Just a few months ago, Wall Street was mostly bullish about the prospects of Canada's Oil Patch with the sector expected to resist a sharp downturn in the current year. Unfortunately, expectations have now taken a turn for the worse: earnings in Canada's energy industry are now expected to decline 19% over the course of 2023 compared to previous projections of a more modest 8% decline.
The biggest reason for the poorer outlook is falling gas prices, which have hit Canadian oil and gas companies particularly hard. Natural gas prices have contracted by a third in the current year and are down 75% from their 2022 peak with an unusually warm winter followed by an equally warm autumn depressing demand. In fact, natural gas prices are now lower than year-ago levels prior to Russia's invasion of Ukraine.
"Energy sectors around the globe are expected to pull back in 2023 off a difficult 2022 comparison, though Canada had, at the end of November, been expected to suffer the least," Bloomberg Intelligence senior associate analyst Gillian Wolff and chief equity strategist Gina Martin Adams wrote on Tuesday.
But the outlook is now changing.
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"Now, Canada is expected to decline more on par with the U.S. and Europe, with energy sectors in emerging markets taking the lead for 2023 earnings expectations," Wolff and Martin Adams warned.
Adding to the woes, UK-based Barclays bank has now said it will no longer provide financing for oil sands companies or oil sands projects.
Still, despite the grim earnings outlook, Wall Street still believes that Canadian energy stocks will outperform their American brethren, with the S&P/TSX Energy Index expected to return 18% in 2023 compared to a 14% return by the S&P 500 Energy Index.
Indeed, it's not all doom and gloom in the Canadian Oil Patch. Oilsands giant Suncor Energy Inc. (NYSE: SU) reported upbeat Q4 2022 earnings on Tuesday, with adjusted funds from operations increasing to C$4.189B (C$3.11 per common share) in the fourth quarter of 2022, compared to C$3.144B (C$2.17 per common share) while Q4 Non-GAAP EPS of C$1.81 beat the Wall Street consensus by C$0.05. The company's upstream production increased to 763,100 barrels of oil equivalent per day (boe/d), compared to 743,300 boe/d in the prior year's corresponding quarter, driven by increased production from the company's Oil Sands assets. Suncor also provided a bright 2023 outlook, saying it plans to increase its share buyback allocation to 75% by the end of the first quarter of 2023, and progress towards its net debt reduction targets.
That outlook is consistent with an earlier projection by BMO Capital Markets who just a few weeks ago predicted that debt-light Canadian oil and gas producers are poised to reward shareholders again in 2023 thanks to their ability to generate ample cash coupled with their diminished appetite for acquisitions.
Canadian Energy Stocks
BMO estimates that the top 35 energy companies will generate C$54 billion ($39.7 billion) in free cash flow in 2023, 16% lower than 2022 levels. However, the analysts say that the portion of cash that flows to shareholders is likely to be higher because companies will spend less on debt repayment. According to the analysts, most large- and mid-size producers expect to be net-debt-free in the second half of 2023. Net debt represents a company's gross debt minus cash and cash-like assets.
BMO notes that Canadian energy stocks have lately come under heavier pressure than their U.S. counterparts during the latest oil price selloff due to a number of factors including discount for their heavy-grade crude and also a $29 per barrel discount due to distance from U.S. refineries. The analysts have warned that the discount may worsen following the shutdown of the Keystone Pipeline.
BMO has tapped Bonterra Energy Corp. (OTCPK: BNEFF) and Canadian Natural Resources (NYSE: CNQ) as good buys.
Bonterra Energy Corp., a conventional oil and gas company, engages in the development and production of oil and natural gas in the Western Canadian Sedimentary Basin. Its principal properties include Pembina and Willesden Green Cardium fields located in central Alberta. The company faced a severe crisis in 2020 when the COVID-19 pandemic crushed oil prices. Luckily, a government-backed loan helpedBonterra through the dark times. Bonterra has managed to repay the loan, along with C$150 million in debt during the past year as of the third quarter. According to Chief Executive Officer Pat Oliver, the company expects to pay off its remaining C$38 million bank debt by the third quarter 2023, after which it will have new options like initiating a dividend, raising production or repaying debt further.
Meanwhile, Canada's biggest oil producer Canadian Natural Resources announced last month that it will raise shareholder returns to 80% to 100% of free cash flow up from 50%, once it brings down net debt to C$8 billion. BMO says this is likely to happen late next year.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More