Canadian oil producers will provide a first glimpse this week of how the spike in energy prices is boosting their bottom line — and what they plan to do with the bumper profits.
Companies are releasing financial results for the first three months of the year, covering a period when oil prices were relatively low in January and February before nearly doubling in March.
Commodity prices skyrocketed following the U.S. war with Iran, which led to the closure of the Strait of Hormuz and blocked about 20 per cent of the world’s oil and natural gas supply from international markets.
Fatih Birol, head of the International Energy Agency, described the war in Iran as the biggest energy crisis in history, pointing to major disruptions in commodities, including fuel shortages and rising prices for consumers.
A litre of regular gasoline is selling for an average of $1.80 across the country, while diesel is selling for more than $2.10, according to the latest data from Kalibrate Canada.
North American oil prices were trading at around $55 US per barrel to begin the year before climbing above $110 US this month.
Energy company stock prices have followed a similar pattern.
“There’s a lot of cash in the system. A lot of the stocks are near 52-week highs,” said David Szybunka, head of the energy team at Canoe Financial, a Calgary-based investment firm.
The upcoming financial results will offer a preview of what could be even stronger returns in the second quarter, from April through June, when oil prices spent at least two months in the $90 US to $110 US range.
To drill or not to drill
The size of the windfall will be noteworthy, along with signals from executives about what they plan to do with the extra cash.
Szybunka said he is open to a range of uses for the profits, including paying down debt, returning the cash to shareholders or spending the money to produce more oil.
Companies are not likely to dramatically increase production, he said, but “there’s going to be a little more spending at the margin.”
After reducing spending last year, Saturn Oil and Gas chief executive John Jeffrey describes confronting volatile commodity and share prices, and how the firm is ready to increase production as oil prices are expected to remain relatively high for the rest of the year.
Large publicly traded companies are generally more focused on increasing financial returns to their shareholders, said Aaron MacNeil, an analyst with TD Cowen. He says they are less likely to make an abrupt decision on changing their spending plans based on a commodity price swing.
“I think they would be more likely to sort of enjoy the windfall of higher prices and not change activity for a period of time,” MacNeil said in an interview with CBC News.
Over the next couple of months, oil producers will continue assessing commodity prices, while considering whether to slowly ramp up spending, he said.
A recent survey of 22 Canadian oil and gas producers by ATB Cormark Capital Markets, released last week, found that 95 per cent of those companies expect to increase production this year.
After pulling back on spending last year, Calgary-based Saturn Oil and Gas is leaning toward increasing investments this summer to raise its production in Western Canada, said chief executive John Jeffrey.
Like many companies, Saturn has experienced steep swings in its share price over the past few months, with the value sometimes changing by more than 10 per cent in a single day.
While first-quarter results will show some revenue gains from the spike in oil prices, Jeffrey said, the second-quarter results are “going to be a lot bigger of a difference.”
The company has signed contracts to sell about half of its oil for the rest of the year at about $70 US per barrel, guarding against prices falling back to the levels seen in January and February.
If the company increases spending, most of it will go to Saskatchewan because Saturn’s wells there produce more oil than its wells in Alberta, which have a somewhat higher ratio of natural gas, Jeffrey said.
“There’s a lot of idle equipment now,” he said. “There’s a lot of services and a lot of availability for rigs and other things where, at least in the fields we operate, there should be a lot of slack that we can increase capital and the services should be there.”
Houston-based oilfield services company Haliburton says its crews will be busy as demand heats up from small and mid-sized oil producers.
“The world is fundamentally tighter in oil and gas than it was 60 days ago. In my view, that supports a durably stronger commodity environment and a far more constructive backdrop for upstream investment and oilfield services activity,” said chief executive Jeffrey Miller during a call with analysts last week.
Major U.S. firms such as ExxonMobil and Chevron have recently accelerated their global search for new development in regions outside the Middle East.
Chevron is looking to increase investment in Venezuela, while Exxon has unveiled a proposed project in Nigeria.
In total, the 30 largest international oil companies could generate $120 billion US in value from their exploration ventures in coming years, according to a report released last week by energy consultancy Wood Mackenzie, as companies look beyond the war in search of new oil production.
