news Petro-Canada erases year-earlier profit with Q1 loss of $47 million

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Petro-Canada erases year-earlier profit with Q1 loss of $47 million



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By Lauren Krugel, The Canadian Press


CALGARY - Petro-Canada (TSX:PCA), which plans to merge with Suncor Energy Inc. (TSX:SU) later this year, will likely see costs at its Fort Hills oilsands mine come down about 30 per cent thanks to the economic downturn, the Calgary-based company's CEO said Tuesday.

The latest cost estimate of the project's mining portion was around $14 billion, but now that number probably sits at under $10 billion because of lower steel, labour and construction costs, Ron Brenneman told analysts on a conference call.

"It's a pretty rough estimate at this point, but it's to us pretty encouraging because it says that even... on a standalone basis we can probably generate a double-digit return (with oil prices) at US$60 with those kinds of numbers," he said.

Petro-Canada came up with the lower figure by plugging current input costs into the existing project design, so Brenneman cautioned it is by no means a final price tag.

"We can look forward to improving on that with the synergies we would see from the merger with Suncor."

The company will hold off on re-engineering the project until after the that transaction, which still needs regulatory and shareholder approval, goes through.

Last fall, Petro-Canada and its two Fort Hills joint-venture partners, UTS Energy Corp. (TSX:UTS) and Teck Resources Ltd. (TSX:TCK.B) delayed a decision to go ahead with the mining portion of the project into this year.

The construction of its accompanying upgrader, a multibillion-dollar facility that would have processed the raw bitumen into refinery-ready synthetic crude oil, has been shelved indefinitely.

Petro-Canada is the operator of Fort Hills, with a 60 per cent stake. UTS and Teck evenly split the remainder.

UTS had been a takeover target of France's Total SA, but on Tuesday the would-be acquirer dropped its bid because it did not get enough support from UTS shareholders.

Brenneman said Petro-Canada is still digesting what that development means for the Fort Hills partnership.

"But at this stage I would say that we're still basically comfortable with our 60 per cent position in that project and we'll just have to see how this whole partnership thing unfolds," he said.

The company would need to see a turnaround in oil prices and a loosening in financial markets before deciding to go ahead with Fort Hills.

"It's a bit up in the air at this point," Brenneman said.

"We're basically in a very low, almost no cost, kind of holding pattern right now. So we can wait out the conditions as long as we need to until we're comfortable that we should pull the pin on this or fire the gun on this and get it restarted."

Earlier Tuesday, Petro-Canada reported a loss of $47 million or 10 cents per share, for the first quarter. The loss marked a sharp reversal from profit of $1.08 billion or $2.22 per share recorded during the same quarter the year before, when oil prices were remarkably higher.

Petro-Canada said quarterly operating earnings tumbled 88 per cent to $111 million from year-earlier levels of $899 million.

The company said it was dragged into the red partially due to a $99 million foreign currency translation of its long-term debt denominated in U.S. dollars.

The company took a $25 million loss on mark-to-market valuations of its stock-based compensation during the quarter, compared to a gain of $68 million during the first quarter of fiscal 2008.

The decrease in operating earnings was attributed to lower commodity prices coupled with curtailed upstream production volume. The global economic downturn has sapped strength from the oil and gas market, with prices plummeting nearly US$100 since reaching record highs of more than $147 a barrel last July.

Petro-Canada said upstream production was in line with expectations for the quarter at 410,000 barrels of oil equivalent per day.

Petro-Canada also said it was trimming its 2009 capital spending budget by $600 million to $3.4 billion. In addition to Fort Hills, the company's Montreal coker development and MacKay River oilsands expansion have been placed on hold.

Petro-Canada shares were off slightly to $37.27 on the Toronto Stock Exchange Tuesday morning.