For integrated Canadian oil companies having to offer a discount on their crude because of oversupply in the U.S. Midwest, profits from thier own refineries margins are proving a lifesaver.Michael Buholzer/Reuters
Canadian crude producers are leaning heavily on their operations that make products such as jet fuel to mask the hit they are taking by selling their oil for less than many of their North American competitors.
Suncor Energy Inc. 's new chief executive said the company's four refineries made up for 90 per cent of the value it missed by having to sell its oil production at a steep discount to oil prices elsewhere in North America. Cenovus Energy Inc. also said refining margins helped the company deal with crude discounts when it reported first quarter results last week.
For oil companies trying to ward off inflation and remain competitive as tight oil formations such as the Bakken threaten to further flood the market, this diversification is paying off. It gives companies such as Suncor, Cenovus Energy, and Imperial Oil a buffer as the price of oil produced in Canada falls out of step with oil in parts of the United States.
"Having the integrated facilities has meant we're relatively immune to those effects," Steve Williams, Suncor's new CEO told reporters after the company's annual meeting on Tuesday. "So we're strong advocates of staying in that place."
Mr. Williams' comments came as Suncor revised its estimate on the average price it expects to receive for its oil relative to the North American benchmark. Its product will be worth between $10 and $15 per barrel less than West Texas Intermediate, which it expects to trade at around $95 (U.S.) per barrel in 2012.
Suncor previously forecast WTI to trade at $90, and predicted it would receive $4 to $5 per barrel less than that benchmark. Canadian Oil Sands Ltd. on Monday also said the discount would widen more than previously anticipated in 2012.
Given the price differences, Suncor wants one pipeline in Eastern Canada to reverse the flow of crude so it reaches its Montreal refining complex, or another existing pipeline to ship oil eastward rather than natural gas. The Montreal facility, like others in the East, is not as helpful as those in the West because it must buy the oil it processes at the much richer European benchmark.
Refineries are "highly important" given these price spreads, said Lanny Pendill, an analyst with Edward Jones. Those designed to process heavy oil are in especially good shape because it trades at an even deeper discount. This puts Cenovus in an envious spot, he noted.
Cenovus, too, highlighted its refining capability when it reported results. The ability to buy cheap crude and refine it into expensive gas and diesel "translated to strong refining performance that more than offset the impact of widening differentials on the upstream," chief operating officer John Brannan said.
Suncor, Canada's largest oil company, made $1.46-billion or 93 cents a share in the first quarter, up from $1.03-billion or 65 cents in the same quarter last year.
Its operating earnings, which exclude one-time items, rang in at $1.33-billion or 85 cents, down from $1.48-billion or 94 cents per share a year ago. The company was dinged in part by lower production at its oil sands operation because of unplanned outage at one of its upgraders.
Suncor's refining and marketing division accounted for $474-million of its earnings, compared with $627-million last year.
The Calgary-based company and its shareholders said farewell to Rick George, who served as Suncor's chief executive for 21 years, with a standing ovation at Tuesday's meeting. Under Mr. George's tenure, the company's market capitalization grew to about $50-billion, up from $1-billion when it went public in 1992. Suncor produces about 550,000 barrels of oil per day, up from 85,000 barrels per day.
With files from reporter Nathan VanderKlippe in Calgary
Carrie Tait