CALGARY, Alberta (Reuters) – Higher oil prices and improved refining profits are likely to strengthen fourth-quarter earnings at Canada's biggest oil companies, though weak returns from natural gas and pipeline woes may dampen gains.
The fourth quarter was marked by renewed investor confidence in Canada's oil and gas sector as an improving global economy buoyed oil prices and raised demand.
Though problems with Enbridge Inc's pipeline system dampened Canadian heavy oil prices, the benchmark price of the commodity surged in fourth quarter.
It averaged $85.24 a barrel on the New York Mercantile Exchange. This was up 12 percent from the fourth quarter of 2009, boosting the profit picture for the country's oil companies, most of which report in the coming weeks.
"The oil price is quite healthy so it's going to be a reasonably (good) quarter," said Michael Dunn, an analyst at FirstEnergy Capital.
The impact of higher oil prices could be seen in the fourth-quarter results of Canadian Oil Sands Ltd, the biggest shareholder in the Syncrude Canada Ltd oil sands project.
The company said on Thursday that its profit more than tripled to C$311 million ($311 million), or 64 Canadian cents a share, well above the 35 Canadian cent a share profit expected by the market. The higher oil price and lower royalty payments lifted results.
Along with higher oil, refining profits improved for the first time in more than a year, adding to the bottom lines of the integrated production and refining companies such as Suncor Energy Ltd, Imperial Oil Ltd and Husky Energy Inc.
"Refining margins are finally working in favor of the integrated (companies)," said Andrew Potter, an analyst at CIBC World Markets. "They've been a big drag on stocks for the last five quarters."
Despite the high oil prices, the picture could be somewhat clouded by the disruptions in Enbridge's oil pipeline network during the quarter. Trouble on its U.S. pipelines lowered the system's capacity, trapping crude in Alberta and cutting into cash crude prices in the province.
Although there is no quantitative assessment of the impact, analysts said the problem could cut into the earnings of heavy oil producers such as Canadian Natural Resources Ltd or Cenovus Energy Inc.
"It obviously is going to play a role on the bitumen side for companies that are bitumen producers," said Phil Skolnick, an analyst with Canaccord Genuity. "That's where you'll see the impact of Enbridge."
Though higher oil prices will lift profits, they could be somewhat offset by continuing weakness in the natural gas markets. Benchmark natural gas prices on the New York Mercantile Exchange averaged $3.97 per million British thermal units in the quarter, 19 percent lower than in the year-before period as supply outstripped demand.
Those low prices will cut into the earnings of Encana Corp, the country's biggest natural gas producer, though the company's aggressive hedging program is expected to offer some protection from the weak pricing.
Rising profits have already translated into higher share prices for oil producers. Over the first three quarters of 2010, the Toronto Stock Exchange's Energy Index sagged 4.2 percent. However in the fourth quarter the index surged 13.5 percent.
There may be more room to run as fourth quarter earnings for the sector roll in over the next few weeks.
CIBC's Potter estimates that that fourth-quarter cash flow per share for the Canada's biggest oil companies - a key measure for investors - will rise about 23 percent on average in the quarter. But he warned much of those gains may already be priced into the shares.
"Better earnings reports help, but the market has already factored in some of that benefit," he said.
COMPANY RELEASE DATE EXPECTED EPS*
Suncor Energy Feb 02 C$0.50
Imperial Oil Ltd Feb 08 C$0.65
Encana Corp Feb 10 $0.15
Husky Energy Inc Feb 15 C$0.41
Talisman Energy Inc Feb 16 C$0.17
Nexen Inc Feb 17 C$0.44
Cenovus Energy Feb 18 C$0.31
Canadian Natural Resources n.a. C$0.64
* Estimates from Thomson Reuters I/B/E/S
(Editing by Peter Galloway and Jeffrey Hodgson)
LONDON (Reuters) – Fundamentals and nasty surprises are on investors minds heading into February, with big tests in the coming week about jobs and inflation and increasing worries over Egypt and its region.
The latter has already hit oil prices and has started to rattle equities. U.S. crude oil futures ended more than 4 percent higher Friday, on concerns the civil unrest in Egypt could spread and threaten stability in the Middle East.
Overall, however, the first month of the year has been a good one for investors willing to take on some risk.
Until Friday's sell off, global equities were gaining at a rate that would have produced one of the best years in the past four decades.
Assets such as short-term high-yielding bonds have also been in favor, while supposedly safe-haven developed market sovereign debt has suffered.
This is all based on a consensus that arose toward the end of last year that leading developed economies -- the United States, the euro zone and even Japan -- were likely to become more dynamic.
It has prompted a significant shift by investors away from potentially overbought emerging markets into developed ones.
But it is also dependent on underlying evidence the big economies are improving and that consumers -- the ultimate arbiters -- will see this and act accordingly by spending.
Friday's U.S. growth data will have added to the view of slow but steady improvement.
The coming week will be more about the way improving growth has filtered down to consumers. The big data release, as usual, will be the U.S. jobs report Friday, but the euro zone employment picture will also be on view Tuesday.
Employment growth tends to lag the wider recovery, but to date it has been anemic, prompting a degree of volatility.
"It is a fairly shallow jobless recovery, and that will make markets move up and down," said Franz Wenzel, a strategist with AXA Investment Managers in Paris.
Despite the renewed growth hopes, meanwhile, there are severe underlying imbalances in many developed economies that may rise up to haunt investors betting on overall improvement.
