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CALGARY HERALD: Tide has turned’ in oilpatch sector

Rising costs will take toll, analysts say

Even as they raked in record profits, Canadian oil and gas companies saw a weaker finish to 2006.


After swelling for most of the year, earnings in the fourth quarter have dropped for all the largest energy firms amid retreating prices for oil and gas, and rising operating costs.

Analysts are keeping an eye on whether prices hold and costs start to ease after a frenzy of oilpatch activity drove up prices for labour and equipment.

“The tide has turned,” said John de la Mare, an analyst with Peters & Co. in Calgary.

“A year ago, we were at $70 oil . . . at $70 there is a lot more cash flow going around.”

But the bigger impacts may come from governments this year, as Alberta launches a review of its royalty rate system and Ottawa weighs measures for the oil and gas sector to reduce greenhouse gas emissions.

“Those are the two pressing issues that are going to sort themselves out over 2007,” said de la Mare. “And we’re very much interested in the cost side of those issues and how it impacts these companies.”

In the final three months of 2006, lower natural gas prices were the main culprit behind lower results, as the commodity weakened heading into a second winter of warmer-thanexpected weather. Oil prices have also come off record highs, trading around $60 a barrel on Friday.

EnCana Corp., which at $6.5 billion, posted the biggest ever Canadian annual corporate profit, reported its fourth quarter earnings fell 72 per cent, while Nexen Inc. earned 75 per cent less in the last three months of 2006.

EnCana chief executive Randy Eresman called it a “challenging” year of “mixed” results.

“It was another year of high industry inflation and operational inefficiencies across the sector,” he said Thursday.

Talisman Energy Inc. and Canadian Natural Resources Ltd., the last of the senior Canadian energy producers, are scheduled to report their earnings in early March.

Among integrated companies, which both explore for and refine oil, there was a similar trend of lower profits in the fourth quarter, even as some reported record earnings for the year.

Earnings at Shell Canada Ltd. were down more than 60 per cent in the fourth quarter, while Suncor Energy and PetroCanada saw profits decline nearly 50 per cent during the same period.

Both Imperial Oil Ltd. and Husky Energy Inc. pumped out record earnings around the $3-billion mark, but reported a 20 per cent decline in profits in the fourth-quarter.

There are some indications that costs may start to come off in the spring, as industry traditionally slows down after the busy winter drilling season. Some drilling operators are reporting demand has softened due to weaker natural gas prices that have led some producers to curtail their exploration programs.

“I think we probably have maybe the first half of this year to white-knuckle through, but after that we should be in much better circumstances, just because supply fundamentals are dictating the price has to go higher,” said Richard Wyman at Canaccord Capital in Calgary.

“Recent commodity prices in a rising cost environment are not enough to generate sufficient reinvestment to sustain supply.” and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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