Energy Summary for Nov. 2, 2022
2022-11-02 20:43 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added $1.63 to $90.00 on the New York Merc, while Brent for January added $1.51 to $96.16 (all figures in this para U.S.). Western Canadian Select traded at a discount of $29.70, up from a discount of $30.10. Natural gas for December added 56 cents to $6.27. The TSX energy index lost 1.68 points to close at 264.07. Oil prices rose on bullish U.S. storage data.
The U.S. Energy Information Administration (EIA) reported today that crude inventories fell by 3.1 million barrels last week, compared with analysts' predictions of an increase of 367,000 barrels. Traders also continue to have their eye on rumours that China may back away from its stringent Covid Zero policies.
Meanwhile, the threat of a windfall tax on energy companies -- floated earlier this week by U.S. President Joe Biden, despite dim odds of congressional support -- continued to draw scoffs. During a conference call late yesterday, co-chief executive officer Marshall McCrea of Energy Transfer, one of North America's largest pipeline companies, likened the White House's rumblings to a "Saturday Night Live skit." He noted that Mr. Biden went from restricting drilling and pipeline approvals to demanding penalties on energy companies if they do not boost investment. "It'd be funny," he said, "if it wasn't so sad."
Here in Canada, oil sands producer Cenovus Energy Inc. (CVE) lost 10 cents to $27.83 on 17.1 million shares, after releasing somewhat mixed third quarter financials. It trumpeted a profit of $1.6-billion, or 81 cents a share, on revenue of $17.4-billion. Yet analysts were expecting a higher profit of 93 cents a share. Cash flow of $1.48 also fell short of analysts' predictions of $1.63 a share. As production of 778,000 barrels a day was in line with predictions of 783,000 barrels a day, the lower earnings largely reflected weaker commodity prices and higher operating costs.
Cenovus tried to offset any disappointment in the numbers by topping up its rewards for shareholders. In addition to its regular 10.5-cent quarterly dividend (for a yield of 1.5 per cent), the company has declared its first variable dividend, setting it at 11.4 cents. It also reminded shareholders of its busy share buyback program, which has seen $2.5-billion in repurchases since last year and is set for renewal later this month. President and CEO Alex Pourbaix toasted "another strong quarter" of "solid" performance. He remained in a cheery mood during a conference call this morning, reiterating Cenovus's commitment to rewarding shareholders, even in the face of volatile commodity prices.
Such prices include the relative price of WCS (Canada's heavy oil benchmark) to WTI. As discussed most recently on Oct. 21, WCS typically trades at a $10 (U.S.) to $15 (U.S.) discount to WTI , but this discount has widened dramatically in the past few weeks and is now around $30 (U.S.). Mr. Pourbaix, during the conference call, shrugged this off as a "temporary issue" that he hopes will clear up next year as refineries expand capacity. This echoes the opinion of the analysts at RBC, who published a research note this morning with their thoughts on the "fast and furious" widening of the WCS-WTI spread. They also sought to estimate which companies will be the most and least affected. (Happily for Cenovus, they put it in the latter category.)
In the past, wrote the analysts, the WCS-WTI spread has worsened in response to conditions in Canada, particularly bottlenecks in export pipelines. This time, the problem is more on the southern side of the border. Canadian export capacity is "comfortable," but U.S. refiners have been suffering outages, and they are also swimming in supply as a result of federal drawdowns of emergency crude reserves. This creates tougher competition for Canadian crude. The analysts noted that it is not all bad news: For producers with refining capacity, such as Cenovus, lower WCS prices means cheaper feedstock and better margins. The analysts singled out Cenovus and Suncor Energy Inc. (SU: $46.66) as being the least affected by the widening spread. Producers facing a harder time, in their view, include Athabasca Oil Corp. (ATH: $2.76) and MEG Energy Corp. (MEG: $19.83).
Back in the world of quarterly financials, Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) lost 19 cents to $10.27 on 1.35 million shares, as it waded into the flood. Its third quarter report was generally as expected, with production of 21,400 barrels a day and cash flow of 93 cents a share. Management noted that cash flow rose quarter over quarter despite a drop in oil prices. This partly reflects the expiry of unfavourable (but bank-mandated) hedges. "[Hedges] are pretty much done now for Surge, so you're seeing what the company can actually do," boasted president and CEO Mr. Colborne today on BNN. In his view, this involves "throwing off gobs of free cash flow."
Investors were unimpressed. Many of them were likely expecting -- because Mr. Colborne previously told them to expect -- the financials to include Surge's guidance for 2023. Such guidance was nowhere to be found, although Mr. Colborne dropped a few hints during his BNN interview. He said Surge can keep its production flat at around 21,000 barrels a day at a cost of about $165-million, easily covered by its forecast cash flow of $350-million. Surge is using some of the cash flow for its 3.5-cent monthly dividend (for a yield of 4.1 per cent) and some for debt reduction. "Look for us by March, April, to be bumping that base dividend" once the company hits its next debt target, said Mr. Colborne. He added that Surge will also start considering special dividends or share buybacks.
The reason for the lack of guidance became clearer after the close. In a separate after-hours news release, Surge announced that it will buy all of the remaining Western Canadian assets of Enerplus Inc. (ERF: $23.39) for $245-million. The deal should boost Surge's production by 3,850 barrels a day when the deal closes in mid-December. Investors should get a chance to react to the news, and to the preliminary 2023 guidance that Surge included in the update, tomorrow.
Further afield, Gary Guidry's Colombia-focused Gran Tierra Energy Inc. (GTE) lost 16 cents to $1.73 on 6.28 million shares, after it too released its third quarter financials. These held few surprises, given the company's habit of releasing quarterly operational updates. Production averaged 30,400 barrels a day (as announced last month) and cash flow came to 26 U.S. cents a share.
Investors' mood remained glum. The political environment in Colombia, never a bastion of investor confidence, has worsened for energy investors since August's election of anti-oil President Gustavo Petro. He has stopped offering new oil exploration licences and is currently trying to hike taxes on oil and implement a fracking ban. The Colombian Petroleum Association recently estimated that his plans will result in a 30-per-cent drop in investment in the sector. Meanwhile, Bloomberg reported yesterday that the Colombian peso has reached record lows, sliding by more than one-fifth since Mr. Petro's election -- the worst performance among the major emerging markets that Bloomberg tracks.
© 2022 Canjex Publishing Ltd. All rights reserved.