Oil patch headed for windfall--Eye-popping results expected for quarter

The Globe and Mail By PATRICK BRETHOUR AND BRENT JANG Monday, April 21, 2003 - Page B1 Closing Markets

Tuesday, Apr. 22

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Canada's nine biggest energy companies are headed for a $2.7-billion windfall as soaring commodity prices hand the oil patch eye-popping profits in the first quarter.

Oil and natural gas prices have spiked sharply over the past three months and are substantially higher than a year ago, propelled by labour strife in Venezuela, worries about the impact of an assault on Iraq and the chilly weather that hung over much of eastern North America this winter.

Now, energy companies are about to reap billions in bounty, starting with Imperial Oil Ltd., which reports its first-quarter earnings tomorrow. Imperial and Canada's other eight top oil and gas companies are projected to report profits -- excluding one-time charges and the effects of currency fluctuations -- of $3.7-billion, up from $930-million in the first quarter of 2002.

Cash flow from Canadian production of oil and natural gas is projected to surge to $13-billion in the quarter just ended, close to triple the $5-billion in cash generated in the first quarter of 2002, according to FirstEnergy Capital Corp.

"They've had this colossal windfall," said Martin Molyneaux, research director at FirstEnergy in Calgary.

The main question now is how companies will try to spend the gushers of cash. Share buybacks, reducing debt, expanding capital programs or striking deals to buy properties -- or even entire firms -- are all options.

What Mr. Molyneaux called a "tidal wave" of cash will also wash into the coffers of the provincial and federal governments: FirstEnergy forecasts that higher royalties will add an extra $2.5-billion to provincial and federal revenues, with $1.6-billion flowing to Alberta alone. "Ottawa and the various producing provinces are going to get a truckload of money," he said. "It's absolutely gargantuan."

Higher corporate income taxes from the oil patch will likely boost Alberta's first-quarter windfall to $2.5-billion, Mr. Molyneaux added.

The rising tide of higher energy prices will lift results at all the major energy firms, but those companies with integrated operations that include refining and marketing stand to further benefit.

Analysts expect refining margins to rebound from the miserly levels of last year, padding out the bottom lines of Petro-Canada, Shell Canada Ltd., Imperial, Suncor Energy Inc. and Husky Energy Inc.

In a report, UBS Warburg said that Petrocan and Imperial are most likely to report higher-than-projected profits from their downstream operations.

Wilf Gobert, vice-chairman of Peters & Co. Ltd., estimated that the four largest integrated companies -- excluding Husky -- will report a $300-million profit from refining and marketing, nine times higher than the $36-million that the group earned from downstream operations in the first quarter of 2002.

Much of the increase comes from the rebound in refining margins from a year ago, when profit levels were squeezed to 10-year lows. Mr. Gobert noted that higher oil prices did put some pressure on margins in the quarter just ended, with profits falling short of the high-water mark of the second quarter of 2002.

Still, analysts see little to feel gloomy about in the first quarter.

"I think that, by all measures, it will be a record quarter -- outstanding," said Thomas Ebbern, an analyst with Tristone Capital Inc. "Commodity prices were so strong, likely the best we've ever seen as a group."

Mr. Ebbern said not only were there red-hot prices for crude oil and natural gas, but heavy oil markets were stellar, too.

Canadian Natural Resources Ltd., which has numerous heavy oil properties, will benefit from strength in that specialty oil. The Calgary-based producer has been getting a lift from its purchase last summer of Rio Alto Exploration Ltd.

First-quarter profit at Canadian Natural is expected to surge to $314-million, compared with $99-million a year earlier.

However, Canadian Natural has been facing faltering production from gas wells in the Ladyfern region of northeastern British Columbia.

Those wells start out as big producers, but tend to have a rapid rate of declining output.

Talisman Energy Inc. is forecast to post a strong first quarter, but with the recent sale of its stake in a large joint venture in Sudan, the Calgary-based producer's subsequent quarters won't receive a financial contribution from that African country's oil production.

Talisman is forecast to make a profit of $401-million or $3.11 a share in the first quarter, compared with $95-million or 70 cents in the same period last year.

EnCana Corp., Canada's largest oil and gas company, will have the capability of using its windfall cash to sharply hike its capital spending budget.

But Mr. Ebbern said he expects EnCana and other large energy companies to be relatively frugal when it comes to spending on new drilling projects.

Calgary-based EnCana, which posted a profit of $186-million or 36 cents a share in last year's first quarter, is forecast to haul in $735-million or $1.52 in this year's first quarter.

EnCana, one of the leading producers of natural gas in North America, thrived in the past quarter, when prices for the fuel approached $8 for 1,000 cubic feet -- more than twice as much as a year earlier.

Calgary-based Nexen Inc., whose key oil project is in the Middle East country of Yemen, is expected to post a first-quarter profit of $224-million, compared with $54-million in the first three months of last year.

While some investors have been worried about Nexen's reliance on Yemen, the company has a diversified portfolio that includes attractive assets in Canada and the Gulf of Mexico, said Andrew Bryne, an analyst with John S. Herold Inc.

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