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CALGARY, Alberta (Reuters) - Imperial Oil Ltd's (IMO.TO) refining profit hit a record high in the first quarter as the company took advantage of a ballooning gap between bargain-basement discounts for Canadian crude oil and strong prices for gasoline and other refined products.
Husky Energy Inc (HSE.TO) also reaped rewards from the drop in prices for Canadian barrels compared with the price for international crudes, the result of burgeoning supplies in the U.S. Midwest and Midcontinent region, the major market for Canadian crude.
Pure producers of Canadian oil, especially heavier grades such as Western Canada Select, struggled as the price slumped at times to around 60 percent of Brent, the international benchmark. It has since recovered to more normal spreads.
Producers with refining and retailing operations, called downstream assets, fared much better, however.
"If you've got downstream joint-venture operations, or you're an integrated company with downstream operations, what you're not making at the wellhead you're going to make back to some degree on the cheaper input cost at your refinery," said Martin King, analyst at FirstEnergy Capital Corp.
"Presumably you'll capture some of the upside on the refined products side as well."
During the quarter, Brent crude climbed above $120 a barrel, but Canadian oil is priced against U.S. Benchmark West Texas Intermediate, which mostly hovered just above $100, due partly to a glut of supplies in the Midwest as well as the massive Cushing storage hub in Oklahoma.
In March, Western Canada Select sold for around $35 a barrel under the WTI at times, which meant bargains for refineries, such as Imperial's that do not have to rely on the more expensive imported barrels.
"Our integration provided strong shareholder value as our downstream segment posted record quarterly earnings, mostly on the performance of three of our four refineries that can capture the value from processing discounted Western Canadian crudes," Imperial Chief Executive Bruce March said in a statement.
In the first quarter, Imperial, the Canadian affiliate of Exxon Mobil Corp (XOM.N), earned C$1.02 billion ($1.04 billion), or C$1.19 per share, up 30 percent from a year-earlier C$781 million, or 91 Canadian cents a share.
Profit from the downstream segment rose by C$179 million to C$455 million.
Imperial produces oil from the Cold Lake oil sands project as well as from its 25 percent share of the Syncrude Canada Ltd oil sands mining development.
The company's C$10.9 billion, 110,000 barrel per day Kearl oil sands project is slated to open by year-end.
Imperial said gross production fell 7 percent to 289,000 barrels of oil equivalent a day due to divestment of natural gas assets.
For Husky, refineries that process Canadian heavy crude, such as its 50-percent-owned Toledo, Ohio, plant, did well due to the spread. Its Lima, Ohio, refinery, which processes mostly light oil, was hit by tighter margins, the company said.
Husky's first-quarter profit was C$591 million, or 60 Canadian cents a share, down 6 percent from C$626 million, or 70 Canadian cents a share, in the year-before quarter.
Husky, controlled by Hong Kong billionaire Li Ka-shing, chairman of Hutchison Whampoa Ltd 0013.HK and Cheng Kong (Holdings) Ltd (0001.HK), also produces oil and gas in Canada and Southeast Asia.
"Higher production and stronger crude oil prices offset impacts from lower natural gas prices and tighter refining margins," Husky said in a statement.
Total production before royalties averaged 320,000 barrels of oil equivalent per day, compared with 310,000 a year earlier.
Husky shares rose 48 Canadian cents, or 2 percent, to C$24.78 on the Toronto Stock Exchange. Imperial slipped 29 Canadian cents to C$44.97.
Addditional reporting by Aftab Ahmed, Reporting by Jeffrey Jones and Sunayan Bhattacharjee; editing by Peter Galloway