July 14, 2008

"Likely another record-breaking quarter . . . driven entirely by strong commodity prices," is how Andrew Potter, an analyst with UBS Securities in Calgary, summed up the outlook.

Stage set for record results in Alberta energy sector
Strong prices expected to lift earnings

The energy sector is staring down another blowout quarter when oil and gas companies start releasing first-half numbers next week.

Nexen and OPTI Canada kick off the reporting season Thursday, followed by Husky, Suncor, Petro-Canada and EnCana the week after.

"Likely another record-breaking quarter . . . driven entirely by strong commodity prices," is how Andrew Potter, an analyst with UBS Securities in Calgary, summed up the outlook.

Kam Sandhar, an integrated oils analyst with Peters and Co., said he expects production growth to be "minimal" for the group -- with the exception of Husky and EnCana.

"However, the negative operational issues will be muted by the continued upward trend of commodity prices."

After starting the quarter below $100 US a barrel, oil rallied above $140 to average $119.42 during the three-month period. Canadian heavy oil fared even better on a relative basis, rising 102 per cent year-over-year compared with 91 per cent for U.S. benchmark West Texas, 78 per cent for North Sea Brent and 73 per cent for Edmonton Par.

New York natural gas futures began a steady climb to average $11.03 per million British thermal units, some of the highest second-quarter gas prices this decade.

Consequently, Potter expects year-over-year earnings for his universe of companies to jump 66 per cent a share while cash flow will likely rise about 25 per cent for both integrated oil companies and senior producers.

Even more telling than the profit picture, the results will provide a glimpse into some key developments that will set the tone for the back half of the year.

Two major oilsands developments are set to come on stream starting in the third quarter: Canadian Natural's highly anticipated Horizon project and the Nexen-OPTI thermal development at Long Lake.

In addition, Petro-Canada will fire up its long-awaited Edmonton refinery conversion that will allow it to process bitumen feed stocks into products such as gasoline. The upgrade is seen as a major step in an integrated oilsands strategy that will eventually include the proposed Fort Hills mine.

On the natural gas side, key resource plays such as the Horn River shale play in northeast British Columbia will continue to be a driver for companies such as EnCana and Talisman that have spent hundreds of millions of dollars acquiring land and drilling test wells to determine the resource potential of the area.

Along with its Long Lake project, Nexen is also seen as an emerging Horn River player.

"With earnings momentum potentially cresting this summer and through the fall, investor attention could shift toward project execution during the second half of '08," said Brian Dutton, an energy analyst with Credit Suisse in Toronto. "It will be delivery time."

But it's not all sunshine and roses, especially for Canada's integrated companies that both produce and refine oil. Tighter processing margins mean companies with significant downstream operations, such as Imperial Oil, could be squeezed.

In addition, oilsands operators such as Suncor have made significant downward revisions to their 2008 production numbers, which could have a major negative impact on financial numbers.

"We think it will be important for Suncor to begin demonstrating better operational performance in order to improve investor confidence in execution," Dutton said.

Shaun Polczer
Calgary Herald
Saturday, July 12, 2008
spolczer@theherald.canwest.com