Business was never better in the Canadian oil patch than during the first quarter of 2022. Canadian Natural (CNQ), International Petroleum (OTC:IPCFF) and MEG (OTCPK:MEGEF) have all rallied 50-100% on the year. If commodity prices hold, Q2 should be even better; however, investors are sure to focus on a few key drivers of earnings and outlooks throughout the reporting season:
- Capital allocation - commodity prices have exceeded even the most aggressive corporate cash flow forecast assumptions; with debt balances falling rapidly, shareholders are sure to focus on management commentary related to the split between buybacks, dividends and growth capex in the "high commodity price" scenario.
- Hedges - many of the smaller Canadian producers will show accelerating profitability as hedges placed in 2021 roll off; Bonterra (OTCQX:BONXF) should see realized prices on hedged oil volumes rise by ~$10/b in Q2; Cenovus (CVE) will also drop the price-linked earn-out provision related to its Conoco (COP) transaction during Q2 2022.
- Gas exposure - the natural gas market in Western Canada has been oversupplied and prices have been depressed for most of the past decade; however, AECO gas prices have more than doubled year over year and producers like Canadian Natural (CNQ) and Birchcliff (OTCPK:BIREF) could emerge as relative winners, given high levels of exposure to the improving market.
- Operations - Suncor's (SU) safety record took another hit early in the quarter; however, no major additional outages have been reported in Q1 -- Cenovus (CVE) announced plans for a turnaround at Christina Lake during Q3; however, cogeneration data indicates production may have tapered off near the end of Q1, with generation remaining around half of normal levels in April.
The Canadian oil patch remains well positioned. High operating leverage and competitive fiscal terms should drive cash flows from Canadian producers to outperform global peers. Further, the gas market has rallied, making new decade highs in April. And pipeline supply has been able to meet offtake demand for the first time in years, with apportionment recently falling to zero. Given the macro backdrop, companies able to operate well, roll off low-priced hedges, and return cash to shareholders should continue to see upside throughout the earnings season.