Jul 20, 2016
How earnings optimism is returning to Canada's energy patch
Activity in the Canadian energy patch may still be near record lows, but optimism is on the rise with second quarter earnings season due to kick off later this week.
The bar was set extraordinarily low in the first quarter, when Canadian oil and gas producers reported some of their worst results ever. That was the result of commodity prices hovering at their weakest levels in over a decade from early January to late March. Prices did climb higher between early April and late June, with the North American crude oil benchmark West Texas Intermediate (WTI) rising roughly 36 per cent from the first quarter to average US$45.60 per barrel.
There were still less oil and gas drilling rigs in operation across western Canada than at virtually any point in the last 40 years, with 48 active rigs on any given day in the second quarter. That’s only slightly better than the record-low 47 rigs active in the second quarter of 1992.Yet the discount applied to the main oil sands price benchmark – Western Canada Select (WCS) – narrowed in Q2, meaning the lion’s share of Canadian crude production got a Q2 price boost.
Refining will be a “saving grace” in the second quarter, CIBC analyst Arthur Grayfer said in a preview report. Production among the largest integrated producers – so-called because they both produce and refine petroleum products – is expected to be down slightly as a result of the Fort McMurray wildfire that left more than a million barrels of daily production offline for most of May.
Integrated producers will unanimously report higher cash flow, Grayfer said, by an average of 68 per cent above their Q1 levels on a per-share basis. Suncor will have the smallest quarterly increase, he said, while noting it should still come in at 22 per cent higher than during the first quarter.
Independent producers – meaning those without refining or marketing divisions – will also see cash flow increase according to the CIBC preview. MEG Energy should see cash flow more than double Q1 levels, Grayfer said, while Tourmaline Oil is the only producer CIBC expected to report a quarterly decline in total cash flow.
Other analysts contacted for their views ahead of second quarter Canadian energy results raised expectations for more hedging contracts to be announced as producers seek to lock in prices. That is largely because confidence in further price gains from here have been, in one respondent’s words “heavily subdued.”
Many also said the likelihood of a wide range of cost structures is high as some producers have proven more successful than others at cutting expenses. Grayfer said CIBC was also expecting a “wide spectrum” of cost structures, but that the differences would have more to do with who was hit hardest by the Fort McMurray wildfire.
“Those affected by the fires will show high per-unit costs,” he said, “and we expect some of those not affected will lower their cost guidance for the year.”
