Canada’s oil and gas industry was operating at a loss in the first quarter of 2015, Statistics Canada reported Wednesday, after the sharpest decline in profitability in records going back nearly three decades.
The industry recorded a $631 million loss in the first three months of this year, when global oil prices hit their low point in the recent price rout. That’s down from a profit of $5.4 billion in the same period a year earlier, when prices were above $100 per barrel.
As recently as the final quarter of 2014, the industry had pulled out a $2.2-billion profit.
“Even for a sector where profit swings are typically wide, that marked the largest decline in the data series, which goes back to 1988,” TD Bank economist Leslie Preston wrote.
"The current level of oil prices is below the cost of production for several extraction sites, particularly in the oilsands," Desjardins senior economist Benoit P. Durocher wrote in an analysis.
"We can expect investment in this sector to continue to fall in the coming months. In addition, some producers could decide to stop operating at a loss and thereby significantly reduce their extraction volume. Either case is not good news for the Canadian economy."
And Preston predicts that “it’s not over. … Profits are likely to be weak in Q2 as well as the knock-on effects of lower energy sector profits hit other industries."
Some of that contagion was already in evidence in the first quarter. Overall operating profits at Canadian corporations fell 6 per cent, StatsCan reported, and corporate profits are now 9.3 per cent lower than they were a year ago.
Although economists predict a lower loonie will eventually help manufacturing, profits in the sector declined by 12.7 per cent in the first quarter. Nine of 13 manufacturing industries reported lower profits.
The financial sector is also struggling, with profits down 14.3 per cent from a year earlier, at $19.7 billion, compared to $23 billion in the same quarter a year earlier.
For all that, Canadian banks’ earnings this week have beaten analysts’ expectations. RBC reported a 14-per-cent increase in second-quarter profits, while CIBC tripled its year-on-year profits, albeit from low numbers due to charges it had to take last year. TD Bank saw profits decline 7 per cent, but still beat analysts’ calls.
On the positive side are retail (profits up 7.9 per cent, according to StatsCan), wholesale trade (up 2.8 per cent) and transportation (up 8.4 per cent).
“Weakness in corporate profits is expected to weigh on business investment through much of 2015, particularly for nonresidential construction,” TD Bank’s Preston wrote.
“Fortunately, looking ahead to the second half of the year, the U.S. economy is forecast to gather speed, and take Canada's export sector along for the ride. This should lead to a modest acceleration in growth in Canada, and a better corporate profit backdrop as we head into 2016.”
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