The International Monetary Fund said in the past week the United States and Japan needed to spell out credible deficit-cutting plans before financial markets started punishing them by selling off their bonds.
Ratings agency Standard & Poor's went as far as cutting Japan's long-term debt rating and Moody's Investors Service said the risk of the United States losing its top AAA rating, although small, was rising.
This is disturbing talk for investors and prompted downward pressure on Japanese assets such as the yen and stocks even though some, like Goldman Sachs, have recently been encouraging investors to look at Japan.
The flip side of growth is inflation, and this too is becoming a worry for some investors. Some of the recent shift into developed market equities, for example, has been promoted by fears of central bank tightening in emerging markets as a result of sharp price rises.
Inflation in the euro zone may be the new concern, with data due Monday and a European Central Bank meeting Thursday.
Some policymakers have fired warning shots, in particular, Lorenzo Bini Smaghi, one of six ECB board members.
He said during the past week that sharper rises in prices of commodities and emerging economy-made goods could push up euro zone inflation unless domestic prices were controlled.
The prospect of higher euro zone interest rates drove the euro higher against other currencies -- a potential problem, if sustained, for exporters -- and promoted bond yields to rise.
Britain too has seen inflation rise to levels where some investors are beginning to price in an interest rate hike.
Tighter monetary policy against a background of only tentative economic recovery would be a threat to the consensus being formed by investors.
For the moment, however, investors seem relaxed.
"Inflation is currently above the ECB's price target of 2 percent," private bank Sarasin said in a note. "(But) the ECB will look through (the) base effect from higher energy prices in their monthly meeting. We expect the ECB to leave interest rates at the current level in 2011."
What few, if any, large investors foresaw in their 2011 outlooks, however, was the potential for an entire region to come under sudden scrutiny as North Africa and the Middle East has in recent weeks.
The focus is on Egypt, where President Hosni Mubarak's long grip on power is being threatened by huge demonstrations.
For global investors the specific stakes are small. Over the past five years, overseas investors have accounted for 15.9 percent of the Cairo stock exchange's total trading value of less than $500 billion for the period.
As for the region, Middle East and North Africa funds had net inflows of $237 million in 2010, according to EPFR Global, although more came in through frontier market funds.
So, the money stakes are not the issue. What investors will be watching for in the coming week is how much the crisis spreads and triggers a broader flight to safety from emerging markets and riskier assets.
(Graphics by Scott Barber; Editing by Dan Lalor)
DUBAI (AFP) – Stock markets in several Gulf countries, where many leading firms have interests in Egypt, dropped Sunday on mounting concerns over developments in the world's most populous Arab nation.
The Dubai Financial Market shed over six percent of its value at the opening of trading week, with the DFM index dropping to 1,505.62 points.
It closed 4.32 percent down at 1,543.02 points.
The leading traded company, Emaar Properties, saw its share price plummeting by nearly 10 percent, the maximum allowed by the market regulations. It closed 8.26 percent down.
Emaar, which built the world's tallest tower, Burj Khalifa, in Dubai, has various projects in Egypt.
Air Arabia also saw its share plunge by nearly 10 percent in early trading, and closed 6.09 percent down. The Middle East's largest low-cost carrier has a hub in Egypt for its local joint venture Air Arabia Egypt.
Arabtec leading construction firm, which also has projects in Egypt, was also among the companies leading the plunge on DFM, with a 9.5 drop in early trading. It closed 6.74 percent down.
A mass revolt broke out across Egypt on Tuesday against the decades-long autocratic rule of President Hosni Mubarak, with more than 100 killed in riots and demonstrations over the past five days and much of the country in turmoil.
Cairo's stock market remained closed Sunday after it had plummeted 10 percent before trading was suspended on Thursday.
"The drop in the Gulf bourses as a result of the events in Egypt is natural since there are huge Gulf investments in Egypt, especially in the industrial and banking sectors," Kuwaiti economist Ali Al-Nimesh told AFP.
Investors in the Gulf Cooperation Council were affected by a negative sentiment, said Monica Malik, senior economist at the Cairo and Dubai-based EFG-Hermes investment bank.
"Although economic fundamentals and the political arena in the GCC are different from those in Egypt, markets are being led by a negative sentiment," she told AFP.
In addition to Dubai's, other Gulf stock markets were also down.
Neighbouring Abu Dhabi Securities Exchange was down 3.74 percent during trading hours, before closing 3.68 percent down.
Etisalat telecom company, which operates in Egypt through Etisalat Misr, was trading 3.35 percent down in early trading. Its value recovered a little during trading and closed 2.87 percent down.
Kuwait Stock Exchange, the second-largest Arab stock market after Saudi Arabia's, also dropped.
After trading 2.14 percent down in early exchange, KSE closed 1.76 percent, or 122 points down, at 6,822 points.
Qatar Exchange opened over five percent down. It recovered during trading but closed 2.95 percent down.
Oman's Muscat Securities Exchange closed down 3.02 percent.
The Saudi stock market plunged 6.43 percent on Saturday, its first day of trading.
But on Sunday, it recovered some of its losses, closing 2.47 percent up.
"Direct exposure to Egypt is an issue for some Saudi companies that have bought into Egyptian companies and established production facilities," said Jadwa Investment in a report Saturday.
Bahrain Bourse closed 1.43 percent, 21.09 points down.