OILPATCH INVESTORS BRACE FOR ‘UGLY’ QUARTER.

Oilpatch had a rough start, but worst may be over

Crude oil prices may have soared over the past few weeks, but first quarter earnings will bring back the painful realization that companies are still grappling with decades-low oil prices.

As RBC Capital Market’s analyst Dan MacDonald said in a note: “It’s ugly out there.”

Precision Drilling Corp. will kick- off the oilpatch earnings season before markets open on Monday, followed by Husky Energy Inc. after markets close.

“Investors will likely look past Q1 results given the meaningful improvement in commodity prices; however, it will serve as a good reminder on the difficulties the industry faced throughout January and February,” said Jeremy McCrea, Raymond James.

BMO Capital Markets expects earnings for integrated companies to be down 95 per cent year- over- year and 109 per cent lower than the fourth quarter of 2015.

“We believe very weak crude and natural gas prices during the first quarter should translate to poor financial performance as well,” Randy Ollenberger, analyst at BMO said in a note.

Cash flow of large producers will also fall 49 per cent year over year, while the small and mid- cap producers will generate 45 per cent lower cash flow during the period, the BMO analyst predicts.

Western Canada Select prices averaged around US$25 per barrel in the first quarter, below the cash costs of many producers. AECO, the Canadian natural gas benchmark, prices averaged around $ 1.84 per million cubic feet in the first quarter, plumbing to historically low levels.

“Among the hardest hit by the fall in heavy oil pricing this quarter will be: Cenovus, MEG, Athabasca, Canadian Natural and Husky,” Nick Lupick, analyst at AltaCorp Capital said in a note.

“Of note, while Suncor and Imperial will also see their heavy oil portfolios get hit, positive downstream refining margins offset much of the negative cash flow impact on a corporate basis.”

Among non-oilsands producers, Tourmaline Oil Corp., Seven Generations Energy Ltd. and Vermilion Energy Inc. will see the highest yearover-year growth, according to BMO Capital.

Canadian oil and gas companies are in the 17th month of an oil oversupply crisis that has seen the commodity decline by 65 per cent at one point. And while markets are buoyed in recent weeks, the damage done is too great to be reversed in a few quarters.

But the worst may be behind us, says Brian Milne of National Bank Financial.

“In addition, with most companies also announcing further budget and dividend cuts during the quarter, we expect to see a rather muted tone with some companies having shut in production or even shutting down drilling programs altogether, in order to preserve capital,” Milne said in a report.

With thousands of jobs lost, projects cancelled and rigs mothballed, the industry will slowly come back to life. Most companies will use any run up in oil prices to replenish funds, repair balance sheets and pay off debt before embarking on a new round of expansion.

And while the worst may be over for producers, the pain will persist for drillers.

Many oilfield services providers are still charging day-rates set a few years ago, which has helped maintain their margins, says Andrew Bradford, managing director Canadian Energy Research at Raymond James.

Drillers will likely articulate optimism on commodity prices “but they will still not be able to articulate great visibility on their own levels of activity through the spring and the summer,” Bradford said. “The second quarter will be the worst quarter this year, as in the springtime rig activity drops tremendously.”

RBC’s MacDonald notes that oil producers have probably given few indications to oilfield service companies about their post-spring breakup plans.

“While overall sector results will be weak across the board, we are most cautious on pressure pumping,” said MacDonald, noting that deferred completions in the first quarter in Canada, and further pricing wars across the U.S., should push the group’s losses lower.

RBC believes Precision Drilling, Canadian Energy Services & Tech Corp. and Canyon Services Group are among the services companies poised for recovery.

Analysts will also be looking for visibility on spring credit line reviews, consolidation prospects and even indications of raising capital expenditure.

Among producers, only Whitecap Resources Inc. has stepped forward to announce an increase in capex, doubling spending to $148 million for the year.

“I am curious to know who is taking advantage of hedging as commodity price have risen and increase in capex spending,” McCrea said.