‘Abysmal’ Q3 expected
Reporting season begins next week for Calgary-based energy companies
Poor oil prices and mixed refinery margins will translate into overall “abysmal” third-quarter financial results for besieged Calgarybased oil and gas companies as reporting season starts next week, an analyst reports.
Benchmark U.S. crude ended the third quarter at under US$45 per barrel on Sept. 30 after three months in which the average price for New York-traded West Texas Intermediate fell 19 per cent to US$46.71 from US$57.73 in the previous quarter.
“Although the fourth quarter has started off with a bang with WTI jumping from $44.75 to $49.50 per barrel in just seven trading sessions, equities have a lot of ground to make up with thirdquarter returns being abysmal,” AltaCorp Capital analyst Nick Lupick said in a report to investors published Tuesday morning.
“With WTI and Brent both falling 19 per cent quarter-over-quarter (testing lows in August not seen since the 2009 correction) and Edmonton Par prices falling 21 per cent, energy investors saw returns plunge deep into the red this summer.”
He pointed out that heavy crude oil, represented by Western Canada Select, averaged Cdn $41.19, down 31 per cent from $60.12. Synthetic crude — upgraded oil from Alberta oilsands mines — traded at a fourper-cent discount to WTI in the third quarter after receiving a fiveper-cent premium in the second.
The report arrived as WTI fell US 44 cents to settle at $46.66 per barrel Tuesday, after slipping 5.1 per cent on Monday.
Lupick said the shares of largecap explorers and producers fell 27 per cent in the third quarter while integrated companies were down 17 per cent.
“Helping to explain the weakness in the Canadian integrated space is the fact that both Husky (Energy Inc.) and Cenovus (Energy Inc.) saw notable downtime within their downstream segments this quarter,” the report notes.
“Conversely, those with Canadian refineries (Suncor Energy Inc. and Imperial Oil Ltd.) are expected to see robust quarters from their downstream segments as strong refining margins in both Edmonton and Sarnia are expected to lift cash flows this quarter.”
Integrated companies have been insulated from low oil prices because their refineries are able to get feedstock at lower prices, driving up profit margins.
AltaCorp’s conclusions are echoed in a report on expectations for 10 major oil companies in North and South America from U.S.-based analyst Paul Cheng of Barclays. The list includes Calgary- based Husky, Imperial, Suncor and Cenovus.
“We expect our group of 10 America-based major oil companies to miss consensus in light of the lower crude oil and gas prices,” Cheng wrote in a report published Monday.
“In comparison, our group of (American independent) refiners is expected to be in line with to slightly above consensus.”
Barclays reduced its earnings per share estimates for the major oil companies and said it expects more trouble to come, cutting its WTI price forecast for 2015 to US$50 per barrel from $51.60. It edged up its 2016 price forecast to $55.70 from $55.
“However, we expect the group’s valuation will improve substantially over the next three to four years as the global oil market demand and supply are restored to a tighter balance by late 2017/2018,” it stated.
On Tuesday, the International Energy Agency said global oil markets will remain oversupplied in 2016 as demand growth slows. The first large Calgary energy company to report is Precision Drilling Corp., set to reveal third-quarter results next Thursday.
Oilsands companies such as MEG Energy Corp., Suncor, Cenovus, Husky, Canadian Oil Sands Ltd. and Imperial are set to post results the following week.
Oilfield services analyst Jason Zhang of Cormark Securities said in a preview report he has a “tepid outlook” for the industry for the rest of 2015 and into next year.
Zhang cautioned that pressure pumpers — the companies whose mobile units are essential for hydraulic fracturing or fracking oil and gas wells — remain a risky investment due to “almost predatory” competition in some cases.
Equities have a lot of ground to make up with third-quarter returns being abysmal. NICK LUPICK, AltaCorp Capital
Canadian energy companies have cut thousands of jobs and scrapped projects in a drive to cut costs. Now they’re raiding workers’ perks.
Holiday parties, childcare benefits and Fridays off are being targeted as the rout in crude prices grinds into its 16th month, workers and company representatives say. The clampdown on perks comes as firms dig deeper for savings after eliminating about 36,000 oil and natural gas jobs in the crash, according to a tally by the Canadian Association of Petroleum Producers.
At Canadian Natural Resources Ltd.’s office in Aberdeen, Scotland, the only microwave is in overdrive after the cafeteria stopped serving hot meals and raised the price of sandwiches. The coffee cups are smaller, too. While the company has avoided job cuts, salary reductions of as much as 10 per cent mean some workers are also earning less.
ConocoPhillips, which is cutting 500 workers this year, removed complimentary juice and pop from fridges in Calgary and cancelled personal development benefits of as much as $1,500 a year that some employees used for sports training.
Cenovus Energy Inc. is weighing whether to end the practice of employees getting two Fridays off a month.
The company already reduced its travel and training budgets and has eliminated 1,340 jobs.
“In times of fiscal prudence, it’s essential to see companies eliminating all unnecessary expenditures,” said Eric Nuttall, a portfolio manager at Sprott Asset Management LP in Toronto. “This whole every second Friday off thing, that’s the most egregious example.”
At Cenovus, “no stone is being left unturned” in a broad review of workforce policies, said Brett Harris, a spokesman.
Employees currently work longer hours on other days to earn the Fridays off, he said.
Tobias Read, chief executive of staffing consultant Swift Worldwide Resources, said retirement and childcare benefits are also being scaled back along with social events, as companies offer unpaid leave and work-share programs on top of salary reductions and job cuts.
“You are seeing a radical change in the incentives,” Read said. “It’s a grim reality that if they don’t reduce costs in every area, the situation will be dramatically worse.”
Not all incentives are vanishing with the oil market crash.
Crescent Point Energy Corp. is keeping an inhouse catering service, which it calls the bistro, to serve bagels, fruits and vegetables each day, Chief Operating Officer Neil Smith said by phone last month. The company cancelled a summer golf outing and toned down plans for its upcoming Christmas party, however, as it avoids cutting jobs, he said.
“A happy crew will put out 20 to 40 per cent more than a stressed, unhappy crew,” Smith said.