Energy Summary for Nov. 29, 2022
2022-11-29 20:48 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added 96 cents to $78.20 on the New York Merc, while Brent for January lost 16 cents to $83.03 (all figures in this para U.S.). Western Canadian Select traded at a discount of $29.07 to WTI, unchanged. Natural gas for January added four cents to $7.24. The TSX energy index added 3.77 points to close at 261.99.
Oil sands giant Suncor Energy Inc. (SU) lost 77 cents to $45.43 on 19.7 million shares. Today brought its long-awaited investor day -- previously postponed from July -- and various operational and guidance updates for investors to chew over. Not everything was to their taste.
Suncor kicked off the day on a defiant note, declaring that "after careful consideration," it has decided to hold on to its Petro-Canada retail business. The decision rebuffs an earlier demand from activist shareholder Elliott Investment. In a scathing open letter about "the confidence that has been lost [in Suncor]," Elliott wrote in April that Suncor "must ... explore opportunities to unlock the value of high-multiple assets ... including a strategic review of retail." It pegged the value of the 1,800-outlet Petro-Canada chain at up to $9-billion. In July, when Suncor and Elliott shook hands on a stand-still agreement, one of the concessions made by Suncor was to launch the demanded "strategic review," with two Elliott-nominated directors sitting on the review committee.
Despite Elliott's influence, it is not altogether surprising that Suncor has now decided to keep Petro-Canada. Shortly after Elliott published its letter, Suncor's chief executive officer at the time, Mark Little, said during a conference call in May that he was not interested in selling the retail division, as it is a "very strong performer" that improves the margins of the overall downstream business. His successor almost certainly shared this view. In July, when Mr. Little abruptly resigned in the wake of a workplace fatality, Suncor gave the job of interim CEO to Kris Smith, who just so happened to have spent the last nine years in charge of Petro-Canada and the wider downstream arm. (The decision to appoint Mr. Smith as interim CEO preceded the stand-still with Elliott. Two Elliott-nominated directors are on the search committee for a permanent CEO, still in progress.)
Without mentioning Elliott by name in today's update, Suncor implied that it had been able to sway the activist, rather than the other way around. It said the board's decision to keep the retail business was "unanimous" (and thus included the Elliott nominees) and reflects Petro-Canada's status as an "iconic" brand. Even icons have room for improvement, of course, and so Suncor will pursue "continued optimization" of the business. Yet the decision is made: Petro-Canada is sticking around.
That was not Suncor's only update of the day. The company also released its official guidance for 2023. Alas, if investors were merely unsurprised by the fate of Petro-Canada, they were likely outright disappointed in the guidance. Suncor is forecasting production of 740,000 to 770,000 barrels a day (flat with 2022) on a budget of $5.4-billion to $5.8-billion (about half a billion dollars higher than 2022). By contrast, analysts' predictions for 2023 included higher production of 790,000 barrels a day on a lower budget of just $5.3-billion. The weak numbers reflect inflation and lower-than-hoped-for contributions from major projects such as Fort Hills.
Fellow oil sands producer MEG Energy Corp. (MEG) lost one cent to $19.11 on 6.76 million shares, after it too released its 2023 guidance. Investors liked its numbers somewhat better. The company is aiming for 100,000 to 105,000 barrels a day on a budget of $450-million. This represents a roughly 10-per-cent production increase over 2022 (for which the target is 92,000 to 95,000 barrels a day), and exceeded analysts' predictions of 99,000 barrels a day. This helped offset the higher-than-expected budget, which is 20 per cent higher than this year's $375-million and exceeded analysts' predictions of $420-million.
MEG emphasized that the budget will be well within its means and that it will have plenty of free cash flow left over for debt reduction and share buybacks. On the debt front, however, MEG quietly changed its estimate of when it will achieve its "net debt floor" of $600-million (U.S.) (down from $1.2-billion (U.S.) as of Sept. 30). Management reckoned in July that it would hit this floor in the second half of 2023. Today's guidance put the timeline "beyond 2023," leaving the extent of "beyond" to investors' imagination.
Further afield, Jose Francisco Arata's Ecuadorean oil producer, New Stratus Energy Inc. (NSE), added four cents to 54 cents on 1.33 million shares, after releasing its financials for the quarter ended Sept. 30. This was the second quarter of its fiscal year, and also its second full quarter as a producer. It was an explorer until acquiring Repsol's interest in the producing blocks 16 and 67 in Ecuador last January. Thanks to these blocks, New Stratus took in revenue for the quarter of $29.4-million. It trumpeted $10.4-million in "adjusted EBITDA," this being the promotional euphemism for what is left after accounting wizards work their magic and send all manner of impairments, one-time costs and other nastiness vanishing into the ether. The actual bottom line for the quarter, warts and all, was a net loss of $3.7-million.
The financials were perhaps more interesting for what they did not contain, namely any mention of the stock's abrupt tumble yesterday, when it slid to 50 cents from 73 cents. The company did not put out any news that would explain the drop. Yet according to reports yesterday from local news outlets such as Primicias and El Universo, New Stratus has fired off a warning to the Ecuadorean government that it might pursue international arbitration over the status of blocks 16 and 67. These are currently under a service contract that expires barely a month from now on Dec. 31. New Stratus has been negotiating with the government all year to extend the contracts and convert them into more favourable production-sharing agreements. With limited time remaining and the government still dragging its feet -- even questioning whether New Stratus acquired the assets properly to begin with, according to the news reports -- the company is apparently losing patience.
It betrayed not a drop of bad feeling in its new financials, merely saying that it "continues to advance its discussions" with the government. Chairman and CEO Mr. Arata told investors to expect updates "in the next four weeks." He is presumably counting on his three decades of experience in the Latin American energy and resource sectors to guide New Stratus through the jungles of regional bureaucracy. Among other promotions, he was the founding president of Colombian oil darling Pacific Rubiales from 2003 to 2015, making his exit just prior to its spectacular collapse into bankruptcy in 2016. Before that, he spent his early career at the state-owned Petroleos de Venezuela.
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