Stockwatch Energy for yesterday
Energy Summary for Sept. 2, 2020
2020-09-02 20:41 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost $1.25 to $41.51 on the New York Merc, while Brent for November lost $1.15 to $44.43 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.78 to WTI, unchanged. Natural gas for October lost four cents to $2.49. The TSX energy index lost 1.82 points to close at 78.57.
Oil sands giant Imperial Oil Ltd. (IMO) lost 3 cents to $20.87 on 4.17 million shares, after shutting down production at its Kearl oil sands project because of a third party pipeline outage. The pipeline, which carries diluent that Imperial mixes with its sticky bitumen to facilitate transportation, suffered a leak on Aug. 29. "The impact of the outage and a timeline for restart is unknown at this time," said Imperial. It maintained that it is "ready to ramp up to full production" once the pipeline is back in service.
Imperial's brief press release offered no details about the pipeline, but the operator of the line came forward with more information: Inter Pipeline says it has closed the western segment of its 240,000-barrel-a-day Polaris system following a leak detected near the Fort McMurray airport. The Alberta Energy Regulator (AER) says initial reports indicate a spill of about 550 barrels, with no reported effects on water or wildlife. The cause of the leak is under investigation. A spokesman for Inter Pipeline, Breanne Oliver, told CBC News that the company cannot estimate how long the repairs will take.
This is the second high-profile setback that Imperial's Kearl has suffered this year. In April, the project made headlines after three workers tested positive for COVID-19. The outbreak spread rapidly: Two days later, the number of cases linked to Kearl was 12; one month later, it was over 100. Imperial responded by accelerating and lengthening the schedule for a turnaround (maintenance) that Kearl needed this year anyway. (The earlier start time meant that Imperial could get a lot of the work done while oil prices were at record lows, while the prolonged work allowed for fewer workers on site at any one time, limiting the risk of COVID-19.) The measures worked and Alberta Health Services declared the outbreak to be over in June. Of course, production was affected by the turnaround, with Kearl's output averaging 190,000 gross barrels a day in the second quarter (135,000 net to Imperial), down from 207,000 gross barrels a day in the first quarter (147,000 net). As a result, Imperial lowered Kearl's gross guidance at Kearl to 220,000 gross barrels a day from 240,000. The above pipeline outage may prompt another guidance reduction if not resolved quickly.
Other companies may also be affected by the pipeline outage. The analysts at Eight Capital pointed out that the Polaris system carries diluent not just to Kearl but also to Sunrise, a 50,000-barrel-a-day oil sands project operated by Husky Energy Inc. (HSE: $4.23). A spokesman for Husky, Dawn Delaney, confirmed to Bloomberg that Sunrise has been affected; "however, we have other options to help mitigate the effects," she said. (As well, Sunrise is not as large within Husky's portfolio as Kearl is within Imperial's. Kearl contributes about 40 per cent of Imperial's production, relative to the 5 to 10 per cent contributed by Sunrise to Husky.) Additional oil sands companies that could be affected by the pipeline outage, according to the analysts at Tudor Pickering Holt, include Cenovus Energy Inc. (CVE: $6.10) and Canadian Natural Resources Ltd. (CNQ: $25.92).
The above-noted Husky Energy Inc. (HSE) lost 15 cents to 4.23 on 3.53 million shares, after putting out a press release that did not mention Sunrise or the pipeline outage but did offer an update on two other projects. The Spruce Lake Central thermal project in Saskatchewan has achieved first oil and is expected to reach full production of 10,000 barrels a day over the next couple of months. As well, across the world in the South China Sea, Husky' and China's CNOOC have tied in the Liuhua 29-1 gas field and are expecting initial production by November. This field will add about 9,000 barrels a day of production net to Husky. Despite weak commodity prices, both Spruce Lake Central and Liuhua 29-1 are expected to generate "immediate strong free cash flow," cheered Husky's chief executive officer, Rob Peabody. He added that the projects reinforce Husky's "resilience in a challenging market environment."
Although the updates were good news, most investors knew they were coming. Husky's management had already said during a July conference call that it had started steaming Spruce Lake Central (suggesting first oil in late August or September), while adding that the tie-in of the Liuhua 29-1 field was "mechanically complete." Mr. Peabody noted at the time that once construction of those two projects was finished, Husky would be able to shift to a much lower spending level. He estimated that Husky's fourth quarter spending would be just $270-million to $320-million, down from $400-million to $450-million in the third quarter. Moreover, in 2021, Husky would be able to sustain total production at around 260,000 barrels a day on a full-year budget of just $1.1-billion to $1.2-billion, down from $1.6-billion to $1.8-billion in 2020, said Mr. Peabody. These preliminary numbers would normally be given more support by the announcement today that Spruce Lake Central and Liuhua 29-1 are making progress on schedule. Yet the pipeline outage and the potential complications at Sunrise are making investors antsy. Husky still has time to finalize the 2021 guidance, as it will not release its official budget until December.
Elsewhere in Alberta, not in the oil sands but in the Duvernay shale, Ovintiv Inc. (OVV) lost 79 cents to $13.87 on 1.68 million shares, after ending its eight-year joint venture with PetroChina. Ovintiv and PetroChina arranged the joint venture in late 2012. Under the terms of the nearly $2.2-billion deal, PetroChina received a non-controlling 49.9-per-cent interest in Ovintiv's 445,000-acre Duvernay landholdings, with Ovintiv remaining operator and holding a 50.1-per-cent interest. PetroChina paid $1.18-billion at closing and agreed to carry Ovintiv for drilling commitments of $1-billion, the last of which ran out in early 2018. The two of them made for a busy pair. When the joint venture was struck, Ovintiv had drilled nine wells into the Duvernay and had five on production. As of year-end 2019, the number of drilled wells was 201 (99 net to Ovintiv), with Ovintiv's share of Duvernay production averaging 57 million cubic feet a day of gas and 7,600 barrels a day of oil and liquids.
Now the joint venturers are going their separate ways. Ovintiv says the move will have virtually no effect on it: Instead of owning a 50.1-per-cent interest in 100 per cent of the assets, it will switch to owning a 100-per-cent interest in 50.1 per cent of the assets, leaving its net acreage and net production unchanged. Investors will have to take Ovintiv at its word, as the exact details of how the acreage and production were assigned to each party were not disclosed. In any case, the main change as far as PetroChina is concerned is that it will obtain operatorship over its 49.9-per-cent interest. This will allow PetroChina and Ovintiv to work on the assets at their own pace. Ovintiv has slowed its pace considerably over the years, turning more and more of its attention to the United States. In 2019, the Duvernay assets were relegated to the "other" section of Ovintiv's portfolio, "to align with the company's strategic development focus." The de-emphasis has continued into 2020: According to Ovintiv's new press release, gas production from the Duvernay was just 44.5 million cubic feet a day in the second quarter (down from 57 million in 2019, as noted above), while liquids production was about 5,600 barrels a day (down from 7,600).
PetroChina seems pleased to take control over its Duvernay land base. "Full ownership and operatorship of the Duvernay is a significant step in the evolution of [PetroChina's] business," declared president and CEO Jilin Fu in a statement. The company plans to go on a hiring spree for engineers, technical specialists and "other functional disciplines as required to support the asset." Investors may recall that Ovintiv laid off over 600 workers across Canada and the United States in June. Some of them may want to keep an eye on the careers page of PetroChina's website.
© 2020 Canjex Publishing Ltd. All rights reserved.