One of the cris de coeur heard from Canada's oil patch last year was that while companies were enjoying the benefits of higher oil and gas prices, a lot of their profits were being eaten up by the strong Canadian dollar. While it's probably too strong to describe the loonie as a petro-currency, there's little doubt that it has increased in value as oil prices have soared.
The problem for Canadian companies is that oil and gas are mostly priced in U.S. dollars, and so when the Canadian currency is strong, they get comparatively less for what they sell. On the flip side, a higher Canadian dollar means that it's cheaper for Canadian companies to buy equipment overseas.
But how much of an effect does this have? Well, on Monday, Petro-Canada – one of the country's biggest energy companies – released its annual report, and in among the detail it runs through its economic sensitivities.
According to the report, the higher oil prices in 2007 meant Petro-Canada realized extra net earnings of $52-million, while higher-than-expected natural gas prices saw it make an extra $30-million.
Conversely, it lost $40-million from its upstream net earnings because of the higher Canadian dollar, and another $11-million from its downstream. So, despite the record high prices last year, the company is actually only up $31-million so far – until you factor in that the stronger Canadian dollar also means you have to re-evaluate the company's long-term U.S. dollar-denominated debt. Which adds another $10-million or so to net earnings.
Still, in summary, record high oil prices, and healthy gas prices, only really added $41-million to Petrocan's bottom line in 2007. In fact, where the company really cleaned up in 2007 was in the downstream sector, where better crack spreads (basically, refinery profit margins) than expected added $72-million to net earnings – a much larger impact than that from the headline oil and gas prices.
And for 2008?
Well, Petrocan thinks “prices for energy commodities are expected to remain volatile in 2008” – a controversial call! However, the company does make some specific predictions. It says that there is “a lid” on further oil price increases because of concerns of the risk of a U.S. recession spreading around the world, while it adds “questions are being raised” about China's ability to keep up its oil demand growth rates.
It also says that a North American recession in 2008 would challenge natural gas demand, that downstream margins this year are expected to be weaker than last, and that the Canadian dollar will stay strong, which “will continue to erode gains as a result of any strength in commodity prices.”
Erode, but not destroy altogether. While the strong loonie is having a considerable effect on companies, it's clear that conditions still favour the producers right now – just, as ever, not as much as they would like.
