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Oil patch earnings likely to be ugly

Energy earnings start to roll out this week, and while the outlook overall is bleak, some oil producers are going to skate through this first sub-$50-oil earnings period with their profits partly intact.

A few winners, lots of losers as first-quarter energy earnings begin this week

Energy earnings start to roll out this week, and while the outlook overall is bleak, it's not uniformly so, with some producers seeing their earnings insulated by profitable refinery operations. 

It's as bad as it was in 1998, we haven't really seen anything like this in 17 years in terms of severity.- Peter Tertzakian, ARC Financial

Oil averaged below $50 a barrel for the first three months of the year. Peter Tertzakian, chief energy economist of ARC Financial, says he expects the energy sector as a whole will report a net loss this year, for the first time since 1998, a year when oil averaged below $12 U.S per barrel.

"If you look at it from a profitability and cash-flow perspective, it's as bad as it was in 1998," said Tertzakian. "We haven't really seen anything like this in 17 years in terms of severity."

Earnings results begin rolling out on Wednesday with Suncor and Cenovus, both of which have refining operations, in which crude is turned into gasoline.

Analysts expect Suncor to report earnings of 0.13 a share, a far cry from the $1.22 per share that it earned in the first quarter of 2014.

Refiners doing OK

Refiners tend to do well when oil prices drop because the oil they feed into the refinery is cheaper, and the prices for gasoline and diesel have not fallen as far as crude oil.

Wholesale gasoline prices actually rose by nearly 20 per cent January through March, even as oil hovered below $50.

That will help Suncor, Cenovus, along with Husky, and Imperial Oil. Of those four, only Cenovus is expected to post a loss.

But that is just four of the 50-plus companies that belong to the TSX's energy sub-index. 

"That's problematic for Alberta," said Tertzakian. "Since most of the industry is not integrated here, we send the raw materials away."

More budget cuts likely

There's a broad expectation that more spending cuts will be announced alongside first-quarter earnings, as producers accept that there is still no end in sight to the price collapse.

So far this year, $20 billion has been shaved from capital spending among the largest Canadian oil and gas firms, according to numbers from ARC Financial. That number is expected to increase.

"This is now acknowledged to be going on longer than expected, said Tertzakian. 

"So now people are going to look and say, well I don't have as much money as I thought I was going to have.` So I would expect some more budget cuts, not as dramatic, but more budget cuts and companies taking defensive positions.

"Whether than means layoffs or not, I don't know — nationally, it probably does."

Prices starting to recover

Oil prices have recovered nearly 30 per cent from the low in March of 2015, as U.S. rig counts continue to decline.

A report on Sunday from Bloomberg said traders are bailing out on their short positions, as the price of oil has now risen six weeks in a row. That's a sign that the speculators are starting to think that oil has hit bottom

But, it's the rare analyst who is totally confident that is true. And it's probably not enough for the energy sector to even start to consider increasing spending.

"I'm not certain it's going to hold," said Jason Whitley, a portfolio manager with EnergyX Capital Management in Houston.

"Saudi said that it was producing ten million barrels a day in April. My sense is that the Saudis are sending a signal, so I expect that companies are going to continue to be cautious." 

"Coming out of this, I don't think they're going to ramp up spending even if prices improve — they're going to hunker down and take care of their balance sheets," said Whitley.

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