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Crash in commodity prices takes a toll on Canada's corporate giants

Two of Canada’s largest companies clarified Wednesday exactly how much the ongoing crash in crude oil prices has cut into their bottom lines.

Royal Bank of Canada (RY.TOmissed expectations for first quarter profit as a result of more provisions being set aside for potentially bad loans to oil and gas producers. Encana (ECA.TO), meanwhile, actually beat quarterly expectations despite reporting a net loss of more than $600-million along with plans to cut its dividend by nearly four fifths and its workforce by 20 percent; equating to several hundred layoffs.

“There is no question that persistently low oil prices are tough for our clients in affected regions,” RBC chief executive Dave McKay said on the bank’s conference call early Wednesday morning. “[But] in Canada we continue to believe that pressure from low oil prices will be mostly contained to oil-exposed regions.”

Provisions for credit losses at RBC, otherwise known as PCLs referring to the amount of money a bank sets aside to cover the impact of loans that may not be paid back, came in well above expectations at $410-million. Gross impaired loans specifically from oil and gas companies came in at $310-million, roughly double the $156-million from the previous quarter and 62 times the $5-million in total oil and gas impairments RBC reported in the same quarter one year ago.

RBC chief risk officer Mark Hughes said the bank has been conducting stress tests at US$25 per barrel oil prices, estimating the impact of that price becoming the average for 2016 on RBC as well as the broader Canadian economy. While noting such a scenario would see the banks PCLs rise roughly 50 per cent from current levels, he stressed such an outcome was “unlikely.”

Gross impaired loans were also higher due to RBC’s largest-ever $5-billion acquisition of Los Angeles-based City National late last year. The addition of City National’s business pushed impaired loans at RBC up by 37 per cent year over year, but according to Canaccord Genuity’s analysis the increase would have only been 9 per cent if the new American business is excluded.

McKay did not specifically address how much more PCLs could climb in subsequent quarters with low oil prices expected to persist until at least the middle of 2016, while Calgary-based oil and gas producer Encana made it clear Wednesday morning it intends to hunker down for a long haul of low prices.

Encana announced plans to cut its quarterly dividend by 79 percent to just 1.5 cents per share as well lower its spending for 2016 to no more than $1-billion. As part of an effort to reduce costs by another $250-million this year, the company also announced another round of layoffs affecting 20 percent of its total headcount. Specific figures were not provided, though Encana did say its total workforce would be less than half early 2013 levels, meaning more than 2,000 positions in total will have been eliminated by the end of this year.

Despite dramatic spending cuts, Encana still managed to grow its production by a whopping 36 per cent in the fourth quarter and, indicative of global crude production remaining stubbornly high, trimmed its 2016 production outlook only slightly.

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