Best Profits in Decade Driving Canada Energy Shares

Profits at Canadian energy companies are rising at the fastest pace in a decade as global economic growth pushes up oil prices and worries over pipeline bottlenecks fade.

Analysts’ forecasts show earnings at oil and natural gas producers such as Suncor Energy Inc. (SU) will jump 42 percent this year, the most since 2003, according to data compiled by Bloomberg, as prices for heavier Canadian crude catches up with benchmark West Texas Intermediate. The projection for earnings growth is more than four times the increase forecast for U.S. energy companies.

The group has risen 20 percent this year to lead the Standard & Poor’s/TSX Composite Index to a record high yesterday. With cash to spend, oil and gas companies are ramping up drilling and looking to acquire competitors, said David Cockfield, a fund manager at Northland Wealth Management in Toronto.

“Increases in drilling are going to be spectacular this year because the money is there,” Cockfield, who helps manage about C$270 million, said by phone. “It’s boom times again and the cash is flowing in so they’re all going to do very well, ”

Oil shipped by train has surged, easing bottlenecks as producers wait for new pipelines such as TransCanada Corp.’s Keystone XL conduit from Alberta to the U.S. Gulf Coast and Enbridge Inc.’s Canadian line, Northern Gateway.

“There’s more rail cars coming on -- they can ship, ship, ship,” Cockfield said. “Keystone might not be built simply because they won’t even need it.”

Differential Narrows

Crude shipped by rail is poised to more than double to 500,000 by the end of this year from 200,000 at the start of 2014, according to an estimate earlier by Calgary investment bank Peters & Co.

The increase in rail shipments has helped narrow the difference in price between West Texas Intermediate and Western Canada Select heavy crude oil from a 2013 high of $42 a barrel to $20 today. Corey Bieber, chief financial officer at Canadian Natural Resources Ltd. (CNQ), pointed to the narrowing spread as a key reason for growing profits during a May 9 conference call.

Keystone has been going through regulatory hoops for more than five years amid protests and environmental reviews. While the Canadian government approved Northern Gateway this week, it has to meet 209 conditions and faces legal challenges from Aboriginal and environmental groups opposed to its route through the Rocky Mountains to British Columbia’s coast from Alberta.

Currency Helps

Energy companies, most of which sell oil and petroleum products in U.S. dollars and pay expenses in the Canadian currency, have also benefited from an almost 6 percent drop in the Canadian dollar over the last year.

Earnings at Suncor, Canada’s largest oil producer, are expected to rise 29 percent to an adjusted C$4.05 a share for 2014, according to estimates gathered by Bloomberg. Canadian Natural Resources Ltd. is forecast to boost earnings 64 percent to C$3.66, the average estimate shows.

Suncor fell 0.8 percent to C$45.94 and Canadian Natural gained 0.5 percent to C$47.81.

The rally in energy shares halted in May after three months of rising returns. It’s back on pace for the month, with Canadian producers up 5.3 percent as a group as oil prices gain amid violence in Iraq that threatens to splinter OPEC’s second-largest oil producer.

“This Iraqi thing has come right out of the blue,” Cockfield said. “It’s going to be messy for a while, and the thing that’s most likely to happen is there is going to be curtailment of oil shipments.”

Deal Activity

Speculation around mergers and acquisitions is boosting stock prices too. The deal market is roaring back compared with the first half of 2013 which saw the lowest number of North American energy acquisitions since 2004.

There have been $15 billion in acquisitions of Canadian energy companies announced so far this year, compared with just under $5 billion for the same period in 2013. Deals include Glencore Plc’s $1.35 billion bid for Caracal Energy Inc. and Canadian Natural’s purchase of assets from Devon Energy Corp. for $2.82 billion.

Investors would be wise to step back from energy stocks, said Martin Pelletier, a fund manager at TriVest Wealth Counsel Ltd. in Calgary.

“These stocks turn hard and fast in either direction,” he said by phone on June 16. “They’ve had a hell of a run and who knows if there’s continued momentum.”

Developments in horizontal drilling and the advent of fracking means the U.S. is expected to surpass Saudi Arabia and Russia in crude production next year, according to the International Energy Agency.

Playing Catch-Up

“It’s worthwhile taking some money off the table,” Pelletier said. “Will people talk about Iraq in two or three months? Probably not.”

Still, as the world economy continues to recover, demand for oil will support the energy industry, said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis, which manages about $750 billion globally.

Canadian energy producers rose almost 10 percent as a group last year to match the return of the broader index, after trailing the benchmark gauge for three straight years. The group trades at 29 times earnings, approaching a five-year high.

“Energy has been an underperformer in the past couple of years,” Fehr said by phone. “We’re still playing catch-up.”

To contact the reporters on this story: Gerrit De Vynck in Toronto at gdevynck@bloomberg.net; Eric Lam in Toronto at elam87@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Michael P. Regan, Jacqueline Thorpe

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