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More earnings carnage expected from oilpatch

Low commodity prices dampen Q4 results

Dan Healing, Calgary Herald

Published: Tuesday, January 27, 2009

C algarians will see more layoffs, cancelled projects and losses on investment this week and over the next several weeks as oil and gas companies deliver what analysts are predicting will be the worst fourth-quarter results in years.

The contrast with the third quarter, when many companies reported record profits, couldn’t be more stark. As oil prices plunged from all-time highs last summer and credit markets tightened, trust companies have chopped distributions to investors, stock prices have plummeted and 2009 spending plans have been cut to the bone.

Analysts expect to see more gloom and doom in the wake of sombre financial results presented by the first company out of the gates. Suncor Energy Inc. got the ball rolling last week by announcing its first quarterly net loss in 16 years and a$3-billion capital budget cut to go along with the mothballing of its $20.6-billion Voyageur oilsands expansion.

Suncor’s decision resulted in Calgary-based Flint Energy Services Ltd. immediately laying off construction workers and vowing more cuts thanks to losing as much as $200 million in work on the projects this year.

Randy Ollenberger, managing director of North American energy equity research for BMO Capital Markets in Calgary, said there will be red ink spilled on the pages of many financial reports as the industry hunkers down to wait out what is shaping up to be a prolonged economic slump.

“You are going to see some net earnings losses this year, there’s no question of that,” he said.

“Fourth-quarter results are going to be very, very weak.And they’re a bit of a glimpse of the future because oil prices in the fourth quarter were better than they are today.

“We had oil prices averaging close to $59 (US per barrel) in the fourth quarter and this industry didn’t make any money. So, at current oil prices, investors are going to be looking at these results and concluding they ought to be concerned.”

The benchmark New York oil price closed Monday at $45.73 a barrel, off 69 per cent from its highs last July. Natural gas closed at $4.49 US per million British thermal units, down 67 per cent from its peak last summer.

The Toronto Stock Exchange’s capped energy index closed Monday at 210.56, off 55 per cent from the peak in May.

Canadian Oil Sands Trust, the largest partner in Syncrude Canada, releases its results Wednesday and is followed by integrated majors Petro-Canada and Imperial Oil Ltd. and drilling giant Precision Drilling Trust on Thursday. Royal Dutch Shell, parent of Shell Canada, also reports Thursday.

In a recently written fourth-quarter preview entitled, “2008 Ends On A Very Ugly Note,”UBS analyst Andrew Potter concludes: “Given the massive rout in commodity prices and crack (refining) spreads that occurred during the quarter, Q4 financial results will be the worst in several years.”

He goes on to predict cash flow per share–a measure of company’s ability to fund future projects–among the biggest oil and gas companies will be off 38 per cent compared with the third quarter of 2008 and down 24 per cent compared with the last quarter of 2007.

Ollenberger said net earnings will be similarly depressed.

“Versus the third quarter, the group is reporting results that are down 50 to 60 per cent, so this is a pretty big sequential decline,” he said. “On a year over year basis, they’re off in the neighbourhood of 30 per cent.

Both Ollenberger and Potter said Canadian Oil Sands is expected to dramatically cut its distributions to unitholders this week. It chopped its quarterly payout by 40 per cent to 75 cents after the third quarter in view of low oil prices but it’s expected to be cut again, perhaps as low as 25 cents.

About two-thirds of Calgary-based energy trusts have reduced payments to investors recently, including Enerplus Resources Fund, which announced it would cut distributions from 38 cents per unit to 25.

Analysts say integrated companies such as Imperial, Petro-Canada and Husky Energy Inc. (expected to report in early February) will likely see earnings per share drop thanks to poor downstream results as consumers cut back on driving, especially in the United States.

UBS economist Jan Stuart warned in a published report last week there’s little in market recovery to fuel a rebound in commodity prices.

“Latest data confirm our projections of unprecedented, steep contractions of global oil demand in the last few months of 2008,” said the report, adding a three per cent decline in world demand in the fourth quarter will likely be repeated in the first three months of 2009 and demand is not likely to turn around until after the third quarter.

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