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Five things to expect when oilpatch firms report first quarter results

Oil sands first quarter results
Oil sands photographed by Andrew S. Wright

CALGARY — This coming week the toll of weak oil prices will be thrown into stark relief as some of Canada's biggest energy names report first-quarter results and hold annual shareholder meetings. In the first three months of the year, crude hovered around US$50 — less than half last summer's highs. It'll be the first full quarter to register the new crude reality.

Oilpatch earnings season kicks off with major oilfield service firm Precision Drilling Corp. (TSX:PD) on Monday, followed by oilsands giants Suncor Energy Inc. (TSX:SU), Cenovus Energy Inc. (TSX:CVE), Imperial Oil Ltd. (TSX:IMO), and Canadian Oil Sands Ltd. (TSX:COS). Pipeline heavyweight TransCanada Corp. (TSX:TRP) caps off the week. Here are five things to watch for:

How to ride it out: Producers can't control commodity prices and all of them will be squeezed by the crude slump to some degree. But Desjardins Capital Markets analyst Justin Bouchard said they're going to have to find ways to manage their way through the doldrums. In a recent research note, he said options could include: overhead cost savings; capital spending and dividend cuts; asset sales and equity and debt financings. "A mistimed asset sale or equity financing could destroy significant shareholder value, and dividend cuts could result in a reputational hit; however, not taking the opportunity to raise cash or cut cash outflow when it is available could have adverse effects."

Let's make a deal: Firms may want to sell off assets to shore up finances. But who's got an appetite to buy? And to the extent there are buyers, are they willing to pony up the prices being asked? Laura Lau, senior portfolio manager at Brompton Funds in Toronto said it's a tough time for mergers and acquisition activity in the oilpatch. "In a good market, you can sell your second-, third-tier assets," she said. "In this kind of market, you're going to have to sell the crown jewels." Cenovus has been looking at selling or taking public its Alberta royalty lands for a while now, but the timing still might not be right.

Costs deflating: The industry has the opportunity to take a breath when activity slows, especially in the oilsands epicentre of Fort McMurray, Alta. During boom times, the cost of labour and materials skyrocketed. In a recent note, CIBC World Markets analyst Arthur Grayfer said he's expecting to find out to what degree suppliers and service providers are sharpening their pencils. Suncor, in the midst of building its massive Fort Hills oilsands mine, will likely be able to provide some insight. While it's a silver lining for producers, it's tough on the companies that provide services, like Precision Drilling.

Pipeline prospects: TransCanada has said it doesn't see the latest crude downturn undermining the economic case for new pipelines that would take crude to market, such as the perennially delayed Keystone XL proposal to the U.S. or its more recent Energy East cross-Canada pipeline, whose startup has also been pushed back. The company will likely be asked what it's been hearing from customers and whether rail is still picking up the slack of stalled pipelines these days, given that it's a more expensive mode of transport.

Is the worst over? U.S. benchmark crude has been gradually bouncing back from its first-quarter depths around US$50 a barrel. On Friday, West Texas Intermediate closed at US$57.15 a barrel — still far from a stellar price. Lau said experience from past crude corrections suggest that the worst has likely passed. "We're starting to see demand come back and I'm not sure how much more Saudi Arabia can increase their oil production."

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