Profits-dive Canadian oil companies softened by downstream
Sept. 8, 1998 Low oil prices took their toll on profits at Canada's integrated companies in the second quarter. But a strong downstream performance-rivalling that of their US counterparts-helped buffer the impact of lacklustre upstream earnings.
Canadian integrated companies posted second-quarter profits that were on average some 25 % below those in the same period of 1997 as the average spot price of West Texas Intermediate (WTI) fell to $ 14.72 per barrel from $ 19.61 per barrel in the same quarter a year ago.
Combined profits of the top 4 integrated firms totalled C$ 277 mm ($ 180 mm at the current exchange rate), off 6 % from the first quarter, when spot WTI prices averaged about $ 15.95 per barrel.
"Integrated earnings came in where everyone thought they would," said an analyst in Toronto. "There were no real surprises since oil and gas prices were lower than in the first quarter."
Upstream earnings continued to suffer from the wide differential between light and heavy oil prices,
despite a substantial narrowing late in the quarter stemming from increased demand for asphalt.
Exploration and production profits sank 50 % on average from last year's second quarter, with Exxon subsidiary Imperial Oil and Petro-Canada Ltd.-Canada's 2 biggest oil companies-posting results close to 80 % below year-ago levels.
Shell Canada Ltd. managed a more acceptable 30 % decline in upstream earnings-more in line with the year-to-year slide in crude oil prices-while Suncor Ltd. actually boosted E&P profits almost 80 % by increasing output and hedging.
Suncor has about 30 % of its 1998 production pre-sold at $ 20 per barrel on the New York Mercantile Exchange. Total liquids output increased by 50 % from a year ago, with the most substantial increases coming from Suncor's oil sands operation.
Refining and marketing (R&M) earnings continued to buffer the impact of low oil prices on companies' bottom lines.
Combined second-quarter downstream earnings of C$ 231 mm were flat with year-ago
levels-though analysts noted that last year was a record for R& M profits.
"Downstream profits were very excellent last quarter, on par with last year's record results. Sales were high and margins were solid," the analyst said.
Rising oil production also helped. Oil output increased 12 % in the second quarter from last year, and is up nearly 5 % over the first half.
"This is very surprising, considering all the talk about shut-ins and reduced drilling activity," the analyst said. He believes that roughly 100,000 bpd of output is currently shut in and doesn't expect it back on stream until WTI stabilises above $ 15 per barrel.
Looking ahead, analysts forecast another tough quarter for integrateds' earnings as downstream earnings erode and crude oil prices languish at near-record lows.
"Margins have steadily contracted in the third quarter. Sales are still up, but crack spreads are way off because of high gasoline and distillate stocks," he said.
He added that companies should benefit
temporarily from a narrowing in light- heavy oil spreads, which are currently in the C$ 3-$ 4 per barrel range, having started the year at C$ 9 per barrel. But he expects them to widen again as asphalt demand tapers off as the summer draws to a close.
"Nobody's admitting it," he said, "but they all know they're in for an even worse quarter."
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