Bright spots for oilpatch despite crunch

SHARES HAMMERED

GEOFFREY MORGAN CALGARY • Expect major Canadian oil producers to hike dividends, hedge more of their production at higher prices and make the case for a share price turnaround as they begin reporting first quarter results next week, analysts say.

Shares in Canadian oilsands companies have been hammered so far this year, despite better oil prices in the first quarter and lower input costs for natural gas. Still, analysts expect companies’ first-quarter results to show improvements.

Cenovus Energy Inc., Athabasca Oil Corp. and MEG Energy Corp. have seen their shares fall by a third since the beginning of the year, while Imperial Oil Ltd. shares are down 10 per cent and Suncor Energy Inc. and Husky Energy Inc. are also down slightly.

At the same time, RBC Capital Markets analyst Greg Pardy said in a research note that West Texas Intermediate oil prices were up six per cent over the previous quarter and the cost of natural gas in Alberta – which is used to power oilsands operations – declined 13 per cent.

The only major oilsands player whose shares are up since the beginning of the year is Canadian Natural Resources Ltd., which struck a deal analysts widely praised to buy Royal Dutch Shell plc’s and Marathon Oil Corp.’s oilsands assets in March. CNRL’s shares have risen just under three per cent since the beginning of the year.

Pardy and other analysts list CNRL as their top pick among large domestic oil players in research notes released ahead of earnings season, which begins Wednesday with Cenovus and Suncor results, followed by Imperial later in the week.

Pardy also has an “outperform” rating on Suncor, MEG and Cenovus in the oilsands.

Analysts have said the improved oil prices and continued decline in costs should lead to better financial performance from oilsands players in the first quarter, which would hedge more of their production at higher prices.

“First quarter results are expected to show slight improvements over the fourth quarter and be up materially versus (the first quarter of last year) with rebounding oil and natural gas prices,” BMO Capital Markets analysts Randy Ollenberger, Ray Kwan and Joe Levesque wrote in a report.

The report notes that “North American oil and gas equities have underperformed the broader market year to date as the enthusiasm created by OPEC’s production cuts has been replaced by concerns that U.S. supply could grow too much.”

There are four key themes investors should watch for as companies report results, CIBC World Markets analyst Arthur Grayfer said. Those trends include: higher commodity prices boosting financial performance, more hedging, dividend boosts and positive operations updates from Suncor and CNRL.

Grayfer said he expects Husky and Imperial could hike their dividends as performance improves, though other analysts were not convince Husky, which scrapped its dividend during the prolonged oil price rout, would reinstate the payout.

GMP FirstEnergy analyst Michael Dunn said in a note that he expected Husky’s “board wants to see WTI prices in the mid-US$50 per barrel (range) for a period of time, with upward momentum, before reinstating the dividend.”

Dunn was more optimistic on potential dividend hikes for Imperial. “Investors need to bear in mind the enticing potential for this stock if operations run relatively smoothly, as capital spending is low and share buybacks and dividend increases should be forthcoming as free cash flow allows for it,” he wrote.