Got a refinery? You’ll do fine this quarter
Look for Canadian crude oil discounts to return as a “major theme” as first-quarter results trickle out later this month, CIBC World Markets Inc. analyst Andrew Potter says.
Discounts against synthetic crude oil and Western Canada Select hit US$23 and US$35.50, respectively, in February, compared to benchmark West Texas intermediate. They could last until 2014, the analyst says.
“We believe that Q1 will be an eye-opener for many investors in terms of the magnitude of opportunity cost to Canadian producers … and, unfortunately, pricing heading into Q2 actually appears to be even worse,” Potter writes.
The pain has been especially bad for heavy oil producers, he adds, with high blending costs for diluent and condensate (needed to make bitumen flow in pipelines) eating further into realizations already stung by discounts.
Potter forecasts Canada Natural Resource’s cash flow per share, a peek at its financial strength, will be down 36 per cent (the company was also hit by low natural gas prices and an outage at its Horizon oil sands plant).
MEG Energy Corp., meanwhile, will see its cash flow per share plummet 49 per cent from the fourth-quarter of 2011, CIBC predicts.
Potter advises those seeking shelter from the storm to buy stock in companies with “significant” downstream exposure or those, like Talisman Energy and Nexen Inc., with exposure to Brent oil pricing.
“Integrated companies such as Cenovus and Suncor offer the best protection to this theme followed closely by Imperial and Husky,” the analyst notes. “Companies with meaningful Brent exposure, such as Nexen and Talisman, generally avoid much of the price risk in North America.”