A spate of corporate earnings reports from the oil patch this week may give a give a hint as to whether the pricing pressures facing the sector will translate into scaled down spending plans in the coming months.
Oil companies have been dealing with a dramatic price discount for oil produced in Canada, relative to the price of the North American benchmark crude, West Texas intermediate, or the world benchmark, Brent crude. The cause is a glut of oil in the U.S. Midwest, and a lack of pipeline capacity to get Canadian crude to market.
At the same time, natural gas prices remain depressed, and there is no sign of a significant recovery in the near future.
All of this will likely be reflected in the reports from Encana Corp., Cenovus Energy Inc., Talisman Energy Inc. and Precision Drilling Corp., the major industry players that report in the next few days.
Last week, Suncor Energy Inc. disappointed investors with a $1.5-billion writedown of its Voyageur oil sands upgrader project, and Husky Energy missed analyst profit estimates.
But it is not the short-term results that will get most of the attention, it is the longer-term outlook reflected in capital spending plans that could signal a period of lowered expectations in the energy business.
The market is clearly worried about “price realization” – the gap in what companies receive for their oil relative to broader market pricing – said Randy Ollenberger, an analyst at BMO Nesbitt Burns.
“We have got some relatively healthy oil prices, but what producers in Canada are actually capturing is significantly lower,” he said. “That does impact the near-term cash flow and earnings of these companies, but if it is not resolved it could start to have an impact on their development plans.” Still, he said, it is probably too early for companies to shift their spending plans dramatically “because we are still waiting for things like the Keystone XL decision.”
Encana is likely to get the most attention, because it is set to release its guidance for 2013 along with the fourth-quarter earnings on Thursday, and this will reveal its expectations for the coming year. “The focus there will be on the capital spending,” Mr. Ollenberger said.
Andrew Potter, an analyst at CIBC World Markets, said he “would not be surprised to see [Encana] adopt a slightly more conservative cap-ex plan in 2013.”
Mr. Potter will also be looking for some “colour” on Encana’s succession plans, following the surprise retirement of long-time chief executive officer Randy Eresman in January. Board member Clayton Woitas took over on an interim basis, and a search process is under way.
At Cenovus, the oil company spun off from Encana by Mr. Eresman in 2009, Mr. Potter is watching for an update on its future oil sands projects, and the results from its emerging light oil operations.
At natural gas producer Talsiman, investors and analysts will be focusing on the cutbacks and asset sales the firm has said it will make in the coming months to try to improve its profits. In late January, Talisman announced plans to chop at least 20 per cent from its administration costs, and to trim its portfolio.
Talisman faces even more pressure now that activist investor Greg Boland has targeted the company, and his investment firm West Face Capital has acquired a stake. He is demanding that Talisman refocus its portfolio of energy projects, and he wants it to stop paying a dividend.
Talisman is set to meet investors in March to outline details of its new plans, but there will certainly be questions from analysts on these issues in its conference call Wednesday.
At Precision Drilling, a firm whose fortunes rise and fall with activity with its oil and gas clients, investors will be looking for a rebound from the third quarter, when it missed expectations and reported a sharp drop in profits. Analysts have been enthusiastic recently about the company’s discipline in cutting capital spending, while taking advantage of the upgrades it made on its rig fleet over the past few years.