The oilpatch is accustomed to many ups and downs, but the situation they face now is uncharted for even the most battle-hardened veterans of the industry, since just about every aspect of the business is under severe financial strain.
Oil producers, pipeline shippers, and refineries are all struggling as there’s too much oil coming out of the ground, with not nearly enough demand or places to store it.
That’s why experts say this earnings season for the oilpatch will be much more interesting as profits (or lack thereof) will provide a sign of the industry’s financial health and offer a glimpse about what to expect for the remainder of the year.
The commentary from companies may prove even more valuable than the numbers themselves as executives explain their survival plans to investors. As tough as the current situation is, experts say there are no prospects to turn around the sector’s fortunes, at least in the months or possibly year ahead.
Beginning today, companies will start releasing their financial results for the first three months of the year and many in the Canadian oilpatch will likely report profits because commodity prices were relatively good in January and February before crashing in March.
West Texas Intermediate (WTI), the North American benchmark, averaged about $57 US per barrel in January and about $30 in March. In Alberta, heavy oil sold for about $37 US per barrel in January and less than $13 in March.
Earnings are expected to be lower compared to the first quarter of 2019 and some companies could dip into the red, especially those who rely heavily on oilsands production, according to Morgan Kwan, a Calgary-based analyst with RS Energy Group.
“Some operators will be hit harder than others,” she said. “Definitely the heavy oil operators are going to be the most challenged.”
Some companies have been forthcoming about how much oil production they have cut in response to low prices, but many others will likely provide those figures, among other information, as they report their earnings.
“We’re not expecting a rosy outlook,” said Kwan. “We will have more of a sense of what shut-in volumes will look like and what these operators’ strategy is for the remainder of the year.”
The oilfield service sector is not expected to show the impacts of the oil price crash during first quarter earnings because of the amount of drilling in January and February, she said, while natural gas producers have not experienced the same fall in commodity prices as oil.
Investors will likely have low expectations overall for the oilpatch, but will look to see which companies are coping better than others.
“Everybody recognizes these [earnings] will stink,” said Denton Cinquegrana, the chief oil analyst with OPIS by IHS Markit. “You look for the cleanest of the dirty shirts.”
‘What’s the plan?’
On Monday, oil prices continued their slide with WTI and Canadian crude both falling more than 20 per cent to about $13 US and $6 respectively.
Some Canadian companies have been able to shield themselves from low oil prices in the past because they also own refineries and gas stations. In the current situation, however, the different businesses are all struggling with too much oil production and a sharp drop in fuel demand.
“This is one of the ultimate, worst-case scenarios,” said Cinquegrana. “I can think of demand shocks, I can think of supply shocks. I can’t think of a time when we had both.”
He agrees the comments from companies will likely be more interesting than the quarterly earnings themselves, since the focus will be on what strategies executives think make the most sense to withstand the crisis in the sector.
“It’s tough out there right now,” he said. “What’s the plan going forward?”