Oil and Gas Sector: Q4 Results Expected to Be Ugly

The year ended on a very ugly note for the oil and gas sector, prompting analysts to suggest that fourth quarter results will be the worst in several years. Suncor Energy Inc. (SU) kicks things off on Tuesday, January 20.

For the large cap explorer and producer group, UBS is forecasting that cash flow per share will fall 24% year-over-year (yoy) and 38% sequentially. Integrated companies, meanwhile, are expected to see earnings per share decline 32% compared to the same period a year earlier and 63% versus the third quarter.

These troubling figures are, of course, driven by plummeting commodity prices. But some names will naturally be hurt worse than others.

For example, UBS analyst Andrew Potter said downstream results range from weak for Imperial Oil Ltd. (IMO) and Petro-Canada (PCZ) to horrible for Husky Energy Inc. (HUSKF.PK) and EnCana Corp. (ECA) as a result of their U.S. exposure and First in-First Out inventory accounting.

While more capital expenditure cuts and project deferrals are likely, he told clients that a dividend or distribution cut is possible for Husky and very likely for Canadian Oil Sands Trust (COSWF.PK). The real question is by how much?

The market appears to be discounting a distribution cut from C$0.75 per quarter down to approximately C$0.45 for COS.

Mr. Potter said:

However, in the current environment and given the trust’s looming debt maturity we believe distributions should be taken down to C$0.25/quarter or lower which we expect could be a disappointment to the market.

He put a short-term “sell” rating on COS as a result and cut his price target from C$32 per share to C$26. However, the analyst maintained a 12-month “buy” rating in anticipation of higher oil prices for the second half of 2009 and the restoration of a healthy distribution.

Canaccord Adams analyst Kyle Preston also puts COS on his list of trusts at the greatest risk of having to cut distributions in the near term, along with Harvest Energy Trust (HTE) and Crescent Point Energy Trust (CPGCF.PK).

“Overall, we believe most of the energy trusts are relatively well positioned to fund their respective 2009 capital programs while maintaining strong balance sheets,” he told clients, adding that this could come at the expense of distributions if commodity prices remain weak for an extended period of time.

So while the market typically responds negatively to distribution cuts, the analyst suggested that most investors realize the severity of the situation and accept that such actions are necessary these days.

On average, UBS’s estimates for large caps are 5% to 10% below current consensus estimates.

Mr. Potter said:

Consensus estimates will probably decrease as we draw nearer to actual reporting dates and Street estimates are marked to market for actual commodity prices during the quarter, which were well below Street forecasts.

He added that investors should also look for a potential capex cut from Suncor, which in the fall reduced its 2009 plans from as high as C$10-billion to C$6-billion, but is expected to move into the C$3 to C$4-billion range with its quarterly results or soon after.

Updates for oil sands start dates are expected from Canadian Natural Resources Ltd. (CNQ) and Nexen Inc. (NXY) /Opti Canada Inc.

The goods news is that the sector is starting to show greater resilience to declines in the price of oil, Mr. Potter noted.

UBS’s top picks in the large cap space include EnCana, Talisman Energy Inc. (TLM), Nexen and Canadian Natural, while Petrobank Energy and Resources Ltd. (PBEGF.PK) gets the nod among small cap names.

Comments

[koolsool:]

For someone who has money on the sidelines, the Canadian energy trusts are a great source of income and a great value. People do not understand that the hedge funds plowed leveraged money in to the trusts for the high yields they offered. These Canadian trusts share prices were crushed by hedge fund forced selling in Oct.-Nov. Prime West just cut their dividend by 25%, but the yield is still almost 20% even after the cut. They pay out every month, instead of once every quarter. HTE has a yield of almost 38%, if they cut it, you are still getting over 20% every month. The share prices are very depressed right now. The Canadian trusts have years of reserves in the ground, they are E&P companies that grow their reserves each year, unlike most of the USA oil MLPs.

Jan 20 10:36 AM

[Conan the B...:]

In 2011, they will be Corporations subject to a corporate Income Tax. Some may be able to extend their payouts because of accounting loopholes but officially, unless present law is revised or repealed, 2011 is it.

Meanwhile, Obama may eliminate the 15% tax rate prior to 2011.

As long as you understand what is coming down the line, then put you money in them.

I have/ will continue to hold and maybe even add more of certain CanRoys.

They have great assets, and if they wind up trading like Oil Companies, Valuations will rise as oil rises over the next couple of years.

Also please remember, the payouts are in Canadian dollars, conversion to USD takes place prior to payout and a 15% Canadian Tax is then applied. Current Loonie value is around .80. What you get monthly is around .68 of the payout listed. That 15% will come back to you as an income tax credit in the following year.

Jan 25 01:52 AM