Energy Summary for Jan. 18, 2023
2023-01-18 20:12 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery lost 70 cents to $79.48 on the New York Merc, while Brent for March lost 94 cents to $84.98 (all figures in this para U.S.). Western Canadian Select traded at a discount of $23.50 to WTI, unchanged. Natural gas for February lost 28 cents to $3.31. The TSX energy index lost 2.25 points to close at 244.43.
Oil prices wobbled despite bullish demand forecasts. In the latest version of its closely watched oil market report, the International Energy Agency (IEA) predicted that China's economic reopening will push global oil demand to a record high of 101.7 million barrels a day in 2023. That would mark a 1.9-million-barrel-a-day increase from 2022, up from the IEA's previous forecast of 1.7 million. At the same time, continued the IEA, global output will rise by only one million barrels a day -- a drop from last year's jump of 4.7 million -- "as Russian supply slows under the full impact of sanctions." The likely result is that "the well-supplied oil balance at the start of 2023 could quickly tighten."
Here in Canada, oil sands producer Cenovus Energy Inc. (CVE) lost 65 cents to $25.01 on 13.4 million shares. Its president and chief executive officer, Alex Pourbaix, headed to BNN yesterday afternoon to polish the company's green credentials. He talked up Cenovus's work as a founding member of the Pathways Alliance, a group of six major oil sands producers (collectively accounting for 95 per cent of oil sands production) with a goal of net zero emissions by 2050.
In the optimistic eyes of Mr. Pourbaix, Pathways is key to boosting the status of Canadian oil worldwide. "If we can decarbonize Canada's production, we should be the preferred barrel of oil going forward," he declared. (The "preferred barrel" is the faddish new way to talk about what used to be known as "social licence" and other metaphorical buzzwords.) Pathways will initially focus on carbon capture and storage, with planned investments of $24.1-billion by 2030. Ideally it will not have to shoulder this cost alone; Mr. Pourbaix pointedly mentioned that "every country in the world" that has pursued similar projects has relied on "collaboration between government and the private sector."
Mr. Pourbaix brushed aside criticisms that Pathways is too meandering. The group is just at the start of a process that will take years of permitting, designing, engineering and other work before any ground is broken. "We're actually moving as fast as I think I've ever moved on a megaproject in my career," said Mr. Pourbaix. "... If I was sitting on $500-billion, I couldn't spend faster on our decarbonization projects." Speaking of money, he defended his own company, Cenovus, for what some critics view as the cheeky offence of spending any of its millions on dividends and buybacks, when the climate is in crisis. He said Cenovus had a "duty ... to thank [its shareholders] and reward them for their patience" following an "unbelievably tough" downturn. In his view, the balance that Cenovus has struck between dividends and decarbonization is "a pretty good mix."
Elsewhere in Alberta, Doug Bartole's Cardium-focused InPlay Oil Corp. (IPO) added three cents to $3.13 on 671,100 shares, after unveiling its 2023 guidance. It will aim for production of 9,500 to 10,500 barrels a day on a budget of $75-million to $80-million. These figures are mostly in line with the preliminary guidance that InPlay laid out in November, although the company is now giving itself a few extra million dollars to spend (the budget in November was $69-million to $71-million) and more wiggle room on production (the target in November was 9,900 to 10,400 barrels a day).
The cautious revisions to the 2023 guidance come after a somewhat rocky end to 2022. "Significant downtime" and "severe cold weather" in the fourth quarter dragged InPlay's full-year output down to 9,150 barrels a day, barely enough to meet its guidance of 9,150 to 9,400 barrels a day. It also went about $5-million over its proposed full-year budget of $70-million to $72-million. Even so, thanks to "record-setting financial and operational performance," management emphasized that InPlay was able to generate more than enough cash flow to cover both the budget and InPlay's entrance fees into the increasingly trendy dividend club. It started paying a 1.5-cent monthly dividend in November, for a current yield of 5.8 per cent.
Lastly, InPlay rolled out the red carpet for a new director, Regan Davis. Mr. Davis is the co-founder and former CEO of the TSX-listed Step Energy Services, from which he retired last September. Step got its start in 2011 with a $75-million investment from ARC Financial. In 2017, Step closed a $100-million initial public offering at $10 a share (though this was a downgrade from its earlier hopes of a $200-million IPO at $14 to $16 a share). This was not an easy time for an energy services company to go public, and Step spent most of 2018 staggering down to about $2. It got as low as 27.5 cents during the worst of the downturn in 2020. Happily for investors who jumped in then (less so for any lingering IPO investors), the stock closed today at $5.90.
Another Western Canadian junior, Don Gray's Alberta- and Saskatchewan-focused Gear Energy Ltd. (GXE), slipped six cents to $1.04 on 4.56 million shares. Investors frowned on the latest monthly update posted by president and CEO Ingram Gillmore on Gear's website. Despite his upbeat chatter about the "many great things" that Gear accomplished in 2022, a chart within the update suggested that production, cash flow and debt all ended the year heading in the wrong direction.
Unusually, Mr. Gillmore did not include a monthly production estimate, only a quarterly one. He pegged Gear's fourth quarter production at 5,750 barrels a day. Based on prior monthly figures, this implies that December's output was the lowest since April. Meanwhile, cash flow in the fourth quarter was at its lowest quarterly level of the year, and did not cover all of Gear's spending. Having ended the third quarter with a net surplus of $7-million, Gear backslid during the fourth quarter into a net debt position of $2.4-million.
The return to net debt is understandably raising questions about the safety of Gear's dividend. Gear initially launched a variable quarterly dividend last May, saying the amount would depend on each prior quarter's free cash flow. In July, seeking to "provide investors with more predictable returns," Gear switched to a one-cent monthly dividend. The implied yield based on today's close is 11.5 per cent. The implied assumption by shareholders is that the lofty payout cannot last much longer.
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