High gasoline prices are driving strong profits for the Canadian oil patch, which has seen refineries turn into major sources of revenue.
The first major glimpse into fourth-quarter energy earnings came Tuesday, with Imperial Oil Ltd. reporting a 26-per-cent rise in net income, to just over $1-billion – an increase that came on the backs of high crude prices and surprisingly strong refining margins.
Analysts had expected earnings of 89 cents a share. Imperial reported $1.18, with refining revenues $100-million higher than some had forecast.
Indeed, refining margins helped boost Imperial to a full-year $3.37-billion profit in 2011, 53 per cent more than in 2010 and the company's second-best return ever.
In the fourth quarter, analysts said it appears refining was more profitable in Canada than in the U.S., where margins dramatically squeezed toward the end of the year. Imperial saw $272-million in net income from that leg of its business, up slightly from the same period in 2010 despite higher maintenance costs that knocked back $60-million of the gain. That bodes well for other Canadian companies with large refining assets, including Husky Energy Inc. and Suncor Energy Inc. Cenovus Energy Inc. also has a large interest in refining operations, though they are based in the U.S.
"On balance it does show that maybe downstream is going to perform better than people expected through the quarter," said Andrew Potter, an analyst with CIBC World Markets Inc.
He cautioned, however, that "there's quite a few differences in accounting and a lot of other intricacies that make it hard to pound the table."
Imperial's earnings were also boosted by record production of 162,000 barrels per day from its Cold Lake operations, although its performance was hurt by pipeline problems, stemming from several leaks, that cost it about $80-million in 2011.
The company's new Kearl oil sands project, however, remains the single-most important element for the company, which is looking to the mine to double its overall corporate output to 600,000 barrels a day by 2020. The company has now spent well over a year attempting to move a series of oversized modules to the mine site from inland ports in the western U.S., after it was unable to transport super-sized trucks through some picturesque mountain roads in Montana. That work is not yet completed.
"A significant number of loads have yet to be moved," spokesman Pius Rolheiser said Tuesday. "But we remain on track."
The company says it continues to expect the first drops of oil to flow later this year from Kearl, whose budget was expanded to $10.9-billion from $8-billion last year amid a broader reconfiguration of the project.
Launched in the depths of the 2009 financial collapse, Kearl's thousands of workers have toiled amid a major corporate return to the oil sands, which saw $19-billion in capital spending last year, and are expected to see another $20-billion in 2012.
Against that backdrop – and with the module delivery troubles – analysts have been skeptical of Imperial's ability to build the mine on time, with some adjusting their own models to reflect a late startup date. Indeed, that has been the way of the oil sands.
"You look at every single big project that I've covered, and it's always on track, on time, on budget until the last 20 per cent. And then it's 'OK, yeah, this project slipped, costs have gone up,'" Mr. Potter said.
But Imperial is now 87 per cent finished Kearl, – up from 80 per cent in December – has already started up some components at the complex site and, Mr. Potter said, is beginning to prove persuasive with its insistence that it can make its schedule.
It may never be clear whether it makes budget. The company's reorganization of the project last year could mask cost overruns, and it is common for oil sands companies to not provide the level of disclosure necessary to really determine whether they have made promised price targets.
Imperial may also face greater challenges at its second, $8.9-billion expansion phase of Kearl, designed to bring the mine to 290,000 barrels a day. The company gave the green light to that project in December – planning, design, engineering, and early-stage procurement is under way.
The company plans to begin expansion construction in 2013, allowing it to maintain some of the construction force that built the first phase. That's important in a province where labour is increasingly constrained. But it will also be building at a time when many others are launching major construction.
Peters & Co. analyst Kam Sandhar warned about the possible consequences in a research note, saying: "We remain cautious on the company's ability to control cost inflation at Kearl in the coming years, given the number of oil sands projects being constructed during that time frame."