CD: Strong oil earnings expected as other energy players struggle
CALGARY -- Heavy oil producers will post the best second quarter results of all energy players in the coming weeks as unhedged natural gas players and service companies struggle, according to oil patch analysts.
They expect the second quarter to herald a return to higher profitability for some on crude oil prices, which have rebounded nearly 40% since the first quarter, with heavy oil taking the lead on tight differentials.
Producers of natural gas, prices of which has fallen some 15% from an already low first quarter, likely will suffer into early 2010 on low industrial demand and near-full storage capacity, particularly if the production is unhedged.
“It’s safe to say the first quarter wasn’t pretty and the second quarter is looking even less so,” said Peter Buchanan, senior economist with CIBC World Markets.
Consensus expectations are for a 50% decline in returns for the TSX composite energy group from the second quarter of 2008, with integrated companies taking the bigger hit, he said.
Crack spreads -- the difference between crude oil and refined petroleum products such as gasoline — averaged US$6 to US$7 during the quarter compared with US$10 to US$15 last year, which will weigh on companies with refining capacity such as Petro-Canada and Imperial Oil Ltd.
Conversely, the difference between the price of heavy oil and its lighter and cheaper-to-refine counterpart narrowed significantly during the quarter, Mr. Buchanan said.
“That’s one of two potential positives,” he said. “The average spread a year ago between Lloydminster blend and (lighter) West Texas Intermediate was around 25%. This quarter, it’s 15% to 20%.”
A cooler labour market will also help companies on the cost side, he added.
William Lacey with FirstEnergy Capital noted that heavy oil and oil sands producers benefit from narrow differentials and low gas prices. Low natural gas can knock “several dollars” off the operating costs for thermal heavy-oil players, he added.
“Obviously, gas (earnings) is going to be dismal. From my perspective, the general theme is that oil sands and heavy oil is going to be the bright spot for the quarter,” Mr. Lacey said.
During the quarter, commodity prices fell on soft demand due to a weak North American economy, with burgeoning storage inventories pulling down natural gas prices further.
Even recovering oil prices have dropped to the US$60 a barrel level from more than US$70 in June on renewed concerns neither the U.S. economy nor oil consumption will rebound as quickly as hoped for.
“Until the economy shows steady improvement, the market won’t have much to cheer about,” Michael Fitzpatrick, a vice-president for energy at MF Global Ltd. in New York, told Bloomberg News. “The upward trend that started in February has been broken. . . . Oil is now trading closer to where it should be, given the fundamentals of the market.”
Alan Knowles, an oil and gas analyst with Haywood Securities in Calgary, said lower earnings for most energy companies shouldn’t be surprising, but the magnitude of the drop might be.
“Despite the euphoria around oil prices, more producers are weighted to natural gas,” he said. “Anybody more than 50% gas weighted is going to have substantially lower revenues. I think we’re looking at some disappointing results.”
The second quarter promises to be the worst in more than a decade for service companies, which have watched producers slash drilling programs in response to lower commodity prices and tight credit markets, Roger Soucy, president of the Petroleum Services Association of Canada predicted.
Only 841 wells were drilled in Canada between April and June, compared with 1,757 last year and 1,768 the year before, Mr. Soucy noted.
“That pretty much tells the story of where service companies will be in the second quarter,” he said. “It’s a bit of a disaster.”
Second-quarter results traditionally are the weakest of the year, following spring breakup, when drilling slows down on seasonal restrictions. But this year’s outlook is particularly bleak.
“Any uptick that we see in 2009 will be in the fourth quarter,” Mr. Soucy said. “After that it will be totally dependent on natural gas prices. If we’re not in the US$5 to US$6 range by the end of the year, then we’re not going to see that much activity in 2010 either.”
However, service companies that are invested in the oil sands or with the ability to run rigs outside of Canada likely will suffer less of a blow during the second quarter, with activity in the United States slowing at a less accelerated pace than in Canada, Mr. Soucy said.
