Investors brace for ugly first-quarter oil results

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Energy investors are dreading what they are about to see – the financial ravages of a full quarter of deeply depressed oil prices.

First-quarter results in the oil patch are bound to be ugly, featuring double-digit drops in revenue and likely another round of budget cuts as the sector deals with the prospect of a lengthy downturn.

The first three months of the year were marred by oil and gas prices that tumbled by half. West Texas intermediate averaged below $50 (U.S.).

"With commodity prices still low, and continuing to fall from when a lot of the budgets were done in late December and early January, we may see revised capital budgets here," said Jeremy McCrea, analyst at AltaCorp Capital Inc.

For a few producers, it could represent the third reduction in planned expenditures since initial budgets were set in late 2014.

In the past three months, numerous companies clawed back spending to cope with low commodity prices, forcing a steep drop in the Canadian rig count, delays in some major projects and industry-wide layoffs that now number in the thousands.

More job cuts are likely as producers with high proportions of debt, falling cash flow and scant avenues to attract new capital seek to stay afloat. Some analysts have said they expect merger and acquisition activity to start picking up as weaker players run out of options.

Integrated oil producers and refiners Suncor Energy Inc. and Cenovus Energy Inc. kick off first-quarter reporting on April 29. Both have refining, or "downstream," operations, which benefited from a sizable price spread between U.S. benchmark West Texas intermediate crude and Brent oil, the international yardstick.

The other publicly traded Canadian refiners are Imperial Oil Ltd., which reports the following day, and Husky Energy Inc., which releases its numbers on May 6.

"For the integrateds, especially those with Canadian operations, their refining business should have an excellent quarter in terms of profits – like, fantastic," FirstEnergy Capital Corp. analyst Michael Dunn said.

North American gasoline prices are largely set in the global market, owing to a large U.S. export business for petroleum products. The discount on WTI has recently been about $10 (U.S.) a barrel as U.S. inventories have surged, allowing the refiners to reap rewards from bargain feedstock in the form of wide margins, Mr. Dunn said.

For oil and gas producers, however, results will display the impact of low prices, especially those firms exposed to battered markets with no commodity or currency hedges in place. The fourth-quarter numbers did not reflect the full impact of oil's plunge since prices were still relatively strong in the first part of that period.

In the first quarter, WTI averaged $48.49 a barrel, down 51 per cent from the year before, as world oil supplies kept climbing despite weakening demand in major consuming countries in Europe and Asia.

The Organization of Petroleum Exporting Countries, led by Saudi Arabia, has given no indication that plans are afoot to reduce production quotas, leading some analysts to project many more months of weakness.

Alberta benchmark natural gas was also about half the value of last year, at about $2.22 a thousand cubic feet. In some regional markets, such as those served by the Alliance and Spectra Energy pipelines in northwestern Alberta and northeastern British Columbia, prices were even weaker due to maintenance constraints on TransCanada Corp.'s competing Alberta pipeline network.

Oil-industry spending could fall this year to $44-billion (Canadian) from $56-billion in 2014, the Conference Board of Canada predicted. Still, first-quarter oil sands output will show an overall increase because new projects, already under construction when prices fell, started up, Mr. Dunn said. In addition, established players have showed operational improvements, pushing more supply into the market.

Suncor, for example, reported record production last week, and Canadian Oil Sands Ltd., the largest interest owner in the Syncrude Canada Ltd. partnership, announced a third consecutive month of stable output.