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The Suncor tar sands processing plant near the Athabasca River at their mining operations near Fort McMurray, Alberta.TODD KOROL/Reuters

Canada's oil industry is about to spring a gusher of red ink.

Fourth-quarter results in the oil patch are expected to be dismal, marred by steep losses, asset impairments and production cuts as major producers struggle with U.S. crude prices that have cratered.

Benchmark West Texas intermediate (WTI) oil skidded even further in recent weeks, sliding below $27 (U.S.) before snapping back to more than $30 last week on talk of a possible deal to curb oversupply in the market.

Western Canadian Select oil sands crude has slumped to less than $20 a barrel, meaning results for the final three months of 2015 won't fully reflect the escalating woes of the Canadian industry's biggest companies.

"Financial results will be quite ugly for many of these companies, but will look stellar relative to what seems to be in store," FirstEnergy Capital Corp. analyst Mike Dunn said last week as oil hovered around $32.

Hints of a potential deal between Russia and the Organization of Petroleum Exporting Countries to tackle a supply glut supported oil prices last week, although WTI remained more than 70 per cent below its mid-2014 peak. It closed Friday at $33.62 a barrel – well below prices analysts say most oil sands producers need to run their operations profitably.

To cope, some producers are cutting budgets again, marking the second-straight year of deep reductions in the oil patch.

Penn West Petroleum Ltd. last week cut its 2016 budget by 90 per cent to $50-million (Canadian). It also halted 4,000 oil-equivalent barrels a day of output and deferred maintenance on another 2,500 boe/d, citing shaky economics.

The moves followed similar cuts by Husky Energy Inc., which slashed planned spending by 27 per cent and scrapped its dividend entirely, and Pengrowth Energy Corp., which lowered its 2016 outlay by 70 per cent from a year ago.

Moody's Investors Service has put 19 Canadian energy companies on notice for a possible downgrade, and is also reviewing ratings at seven of the sector's largest players.

Analysts expect more austerity as rapidly dwindling cash flows fail to cover even reduced spending plans. Dividends, once viewed as sacrosanct, are increasingly seen as a "luxury" many companies can no longer afford, Raymond James analyst Chris Cox said.

Integrated oil producers Imperial Oil Ltd. and Suncor Energy Inc. report their fourth-quarter results this week, on Feb. 2, and after markets close the following day, respectively. Oil sands producer MEG Energy Corp. reports on Feb. 4.

Imperial and Suncor each have refining, or "downstream," divisions, which face headwinds from a narrowing price spread between WTI crude and global benchmark Brent oil.

Until recently, the operations had been a bright spot as U.S. crude prices slumped relative to gasoline prices, which are influenced by global oil markets. That enabled refiners to generate hefty profits from bargain feedstock.

The other publicly traded Canadian refiners are Cenovus Energy Inc., which reports on Feb. 11, and Husky, which releases numbers on Feb. 26.

Oil's collapse is likely to exact a heavier toll on producers that don't have commodity hedges in place, leaving them fully exposed to sinking prices.

In the fourth quarter, WTI crude averaged $42.16 (U.S.) a barrel, down 42 per cent from the same period a year ago. Alberta benchmark natural gas plunged 31 per cent over the same period to $2.48 (Canadian) per 1,000 cubic feet.

Responding to the price rout, Alberta's New Democratic Party government last week unveiled an industry-friendly royalty policy aimed at boosting the sector's competitiveness.

Among other changes, the new measures include a flat initial rate of 5 per cent for all wells drilled after 2017 outside the oil sands, easing industry fears that the sweeping review would result in substantially higher fees. No changes are planned to oil sands royalties.

Even so, industry spending is expected to contract by an average of 30 per cent this year, according to estimates by Raymond James. That would mark a deeper reduction than a recent forecast by the Bank of Canada, which said it expects energy companies to slash spending by 25 per cent.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
CVE-N
Cenovus Energy Inc
+0.76%19.99
CVE-T
Cenovus Energy Inc
+0.56%27.08
IMO-A
Imperial Oil Ltd
+0.7%69.13
IMO-T
Imperial Oil
+0.15%93.43
MEG-T
Meg Energy Corp
+0.81%31.1
SU-N
Suncor Energy Inc
+1.18%36.91
SU-T
Suncor Energy Inc
+0.99%49.99

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