CALGARY, Alberta (Reuters) - Profit at Canada's big oil sands producers climbed in the first quarter as prices surged for oil, especially the heavier grades, allowing the industry to shake off the effects of economic meltdown.
Cenovus Energy Inc, in its first full quarter after being spun off by EnCana Corp, generated better-than-expected earnings, partly on a surge in output at Foster Creek, its biggest steam-driven oil sands project.
Imperial Oil Ltd, the country's No. 2 oil producer and refiner, reported a 65 percent jump in net income, as production from such oil sands projects as Cold Lake and Syncrude Canada Ltd held steady amid the stronger oil prices.
Canadian Oil Sands Trust, which has the largest interest in Syncrude, reported a fourfold jump in earnings and lifted its cash distribution by 43 percent.
However the trust, whose investors approved its transition to a corporation at year-end when the government phases out the tax-advantaged trust structure, said it increased the payout beyond its expected cash flow for the year in order to bolster debt in advance of the switch.
"That's in order to increase the (tax writeoffs) available to us after conversion," Marcel Coutu, Canadian Oil Sands' chief executive told unitholders at the trust's annual meeting. "That means the current level of distributions now may not be sustainable."
In the past several months, Cenovus, Imperial and other developers have launched new projects and expanded existing ones, after the recession halted most investments.
That has begun to lift costs in Alberta, site of the vast oil sand resources. Still, costs are well below levels through mid-2008, when the rush to move projects forward stretched the labor supply thin and led to massive overruns, Versant Partners analyst Mark Friesen said.
"Are there pockets of single-digit inflation? Sure. Is that something companies need to manage around? Sure. Is it manageable? Yes," Friesen said.
Executives said cost increases vary depending on the activity in different regions. Double-digit inflation has hit the red-hot Bakken unconventional oil play in southern Saskatchewan and the northern United States, for example. Oil sands inflation has yet to hit that level.
In the quarter, Cenovus earned C$525 million ($516 million), or 70 Canadian cents a share, up from year-earlier C$515 million, or 69 Canadian cents. Operating profit fell 15 percent to C$353 million, or 47 Canadian cents a share.
Imperial, 69.6 percent owned by Exxon Mobil Corp, earned C$476 million, or 56 Canadian cents per share, up from C$289 million, or 33 Canadian cents per share.
The company, which is developing the C$8 billion Kearl oil sands project in northern Alberta, also raised its dividend by 10 percent to 11 Canadian cents a share.
Canadian Oil Sands earned C$167 million, or 35 Canadian cents a unit, up from C$43 million, or 9 Canadian cents. It raised its quarterly payout by 15 Canadian cents to 50 Canadian cents a unit.
Its units slipped 4 Canadian cents to C$31.20 on the Toronto Stock Exchange. Cenovus jumped C$1.30, or 5 percent, to C$29.89, and Imperial rose 18 Canadian cents to C$43.07.
In the quarter, U.S. benchmark crude prices averaged $78.37 a barrel, up 86 percent from a year earlier. That helped offset weak refinery margins.
A narrow discount on the price of heavy oil, including bitumen from the oil sands, compared with benchmark light crude has also helped Canadian firms.
The differential fluctuates with demand in key markets like the U.S. Midwest, as well as supplies in producing regions.
Falling exports from Venezuela and Mexico, the halt of new oil sands projects during the downturn and the expanded ability of U.S. refiners to process Canadian volumes should keep discounts small, Cenovus Chief Executive Brian Ferguson said.
"I think for the next few years you're going to see tighter light-heavy differentials than what we have seen historically," Ferguson said in an interview.
Weak natural gas prices helped Cenovus's oil sands operations, as it burns the fuel to generate the steam it injects into the ground. It also buys gas for the two refineries it runs in the United States as part of a joint venture with ConocoPhillips.
Still, weak gas prices are a net negative for the company, as it is a major natural gas producer in Western Canada, Ferguson said. It uses price hedges to stabilize its returns.
Additional reporting by Scott Haggett; editing by Janet Guttsman and Peter Galloway