Oil patch braced for worst results in years


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Posted by: James Thompson
Date: 04.21.09
Sectors: Oil and Gas

The next few weeks could get very ugly in Calgary - a city used to being spoiled by dazzling earnings and upbeat annual meetings - and the messy news could extend beyond weak first-quarter earnings.

That's not to say that amidst the expected carnage a few oil patch darlings won't emerge.

But first, the cold, hard truth: "[First-quarter] results will likely be the worst financial results delivered by the sector in many years," said Andrew Potter, an analyst at UBS Securities. "Not in recent history have we seen a marked drop-off in earnings."

Earnings per share at Canadian integrated oil and gas companies will fall by about 70% year-over-year, and about 50% sequentially, Mr. Potter predicted in a research note. Large explorers and producers will also be dinged, with earnings falling 69% year-over-year and 37% sequentially.

With oil and natural gas prices in the sewer - oil fell US$4.45 to US$45.88 Monday and gas was off US19¢ to US$3.54 - this is not a shock. But surprises - both sunny and horrific in nature - could reveal themselves as companies roll out financial details such as updates on their lines of credit.

"As part of disclosure on their bank lines [some companies] may be surprising some people," said Dennis da Silva, a fund manager at Middlefield Capital Corp. in Toronto. Oil and gas companies meet with their bankers each spring, reserve reports in hand, for an annual checkup. With energy prices in the tank, production declining, and the financial crisis still looming, loans can shrink.

The Street is closely watching Crew Energy Inc. (CR/TSX), Birchcliff Energy Ltd. (BIR/TSX) and Galleon Energy Inc. (GO/TSX), Mr. da Silva said. "Those are the next three intermediates that haven't disclosed any information about their lines yet - they are still being reviewed. And they are fairly up on their lines."

Should their bankers put the screws to their credit limits, companies in a pinch will have to turn to the equity markets (as Iteration Energy Ltd. [ITX/TSX] has done), or put themselves or assets up for sale (as Profound Energy Inc. [PFX/TSX] has done).

Galleon, Mr. da Silva figures, is at the greatest risk because of how much it has drawn on its credit lines. The company, however, dismisses these concerns.

"We're not expecting any changes given our reserve growth and year-over-year increase," said Shivon Crabtree, Galleon's chief financial officer. It has a $310-million line of credit, with $249-million drawn down at the end of 2008, she noted.

Further, Steve Sugianto, the company's chief executive, said the company's proved, developed and producing reserves grew by about 53% in 2008 compared with 2007. About 53% of Galleon's reserves are oil, while the remaining 47% are gas - an advantage because natural gas prices remain especially ugly, Mr. Sugianto noted. The company has also hedged about 45% of its 2009 oil production at prices between US$67 and US$68, he said.

Galleon will not have to turn to the equity markets for a financial cushion, Mr. Sugianto said. "We're comfortable."

With the market prepared for ugly results, it may be the positive news that catches investors off guard.

"Heavy-oil differentials were tighter than people anticipated coming in, and synthetic crude oil price realization, I would argue, have been better than people may have thought," said William Lacey, an analyst at FirstEnergy Capital Corp.

Mr. da Silva thinks hedges will also help usher in positive surprises. Canadian Natural Resources Ltd. (CNQ/TSX) and Celtic Exploration Ltd. (CLT/TSX) fall into this category, he said.

Husky Energy Inc. (HSE/TSX) kicks off the annual general meeting parade Tuesday (its results are next week), with its rivals revealing first-quarter results and hosting their own annual updates between now and Mother's Day.

EnCana Corp. (ECA/TSX) (annual meeting and earnings) and Precision Drilling Trust (PDun/TSX) (earnings) are Wednesday, while Suncor Energy Inc. (SU/TSX) follows with quarterly results on Thursday.

"[The] first quarter likely marks the bottom of negative earnings momentum," said Mr. Potter of UBS. "Fortunately, oil prices have rebounded from the lows hit in [the first quarter] and, if sustained, means that [the first quarter] marks the turning point back towards better times."




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