CALGARY - Two major Canadian oil companies say profit margins at their U.S. refineries were squeezed during the third quarter as oil prices strengthened.

The stronger commodity prices were a boon to Cenovus Energy Inc. (TSX:CVE) and Husky Energy Inc. (TSX:HSE) in the upstream — the part of the business that involves getting the raw product out of the ground. But they were a drag on their downstream segment, which involves processing that crude into products such as gasoline and diesel.

Brian Ferguson, the CEO of Cenovus, cited several reasons for the higher crude prices. Refineries were running at 92 per cent of their capacity during the quarter, which meant that demand for oil was strong, he said in an interview. At the same time, new pipeline capacity came into service to take crude to refineries on the U.S. Gulf Coast.

On one hand, that meant Cenovus made more money for every barrel of oil it produced.

"But what that means is your feedstock cost going into the refinery is higher," Ferguson said.

At Cenovus, operating cash flow from oil production was 40 per cent higher during the quarter, at $915 million, as the price gap between the key U.S. benchmark for light oil, West Texas Intermediate, and Canadian heavy oil narrowed by 20 per cent. Meanwhile, the average price of WTI itself strengthened by $13.61 per barrel during the quarter.

But Cenovus' refining operating cash flow dropped 75 per cent to $133 million during the three months ended Sept. 30, compared to a the same period a year earlier.

Cenovus has interests in refineries in Illinois and Texas, which are geared to process Canadian crude. Lately, those inland refineries have had an edge over coastal ones, which run on pricier crude imported from overseas.

In addition to the higher crude costs, Cenovus also had to pay five times more than last year to comply with U.S. Environmental Protection Agency requirements for refineries that opt not to blend renewable fuels, such as ethanol, into their product. However, that impact should be temporary with the EPA expected to change those rules, Cenovus said.

Despite the third-quarter headwinds, Ferguson noted Cenovus' refining business will generate more than $1 billion in free cash flow this year.

"So it's still a very valuable asset and strategy for Cenovus as we go forward."

Meanwhile, Husky realized an average price of $93.23 per barrel on its oil and gas during the quarter, up from $70.14 a year earlier.

Refining margins at Husky's two Ohio refineries were $11.86 per barrel, compared to $24.36 a year earlier, while its average upstream netback rose to $46.15 per barrel from $30.08 a year earlier.

Husky posted $544 million in adjusted earnings in the third quarter, in line with analyst estimates and higher than last year's profit of $512 million.

It said its Liwan offshore natural gas project in the South China Sea is 95 per cent complete, while the first phase of its Sunrise oilsands project is on track to start up late next year.

Cenovus posted operating earnings $313 million, or 41 cents per share, missing the average estimate of 48 cents per share, according to Thomson Reuters. A year earlier, operating earnings were $432 million, or 57 cents per share.

Cenovus vowed to take a more stringent approach to well maintenance on Thursday after reporting that production from its Foster Creek oilsands project was down 22 per cent compared to the same 2012 quarter.

Last year, the project in northeastern Alberta was churning out crude at a rate well above its design capacity. In light of the strong performance, the company decided to defer scheduled maintenance, such as checking pumps and cleaning liners.

That decision led to a backlog in maintenance work at the steam-assisted gravity drainage project, Ferguson said.

Usually three per cent of Cenovus' SAGD wells are down for maintenance at any given time, but in early 2013 it was more like seven per cent. At the same time capital spending on that maintenance work rose by $20 million.

"We have spent the first few quarters catching up on that maintenance. We've got the vast majority of it done and we expect that we will be fully completed the backlog of maintenance by the end of the year," Ferguson said.

Fellow oilsands producer MEG Energy Corp. (TSX:MEG) also reported its quarterly earnings on Thursday.

MEG posted operating earnings of $56.2 million, or 25 cents per share, during around a year-ago loss of $12.9 million, or seven cents per share. The results were in-line with analyst expectations.

MEG said higher production volumes, lower operating costs and stronger prices led to the better quarterly performance.

News from © The Canadian Press, 2013