Energy investors are looking past the financial carnage left by oil’s collapse to tentative signs of recovery in the sector.TODD KOROL/Reuters
Energy investors are looking past the financial carnage left by oil's collapse to tentative signs of recovery in the sector.
First-quarter results start rolling out this week and the numbers are expected to be grim, marred by hefty losses and heightened concern over debt levels as banks trim credit lines and industry-wide cash flow remains anemic.
But investors are wagering on a recovery, even as some companies remain under extreme financial duress. The Toronto Stock Exchange energy subindex has climbed by roughly one-third since mid-February, when U.S. crude sank to a 12-year low of about $26 (U.S.) a barrel.
Oil prices have rebounded despite a failed deal by top exporters to tackle a global glut, with support coming from slowing production in the United States and strengthening demand for gasoline. U.S. benchmark West Texas intermediate oil closed up 1.3 per cent Friday at $43.73 a barrel, capping its third week of gains.
Some companies are now keen to revive dormant drilling plans, betting that a recovery is at hand. Earlier this month, Calgary-based Whitecap Resources Inc. more than doubled its budget and boosted its production outlook for the year, although it chopped its dividend by 40 per cent.
"Some of them will probably want to wait for firmer pricing, but in general most [exploration and production companies] are more constructive going forward," said Laura Lau, senior portfolio manager at Brompton Funds in Toronto.
"Most people see that the supply-demand imbalance is starting to get back into balance, so they're getting more positive in general."
The industry is far from out of the woods. Drilling activity in Western Canada plunged 46 per cent in the first three months of 2016 to a 30-year low, as producer spending ground to a halt.
By mid-April, there were only 38 rigs working heading into what is considered the industry's lean months, said analysts at investment dealer Peters & Co. Ltd. That's down from a mid-January high of 244 rigs, the lowest and earliest seasonal peak on record, they said.
The drop has sapped revenue at oil-field service companies, prompting deeper cuts and pushing others into seek protection from creditors.
Last week, Mullen Group Ltd. slashed its monthly dividend by roughly 63 per cent, to 3 cents a share, effective in May. It said first-quarter revenue plunged by about 20 per cent and that it has now shed more than 650 staff in a little over one year.
Meanwhile, privately held hydraulic fracturing firm Sanjel Corp., as well as Alberta-based ATK Oilfield Transportation Inc., were pushed into receivership after skipping debt payments. Others are expected to follow as banks tighten lending restrictions.
In downtown Calgary, executives will host annual shareholder meetings following a three-month stretch that saw U.S. crude average $33.63 a barrel, its lowest level in 50 quarters. Western Canadian Select oil sands crude slumped to $26.38 (Canadian) a barrel versus $43 in the first quarter of 2015.
Companies are also grappling with a sharp deterioration in natural gas prices owing to bloated storage levels. Alberta natural gas fetched $1.24 a gigajoule on Friday, down from $2.47 a year ago, according to the NGX electronic exchange.
Citibank analysts said large, integrated oil producers are expected to post losses, hampered by weak margins from their refining, or downstream, operations.
Husky Energy Inc. reports its first-quarter results on April 25. The other publicly traded refiners, Cenovus Energy Inc. and Suncor Energy Inc., release numbers on April 27. Imperial Oil Ltd. reports on April 29.
Analysts are also watching for updates on cost savings and asset sales, and for companies to bolster their financial hedges as the outlook for future oil prices starts to brighten.
Despite global stockpiles remaining swollen, there is a growing consensus that oil markets will not retest February's lows, said FirstEnergy Capital Corp. analyst Martin King.
"It's just a question of grinding our way through and letting all the cuts to the capital programs and everything else just take their toll," he said.