TORONTO, June 23 /CNW/ - Clearly the energy industry remains a
cornerstone of the Canadian economy. There are a number of opportunities for
businesses to succeed in Alberta in the oil and gas industry, but it is not an
easy venture. And, according to a new report from PricewaterhouseCoopers
(PwC), the pressures of rising costs, a strong Canadian dollar and the
commitment to manage environmental concerns are eating into the headline
grabbing record oil prices.
This year, the annual report from PwC has a new look, with an emphasis on
key drivers and issues in the marketplace such as tax, international financial
reporting standards (IFRS) and the environment. The report also includes a
compilation of the data from the top 100 Canadian public oil and gas companies
and top 24 trust companies as presented in their respective annual reports to
shareholders and unit holders for the fiscal year ended in 2007.
According to the survey, the Top 100 exploration and production companies
are seeing solid growth. Gross revenues grew an average 17% while average
assets grew 21%. Among the Top 100, average cash flow from operations
increased by 10 per cent to $443 million. However, earnings per share
decreased from an average $0.36 to $0.31 a result of lower natural gas prices
combined with high operating costs and royalties per boe in 2007.
"The pressures of rising costs and a strong Canadian dollar are impacting
revenues," says John Williamson, Canadian Energy and Utilities Practice Leader
with PwC. "Yet given that we are an energy reliant society we will surely see
continued exploration and development by companies of all sizes."
Capital expenditures grew 8% to an average of $464 million. Total
production in 2007 has remained relatively constant - average daily production
has increased to 40,008 boe/d from 37.641 boe/d.
Operating costs increased again this year - rising 9% due largely to
escalating labour and materials costs. Williamson notes, "In the long term,
the impact of proposed spending in the energy industry will reach across the
entire country and will provide benefits to many."
Trusts included in the survey decreased from 32 to 24 as a result of
merger and acquisition in 2007. Total market capitalization of the trusts in
the survey decreased to $60 billion, a decline of 6% from the prior year.
Update on key drivers and issues in the industry:
Oil sands: The investments made in the oil sands sector are resulting in
a significant multiplier effect for the economy. It is not simply revenue
generated by the oil sands, but the money that will be spent to get
development to where it needs to be across all industries. Within the next ten
years, it is estimated that in excess of $250 billion will be spent on
construction alone in Alberta. This projected spend will have an impact on a
number of Western Canadian businesses. As a result, these companies will be
presented with significant opportunities and challenges in the areas of:
environmental, royalty and taxation regimes and operational/support
infrastructure, amongst others.
Tax - corporate rate reductions: In December 2007 the Federal government
enacted additional tax rate reductions which decreased corporate tax rates
from 22.12% in 2007 to 15% in 2012. When combined with the announced increase
in Alberta's royalties, which are now deductible, there has been a significant
decrease in the amount of taxes expected to be paid to the federal government
and more royalties paid to the province. For Canadian energy companies, this
will affect strategic cash flow projections and the future tax expense and
liability amounts reported to shareholders.
IFRS: During the first quarter of 2008, the CICA approved Canada's move
to IFRS effective January 1, 2011. Although this change will pose significant
challenges for all publicly accountable enterprises, the effect on energy
companies will be especially profound. The absence of industry specific rules
for the extractive industries under IFRS continues to challenge energy
companies' abilities to assess the impact that adoption of the new accounting
framework will have. Oil and gas companies presently following the full cost
method of accounting are likely to experience the most extensive changes, but
utility and mining companies will also have their challenges.
Scientific Research and Experimental Development (SR&ED): The 2008
Federal Budget has enhanced SR&ED tax incentives for companies by increasing
the annual expenditure limit, taxable income and capital phase out ranges, and
allowing certain salary or wages incurred for SR&ED activities outside Canada
to qualify for the SR&ED investment tax credit. The 2008 Alberta Budget
introduced a SR&ED tax credit of 10% on up to $4 million of eligible
expenditures incurred (as defined in the federal SR&ED program), for a maximum
annual credit of $400,000. It will be refundable to all taxpayers and will
apply to eligible expenditures incurred after December 31, 2008.
Junior Oil & Gas: Junior oil and gas companies continue to be a very
important part of the energy industry. While the October 2007 royalty
announcement was a difficult blow for a lot of companies, the recent strength
in gas prices has somewhat eased this pain. Nevertheless companies are
beginning to cast their nets out further. PricewaterhouseCoopers predicts that
the junior market will continue to strengthen in two main areas, namely in
technology and the internationalization of resource exploration.
Environmental: As governments struggle with the best mechanisms to curb
greenhouse gas emissions, a patchwork of systems has emerged across the
country. This makes it a major challenge for energy companies with operations
in different provinces to develop cross-company programs to comply with legal
requirements as well as manage and reduce emissions. Also, with the impending
change in government in the US later in 2008, many observers are speculating
there could be dramatic shifts in American climate change policies and
programs, with some indicating a federal emissions-trading program is likely.
This would create further challenges for Canadian energy companies with
For more information, please visit www.pwc.com/ca/energy
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For further information: Carolyn Forest, PricewaterhouseCoopers LLP,
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