Stockwatch Energy today
Energy Summary for June 29, 2022
2022-06-29 20:19 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost $1.98 to $109.78 on the New York Merc, while Brent for August lost $1.72 to $116.26 (all figures in this para U.S.). Western Canadian Select traded at a discount of $18.25 to WTI, unchanged. Natural gas for August lost seven cents to $6.50. The TSX energy index lost 8.90 points to close at 233.00.
Oil sands giant Imperial Oil Ltd. (IMO) lost $2.21 to $61.33 on 1.26 million shares, after agreeing to sell its 50-per-cent interest in XTO Energy Canada, which produces 32,000 barrels a day from unconventional (shale) plays such as the Montney and the Duvernay. Imperial's parent company, ExxonMobil, is also selling its 50-per-cent interest in XTO. The full price tag for the subsidiary is an impressive $1.9-billion.
Imperial (and Exxon) first began marketing its interest in January, saying it wanted to prioritize its core assets in the oil sands. The decision came as little surprise: During 2020, Imperial said it no longer wanted to develop its unconventional assets, prompting a $1.17-billion year-end impairment charge. The company clarified that it would make an exception for particularly "attractive" unconventional assets, but clearly XTO did not make the cut.
XTO did, however, succeed in fetching an attractive purchase price. When XTO went up for sale in January, analysts generally pegged its total value at around $1-billion, give or take a few hundred million. The "give" side won handily with a price tag of about $1.9-billion. (Worth noting is that oil and gas prices are nearly one-third higher than they were in January.) Imperial and Exxon will get $940-million each, entirely in cash.
The buyer is Grant Fagerheim's acquisitive Whitecap Resources Inc. (WCP), down 63 cents to $9.12 on 26 million shares. It has spent the last year and a half on an ambitious shopping spree, scooping up companies such as TORC Oil, NAL Resources, Highrock Resources and Timberrock Energy, which collectively more than doubled its production to 132,000 barrels a day from about 60,000 in late 2020. Buying the 32,000-barrel-a-day XTO for $1.9-billion will be its splashiest deal yet.
Whitecap noted that XTO should have about $200-million in working capital on closing (expected in October), which will reduce the net purchase price to $1.7-billion. The company will still have to take out a $1.1-billion loan to close the deal. It is not worried about its resulting net debt burden of about $2.1-billion, breezily predicting that it will reduce this to $1.5-billion by the end of 2022 and to $800-million by the end of 2023. Indeed, Whitecap is so confident in its finances that it has simultaneously announced a dividend increase. It will now pay a monthly dividend of 3.67 cents (44 cents annualized), up from three cents, for a yield of 4.8 per cent.
If Whitecap got a lukewarm reaction in the market, analysts made up for it with vigorous applause. "Still on the offensive!" marvelled Scotia Capital analyst Jason Bouvier in a new research note. Mr. Bouvier acknowledged that the deal is on the pricey side, at over $53,000 per barrel of production, which is about 50 per cent higher than comparable deals last year. This does not faze him as the assets "are high quality and add meaningful inventory." He has a $13 price target on Whitecap. Even more optimistic is CIBC analyst Dennis Fong, who lauded the "attractive" deal and reiterated his price target of $15. The stock closed today at $9.12. Neither Scotia nor CIBC is involved in this deal, but both seek to do business with Whitecap, and CIBC in particular discloses that it "makes a market" in Whitecap's securities.
The deal also stirred takeover speculation about other companies with unconventional assets, particularly in the Montney. Scotia analyst Cameron Bean opined that Whitecap's willingness to fork over $1.9-billion for XTO could provide "valuation upside" for other Montney operators. Three "premium take-out candidates," in his view, are Kelt Exploration Ltd. (KEL: $6.18), Crew Energy Inc. (CR: $4.82) and Spartan Delta Corp. (SDE: $12.76). He also likes Advantage Energy Ltd. (AAV: $8.51) and Birchcliff Energy Ltd. (BIR: $9.12).
(It is best to cast a wide net, for this sort of speculation tends to crop up any time a large operator does a deal in the Montney. This has been particularly the case after ConocoPhillips grabbed headlines with a $390-million Montney deal in the summer of 2020. Other deals since then include ARC Resources Ltd.'s (ARX: $16.65) takeover of Seven Generations, Tourmaline Oil Corp.'s (TOU: $68.57) takeover of Black Swan and -- just last month -- Vermilion Energy Inc.'s (VET: $25.70) takeover of Leucrotta Exploration. The more targets listed by an analyst, the better the odds of getting one right.)
Outside the Montney, the Gray brothers' Cardium-focused Petrus Resources Ltd. (PRQ) lost 17 cents to $2.15 on 122,700 shares. It has published its latest monthly activity update on its website. Production in May averaged 7,100 barrels a day, down slightly from about 7,400 in April, a normal seasonal dip. Spring breakup is now over and Petrus has "kicked off the 2022 drill program," cheered management. It has two rigs running and expects to drill 14 wells, with "superior economic returns," by the end of the year.
Insiders seem confident. Last week, major shareholder Glen Gray spent $324,000 buying 149,100 shares, which boosted his position to 28 million of Petrus's 121 million shares. Also last week, president and chief executive officer Ken Gray bought 18,500 shares, boosting his position to 3.4 million. The names are no coincidence. Glen Gray and Ken Gray are brothers, as are Stuart Gray (a non-executive insider holding 25.8 million shares) and Don Gray (Petrus's chairman and the owner of 32.7 million shares). Don Gray founded Petrus in 2015. He brought in his brothers in 2021 to help rescue Petrus from debt difficulties, in the process turning the promotion into a tight-knit family affair.
Further afield, Dr. Art Halleran's Turkish gas explorer, Trillion Energy International Inc. (TCF), lost 2.5 cents to 27 cents on 4.44 million shares. It has closed a $22.4-million public offering at 31 cents a unit (each comprising a share and half a warrant). Trillion was initially aiming to raise just $12-million when it announced the financing earlier this month. It quickly hiked the proceeds to $20-million, and today's figure of $22.4-million includes the exercise of the overallotment option.
Investors' reaction to the financing has been cool, likely because it came soon after Trillion already raised $17.9-million in late March. Its share count has thus doubled to about 370 million from 185 million in a mere three months. Dr. Halleran, Trillion's CEO (and the former co-founder of Colombian gas producer Canacol Energy Ltd. (CNE: $2.58)), says the company needed the extra money to expand a planned drill program in the Turkish Black Sea. He proclaimed last month that the program will provide "instant" production "during a time of historically high natural gas prices" across Europe.
For investors, "instant" is still several weeks away. The contracted rig is currently busy in Romania. Assuming smooth sailing, it should arrive at Trillion's project some time in August.
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