold interest rates at 0.50 percent and markets or 68 percent, from its low at the end will parse the central bank's monetary policy report for any insight as to what of August, according to oilfield ser- impact the economic policies of U.S. President-elect Donald Trump could have vices company Baker Hughes. on Canada. U.S. stock index futures pointed to a higher open. European More than half of all the new rigs shares were steady after a choppy start, while Asian markets closed mostly have been added in the Permian up. The prospect of rising U.S. production weighed on oil prices. Gold retreat- Basin of West Texas and Southeast ed from the previous day's eight-week high as the dollar gained. New Mexico, which has emerged as

the top shale oil play in the United

States. STOCKS TO WATCH

PERMIAN BOOM Results The Permian's stacked layers of or- • Cameco Corp (CCO). The uranium producer on Tuesday said it expected its ganically rich but relatively shallow 2016 adjusted profit to be significantly lower than analysts' estimates and also shale formations make them an ideal said it would cut 120 jobs at three of its uranium mines in 2017. The company target for drillers seeking to add low- said it expects to report a net loss for 2016 citing asset impairments resulting cost, low-risk oil production in a low- from fair market assessments at the end of the year. The average estimate price environment. among Reuters' analysts was a profit of 86 cents per share for 2016. Cameco The Permian has long been among said it plans to reduce workforce at the McArthur River, Key Lake and Cigar the most productive petroliferous Lake operations by 10 percent. sedimentary basins in the world and

MORNING NEWS CALL - CANADIAN EDITION January 18, 2017

In other news is among the best explored • Royal Bank of Canada (RY). The company is hiring a pioneer in artificial ("Petroleum geology and hydrocar- intelligence as an advisor to a new research lab the bank is establishing as bon plays of the Permian Basin", part of its investment in AI and machine learning, Canada's largest bank said. Robinson, 1988). The bank declined to say how much is being invested, but estimated that its But until the advent of horizontal ongoing investments in AI will total in the tens of millions of dollars over the drilling and hydraulic fracturing oil coming years. RBC Research said it is looking into how AI can be applied in and gas could only be produced banking and it will be working with Richard Sutton, a professor of computing from the sandstone and carbonate science at the University of Alberta. reservoirs where it had migrated un- • Yamana Gold Inc (YRI). Striking workers at the company’s El Peñón mine in derground. Chile have reached a wage agreement with the Canadian miner, allowing for Now drilling companies can target the mine to reopen, a union leader said on Tuesday. "Operations partially re- the thick impermeable shale layers sumed last Friday after these workers relinquished the camp in order to allow which are the source of most of the for conclusion of negotiations," the company said in a statement. It added that oil and gas that has made the basin the interruption in operations has not had a "significant impact" on mine and a top producer in the past. consolidated production and that it expects to recover production from its other Thanks to improvements in target- operations in the short term and from El Peñón throughout the year. ing, drilling and fracturing efficiency, Permian wells are now producing almost 60 percent more during their ANALYSTS' RECOMMENDATIONS first 30 days than in 2014, and the • Imperial Metals Corp (III). Canaccord Genuity cuts rating to sell from hold, benefits are persisting in subsequent to reflect fourth-quarter operating results. months. • North West Company (NWC). Barclays raises price target to C$29 from Permian producers are targeting well C$27, citing higher profitability after an agreement to acquire Roadtown locations more carefully, drilling Wholesale Trading. longer horizontal sections and im- • Trilogy Energy (TET). Barclays raises price target to C$7 from C$6, saying proving well construction techniques the company has a focused asset base with long-term resource potential and ("Oilfield Services/Drilling Outlook", the return to growth should help the leverage ratios. Cosgrove and Foiles, Bloomberg Intelligence, Dec. 2016). Drilling is getting faster, with the av- ECONOMIC EVENTS erage time taken to drill a Permian 1000 BoC rate decision: Expected 0.50 pct; Prior 0.50 pct well down by around 20 percent since 2014. The result is that a much smaller COMPANIES REPORTING RESULTS number of rigs are needed to sustain any given level of production than in Jan 18: earlier years. Canadian Pacific Railway Ltd (CP). Expected Q4 earnings of C$3.11 per Other shale oil and gas plays, includ- share ing the oil-rich Bakken in North Da- kota and gas-rich Marcellus/Utica in Jan 19: Pennsylvania have also seen an up- ExactEarth Ltd (XCT). Expected Q4 loss of 10 Canadian cents per share tick in drilling since the end of May. The enormous improvement in efficiency and reduction in drilling costs CORPORATE EVENTS in all these plays is a direct feedback 16:30 Canadian Pacific Railway Ltd (CP). Q4 earnings conference call response to the slump in oil and gas prices during 2014/15. The slump has made U.S. oil and EXDIVIDENDS gas producers leaner and fitter after Jean Coutu Group PJC Inc (PJCa). Amount C$0.12 the 2010-14 boom permitted a lot of Parkland Fuel Corp (PKI). Amount C$0.09 inefficiency.

DEMAND MATCHING (All analysts' estimates are according to Thomson Reuters I/B/E/S) The resumption of drilling is now fil- tering through into an increase in demand for oilfield services and an improvement in the employment situ- ation. The number of jobs in oil and gas production, as well as support services, stabilised during the second

2 MORNING NEWS CALL - CANADIAN EDITION January 18, 2017

and third quarters and climbed mar- ginally in the final three months of 2016. The gradual stabilisation and incipi- ent recovery in the U.S. oil and gas sector mirrors a big rise in prices for both oil and gas since the first half of last year. U.S. crude futures prices have risen by around two-thirds since January and February 2016 and benchmark gas prices have doubled since March. The turning point pre-dates the election of Donald Trump in November and the output-cutting agreements negotiated by OPEC and non-OPEC countries in November and Decem- ber. Nonetheless, both are likely to give a further boost to U.S. oil and gas production by improving sentiment and (in the case of the OPEC/non-OPEC deals) by helping establish a floor underneath oil prices. The main risk now will come if U.S. oil and gas producers increase output faster than demand grows and send the industry back into a mini- slump. The probability of another deep and prolonged slump such as the one seen between 2014 and early 2016 is low, but a quicker, shallower short- cycle slump remains a very real pos- sibility. If U.S. shale production starts to climb rapidly, Saudi Arabia and other OPEC producers will likely respond by raising their production to main- tain market share and sink prices again. U.S. oil and gas industry leaders have promised a more “disciplined” approach this time around, focused on boosting profits rather than output, but that may be difficult to main- tain as prices and confidence rise.

-- By John Kemp -- He is a Reuters market analyst. The views expressed are his own

3 MORNING NEWS CALL - CANADIAN EDITION January 18, 2017

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