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Analysts expect mild summer to fuel weak quarter for energy firms

An oil pump jack pumps oil in a field near Calgary, Alberta on July 21, 2014. Pump jacks are used to pump crude oil out of the ground after an oil well has been drilled.

Todd Korol/Reuters

A host of small and mid-size energy firms report results this week just as stock prices across the board have lost steam since the end of the second quarter.

Over all, the S&P/TSX Capped Energy Index has dropped more than 6 per cent of its value since June 30 as North American natural gas prices tumbled under the weight of mild summer temperatures in major markets and large storage injections. That followed the sector's steady gains through the first half of the year.

The weaker conditions are likely to prompt some energy-company executives to pour cold water on investor hopes of increased capital spending and production and cash flow targets for the remainder of the year, said Jeremy McCrea, analyst at AltaCorp Capital Inc.

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Among the companies reporting this week are Legacy Oil & Gas Inc., NuVista Energy Ltd. and Spartan Energy Corp.

Legacy and Zargon Oil & Gas Ltd. report second-quarter numbers on Monday, followed by Cequence Energy Ltd., Gear Energy Ltd. and NuVista on Tuesday. Crescent Point Energy Corp., one of Canada's largest energy independents, reports its results on Wednesday, as does gas-producer Birchcliff Energy Ltd. Spartan and Storm Resources Ltd. issue numbers on Thursday.

"With gas prices falling materially here, a lot of these growth projections into 2015 are at risk," Mr. McCrea said. "This will be a chance for companies' management teams to start tempering expectations."

He pointed out that most of the companies have been structured to operate profitably amid weak commodity prices that existed before last winter, so it is actually the excess cash that will shrink.

Not all the companies reporting in the coming days are gas-weighted; some, such as Gear and Crescent Point, are more oil-focused. But their shares have also come off in recent weeks.

U.S. gas futures have fallen 16 per cent since mid-June, settling on Friday at $3.96 (U.S.) per million British thermal units. Heating demand during this year's unusually cold winter drained inventories of the fuel and pushed prices to multiyear highs, leading some analysts to predict sustained strength as the industry scrambled to refill storage facilities.

But the industry turned up the taps in major shale gas plays, such as the massive Marcellus formation in the U.S. Northeast, shrinking the North American storage deficit with more than 2 1/2 months to go before the start of the winter heating season.

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"It shows there's a lot of Marcellus production behind pipe, and once pipeline infrastructure constraints are resolved, there will be just that much more gas coming on stream," Mr. McCrea said.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More


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