CALGARY (CP) -- As Canada's largest energy companies get set to release record-shattering fourth quarter and year-end results, the biggest profits are expected to come from the natural gas producers.
In the fourth quarter, natural gas prices soared to an average of $12.30 per thousand cubic feet, almost double the price in the same quarter of 2004.
''The real big win is on gas, for sure,'' said Martin Molyneaux, an energy analyst with Calgary-based FirstEnergy Capital.
''It's the first time ever where we've seen a single quarter where (the market price) averaged double digits. And I think that's going to be the big shocker when people start seeing the press releases rolling out here in a couple weeks' time.''
Most large energy companies have Canadian natural gas production in their portfolio, but none more so than Calgary-based EnCana Corp. [TSX:ECA; NYSE:ECA], which is currently North America's largest gas producer.
But the company's hedges - where production is sold ahead on futures markets to lock in profits - will likely continue to drag down earnings despite record high gas prices.
In the third quarter, EnCana's profits fell 32% to $266 million after recording after-tax hedging losses of $604 million.
Although natural gas producers are expected to put up some record earnings for the quarter and full-year 2005, don't be surprised if some companies actually drop in market value.
It's likely the market has already factored in last year's increases and is looking forward to current gas prices, which are substantially lower.
''The market has already looked through the fourth quarter and is probably more nervous on gas right now due to the warm weather and high storage levels,'' said Tom Ebbern, an analyst with Tristone Capital in Calgary.
The continuing rise of the loonie in 2005 will also negatively affect companies that operate in Canadian dollars compared to their American competitors, as it averaged 85 cents on the U.S. dollar in the fourth quarter, up three cents over the previous year.
Oil producers are also expected to show strong profits as the price of crude averaged just below $60 per barrel - an increase of nearly $12 over the same period in 2004.
That's down from the third quarter, which witnessed an all-time record high of $70.85 per barrel set in late August. But it will still result in strong year-over-year results for Canada's big oilsands producers.
Suncor Energy [TSX:SU; NYSE:SU], coming off significantly lower output in the first nine months of 2005 due to a major fire last January, is now riding three months of record production due to expansion work that was completed at the same time as its fire repairs.
Shell Canada [TSX:SHC], which will lead off earnings season in the Canadian oilpatch on Jan. 25, will also reap the benefits of oilsands production from its 60% operating stake in the Athabasca oilsands project in northern Alberta.
In the third quarter, profit from Shell's oilsands division rose 31% to C$225 million as production hit a new quarterly record of 165,000 barrels per day.
''The (oilsands) mine is now producing more reliably than it did a year ago and crude is up and gas prices are strong, so Shell will be bringing fairly strong results,'' said Ebbern.
Canada's integrated oil companies, which have refining and marketing operations along with oil and gas production, are expected to produce strong numbers.
That is because last fall's devastating hurricane season in the Gulf Coast is likely to have less of an impact on the Canadian refining business than in the U.S.
One of the biggest questions arising from the 2005 profit parade in the oilpatch will be what the companies plan do with all their extra cash.
''The capital expenditure programs are up over last year, but the cash flows are up even more,'' said Molyneaux.
With oil and natural gas prices forecast to remain high this year and debt loads already low, companies will continue with share buybacks, increase dividend payments and potentially rev up merger and acquisition activity.
Junior companies and energy trusts are the most likely to be involved in consolidation activity this year, but even Canada's large exploration and production companies like EnCana, Talisman Energy [TSX:TLM; NYSE:TLM], Nexen Inc. [TSX:NXY; NYSE:NXY] or Canadian Natural Resources [TSX:CNQ; NYSE:CNQ] could become targets for large multi-national companies looking to increase their reserves.
Talk of big-money takeovers in the North American energy sector heightened last December when Dallas-based ConocoPhillips [NYSE:COP] unveiled a friendly, $35.6-billion deal for natural gas producer Burlington Resources Ltd. [NYSE:BR]. Both companies have significant Canadian production.
(c) The Canadian Press 2006
