Stockwatch Energy yesterday
Energy Summary for April 23, 2021
2021-04-23 20:52 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for June delivery added 71 cents to $62.14 on the New York Merc, while Brent for June added 72 cents to $66.11 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.55 to WTI, down from a discount of $12.00. Natural gas for May lost two cents to $2.73. The TSX energy index added a fraction to close at 113.18.
U.S. shale producer Ovintiv Inc. (OVV), up 65 cents to $28.14 on 427,600 shares, had a strange start to the weekend. The Globe and Mail's Report on Business (ROB) Magazine published a lengthy and not especially flattering article on the company this morning. More accurately, the feature was on Ovintiv's predecessor company, with the dramatic heading: "Who killed Encana? Inside the mess that crushed Canada's energy icon."
Encana was Ovintiv's name until it rebranded at the beginning of 2020. It also moved its headquarters to Denver from Calgary. Both moves caused plenty of hand-wringing, with streams of op-eds pouring forth about the symbolic blow to an already suffering Canadian oil patch. ROB Magazine painstakingly raked it all up again, while detailing the prior decisions that put Encana -- whose very name was intended to evoke Energy Canada -- onto its now-U.S.focused path. (The thought process that went into changing the name to Ovintiv -- "Ovintiv, of all things," as ROB Magazine put it -- remained a mystery.)
The article is thoroughly researched and filled with quotations from many of Encana's former executives (including founder and former chief executive officer Gwyn Morgan, who came up with the name on a skiing trip with his wife and will apparently never, ever forgive the rebranding. He told the magazine that the day he learned of the rebranding, which was nearly 15 years after he retired from the company, was "pretty much the worst day of my career"). As the article points out, the company's days of being one of the most lionized and valuable companies in Canada are long behind it. Its share price, adjusting for rollbacks in 2009 and 2020, slid all the way from $244 in 2008 to just $2.95 during the worst of the 2020 downturn. The article will undoubtedly bring back some painful memories for long-term shareholders.
Short-term shareholders, of course, will be delighted with the company's rise to its current share price of $28. The company has benefited from the oil price recovery, while also shedding non-core assets and reducing debt. The ROB Magazine article gave relatively little space to how and what Ovintiv is doing now (perhaps because neither Ovintiv nor its current CEO, Doug Suttles, would provide comments). In any case, the story about Encana's old troubles did not appear to have much effect on Ovintiv's current share price.
Ovintiv may have been helped by the decidedly friendlier mention it got earlier this week, this time from Fitch Ratings. Fitch affirmed the company's credit rating at BB+ (which is junk, but only barely) and upgraded its outlook to positive from negative. "The main drivers for the revision ... centre on the company's $1.1-billion in announced asset sales and enhanced FCF [free cash flow] outlook," said Fitch. It was all very pleasant, but Ovintiv would doubtless prefer to reclaim its old investment-grade status. When Fitch pushed it into junk territory last September, Ovintiv's stock dropped to less than $10 from over $13 in a matter of days, on no other news. Fitch said it would consider upgrading Ovintiv if it sees "a trend of continued structural improvements in netbacks and FCF."
Further south, Manolo Zuniga's Peru-focused Petrotal Corp. (TAL) lost one cent to 29 cents on 308,500 shares, giving back some of the 1.5 cents it added yesterday after releasing its year-end financials. They held few surprises in light of Petrotal's frequent operational updates throughout 2020. The year was a rocky one for Petrotal, which repeatedly had to shut down its sole producing field, Bretana, because of local protests. (Petrotal always made sure to emphasize that the protests were against the government and that it was merely an unfortunate bystander.) In yesterday's financials, Petrotal's president and CEO, Mr. Zuniga, maintained that 2021 has been much smoother and he is "excited to continue to deliver on our 2021 capital program." The $100-million (U.S.) budget is designed to increase Petrotal's production (which averaged just 5,700 barrels of oil a day in 2020) to at least 18,000 barrels a day by the end of this year.
Petrotal has the money for this ambitious budget. Even leaving aside its cash flow -- although it has said its cash flow could cover the budget as long as Brent oil prices are at least $50 (U.S.) -- the company raised $100-million (U.S.) in February through a bond issuance. Unfortunately, the debt bears interest at an expensive 12 per cent. Petrotal previously mused that it might use some of the money to "finance potential synergistic acquisitions." It has not announced anything so far.
Another company making acquisition noises is Ian Atkinson's U.S. Gulf Coast junior, Southern Energy Corp. (SOU) up half a cent to four cents on 105,000 shares. Southern announced today that it is rejiggering its finances and adding a special adviser to its board. To start, Southern has arranged a $6-million private placement of 150 million units at four cents, with each unit comprising a share and a warrant. The company is also retiring a $12.7-million (U.S.) outstanding credit facility for a payment of just $8.1-million (U.S.). After that, it will head to a new lender, which will immediately lend it $5.5-million (plus up to $3-million (U.S.) over the coming months). The net effect will be a sharp reduction in Southern's first-lien debt, thus lowering its interest costs, while the private placement will give it some walking-around money.
Southern has big plans for its stronger balance sheet. Its president and CEO, Mr. Atkinson, hyped a "bold strategy for significant growth through consolidation." The company has even hired Eight Capital and Hannam & Partners to help it look for possible acquisitions along the U.S. Gulf Coast. This is not necessarily an intuitive area for Hannam & Partners, which is a U.K. investment bank. Southern explained its financing has attracted interest from European investors in addition to North American ones.
Also aiding in the hunt for acquisitions will be Paul Baay, the new special adviser to Southern's board. Mr. Baay is the president and CEO of Trinidadian gas explorer Touchstone Exploration Inc. (TXP: $1.78). Touchstone -- which also has European connections, given its London AIM listing -- has been one of the rare bright spots in the energy industry throughout the downturn, rising from about 20 cents in late 2019 to as high as $3.06 in early 2021 (though it has since pulled back to today's level of $1.78). Mr. Atkinson seemed confident that Mr. Baay will be useful as Southern embarks on this "period of exciting growth."
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