CALGARY, Alberta, Oct 18 - First, the good news: if you're an investor in Canadian energy stocks, the worst may be over for natural gas markets.
But before getting giddy, remember that the oil patch starts reporting third-quarter financial results this week, and those numbers won't show what's happening in gas markets now.
In fact, earnings will reflect gas prices that sank to multi-year lows under the weight of bulging inventories.
Worse, they will be compared to year-earlier prices that had yet to show the worst ravages of the financial crisis. Oil, too, withered from 2008 heights above $147 a barrel.
It all points to results for some companies that Macquarie Capital Markets Canada analysts predicted will be "ugly."
But, at the same time, they recommended investors maintain exposure to gas, especially companies that can tap into large unconventional reserves, because of the recovery. Producers with in-the-money hedges will shine, too.
Husky Energy Inc (HSE.TO), the large gas and heavy oil producer, leads off the industry's third-quarter reporting on Wednesday. Its earnings are expected to be chopped by more than two-thirds from last year's third quarter, according to analysts polled by Thomson Reuters I/B/E/S.
Such drops are expected throughout the sector.
In the third quarter, U.S. crude averaged $68.24 a barrel, down 42 percent from $118 a year earlier. Oil was up 14 percent from the second quarter as the world economy improved.
Gas was hit by a big drop in industrial demand and moderate temperatures, which prompted record storage injections.
Canadian wholesale gas averaged just C$2.83 a gigajoule in the quarter, down more than 60 percent from a year earlier and 14 percent from this year's April-June period.
But wait -- gas in the Alberta market has climbed steadily in the past six weeks as producers cranked valves shut on unprofitable production and as cold weather arrived in Western Canada. On Friday, it fetched C$4.43 a GJ.
Investors have twigged to improving conditions in the industry, lifting the Toronto Stock Exchange's oil and gas subgroup by 18 percent since the start of September.
The big question now, said analyst Martin King of FirstEnergy Capital, is whether the gains are solely driven by supply cuts or if economic recovery is also fueling demand.
"It's a situation where you've got to get to 2010 before seeing that surplus eaten down to some degree because right now it's pretty much crazy how much gas is in storage," King said.
That's one reason why companies are unlikely to announce during quarterly conference calls that they are ladling large amounts of cash back into their gas budgets. At least not yet.
"We're not going to be hearing anything about 2010 anyway until the December time frame," Phil Skolnick, analyst at Genuity Capital, said.
Some of the biggest gas players, including Canadian Natural Resources Ltd (CNQ.TO) and EnCana Corp (ECA.TO), have spent the past year cutting their gas spending sharply.
Canadian Natural, due to report results on Nov. 5, is expected to show a 28 percent drop in profit. EnCana is forecast to report earnings that are down 40 percent when it releases its numbers.
"I can't see these guys going gangbusters (on gas spending) after all the pain they've just gone through," King said.
Those companies, and others, will be cushioned by their heavy oil operations, which have been highly profitable as benchmark crude prices have climbed and demand in the United States for the thicker crude has jumped.
The price spread between light crude and Canadian heavy oil has been unusually narrow, analysts said, as Mexican oil exports have waned, Venezuela has shifted some shipments away from the U.S. market and refineries have increased their capacity to process the gooey oil.
Meanwhile, TransCanada Corp's (TRP.TO) new 435,000 barrel a day Keystone pipeline to the United States is expected to start filling up with crude before year-end, adding more demand.
For integrated companies such as Suncor Energy Inc (SU.TO), which reports for the first time following its C$22.8 billion ($21.9 billion) takeover of Petro-Canada, weak refining margins are expected to weigh on results, Macquarie said.
But before getting giddy, remember that the oil patch starts reporting third-quarter financial results this week, and those numbers won't show what's happening in gas markets now.
In fact, earnings will reflect gas prices that sank to multi-year lows under the weight of bulging inventories.
Worse, they will be compared to year-earlier prices that had yet to show the worst ravages of the financial crisis. Oil, too, withered from 2008 heights above $147 a barrel.
It all points to results for some companies that Macquarie Capital Markets Canada analysts predicted will be "ugly."
But, at the same time, they recommended investors maintain exposure to gas, especially companies that can tap into large unconventional reserves, because of the recovery. Producers with in-the-money hedges will shine, too.
Husky Energy Inc (HSE.TO), the large gas and heavy oil producer, leads off the industry's third-quarter reporting on Wednesday. Its earnings are expected to be chopped by more than two-thirds from last year's third quarter, according to analysts polled by Thomson Reuters I/B/E/S.
Such drops are expected throughout the sector.
In the third quarter, U.S. crude averaged $68.24 a barrel, down 42 percent from $118 a year earlier. Oil was up 14 percent from the second quarter as the world economy improved.
Gas was hit by a big drop in industrial demand and moderate temperatures, which prompted record storage injections.
Canadian wholesale gas averaged just C$2.83 a gigajoule in the quarter, down more than 60 percent from a year earlier and 14 percent from this year's April-June period.
But wait -- gas in the Alberta market has climbed steadily in the past six weeks as producers cranked valves shut on unprofitable production and as cold weather arrived in Western Canada. On Friday, it fetched C$4.43 a GJ.
Investors have twigged to improving conditions in the industry, lifting the Toronto Stock Exchange's oil and gas subgroup by 18 percent since the start of September.
The big question now, said analyst Martin King of FirstEnergy Capital, is whether the gains are solely driven by supply cuts or if economic recovery is also fueling demand.
"It's a situation where you've got to get to 2010 before seeing that surplus eaten down to some degree because right now it's pretty much crazy how much gas is in storage," King said.
That's one reason why companies are unlikely to announce during quarterly conference calls that they are ladling large amounts of cash back into their gas budgets. At least not yet.
"We're not going to be hearing anything about 2010 anyway until the December time frame," Phil Skolnick, analyst at Genuity Capital, said.
Some of the biggest gas players, including Canadian Natural Resources Ltd (CNQ.TO) and EnCana Corp (ECA.TO), have spent the past year cutting their gas spending sharply.
Canadian Natural, due to report results on Nov. 5, is expected to show a 28 percent drop in profit. EnCana is forecast to report earnings that are down 40 percent when it releases its numbers.
"I can't see these guys going gangbusters (on gas spending) after all the pain they've just gone through," King said.
Those companies, and others, will be cushioned by their heavy oil operations, which have been highly profitable as benchmark crude prices have climbed and demand in the United States for the thicker crude has jumped.
The price spread between light crude and Canadian heavy oil has been unusually narrow, analysts said, as Mexican oil exports have waned, Venezuela has shifted some shipments away from the U.S. market and refineries have increased their capacity to process the gooey oil.
Meanwhile, TransCanada Corp's (TRP.TO) new 435,000 barrel a day Keystone pipeline to the United States is expected to start filling up with crude before year-end, adding more demand.
For integrated companies such as Suncor Energy Inc (SU.TO), which reports for the first time following its C$22.8 billion ($21.9 billion) takeover of Petro-Canada, weak refining margins are expected to weigh on results, Macquarie said.
