Energy stocks can be a mixed bag

Ask virtually anyone what has been powering the TSX through the recent bull run and you’ll get the same answer: Huge profits in the energy sector. But that seemingly easy answer may be only half true.

While Canada’s oil producers have reaped the benefits of soaring crude prices, the natural gas side of the sector faces challenges, according to a report on industry performance in the first quarter, issued by Standard & Poor’s.

“Companies with a liquids-focused product mix continued to benefit from the high crude oil prices, while the operating cash flows of natural gas-focused companies were tempered by the first-quarter softness in natural gas prices,” said Standard & Poor’s credit analyst Michelle Dathorne.

Not only have natural gas prices been dampened by strong production levels, but exports to the U.S. have declined under a resurgent Canadian dollar, which gained 6% in the first three months of 2006. These have not only impacted the small to medium producers, but also the large independents.

Prices have recovered somewhat lately, as global traders have bid up the price on both oil and gas over escalating violence between Israel and Hezbollah guerillas in southern Lebanon. There is some concern that the violence could spread to Syria and possibly Iran, both sponsors of Hezbollah.

Natural gas futures are trading on the New York Mercantile Exchange above $5.50/MMBTU (Henry Hub Future), while oil prices are holding steady, north of $70 a barrel.

Meanwhile, crude producers have been pouring their profits into stock buy-backs as well boosting their dividends. Among the oil and gas companies that S&P covers, share buy-backs have totaled $13 billion since 2002, while $7 billion in dividends have been disbursed. These numbers do not include distributions from energy royalty trusts.

BMO Financial Group’s commodity index measurement shows energy prices stabilized during the month of June, with both crude and natural gas remaining close to averages set during the previous month. But the group points out that flaring conflict in the Middle East and tensions over North Korea’s missile tests have driven prices higher in early July.

“North Korea’s testing of longer-range missiles and increased violence in the Middle East have unsettled the international community, and have led to oil prices reaching new heights,” said Earl Sweet, assistant chief economist, BMO Financial Group. “For the rest of the year, we expect commodity markets to remain generally buoyant, though with heightened market volatility.”

BMO’s index measurement of oil and gas prices points to a gain of 0.2% over May, and an increase of 7.9% over June 2005.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com