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Teck Modifies Fort Hills Operating Plan Amid Low Oil Prices

Zacks Equity Research

Teck Resources Limited TECK announced that the Fort Hills project will temporarily operate as a single-train facility in response to lower prices for Western Canada Select (WCS) heavy oil. The decision, taken by the partners of the project will also help lower the negative cash flow from Fort Hills.

Fort Hills’ production is projected at 100,000-120,000 barrels per day for the ongoing year. Teck owns 21.3% interest in the Fort Hills project. For 2020, the company expects its share of Fort Hills’ production to be down 8-9 million barrels of bitumen. This will significantly lower variable costs. However, unit costs for the remaining production will be higher as fixed costs are being covered by lower volumes. Considering this, unit operating costs are predicted to be C$37-C$40 per barrel for the year. The company is also focused on reducing capital expenditure for this project.

In 2019, Teck’s share of bitumen production from Fort Hills was 33,593 barrels per day compared with the 31,955 barrels per day produced in 2018. Although it was higher than 2018, production was below the design capacity as a result of the Government of Alberta production curtailments that came into effect on Jan 1, 2019. Due to wider Canadian heavy crude oil differentials and higher-than-expected inventory levels at the beginning of the year, uncertainty regarding the mandatory production curtailments prevails. Meanwhile, the Fort Hills project continues to assess the potential to debottleneck and expand its production capacity. In 2019, the company’s share of production at the Fort Hills oil sands mine was 12.3 million bitumen barrels.

Global oil prices were under pressure amid the coronavirus pandemic. Oil prices have slumped as Saudi Arabia initiated a price war and boosted its oil production significantly in retaliation to Russia’s refusal to lower its crude production at the OPEC meeting. The Canadian oil benchmark WCS is also trading below $10. WCS is considered as one of the largest heavy crude oil streams in North America. This scenario is likely to impact the company’s energy business.

On Mar 24, in the early trading session, oil prices traded higher after the Fed announced new stimulus measures to cushion the economic disruption from the coronavirus outbreak. However, concern regarding falling oil prices persists, as the pandemic continues to spread worldwide straining oil demand.

The company’s business units are focused on steelmaking coal, copper, zinc and energy. The Energy business unit includes 21.3% interest in the Fort Hills oil sands mine, 100% interest in the Frontier oil sands project and a 50% interest in various other oil sands projects. The company’s energy business accounted for 8% of revenues in 2019.

Mining stocks have been plagued with sliding metal prices over escalating coronavirus fears. The company’s shares have plunged 65.7% over the past year compared with the industry’s decline of 30.0%.

Zacks Rank & Key Picks

Teck currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the basic materials space are Newmont Corporation NEM, Franco-Nevada Corporation FNV and Novagold Resources Inc. NG, each currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Newmont has an expected earnings growth rate of 72% for 2020. The company’s shares have gained 19.3% in the past year.

Franco-Nevada has a projected earnings growth rate of 37.6% for the current year. Its shares have rallied 30.1% over the past year.   

Novagold has an estimated earnings growth rate of 11.1% for fiscal 2020. The company’s shares have surged 61.6% in a year’s time.

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