Stockwatch Energy todaySorry just ho hum?
Energy Summary for Aug. 17, 2020
2020-08-17 20:25 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery added 88 cents to $42.89 on the New York Merc, while Brent for October added 57 cents to $45.37 (all figures in this para U.S.). Benchmarks edged higher as traders awaited Wednesday's meeting of the OPEC+ monitoring committee, which will review compliance with the group's production-cutting pact, as well as consider downside scenarios if COVID-19 conditions worsen. This week will also bring the U.S. Democratic National Convention, where presumptive Democratic presidential nominee Joe Biden will likely introduce his energy plan for the United States. Meanwhile, Western Canadian Select traded at a discount of $12.25 to WTI, unchanged. Natural gas for September lost two cents to $2.34. The TSX energy index added a fraction to close at 85.21.
The U.S. shale bankruptcy club gained another member as Chaparral Energy Inc. (U:CHAP) filed for Chapter 11 protection -- again. Chaparral, which focuses on the Anadarko basin of Oklahoma and produced 30,700 barrels of oil equivalent a day in the first quarter, had already signalled distress in May, when it announced that a "strategic alternatives" review (often a troubled company's euphemism for putting itself up for sale). It owed around $500-million (U.S.) at the time. Chief executive officer Chuck Duginski strove to keep up a brave face, claiming that despite "turbulent conditions," Chaparral was continuing to "execute operationally at a very high level ... [and] manage through the pricing and logistical challenges." Investors were skeptical, and with good reason: This was not Chaparral's first time on the insolvency carousel. In 2016 (under a different CEO), it filed for bankruptcy with about $1.2-billion (U.S.) in debt, re-emerging from a restructuring in 2017 with a share price of around $25 (U.S.). By the time of its "strategic alternatives" warning three months ago, it was worth around 50 U.S. cents. Today it was halted at 39 U.S. cents.
Here in Canada, one company was able to keep its investors in a much better mood. Jim Riddell's Alberta Montney- and Duvernay-focused Paramount Resources Ltd. (POU) added 13 cents to $3.23 on 2.05 million shares, on top of the 50 cents it added on Friday. The excitement reflects news about one of its investment companies. On Friday, Adam Waterous's Waterous Energy Fund announced that it would merge two of its private portfolio companies, Strath Resources and Cona Resources, whose names would have rung a bell for investors. Strath Resources is partially owned by Paramount, and Cona used to be a public company until Mr. Waterous took it private in 2018 at $2.55 a share. (For context, Cona had gone public in 2014, as Northern Blizzard Resources, at $19 a share.) The terms of the merger were not disclosed, but Mr. Waterous was perfectly happy to discuss the rationale. Strath and Cona's assets "fit perfectly together," he declared, and together they will create a "premier company" that will be rebranded (aptly enough) as Strathcona Resources. (Both Strath and Cona were named for the famed industrialist and energy investor Lord Strathcona in the first place.) Strathcona will produce around 60,000 barrels a day, making it the largest private-equity-owned oil-weighted producer in North America.
Not everyone shared Mr. Waterous's enthusiasm for the deal. This morning, Paramount issued a terse statement opining that "neither the amalgamation nor the process followed in connection with the approval of the amalgamation were in the best interests of Strath and its shareholders." Paramount became a shareholder of Strath in 2018. That year, Strath acquired one of Paramount's Montney properties for $340-million, comprising $170-million cash, $170-million in shares (or 85 million shares at $2, for a 16-per-cent interest) and warrants to acquire a further 8.5 million shares (also at $2) within 10 years. It is not clear what Paramount would have received for its shares and warrants under the terms of the Strath-Cona tie-up. Whatever it was, Paramount did not like it, and announced today that it has exercised dissent rights in order to receive the fair value in cash.
The fair value was not disclosed either. It is unlikely to be $170-million, given the recent oil price crash and global economic downturn. Even so, the thought of any cash seems to have heartened Paramount's investors. Paramount has been on a short leash with its bankers lately. Although they granted the company some covenant relief at the end of June, they also slashed its credit facility to $900-million from $1.5-billion, subject to conditions. The facility was about $755-million drawn as of June 30. The aforementioned conditions include a clause that would allow Paramount to increase the facility to $1-billion as long as it first raises $200-million in "junior capital" (specifically, every $5-million in junior capital would lead to a $10-million increase in the facility). The term junior capital was not defined, but assuming that the money from the Strath deal fits the bill, Paramount's leash will gain a bit of slack.
Elsewhere in Alberta, oil sands giant Suncor Energy Inc. (SU) had an unfortunate start to the week, edging down 12 cents to $22.45 on 8.57 million shares. Last night it announced that it suffered a fire on Friday in the secondary extraction area of its base plant operations. There were no injuries and the fire was "contained quickly and extinguished some hours later," said Suncor. The fire will nonetheless have an effect on Suncor's bitumen production. Although the bitumen that has already been mined will continue to be processed, normal operations are not expected to resume until early September. Suncor promised to provide a more comprehensive update then.
Although the cause and effects of the fire are still being determined, the information to date suggests that this fire was not as damaging as it could have been. Investors with long memories may recall that in 2005, a fire caused such extensive damage to one of Suncor's upgraders that its production capacity dropped to 122,000 from 225,000 barrels a day for nine whole months. Investors with even longer memories may cast them all the way back to 1982, when Suncor saw a compressor station catch fire in the middle of a frigid January night, as temperatures were hitting minus 45 C. When the fire was finally extinguished several hours later, the building was covered in ice that had to be chipped away, compounding the damage and the difficulty of cleanup. Of course, even those fires had nothing on the one that utterly destroyed a different oil sands facility, operated by the long-gone Abasands Oil, way back in 1941. All in all, fires are rare but they happen, and importantly the safety and containment measures are vastly improving with time.
Further afield, the Lundin promotion Africa Oil Ltd. (AOI) lost one cent to $1.15 on 191,500 shares, on top of the one cent it lost on Friday after releasing mixed financials. Its Nigeria-based production averaged just 28,300 barrels of oil equivalent a day in the second quarter, below analysts' expectations and the first quarter average of 33,500 barrels a day. This reflects Nigeria's participation in the OPEC+ production-cutting pact. On the plus side, thanks to extensive hedges, Africa Oil sold its oil at over $60 (U.S.) a barrel, roughly double the benchmark Brent price. This allowed it to turn a profit for the quarter of $19.2-million (U.S.). Investors remained leery. There is a strong possibility that Africa Oil will have to decrease its full-year production guidance, currently set at 30,000 to 33,000 barrels a day, if its production remains constrained. As well, the company through which this production is achieved (Prime Oil, in which Africa Oil holds a 50-per-cent interest) has to repay about $255-million (U.S.) in debt this year, which could eat into the dividends that it pays to its shareholders such as Africa Oil. Africa Oil is using these dividends to repay its own long-term debt of nearly $200-million (U.S.). President and CEO Keith Hill brushed such concerns aside and said Africa Oil's "admirable" hedging and cash flow give it a "promising" future.
One analyst seemed to agree. In a new research note, Scotia Capital analyst Gavin Wylie called the hedge program "exceptional," although he acknowledged that Africa Oil will probably have to lower its guidance (his estimate is 28,000 to 30,000 barrels a day). Mr. Wylie has a "sector perform" rating on Africa Oil and a price target of $1.50. The stock closed today at $1.15.
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