Hi Vic,
Yes the current down turn is worrysome and yes there are likely going to be lay-offs. The level of profitability depends on the investment portfolio of each oil company. For example, Syncrude is profitable at around $40 per barrel because most of its facilities were build in earlier years and no major expansion is planned untill 2012. New projects by companies such as Total and PetroCanada require a much higher oil price to be profitable because of the recent explosion of wages and other construction costs. So they will likely be cancelled or delayed. There is no doubt in my mind that profitabilty in the oil industry will fall over the short term.
At the last investors meeting Canadian Oil Sands Trust increased its dividends from $1 to $1.25 per share. So that is a dividend of $5 per share per year; a share which you can buy now for $25. That is a yield of 5/25=20% - wow! 2o% positive cashflow without leverage!
However, the dividend increase was based on 3 assumptions:
1 Oil price of around $100/bbl
2 Potential for increased production because current facilities are not yet producing at max capacity
3 Increased debt level. COS had only $0.9 billion debt. It plans to increase debt to $1.6 billion so that return on share holders equity will improve (just like the real estate investor plays with the amount of down payment to tweek the cashflow/capital appreciation ratio). Since the new borrowed moneys are not going to expansions, they will be paid out as distributions to the sharefolder making the recent dividend increase more secure.
So the risk that COS can not maintain its current dividends at $5/year has significantly increased. As you can see, the economic impact of lower oil prices can be found back in many facets of the oil companies as well as in the economies of Alberta and Canada at large - think royalties.
Of course, the big question is, how long will oil prices stay down? If we`re going into a deep recession it may stay down for a long time and dividend reductions may become reality and lay-offs will stay around for a long time. On the other hand if we are near a stock market bottem, and an improvement of the economy (a turn around in the stock market often foreshadows an economic recovery by approximately 6 months), oil prices are likely to rise again. Alternatively,a mild recession in the U.S. and slower but still impressive growth in the BRIC countries may be enough to cause oil demand and thus prices to improve significantly.
So now you may ask whether the stock market will be recovering. For that, you will have to look at the credit markets and what people call the Libor Rate (London Interbank Overnight Rate, i.e. the interest rate at which banks lend each other money overnight) or the Ted Spread, which is the difference between Libor Rate and the interest rate of short term Government debt. This Ted Spread has been very high in recent weeks, it is a measure of `Credit Liquidity`; the higher Libor and the Ted Spread, the less liquidity. Lately, because of all the government actions in Europe and the U.S., the Ted Spread and Libor have STARTED to move down, i.e. banks are starting to lend money to each other again. That means the Credit Crunch is possibly STARTING to loosen up. That in turn may get the economy to improve, because once banks start to lend each other money, they will also start to finance inventories of other industries, which in turn can re-start production and other business activities. That is what we are all holding our collective breath for. Is the drop in Libor and the Ted Spread a real trend, or is just a minor blib? Hold on to your seat!
The bottom line is, if you think long term and you have positive investment cashflow, things will get better. If you have no financial backbone and are leveraged to the hilt, you may want to prepare for a dreadfull 6 months ahead with vacancies and reduced cashflow (being it reduced rents or dividends). Hope this clarifies the situation a bit.
