Stockwatch Energy for yesterday
Energy Summary for July 19, 2022
2022-07-19 20:45 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added $1.62 to $104.22 on the New York Merc, while Brent for September added $1.08 to $107.35 (all figures in this para U.S.). Western Canadian Select traded at a discount of $20.00 to WTI, down from a discount of $19.75. Natural gas for August lost 21 cents to $7.26. The TSX energy index added 5.21 points to close at 218.72.
The Canadian oil patch saw the first green shoots of the quarterly earnings season, with PrairieSky Royalty Ltd. (PSK: $18.33) releasing its second quarter financials yesterday after the close. PrairieSky is not a direct oil and gas producer, but collects royalties from producers across Western Canada, providing a useful indicator of industry activity. Its second quarter financials showed higher production than analysts were expecting and a healthy profit of $110-million. As well, although PrairieSky does not provide guidance, its management indicated during a conference call this morning that the second half of the year is looking beautifully busy. It noted that there are currently 206 rigs running across its assets, up from 156 this time last year.
"Robust," "attractive" and "very strong" were some of the many compliments gushed forth by analysts this morning. Many of them marvelled at PrairieSky's record quarterly production and higher-than-forecast cash flow. At least five of them increased their price targets on the stock. All of this bodes well for when producers' earnings season kicks off next week.
One of the first producers to report next week will be Mike Rose's Alberta and B.C. gas producer, Tourmaline Oil Corp. (TOU), down 23 cents to $68.33 on 2.87 million shares. It plans to release its financials next Wednesday after the close. In the meantime, it has just received a lovely mention from credit rating agency DBRS, which reaffirmed its investment-grade rating of BBB (high). Indeed, DBRS said that Tourmaline could actually be in the superior AA range, but is "constrained" by factors such as its higher exposure to lower-priced Canadian gas (relative to U.S. gas). The company also has a reserve life index (a measure of how quickly its reserves will run out at current production rates) that is on the low side relative to competitors.
DBRS nonetheless heaped praise on Tourmaline's "highly integrated and efficient operations," "strong balance sheet," and "meaningful free cash flow." The company has been using its extra cash flow for buybacks and dividends. Last month, it hiked its quarterly dividend to 22.5 cents from 20 cents, for a yield of 1.3 per cent. It has also announced two special dividends so far this year. Mr. Rose, its president, chairman and chief executive officer, has strongly hinted that another special dividend announcement is coming this quarter, perhaps with next week's financials.
Elsewhere in Alberta, Stephen Loukas's Cardium oil producer, Obsidian Energy Ltd. (OBE), added 32 cents to $10.03 on 600,100 shares. It has finally announced its long-hyped debt refinancing. The company has been talking about refinancing its debt all year, putting particular emphasis on extending due dates. As of March 31, Obsidian had over $368-million in debt coming due within 12 months, next to a cash balance of just $5.6-million. Now it can ease investors' minds with a proposed $125-million five-year note offering and $225-million in new credit facilities.
Specifically, Obsidian owed about $311-million under an old credit facility maturing this December, along with about $57-million in notes and term debt due in November. It can now repay all of this with the proceeds of the five-year note offering and the new credit facilities. To be clear, it will still carry some near-term debt, as the $225-million in new credit facilities includes a $50-million term due Dec. 31. Obsidian said it plans to draw just $30-million under this loan.
The extra breathing room is significant, but comes at a cost. To have just $225-million in credit facilities is a drop of more than one-third from the prior effective limit of $366-million. A few years ago, the limit was as high as $470-million, but fell steadily as Obsidian and its lenders negotiated countless amendments and extensions. Obsidian even attempted to wash its hands of the whole thing by putting itself up for sale from late 2019 to early 2021. There were no takers, so the merry-go-round with the lenders continued. Investors seemed relieved today that the music will finally stop for a while. They likely would have appreciated more details on the terms of the new facilities, for example whether they continue the old facility's prohibition on dividends without the lenders' consent. (Obsidian was formerly a generous dividend payer but has not paid one since 2015.)
Another Alberta producer, Don Gray's Gear Energy Ltd. (GXE), added four cents to $1.13 on 4.26 million shares. Management has posted its latest monthly update on Gear's website. As usual, the update included an estimate of Gear's production, which it pegged at 5,900 barrels a day in June. This brings its average to 5,800 barrels a day for the second quarter, an increase from 5,700 in the first quarter. Thanks in part to this extra production, but mostly to higher oil prices, quarterly cash flow soared to $33.8-million from $18.8-million.
President and CEO Ingram Gillmore usually writes the monthly updates, but this month's edition came from David Hwang, vice-president of finance and chief financial officer. He congratulated Gear at length for achieving its goal of having zero net debt as of April. "Getting to zero net debt was made possible by investing in capital projects efficiently and running the business prudently," declared Mr. Hwang, no doubt feeling quite pleased with himself as he did so. He added that Gear is not at the mercy of any lenders and is "in full control of our business." It could even exert some of that control by pursuing "opportunistic acquisitions," he mused. He did not hint at anything imminent, but made meaningful noises about having "dry powder" for "the right opportunity."
Investors seemed intrigued. Gear is not normally acquisitive; its last significant deal was in 2018, when it bought Steppe Resources for $70.4-million. It claimed that this would give it "visibility ... to exceed [production of] 10,000 barrels a day ... in the near term." Four years later, that has still not come close to happening, and Gear long ago stopped mentioning it in favour of more conservative production targets. Perhaps it will soon be ready to once again show its ambitious side.
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