Profits are flowing again in Canada's oil industry after nearly three years of weak returns. But the improving financial health of the sector is being tested anew by tumbling oil prices.
Canadian Natural Resources Ltd. and other large oil sands producers have posted a string of earnings that reflect lowered costs and a big jump in crude prices from a year ago, when West Texas intermediate oil sank under $30 (U.S.) a barrel. Yet optimism that had only just returned to the industry has rapidly evaporated.
Crude has fallen as high inventories and rising shale production in the United States test investor faith in the ability of the Organization of Petroleum Exporting Countries and its allies to tackle a global glut with supply cuts. WTI has tumbled nearly 15 per cent since mid-April and on Thursday closed at $45.52 per barrel.
The TSX energy subindex has slumped about 8 per cent over the same period, pressured in part by renewed concerns over industry debt levels as energy prices have weakened, said Martin Pelletier, portfolio manager at Trivest Wealth Counsel in Calgary.
"Everyone's talking about the huge earnings growth, the year-over-year, and how that translates into the broader sector. That's yesterday's trade," he said by phone.
"We're seeing oil prices through this earnings season roll over and now we're back to where we were pre-Trump rally, so investors are concerned," he added. "How are you going to improve your balance sheet if oil prices continue this trend?"
Oil sands giant Canadian Natural on Thursday posted first-quarter profit of $245-million (Canadian) or 22 cents per share, up from a year-ago loss of $105-million or 10 cents.
However, the company's shares fell on the Toronto Stock Exchange, reflecting lower-than-expected production due in part to unplanned maintenance at its flagship Horizon bitumen mine. The stock was down 3.5 per cent in late afternoon trading.
CNRL and other oil sands producers have taken advantage of the downturn to consolidate holdings in the region, piling on debt to acquire properties from global oil majors that are seeking better returns elsewhere.
Earlier this year, the company snapped up mining assets from Royal Dutch Shell PLC and Marathon Oil Corp. in a deal valued at $12.7-billion. The move gave CNRL a controlling stake in the Athabasca oil sands project.
Following the deal, credit rating agency DBRS Ltd. placed debt held by the company under review and warned that it could be harder to reduce overall leverage should oil prices drop significantly below $50 (U.S.) a barrel.
Similarly, rival Cenovus Energy Inc.'s return to profitability in the quarter was largely overshadowed by concern over debt amassed to help fund its acquisition of oil sands and natural gas properties from ConocoPhillips Co.
On Thursday, the Houston-based company said it had begun layoffs this week of about 300 staff, mostly in Calgary, as a result of the deal.
In the quarter, CNRL said it used funds flow from operations of roughly $800-million (Canadian) to cut debt by more than $500-million.
CNRL president Steve Laut told analysts the company was focused on digesting the Shell deal, which is expected to close in the second quarter.
But he said the company is open to further acquisitions if they fit within its core holdings. The firm has been speculated as the logical buyer of Chevron Corp.'s remaining 20-per-cent interest in the Athabasca project.
"We've got lots on our plate, but that won't stop us from evaluating everything that goes through our core area," he said.
The company said total production in the period rang in at 876,907 barrels of oil equivalent per day, below levels analysts had expected. A year ago, output was 844,531 boe/d.
A third production phase at Horizon is on track to start up by the end of the year, adding capacity of 80,000 barrels per day. The company also said it would move forward with a smaller expansion at the site later this year, potentially boosting daily capacity by a further 15,000 barrels at a cost of $70-million.