Canadian Energy Sector Hit by Lower Earnings Outlook as Natural Gas Prices Collapse

From the corporate offices of Wall Street to the bustling cityscape of Bay Street, analysts have been furiously working to adjust their earnings outlooks for companies operating in one corner of the global oil industry that was expected to resist a sharp, double-digit earnings downturn: Canada.

As reporting season picks up pace in Toronto this week, analysts have begun to aggressively reduce their earnings forecasts for the nation’s energy sector. According to data compiled by Bloomberg Intelligence, the country’s oil and gas industry is now expected to suffer a staggering 19% decline over the course of 2023, which marks a significant deterioration from previous expectations of a roughly 8% drop.

This darkening outlook reflects a sharp and swift collapse in natural gas prices, which has fallen particularly hard on Canadian energy companies. Since late November alone, the price of natural gas has slid by some 65%, and it is now nearly one-fourth of what it was at last year’s peak.

“Energy sectors around the globe are expected to pull back in 2023 off a difficult 2022 comparison, though Canada had, at the end of November, been expected to suffer the least,” wrote Bloomberg Intelligence senior associate analyst Gillian Wolff and chief equity strategist Gina Martin Adams in a report released on Tuesday. “Now, Canada is expected to decline more on par with the U.S. and Europe, with energy sectors in emerging markets taking the lead for 2023 earnings expectations.”

The grimmer earnings outlook is a fresh disappointment for the Canadian energy industry, which has struggled to keep pace with outsized stock gains by peers in the U.S. and globally over the last year. The S&P/TSX Energy Index has climbed by a mere 12% over the last 12 months, significantly lagging behind the S&P 500 Energy Index’s 32% rise and the 22% gain for the MSCI World Energy Index.

Nevertheless, there are still reasons for optimism in the Canadian market, as analysts see some potential for oil producers traded in Toronto to catch up with their U.S. peers. The country’s energy index is expected to return 18% this year, compared with an expected 14% return for the S&P 500 Energy Index, according to analyst price targets.

The earnings downturn is expected to lead to weaker gas and oil prices, as well as a slowdown in global demand. This will force down net income for Canada’s energy sector by over 27% from its Q3 peak, but the metric is still expected to be 35% above Q4 2021, according to Wolff and Adams.

The decline in natural gas prices has had a profound effect on Canadian energy companies, and as such, the industry will need to make some significant changes to adapt to this new reality. However, the analysts' report suggests that with some smart investments and strategic planning, there is still plenty of room for growth and profit in this important sector of the Canadian economy.