Profit to Tumble to Decade Low at Canadian Oil Producers

Canada’s oil and gas industry is projected to report the biggest drop in profit in at least a decade as crude’s collapse pummels one of the world’s costliest producers.

Earnings per share for Canadian petroleum producers will fall more than half to 20 cents for the 63 members of an energy industry sub-sector of the Standard & Poor’s/TSX Composite Index, according to data compiled by Bloomberg. Twenty-seven of them, including Cenovus Energy Inc. and Canada Natural Resources Ltd., are expected to post losses in the quarter.

“This will be a brutal quarter for earnings,” said Robert Mark, director of research at MacDougall, MacDougall & MacTier Inc., which oversees about C$5.5 billion ($4.4 billion) in assets. “They’re bleeding money right now.”

Canada’s petroleum industry has hit the brakes, curbing spending and cutting jobs to cope with an oil market meltdown. Many operators are unable to turn a profit at the current price of about $56 for a barrel of West Texas Intermediate.

The oil plunge prompted the Bank of Canada yesterday to slash its first-quarter economic growth forecast to zero from a January forecast of 1.5 percent.

The nation’s oil producers, including those operating in the oil sands, have some of the highest costs in the industry and require WTI of about $80 to turn a profit, a price last seen in November. Much of the country’s crude is produced from bitumen, which must be dug or pumped out of the ground after being melted using steam.

The bitumen is upgraded into lighter synthetic crude or is diluted with condensate and shipped by pipeline or rail car to refineries, most in the U.S. Canadian Oil Sands Ltd., among the country’s largest producers, needs a WTI price of about $50 a barrel to sustain business with no production declines, Chief Financial Officer Robert Dawson said March 11.

Cenovus Energy will be the first of the large producers to report first-quarter earnings on April 29.

‘Survival Mode’

Some analysts don’t anticipate oil will top $60 a barrel before the end of the year. HSBC expects WTI, the U.S. benchmark, to average $55.50 a barrel this year. The end of sanctions on Iranian oil exports could lead the U.S. Energy Information Administration to reduce its Brent price estimates by $15, the agency said this month.

Oil prices remain about 50 percent below June highs after the Organization of Petroleum Exporting Countries resisted calls to cut production amid surging North American output, though prices have rallied in recent days. West Texas Intermediate, the U.S. benchmark, rose 5 percent to more than $56 in New York yesterday, the highest this year, as the glut in U.S. oil shale supplies is expected to ease. Western Canadian Select benchmark traded at $44.94 after falling below $30 a barrel last month for the first time in six years.

The drop in oil and other commodity prices since last summer “has curbed capital spending, with companies shifting to survival mode to try and protect their respective balance sheets to weather the storm,” First Energy Capital analysts Robert Fitzmartyn and colleagues wrote in an April 10 note.

More Hurdles

Among oil producers, Imperial Oil Ltd. is estimated to post quarterly earnings per share of 50 cents, less than half that of the year-earlier period, according to data compiled by Bloomberg. Suncor Energy Inc. will report earnings of 14 cents a share, a decline of 86 percent. The estimates for the group are based on the market-weighted average of the 63 companies in the energy sector index.

“Imperial plans and operates its businesses with a long-term perspective that results in resiliency across a wide range of market conditions,” said spokesman Pius Rolheiser, in an e-mail response.

Share prices may already be looking forward. The S&P/TSX energy index has increased 6.5 percent this year, compared with a 3 percent gain for its U.S. peers and a 5.6 percent gain for the broader S&P/TSX Composite Index.

With the price of oil unlikely to return to levels that will make it profitable for many Canadian producers, the outlook could darken, said MacDougall, MacDougall & MacTier’s Mark.

“There’s probably more pain to come,” he said. “If you’re over-levered and not hedged, you’re in big trouble.”

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