Stronger prices to bolster oil and gas profits

CALGARY — A weaker Canadian dollar, tighter heavy oil differentials, stronger crack spreads and a cold winter are all expected to enhance the bottom line of Canadian oil and gas producers who start reporting first-quarter results next week.

Reporting season for the sector starts Monday with Suncor Energy Inc., Calgary largest publicly traded company by market capitalization, and Precision Drilling Corp., Canada’s largest land-drilling company.

“We anticipate results across the group to be strong sequentially as a weaker Canadian dollar and very strong commodity pricing in the quarter for both oil and natural gas will improve profitability,” said Calgary investment bank Peters & Co. in a note to investors.

It pointed out that while New York Mercantile Exchange natural gas prices were up 23 per cent in the first quarter versus the last quarter of 2014, Alberta prices at the AECO hub were up 59 per cent from the previous quarter and 75 per cent versus the first quarter of 2013.

Similarly, the benchmark West Texas Intermediate crude oil price in New York was up an average of just one per cent quarter over quarter but Canadian crude prices improved by about 17 per cent in the same period.

Analyst Arthur Grayfer of CIBC World Markets said in a report he is increasing his 2014 gas price assumptions to incorporate the effects of the cold winter and a 10-year low in storage levels in North America.

“In addition, we have increased our crack spread assumptions to reflect current (refinery) margins,” he wrote.

He said he expects quarter-over-quarter cash flow per share growth among integrateds — companies that both produce and refine oil — of about 17 per cent and earnings per share growth of almost 50 per cent.

Analyst Kyle Preston of National Bank Financial warned in a research report that the cold weather of the past winter may have caused outages or reduced output for oilsands producers.

But he also pointed out that spring breakup, when the provinces impose heavy equipment bans on melting roads, was actually delayed by two weeks this year, which may have allowed more drilling and completions to be done.

“The key drivers in Q1 were higher natural gas prices, narrower heavy differentials and a weaker Canadian dollar, all of which played in favour of Canadian producers,” he wrote.

“We witnessed one of the strongest gas rallies in a long time as the extreme cold weather across most of North America increased heating demand and depleted storage levels to a multi-year low.”

Scott Treadwell, an oilfield services analyst for TD Securities, said he expects continued improvement in the first quarter.

“We expect 2014 to build on the activity witnessed throughout 2013 while continuing the major themes observed in 2013 — modest growth in Canadian activity, driven by LNG (liquefied natural gas) resource delineation, and further growth in other developing plays, primarily the Duvernay and Montney,” he wrote.

He said drilling activity in Canada was slightly ahead of expectations in the first quarter, but completions results were “a mixed bag,” due to customer mix and the impact of weather.

Analysts said the biggest first-quarter upside surprise among senior producers could come from Encana Corp., which reports May 13.

A report from FirstEnergy Capital Corp. notes that Encana’s unhedged gas production from the offshore Nova Scotia Deep Panuke field is expected to fetch about $20 US per million British thermal units in the first quarter. (An mmBtu is a unit of heat that is similar to a volume unit of 1,000 cubic feet.)

“We are forecasting production before royalties of 280 million cubic feet per day from Deep Panuke in the first quarter ... This production sees royalties of only two per cent, so pre-tax cash flow from this asset should be in the $350 million to $400 million US range for the quarter,” FirstEnergy stated.

It added Encana will also benefit from AECO price spikes as only half of its western Canadian gas production is hedged based on U.S. gas prices.

Peters & Co. pointed out the first quarter was a busy one in Canada for mergers and acquisitions and that is expected to continue through the year.

It said average sector production in the first quarter, overall, will likely be little changed from the fourth quarter.

dhealing@calgaryherald.com