Canada's major integrated oil and gas companies missed the financial mark last quarter and their stocks suffered, but analysts say better times lie ahead for investors who are willing to take a longer term view on these energy stalwarts.



Shares of Suncor Energy Inc., the country's biggest integrated energy player, Husky Energy Inc. and Imperial Oil Ltd. have all dipped during the last month, with Suncor and Imperial getting a rough ride this week after delivering disappointing financial results.

Shares of Suncor gave up another 0.5 per cent yesterday, after tumbling 6 per cent a day earlier. Suncor's earnings of $457-million, or 29 cents a share, came well under consensus expectations of 42 cents a share in its first full reporting period as a combined company after merging with Petro-Canada last August.

Analysts forgave Suncor for incurring unexpected charges related to its acquisition of Petro-Canada, but they were less receptive to signs of higher operating costs and weaker downstream results in refining and marketing. Suncor management also said the company hurt itself by hedging against lower prices for crude.

Menno Hulshof, of TD Securities Inc., lowered his price target on Suncor shares to $44 from $47, citing "a much weaker than expected quarter," though he maintained his "buy" recommendation.

He pointed to Suncor's "deep portfolio of oil sands projects" that will need to be developed for the company to reach its objective of annual oil sands growth of between 10 per cent and 20 per cent through to 2020. Suncor is now budgeting and scheduling these projects and should provide investors clear direction by year-end, Mr. Hulshof said in a research note.

Suncor was bumped off Goldman Sachs' "conviction buy" list yesterday by Canadian Natural Resources Ltd., partly because of Suncor's high costs related to the Petro-Canada acquisition, and partially because of Canadian Natural's improving costs. Goldman has a six-month target price of $90 on CNQ's stock.

Imperial Oil, the country's largest refiner, this week reported share profit of 62 cents, compared with estimates of 64 cents, as it faced weaker demand and margins. Investors knocked more than 1 per cent off the stock, after the company said production volumes were hurt in the fourth quarter by repairs at its Cold Lake site in Alberta.

Despite these recent challenges and sagging oil prices, Imperial and other players are starting to spend in the oil patch again. Imperial plans to raise its capital expenditures to $3.2-billion this year, up from $2.4-billion in 2009. Last month, Husky and partner BP PLC said they will spend $2.5-billion on the Sunrise oil sands project. Both are signs that oil companies are gradually being attracted back to business in the oil sands by an improved economic picture and lower development costs.

Terry Peters, of Canaccord Adams Inc., maintains "buy" recommendations on Husky, Imperial Oil and Suncor. His 12-month prices targets are $33, $48 and $43, respectively.

One factor that analysts expect will help the oil industry this year is steadier pricing for crude compared with the dramatic swings experienced in 2008 and 2009.

But other challenges remain. The macro pictures shows growth in oil production outpacing consumption, with global inventories at 95 days, significantly above their five-year average of 86 days, according to the Energy Intelligence Group. "The fundamental picture remains quite weak," says Dina Cover, an economist with Toronto-Dominion Bank.

Demand is coming from the developing world, where consumption rose 5.1 per cent in the fourth quarter, compared with a year earlier. In OECD countries demand actually slipped 3.4 per cent. Global demand for oil rose 0.3 per cent last year, compared with 2008 demand. But when compared with 2007 levels, which Ms. Cover considers a more accurate "pre-recession benchmark," global demand decreased 2 per cent last year.

Source: Globe & Mail

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