July 12, 2023
Integrated Oil and Senior E&P 2Q Preview—Mother Nature Weighs In
The second-quarter earnings season is set to kick-off on July 27 with Cenovus Energy slated to release its results before market open, followed by Baytex Energy, MEG Energy and Ovintiv all reporting after market close that day. Our second-quarter CFPS estimates generally sit below Bloomberg (IBES) consensus but may move more into line as formal corporate surveys are released (Exhibit 1).
Second-quarter results for energy producers were buffeted by mother nature—a mild winter that hammered natural gas prices and extensive wildfires in Alberta and elsewhere. That said, quarterly results should continue to showcase the commitment of producers to reduce net debt and return free cash flow to shareholders, albeit at a bit slower pace. Planned upstream/downstream maintenance, the impact of Alberta wildfire production shut-ins and relatively stable refinery margins all point towards uninspiring results and conference calls. That said, in contrast with the first-quarter, we anticipate that net debt reduction resumed in the second-quarter—unlocking higher shareholder returns down the road.
We estimate that Canada’s oil sands weighted majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil—generated free cash flow (before dividends and working capital movements) of $3.4 billion in the second-quarter, reduced net debt by $1.4 billion, repurchased $1.5 billion of their common shares and paid/accrued cash taxes (to all jurisdictions) of about $1.3 billion.
The commodity star of the second-quarter was WCS where narrowing spreads vis-a-vis WTI benefitted from reduced oil output and robust off-shore demand. For a detailed rundown on our outlook for WCS, please see Energy Insights: Canada—The Coming of TMX.
Our updated earnings/cash flow estimates reflect second-quarter actual commodity prices, our recent Global Energy Research Commodity Price Update, disclosed share buybacks and other various fine- tuning adjustments. On average, we have trimmed our one-year target prices for our coverage group by 5% amid lower estimates which are outlined in Exhibit 3. Our favorite producer remains Canadian Natural Resources (Global Top 30 and Global Energy Best Ideas), with Suncor Energy (Global Energy Best Ideas) remaining our favorite integrated over a one-year horizon. Enerplus Corporation remains our favorite intermediate producer. Baytex Energy and Cenovus Energy round out our Outperform roster.
Upstream wise, oil prices remained under pressure during the second-quarter. WTI averaged US$73.71 in the quarter—down US$2.42 (3%) sequentially, while Brent fell 5% to average US$77.93. The Canadian dollar held steady sequentially vs. the US dollar in the second-quarter to average US$0.74. Mixed Sweet Blend (Canadian Light) traded at a discount of US$2.96 to WTI (vs. US$2.85 in the first-quarter), while WTI-WCS differentials tightened to US$15.07 (vs. US$24.77 in the first-quarter). Syncrude’s SCO (as per Bloomberg) averaged $103 during the second-quarter—a 4% premium to WTI. Canadian condensate prices of $93.25 fell 13% sequentially, which should support higher bitumen realizations.
On the natural gas side of the equation, National Balancing Point (NBP) fell 35% to average US$10.46/ mmBtu in the second-quarter amid warm weather in Europe, while Title Transfer Facility (TTF) fell 29% sequentially to US$11.21/mmBtu (as per Bloomberg). Henry Hub (spot) prices averaged US$2.13/ mmBtu (down 20%) in the second-quarter, while Alberta spot (AECO C) gas prices of $2.40/mcf fell 26% sequentially amid a slightly wider Henry Hub basis of US$0.37/mmBtu.
Downstream wise, US Midwest cracks rose 5% sequentially to US$30.92/bbl, while New York Harbor 3-2-1 cracks of US$35.26/bbl were down 3% on a sequential basis. We anticipate that integrated companies Suncor and Cenovus will undergo negative FIFO-LIFO inventory adjustments in the quarter.
Enerplus – Outperform (Favorite Intermediate Producer)
Our second-quarter CFPS estimate for Enerplus sits at US$0.90 (US$193 million) and factors in production of 93,700 boe/d. We peg Enerplus’ oil & liquids production at 57,000 bbl/d (US$17/bbl operating costs), while our oil & liquids realization sits at US$66/bbl. Included in our outlook is Enerplus’ second-quarter capital spending at US$175 million, with US$10 million in cash taxes and realized hedging gains of US$15 million. Also included in our outlook is US$30 million in share repurchases in the quarter.