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CALGARY, Alberta (Reuters) - Higher oil prices and improved refining profits are likely to strengthen fourth-quarter earnings at Canada's biggest oil companies, though weak returns from natural gas and pipeline woes may dampen gains.
The fourth quarter was marked by renewed investor confidence in Canada's oil and gas sector as an improving global economy buoyed oil prices and raised demand.
Though problems with Enbridge Inc's pipeline system dampened Canadian heavy oil prices, the benchmark price of the commodity surged in fourth quarter.
It averaged $85.24 a barrel on the New York Mercantile Exchange. This was up 12 percent from the fourth quarter of 2009, boosting the profit picture for the country's oil companies, most of which report in the coming weeks.
"The oil price is quite healthy so it's going to be a reasonably (good) quarter," said Michael Dunn, an analyst at FirstEnergy Capital.
The impact of higher oil prices could be seen in the fourth-quarter results of Canadian Oil Sands Ltd, the biggest shareholder in the Syncrude Canada Ltd oil sands project.
The company said on Thursday that its profit more than tripled to C$311 million ($311 million), or 64 Canadian cents a share, well above the 35 Canadian cent a share profit expected by the market. The higher oil price and lower royalty payments lifted results.
Along with higher oil, refining profits improved for the first time in more than a year, adding to the bottom lines of the integrated production and refining companies such as Suncor Energy Ltd, Imperial Oil Ltd and Husky Energy Inc.
"Refining margins are finally working in favor of the integrated (companies)," said Andrew Potter, an analyst at CIBC World Markets. "They've been a big drag on stocks for the last five quarters."
Despite the high oil prices, the picture could be somewhat clouded by the disruptions in Enbridge's oil pipeline network during the quarter. Trouble on its U.S. pipelines lowered the system's capacity, trapping crude in Alberta and cutting into cash crude prices in the province.
Although there is no quantitative assessment of the impact, analysts said the problem could cut into the earnings of heavy oil producers such as Canadian Natural Resources Ltd or Cenovus Energy Inc.
"It obviously is going to play a role on the bitumen side for companies that are bitumen producers," said Phil Skolnick, an analyst with Canaccord Genuity. "That's where you'll see the impact of Enbridge."
Though higher oil prices will lift profits, they could be somewhat offset by continuing weakness in the natural gas markets. Benchmark natural gas prices on the New York Mercantile Exchange averaged $3.97 per million British thermal units in the quarter, 19 percent lower than in the year-before period as supply outstripped demand.
Those low prices will cut into the earnings of Encana Corp, the country's biggest natural gas producer, though the company's aggressive hedging program is expected to offer some protection from the weak pricing.
Rising profits have already translated into higher share prices for oil producers. Over the first three quarters of 2010, the Toronto Stock Exchange's Energy Index sagged 4.2 percent. However in the fourth quarter the index surged 13.5 percent.
There may be more room to run as fourth quarter earnings for the sector roll in over the next few weeks.
CIBC's Potter estimates that that fourth-quarter cash flow per share for the Canada's biggest oil companies - a key measure for investors - will rise about 23 percent on average in the quarter. But he warned much of those gains may already be priced into the shares.
"Better earnings reports help, but the market has already factored in some of that benefit," he said.
Suncor Energy Feb 02 C$0.50
Imperial Oil Ltd Feb 08 C$0.65
Encana Corp Feb 10 $0.15
Husky Energy Inc Feb 15 C$0.41
Talisman Energy Inc Feb 16 C$0.17
Nexen Inc Feb 17 C$0.44
Cenovus Energy Feb 18 C$0.31
Canadian Natural Resources n.a. C$0.64
* Estimates from Thomson Reuters I/B/E/S
Editing by Peter Galloway and Jeffrey Hodgson