The energy sector is expected to post a solid growth for the last three months of 2014, but some firms, such as Suncor, will likely report a substantial drop-off in earnings.TODD KOROL/Reuters
Analysts have been turning increasingly sour on Canadian corporations as the decline in the price of oil weighs on the resource-heavy S&P/TSX composite index and threatens to serve as an anchor on other domestic equities.
As the country's largest companies begin to report their fourth-quarter results, Canadian investors find themselves in the calm before the storm. The S&P/TSX composite index is expected to boost earnings by close to double digits on an annual basis, far exceeding the anticipated 3-per-cent profit growth of S&P 500-listed firms.
But don't get used to seeing our publicly listed companies grow earnings faster than those of our neighbours to the south. The net income of TSX-listed companies will likely be spared – for now – from the full impact of the commodity-related carnage. However, the speed at which analysts are lowering their profit estimates across a variety of sectors suggests that the adverse effects of this price slump have not yet been adequately factored in.
The consensus estimate for fourth-quarter earnings has been cut by more than 15 per cent since the start of October, compared to a decrease of 11 per cent for S&P 500 companies over the same time frame. Much of the decline in earnings estimates for TSX-listed companies – about 40 per cent – has occurred in the first few weeks of 2015, with analysts playing catch-up after the holidays.
The energy sector is expected to post annual profit growth of close to 10 per cent in the final three months of 2014, but even these solid figures are somewhat of a mirage. Abysmal results from Penn West Petroleum Ltd. and Athabasca Oil Corp. during the fourth quarter of 2013 skew the comparable figures for this period. The integrated oil giants, such as Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc., are expected to experience a substantial drop-off in fourth-quarter earnings, a portent of the tough times the entire sector is facing barring a recovery in the price of crude. Many energy companies may be forced to issue revised guidance for 2015 in concert with their year-end results, as their current capital spending plans and production targets assume a much higher level for crude oil than has persisted in the market.
"Thanks to the dramatic move in prices we've seen, both in commodities and currencies, people will be looking at guidance – the outlook for 2015 – as much as anything else in the fourth-quarter results," said CIBC World Markets senior economist Peter Buchanan.
Though earnings estimates for energy companies have been slashed by more than 60 per cent since early October, it's hardly the only sector to have had profit forecasts go under the knife. Segments of the market with a sizable amount of indirect exposure to oil prices have suffered a similar fate in recent weeks. For instance, industrials has seen profit estimates fall by 13 per cent since the start of the year as companies such as SNC-Lavalin Group Inc. and Finning International Inc. are poised to see their order books deteriorate along with activity in the oil patch.
Even some of the most obvious winners from lower oil prices, consumer stocks, have not been immune from analysts' wrath. The profit forecast for the consumer staples sector has fallen by 7 per cent since the start of 2015, while earnings estimates for consumer discretionary stocks have remained flat over the same period.
Analysts remain relatively sanguine about the fourth-quarter earnings outlook for the Canadian financials. Leaders of the Big Six banks have indicated that their loan portfolios do not have a large amount of exposure to the oil patch in an attempt to reassure market participants. Investors, however, seem rather concerned, as the banking group has given back nearly 6 per cent year to date. The largest Canadian lenders won't begin to release their quarterly results until late February. At that time, investors should have more clarity about the extent of the contagion emanating from the energy sector across the financial system and the index as a whole.