Energy companies expect to announce windfall profits
Analysts say firms need to figure out best way to use higher-than-expected earnings
Jon Harding
Canwest News Service
Saturday, April 19, 2008
CALGARY -- Earnings season in the Canadian oilpatch begins Monday and due to the surprising heights to which oil and natural gas prices have risen, industry watchers say management teams will feel pressure to put windfall profits to good use.
"Actual first-quarter cash-flow numbers versus analyst and investor expectations from six months ago will be like night and day," said Martin Molyneaux, oil and gas analyst at FirstEnergy Capital Corp.
Tristone Capital Inc. analyst Chris Feltin was also succinct, telling Reuters on Thursday: "We're expecting pretty much every company to outperform what even they were expecting to do."
The price of oil averaged roughly $97.70 US in the first quarter, 60 per cent higher than a year ago when it was $58.13 US. Year-over-year, Canadian heavy oil prices were roughly 80 per cent higher in the recent quarter.
More important, oil's strength has exceeded even the most bullish company forecasts from last fall, when 2008 capital spending programs were crafted -- and in some cases knocked back from previous years -- as oil hovered at around $75 US a barrel.
Natural gas, meanwhile, has risen nearly 40 per cent since January and the North American supply-demand picture has changed dramatically from last fall, when it looked like a stubborn overhang on U.S. inventories might last forever.
Canadian producers were also bogged down back then by the uncertainty around the Alberta government's plan to hike royalties, a situation that became clearer but not until last week, when a pair of incentive programs were unveiled to spur more deep gas and deep oil exploration in the province.
The timing means chief financial officers will be scrambling to find the best ways to take advantage of the unexpected gains, all the while satisfying fickle investors, analysts said.
Feltin said Canadian producers will certainly take a hard look at boosting capital spending in the year's second half.
Molyneaux predicted spending increases will be a top priority, ahead of paying out special dividends or even share buybacks, which has become a less favourable option as share prices for many Canadian oil and gas companies surged in recent weeks. Shares of EnCana, Suncor and Canadian Natural are all trading at or near their all-time highs.
"These companies have had enough time to noodle through what Alberta's new royalty regime will look like starting Jan. 1, 2009, and I guarantee you among the big caps a top priority is finding where they can deploy more cash to get heavy oil," said Molyneaux.
"For the companies that can look outside Canada, they also have to consider that the whole world is a busy place right now."
Husky Energy Inc. kicks things off Monday, with first quarter reports from EnCana Corp. and Suncor Energy Inc. also due next week.
Canadian Oil Sands Trust, Talisman Energy Inc., Nexen Inc., Petro-Canada and Imperial Oil Ltd. will follow the week after.
© The Vancouver Sun 2008
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