Higher prices, margins should produce bumper crop of earnings for embattled oil companies

CALGARY — Improved oil prices and juicy refining margins have meant a bumper second quarter for major oil companies with analysts expecting — after years of either negative or meagre results — a windfall of cash.

“Things are finally looking up for the perennially lagging Canadian energy sector,” GMP FirstEnergy analysts Stephen Harris and Anthony Prost wrote in a recent research note.

In recent years, embattled Canadian oil companies have cut staff, slashed budgets and reduced costs to grapple with an extended period of low oil prices. Since the beginning of the year, however, the price of oil has risen steadily from less than US$60 per barrel for West Texas Intermediate to US$67.75 per barrel on Monday, at times breaching US$70.

In addition, the value of the Canadian dollar has fallen relative to the U.S. dollar and since Canadian oil companies sell their barrels in U.S. dollars but pay their expenses in Canadian dollars, the net effect has been positive.

“With WTI nearing $100 (Canadian), commodity markets tightening, and many companies seeing rising free cash flows, we think momentum in the energy sector can be sustained,” Harris and Prost wrote.

They are not alone. Financial analysts at Canadian banks, U.S. banks, credit ratings agencies and fund managers expect both Canadian and foreign oil producers to report vastly improved quarterly earnings figures this week.

Suncor Energy Inc., Cenvous Energy Inc., Husky Energy Inc. and Imperial Oil Ltd. all report second quarter results this week — beginning with Suncor on Wednesday — and should benefit from higher crude prices and wide margins at their refining divisions.

But even with a potentially big improvement in profits or cash flows, analysts don’t expect to see Canadian companies boosting spending on growth projects.

“The market is looking for disciplined capital and measured growth,” Wood Mackenzie analyst Stephen Kallir said in an interview. “If you see oil begin to escalate, we don’t see that materially changing what the strategy is going to be, which is growing within cash flow.”

Kallir added that integrated Canadian producers — Suncor, Imperial and Husky — would also benefit from their upgrading and refining operations, which have insulated them from the big discounts for heavy oil produced in Canada.

Similarly, AltaCorp Capital analyst Nick Lupick said in a research note that Suncor, Cenovus, Husky and Imperial “are likely to deliver strong quarters of solid financial results with crack spreads rallying in North America.”

If the results live up to the hype, investor sentiment toward Calgary-based oil companies may improve after a period of extreme pessimism.

“The Canadian energy sector is not in nearly as bad of shape as the rhetoric and news headlines suggest,” National Bank Financial analysts Travis Wood and Dan Payne wrote in a research note, which also predicted dramatically improved cash flow numbers for domestic companies.

The bank has revised its cash flow estimates up by 30 per cent compared with the same time last year, and up 20 per cent year-to-date.

“This re-positioning is coupled with the recent strength in oil prices against a weakening Canadian dollar, embedding realized oil and liquids pricing that is comparable to 2014 levels,” Wood and Payne wrote.

Despite rising oil prices, however, there were significant stretches during the quarter in which oilsands facilities were shut down for maintenance, which Cannacord Genuity analyst Dennis Fong said has not been well-understood by the market.

Suncor and Imperial have both been working to bring the Syncrude oilsands mining joint venture back online after a power outage caused the facility to shutdown unexpectedly close to the end of the quarter in late June. That 350,000 barrels-per-day project is not expected to be fully back online until the fall.

However, Suncor also undertook a “turnaround,” an industry term for a period of planned maintenance, at its mining operations north of Fort McMurray and at its refining operations in Edmonton.

Fong pointed out in a research note last week that Imperial also did maintenance at its Kearl oilsands mine and Cold Lake facilities. Canadian Natural Resources Ltd. also performed at turnaround at its Horizon oilsands mine.

Partly as a result, Fong said that oil production from Canada’s large cap producers is expected to remain flat, on average, as the companies begin reporting.

“Cenovus is expected to show the greatest (quarter-over-quarter) increase in production, and Imperial is expected to show the greatest (quarter-over-quarter) decrease in production of 8 per cent due to planned and unplanned downtime,” Fong said.

Even with flat production, Fong expects integrated Canadian oil producers to report cash flow growth by an average of 12 per cent.

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