Canadian Profits Impacted by Oil Price

The oil price rout and related Canadian dollar slide that is ravaging the country's economy is starting to take its toll on corporate profits, from rail and retail to seemingly unrelated sectors like telecoms.

"The direct impact from the energy sector alone is going to be significant," said Macquarie analyst David Doyle. "But the indirect impact will be large as well, and in many ways cascade across almost all sectors."

Thomson Reuters SmartEstimates data project that earnings per share for constituents of the Toronto Stock Exchange's S&P/TSX composite index are likely to decline on average by 28.3 percent in 2016 from a year ago, mainly due to the drag from energy and mining companies.

"It's a huge negative impact on earnings," said John Stephenson, head of Stephenson & Co Capital Management, who predicts the fallout will be felt across the board, from banks to real estate firms.

As 2016's first round of quarterly earnings begin to trickle in, some of the impact is already visible. Cable TV and internet firm Shaw Communications said this month the shutdown of work camps in Fort McMurray - the oil boomtown in northern Alberta - had led to the loss of a large number of internet subscribers.

Companies in other industries are also feeling the pain.

"We have seen in the last three quarters of 2015 economic headwinds across all business segments except for a couple of bright spots in forest products and Canadian grain," said Keith Creel, the president of Canadian Pacific Railway (CP) on a conference call on Thursday.

The railroad plans to trim 7 percent of its workforce this year. Although it benefited from a 35-percent decline in fuel costs in the fourth quarter, its revenue fell 4 percent as crude shipment volumes dropped sharply, along with those of coal, potash and other minerals caught up in the commodity price rout.

CURRENCY SQUEEZE
Even as manufacturing, mining and energy companies in Canada see relative production costs slide due to a weaker Canadian dollar, the costs of imports from food products to finished goods have soared, squeezing margins for retailers and restaurant chains.

Clothing retailer Reitmans Canada said on Jan. 14 it was cutting 10 percent of its head office employees to tackle a challenging retail environment and to offset pressure from the weak Canadian dollar.

The knock-on effect of sinking oil prices is also expected to take a bigger bite out of Canadian bank profits in 2016, as more corporate loans sour, capital raising dries up, and job losses take a toll on banks' consumer operations.

"Analysts have lowered the bar on earnings expectations, but perhaps they haven't lowered it far enough," said Elvis Picardo, head of research at Global Securities. "It's quite likely we may see a number of earnings disappointments this quarter."

By Euan Rocha and Fergal Smith