Canada's energy patch will begin to report first-quarter financial results this week, giving investors a look at how companies fared amid soaring prices fuelled by geopolitical tensions and bans on Russian oil and gas. However, owing to strains from rising costs to recession fears, analysts and money managers are warning of macro risks on the horizon.
Josef Schachter, an energy investment veteran and president of Schachter Energy Research Services, expects companies to report robust cash flows, and to boast about the speed of debt repayment. He also predicts a greater balance between returns to shareholders through dividends and buybacks, and spending on growth and reducing carbon emissions.
"All of them are going to be quite spectacular. I think the cash flows are probably going to blow everyone away," Schachter said in an interview. "[But] the matrix where all of the free funds flow is going to go to shareholders, I think that's gone down the drain. We're going to see maybe a third go to pay down further debt and improve the balance sheet, maybe a third goes to shareholder returns, and a third goes to growth and environmental initiatives."
Cenovus Energy (CVE.TO)(CVE) is expected to report results for the quarter ended March 31 on Wednesday, followed by Precision Drilling (PD.TO)(PDS) on Thursday, and Imperial Oil (IMO.TO)(IMO) and TC Energy (TRP.TO)(TRP) on Friday.
The quarter was not short on weighty geopolitics. Russia's invasion of Ukraine and the resulting sanctions on Russian energy sent a shockwave through the global commodities complex. The war, and tightening global supply, pushed the price of West Texas Intermediate (WTI) (CL=F) crude to levels not seen since 2008. According to Scotiabank Global Equity Research, WTI prices averaged US$94 per barrel in Q1 2022, up 22 per cent from Q4 2021 levels.
Given the potential for Russia to ramp up its war against Ukraine, prompting heftier sanctions and untold chaos, Schachter says it's tough to make oil price predictions much beyond the quarter already in the books.
"I can conceive of both US$150 a barrel, and US$50 a barrel, in 2022. The high end is if Russia uses weapons of mass destruction in Ukraine. US$50 [per barrel] would be if we saw a severe recession hit and the unemployment rate goes up," he said.
Calls for a recession are picking up on Wall Street, as the U.S. Federal Reserve appears set to battle run-away inflation with higher rates. Last week, analysts at Goldman Sachs pegged recession odds at 15 per cent in the next year, and 35 per cent within the next 24 months. That would be bad news for Canada, given the overwhelming majority of our energy exports flow south.
"I'm in the camp that if we do see a recession, which I believe I would put over 50 per cent probability that we have it before the end of the year, that we will see the Dow... 10,000 points lower than we are today," Schachter said. "As we saw in February and March of 2020, energy stocks can't hold up, even though the fundamentals before the problem hits are perfect. The inter-market pressure drags them down. Nothing is safe."
Investors have been burned. So they just want a return of capitalAnish Chopra, managing director and portfolio manager at Portfolio Management Corporation
Even with inflation boosting the cost of operations, Anish Chopra expects returns to shareholders will continue to be a major talking point this quarter, given the strong price of oil. The managing director and portfolio manager at Toronto-based Portfolio Management Corporation says there are just too many risks on the table for many firms to stomach investing in new production.
"The price of oil could be quite volatile in either direction because of how all these cross-currents cut together," he said in an interview. "Investors have been burned. So they just want a return of capital."
Greg Taylor, chief investment officer at Toronto-based Purpose Investments, calls for an "extremely good quarter" for Canadian energy stocks, marked by stronger revenue and continued debate about what to do with excess cash.
However, he says companies in the energy patch won't forget the 2014 commodity crash while weighing their spending options.
"I would think more companies are going to be hesitant to put capital in the ground and start to bring on a ton of new production until they get strong reassurances that this time is going to be different," he said in an interview. "They're probably right to think this isn't going to last forever. But it does feel like something that will be around for the next few years or so."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.