Oil discount, gas prices to weigh on results
TRANSPORTATION CONCERNS Financial updates start Wednesday
The continued “double discount” of western Canadian crude oil, combined with further erosion in natural gas prices, will weigh heavily on first-quarter results from oil and gas producers, analysts say.
Financial updates from Calgary-based companies start Wednesday with Nexen Inc., Encana Corp. and Cenovus Energy Inc. and carry on Thursday with Imperial Oil Ltd., Husky Energy Inc. and MEG Energy Corp.
While U.s.-traded crude oil fetches a discount in relation to global crudes such as London’s Brent, analysts say there is a second discount for Canadian and Northern U.S. oil because of the Midwest transportation choke point at Cushing, Okla., that prevents timely pipeline access to the refineries on the Gulf of Mexico.
“Overall, first-quarter results will likely be very mixed again this quarter,” wrote Andrew Potter, an analyst for CIBC World Markets, in a Q1 preview.
“Producers with big Brent exposure (Nexen and Talisman Energy Inc.) should post higher CFPS (cash flow per share) sequentially while producers with unhedged natural gas and heavy oil/bitumen should record sharp drops in CFPS( Canadian Natural Resources Ltd. and MEG).”
CIBC pointed out that Canadian companies with sig- nificant refining and retailing operations such as Imperial and Cenovus should see results similar to those in the fourth quarter as strong downstream margins offset weaker upstream prices.
In a First synopsis report this week, a team of analysts at Firstenergy Capital Corp. agreed.
“We once again find the refining margin discussion for the Canadian integrated oils dominated by crude price differentials,” the report says.
“In short, the majority of the refining capacity owned by the Canadian integrateds continues to sell gasoline and diesel at a premium to global oil (Brent) prices, while purchasing feedstocks (synthetic crude oil, Edmonton Light, Western Canada Select, West Texas Intermediate) at significant discounts to Brent, the report said.
“With our recently updated commodity price forecast calling for Canadian crudes to remain discounted to WTI until 2014, and WTI to remain discounted to Brent, we are forecasting large refining profits for this group.”
The discount, which CIBC estimates could cost Canadian producers $18 billion in lost opportunity this year, is expected to gradually narrow as the Seaway pipeline to the Gulf coast is reversed next month and expanded next year and as the Cushing to Gulf Coast portion of the Keystone XL pipeline is completed by the end of 2013.
CIBC predicts heavy and synthetic oil producer Canadian Natural Resources will report a 36 per cent drop in cash flow per share quarter to quarter when it reports first quarter results May 1.
MEG is expected to take a whopping 49 per cent drop from record Q4 cash flow due to lower realized bitumen prices.
BMO Capital Markets analyst Randy Ollenberger pointed out companies are using trucks and rail to get oil around the Cushing blockage and that could create some surprises.
“Across the board, there are going to be a variety of different realized prices just because of the alternative transportation mechanisms everybody’s using, a combination of trucks and rail and pipelines,” he said. “I think that’s really going to impact realized prices, because it’s all net of transportation costs.”
Rail transport costs as much as three times pipeline tolls and trucking is as much as five times, according to industry estimates.
Ollenberger agreed there could be upside surprises from Nexen and Talisman.
In the first quarter, nearmonth delivery natural gas prices in New York averaged $2.43 per thousand cubic feet, the lowest since 2001, while gas sold in Alberta averaged $2.12 per mcf, the lowest since 2009, thanks to a glut of gas from United States shale plays.