Oil producer profits to jump on lower discounts
Market forces that imposed a severe discount on western Canadian crude oil over the winter reversed in the second quarter, creating a pricing regime that should deliver happy returns to investors, analysts say.
A much narrower price differential for Western Canada Select crude is expected to buoy second-quarter financial results for Calgary oil and gas producers as reporting season begins next week.
Two companies that split from one three years ago, thermal oilsands leader Cenovus Energy Inc. and gas-weighted Encana Corp., are to lead the parade Wednesday, followed by integrated Husky Energy Inc. and Canada’s largest driller, Precision Drilling Corp., on Thursday.
It will be the first quarterly report from new Encana president and chief executive Doug Suttles, named last month to succeed Randy Eresman after he left suddenly early this year. In a note to investors, British financial services firm Barclays said this week regional oil prices moved in opposing directions in North America in the three-month period ended June 30.
“International and Gulf Coast prices fell while Midland and WCS prices rebounded and WTI (West Texas Intermediate) prices at Cushing were flat at about $94 US per barrel,” it stated.
“LLS (Louisiana Light Sweet) and Brent declined to roughly 110 per cent of WTI from about 120 per cent in 1Q ... The WCS discount narrowed from 33 per cent of WTI in 1Q to 20 per cent in 2Q.”
Calgary analyst Gord Currie of Salman Partners said the oil price action is good news for investors in Canadian domestic oil producers but there’s no such lift for those who have money in natural gas.
“We had the dreadful differentials in January and they got steadily better in the second quarter so results should be much better than first-quarter results, particularly for heavy oil producers,” he said Friday. “The outlook for the third quarter is even better.” The high differentials were described as a “bitumen bubble” by Premier Alison Redford and used to explain the province’s higher deficits.
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“WTI prices completely closed the gap with Brent ... a year or so ago there was a huge gap and we were counselling people to invest in international producers to get Brent prices,” added Currie.
“That advantage is over now.”
On Friday, London-traded Brent settled at $108.07, two cents higher than $108.05 for near-month delivery WTI.
Natural gas prices were up in the first quarter but tumbled in April and are back at recent depressed levels, Currie said, adding that if not for liquids-rich gas plays, the decline in gas production in Western Canada would be even more pronounced.
Prices for gas liquids, meanwhile, are slumping, he said, with propane and butane hit by too much supply.
Condensate is faring much better due to its role as a diluent for pipeline-borne bitumen.
Refinery and marketing segments are expected to fall from robust results last year and in the first quarter, Currie said.
RBC Capital Markets analyst Greg Pardy said in a note he’s looking forward to hearing
WTI prices completely closed the gap with Brent … GORD CURRIE, ANALYST
Suttles’ presentation although a full strategic plan for Encana isn’t expected to be rolled out until the fall.
He pointed out that Encana’s 5,000-barrel-per-day Musreau deep cut gas plant was off-line for about three weeks in April, likely producing a shortfall of about 1,150 bpd to liquids volumes.
The tightening spread between WCS and WTI will hurt cash flow from the downstream refineries in Illinois and Texas Cenovus co-owns with Phillips 66, Pardy said, predicting cash of $306 million versus $524 million in the first quarter.
The average wellhead price realization at Cenovus’ Christina Lake thermal facility in northeastern Alberta, however, will help make up for it.
The price is expected to be $53 per barrel versus $33 in the first three months of the year, he wrote.
RBC analyst Dan McDonald wrote in a separate note that services companies will likely report a soft second quarter due to lower activity levels in Western Canada.
He noted 1,130 wells were drilled in the quarter, off 18 per cent versus the same period of 2012, mainly due to fewer vertical and directional wells.
Horizontal well totals were down only three per cent. Completions were down 20 per cent.
In the U.S., the active rig fleet count declined 11 per cent in the second quarter versus the same period of 2012, RBC noted.