The oilpatch rebound is here: Suncor, Cenovus swing to profit amid higher oil prices, reopening economies

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CALGARY — Two of Canada’s largest oil producers are profitable again as the North American crude oil benchmark trades at its highest monthly price in seven years and major companies promise to spend their excess cash on dividends and debt rather than drilling.

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Suncor Energy Inc. and Cenovus Energy Inc., two of Canada’s three largest oil companies, reported better-than-expected quarterly profits Thursday and announced they cumulatively spent close to $2 billion on a combination of share buybacks, dividends and debt repayment in the second quarter.

Both companies have enjoyed a dramatic turnaround in oil prices over the past year, as the West Texas Intermediate benchmark is up 78 per cent over the past 12 months. WTI rose 2 per cent Thursday, or US$1.17 per barrel, to US$73.56 per barrel.

For Cenovus, the run up in oil prices and its blockbuster acquisition of competitor Husky Energy Inc. last year, translated into a dramatic 386 per cent increase in quarterly revenues to $10.6 billion in the second quarter, up from just shy of $2.2 billion in the same period a year earlier.

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“Our results underscore the earnings power of the combined company as we further integrated and deliver on our expanded asset base,” Cenovus president and CEO Alex Pourbaix said Thursday after reporting net earnings of $224 million in the quarter, compared to a $235-million net loss a year earlier.

Calgary-based Cenovus spent much of the additional cash it generated to drive down its net debt by roughly $1 billion in the second quarter, following through on a commitment to aggressively pay down debt after the Husky deal. Cenovus bought Husky’s shares for $3.8 billion last year and assumed its $5.2 billion of long-term debt.

Pourbaix said that if commodity prices and the Canada-U.S. dollar exchange rate hold, then the company is in a position to further accelerate its debt repayment in the third quarter with the goal of bringing net debt down to $10 billion by the end of the year.

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Brent crude oil is enjoying its highest monthly average price since late 2018 and the West Texas Intermediate benchmark is enjoying its highest average price since 2014, Scotiabank Economics’ senior economist Marc Desormeaux wrote in a Thursday commodity price forecast.

The bank upped its estimate for both WTI and Brent to US$66 per barrel and US$69 per barrel for 2021 on Thursday. Next year, the bank forecasts a higher average of US$69 per barrel for WTI and US$72 for Brent.

Desormeaux wrote that the Delta coronavirus variant has unleashed some concerns about oil demand while OPEC’s decision to boost oil supply beginning in August have caused oil prices to dip in recent weeks. “Yet, the fundamentals remain supportive and we have revised our outlook for Brent and WTI higher despite near-term risks,” he wrote.

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As economies re-open, commuters return to their offices and travellers take flight, demand for refined fuels is expected to rise. Cenovus attributed part of its earnings beat to the U.S. economy re-opening “along with the continued recovery of demand for U.S. downstream products.”

“Inventories increased as U.S. refinery utilization ramped up and product was stored in June for sale at higher prices in the third quarter, and accounts receivable increased mainly due to higher commodity and refined product prices,” Eight Capital analyst Phil Skolnick wrote in a Thursday research note.

However, Suncor Energy’s largest refineries are in Canada, where the company reported gasoline and diesel demand in the second quarter were still 13 per cent below pre-COVID-19 levels. As lockdown restrictions began to ease in July, the company said that gasoline and diesel demand rose slightly in Canada but are still 6 per cent below pre-COVID levels.

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Still, Canada’s second-largest oil and gas company by market capitalization behind Canadian Natural Resources Ltd. posted net earnings of $868 million in the quarter, up sharply from a $614-million net loss recorded at this time last year.

Suncor focused most of the cash it generated on buying up its own stock and announced it now plans to buy up to 5 per cent of its float this year. Suncor spent $643 million to buy 23 million of its own shares in the second quarter, representing about 1.5 per cent of its float.

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The company also spent $315 million in dividends, and reiterated a previous promise to raise those distributions in the future.

Little said Suncor intends to grow its dividend at a compounded annual rate of 25 per cent between now and 2025 as it focuses on returning funds to shareholders.

Cenovus shares rallied roughly 3 per cent, or 28 cents each, to $10.45 per share on the Toronto Stock Exchange after announcing its quarterly results. Suncor Energy, weighed down by production issues at the Fort Hills oilsands mine, fell 3 per cent, or 79 cents each, to $24.92 per share.

National Bank analyst Travis Wood called the issues at Fort Hills an “operational hiccup” that would have a negative outlook on the company “and in our view, leaves 2021 a wasted year to gauge execution given turnaround activity and Fort Hills recalibration.”

Financial Post

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