* Suncor operating profit lags Street as costs rise
* Precision Drilling earnings jump after Grey Wolf deal
* Oil prices, refining margins hurt Husky profit
* Precision to focus on debt repayment
* Suncor CEO likes Petro-Canada’s offshore assets (Adds Husky results)
By Jeffrey Jones
CALGARY, Alberta, July 22 (Reuters) - Suncor Energy Inc SU.TO sank into the red in the second quarter as skidding oil prices, hedging losses and costs related to project deferrals marred the last reporting period before it closes its C$22.5 billion ($20.5 billion) takeover of Petro-Canada PCA.TO.
Excluding unusual items, Suncor, one of the largest Canadian oil sands producers, made a profit, even as the sector struggled with lower commodity prices. But the results lagged expectations.
The shares fell 20 Canadian cents to C$36 on the Toronto Stock Exchange.
Suncor sold a higher proportion of lower-quality, high-sulfur crude in the quarter, which was a factor in its weaker than expected showing, said Lanny Pendill, an analyst at Edward Jones. Increases in staff, royalty and tax expenses also played a role, he said.
“While results for the quarter were lower than what people anticipated, the underlying operations performed very well and continued to show improvement,” Pendill said.
“The oil sands operations continue to ramp up production, cash costs continue to come down within the oil sands business, and that’s something you certainly want to see.”
Suncor lost C$51 million, or 6 Canadian cents a share, in the second quarter, compared with a year-earlier profit of C$829 million, or 89 Canadian cents a share.
Excluding unusual items such as mark-to-market hedging losses and costs related to the project deferrals, the company earned C$185 million, or 20 Canadian cents a share.
Analysts, on average, had expected earnings of 35 Canadian cents a share, according to Reuters Estimates.
Investors remain focused on the takeover of Petro-Canada, which will create Canada’s largest oil company and a dominant force in oil sands production and processing. The country’s Competition Bureau approved the deal on Tuesday after Suncor agreed to sell 104 gas stations in southern Ontario.
Canada’s energy firms had been expected to report sharply lower profits as the recession sapped oil and gas demand and pulled prices down from last year’s records.
U.S. crude averaged $59.79 a barrel in the second quarter, down 52 percent from a year earlier. Canadian natural gas prices averaged C$3.28 a gigajoule, down 66 percent.
Husky Energy Inc HSE.TO said weak refining margins and a 12 percent drop in oil and gas output contributed to a more than two-thirds fall in second-quarter profit.
Husky, controlled by Hong Kong billionaire Li Ka-shing, earned C$430 million, or 51 Canadian cents a share, down from year-earlier C$1.36 billion, or C$1.60 a share. Adjusted net income was C$471 million, or 55 Canadian cents a share.
Analysts expected Husky to earn 33 Canadian cents a share.
Its shares ended up 20 Canadian cents at C$32 in Toronto.
Precision Drilling Trust PD_u.TO, the country’s top contract driller, said quarterly profit jumped 164 percent as its $2 billion takeover of Houston-based Grey Wolf Inc late last year and a foreign exchange gain cushioned the impact of a major downturn in activity.
It earned C$57.5 million, or 22 Canadian cents a unit, up from a year-earlier C$21.7 million, or 16 Canadian cents a unit. The 2009 results included a gain of C$74 million from foreign exchange.
Precision said its Canadian rig fleet operated at a record low rate during the period. It sees the few bright spots being North American shale gas regions such as the Marcellus in Pennsylvania and Horn River in British Columbia.
Chief Executive Kevin Neveu held out little hope for a recovery in activity this year and said the company will use its cash to repay debt rather than build numerous new rigs.
Precision units climbed 2 Canadian cents to C$5.48.
For his part, Suncor Chief Executive Rick George said his company will move ahead with major investments after the Petro-Canada takeover, and jettison assets, by focusing on projects that offer the lowest risk and highest returns.
He described Petro-Canada’s assets off the Newfoundland coast and in the North Sea as “key long-term keepers”.
George cast doubt, however, on some international assets.
“Risk will be a factor, and I know the market has not really liked, particularly, the risk around the Syrian and Libyan assets,” he said. “That’s an equation that I haven’t actually had time to completely analyze or make the decisions on.”
$1=$1.10 Canadian Editing by Rob Wilson