‘ FRAGILE’ OPTIMISM IN OIL COUNTRY
- 22 Jul 2016
- National Post – (Latest Edition)
- Geoffrey Morgan
‘ FRAGILE’ OPTIMISM IN OIL COUNTRY
Encana, Precision results hint at recovery
CALGARY • Executives from Encana Corp. and Precision Drilling Corp. expressed restrained optimism as they reported mixed earnings for the second quarter Thursday, but analysts said the results show early signs of a rebound in the hard- hit sector.
“The sentiment swings in the past month-and-a-half have been phenomenal. The tone has changed, the sentiment has change but it’s fragile,” Precision Drilling president and CEO Kevin Neveu said of the oilpatch outlook on his company’s earnings call.
After a prolonged downturn and tens of thousands of layoffs, Precision announced it had recently re-hired a small number of rig workers to meet an uptick in demand. Precision also announced that its customers hadn’t cancelled any more drilling contracts in the most recent quarter.
“Whether this is a green shoot, an improving outlook or early signs of a rebound, it’s all predicated on commodity prices and strip prices,” Neveu said, adding that if oil prices unexpectedly dip, drilling activity will follow suit.
Precision and Encana kicked off second-quarter results Thursday, which many analysts expect will show an improvement compared with the first quarter of the year when drilling activity slowed and oil prices fell below US$30 per barrel.
For Precision, the second quarter brought a near doubling of losses to $58 million, as revenue dropped 51 per cent from a year earlier owing to a pullback in spending in North America. The Calgary-based company said lower activity from its North American operations drove down revenue to $164 million, from $334.4 million a year ago.
Calgary- based Encana posted a US$ 601 million net loss in the quarter, an improvement on its US$ 1.6 billion net loss in the same period a year earlier, and managed to avoid an operating loss. The company posted operating earnings of US$ 89 million in the quarter, compared with an operating loss of US$167 million a year ago.
Despite the losses, analysts say the underlying results could point to a turnaround.
RBC Capital Markets analyst Matt McKellar said in a research note that Precision now had more rigs working in U.S. oilfields than it did at the beginning of the year, a fact that supports his “thesis that the industry is slowly turning a corner and that ( the second quarter) will mark the bottom of the trough in North America.”
Encana, for its part, is confident enough in the company’s cost savings and operations that it is planning to boost spending in the second half of the year by US$ 200 million, which will increase its planned production, with most of that new capital going to its operations in the Permian Basin in Texas.
Encana CEO Doug Suttles said the company had trimmed another US$ 100 million from i ts costs in the quarter, while oil prices showed some improvement. The combination, he said, “is giving us the confidence to increase capital spending in 2016.”
BMO Capital Markets analyst Randy Ollenberger called Encana’s results “slightly positive” and added its oil and gas production levels beat market expectations. The company was pumping 368,000 barrels of oil equivalent per day in the second quarter.
Shares in Encana, which has been selling off assets in a shift away from natural gas towards more liquids production for years, j umped more than eight per cent before finishing the day up 3.6 per cent to $ 10.81. in Toronto. Precision shares fell 4.6 per cent to $5.87.
Some credit analysts, however, are less optimistic about the Canadian oil and gas sector’s prospects.
“Under our current hydrocarbon price assumptions, we expect annual cash- flow metrics for many companies will remain well below the levels needed to support current ratings, then strengthen in by 2018 and beyond ,” S& P Global Ratings credit analyst Michelle Dalthorne said in a research report.
Standard and Po or’ s downgraded the credit of Canadian oil and gas sector companies 23 times in the first six months of the year.