Stockwatch Energy for yesterday
Energy Summary for Dec. 8, 2020
2020-12-08 20:15 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery edged down 16 cents to $45.60 on the New York Merc, while Brent for February added five cents to $48.84 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.79 to WTI, down from a discount of $11.75. Natural gas for January lost one cent to $2.40. The TSX energy index added a fraction to close at 92.97.
Oil prices wobbled despite the public's celebration of "V-Day," so named to mark the first administering of a COVID-19 vaccine. A 90-year-old grandmother in the United Kingdom became the first person to receive Pfizer's jab this morning, after the U.K. became the first country to approve it. The U.S. government is seen as likely to make a similar decision in the coming days. As well, the Canadian government has announced that Canada is in line to receive hundreds of thousands of the vaccines this month, pending Health Canada approval. Yet the news did little to prop up oil prices. Worsening COVID-19 statistics and lockdowns, combined with uncertainty about U.S. fiscal stimulus talks, locked oil in a tight range all day.
Here in Canada, oil sands producer MEG Energy Corp. (MEG) edged up five cents to $4.21 on 7.4 million shares, after releasing its 2021 guidance. It plans to produce 86,000 to 90,000 barrels a day on a budget of $260-million. The production target was in line with analysts' predictions, but the budget was noticeably higher -- analysts were forecasting a 2021 budget of just $236-million -- which would generally be cause for concern. MEG defended the budget by claiming that when it reduced its 2020 budget earlier this year (to $150-million from $250-million), it was actually deferring some of the 2020 budget into 2021, and now it is time to spend that money. It did, however, say that if Canadian heavy oil prices significantly deteriorate, it could probably lower the 2021 budget by $65-million -- meaning push that money out again, into 2022 -- without having to touch the production guidance.
The guidance drew mixed reactions from analysts. Scotia Capital analyst Jason Bouvier dubbed it "slightly negative," noting that the sum of higher-than-expected spending plus just-as-expected production equals lower-than-expected free cash flow. He was previously estimating that MEG would generate $161-million in free cash flow in 2021. Now he is lowering that figure to $91-million. (This means less money that MEG can use to reduce its considerable debt, which was over $2.2-billion as of Sept. 30.) Mr. Bouvier kept his rating at "sector outperform" and left his price target at $4.50. Meanwhile, National Bank Financial analyst Travis Wood downgraded his rating to "sector outperform" from "outperform" while hiking his price target to $4.25 from $3, and TD Securities analyst Menno Hulshof left his rating at "hold" while increasing his price target to $4.50 from $3. MEG's stock closed today at $4.21
Another company trying to impress investors with its plans for 2021 was Gary Guidry's Colombia-focused Gran Tierra Energy Inc. (GTE), up 10 cents to 49 cents on 11.6 million shares. Investors were indeed impressed, or at least content that the situation was not worse than expected. Gran Tierra is aiming for a fairly conservative production target of 28,000 to 30,000 barrels a day on a budget of $130-million (U.S.) to $150-million (U.S.). These are relatively in line with analysts' forecasts, likely because Gran Tierra had dropped some hints about its 2021 plans back in September. At the time it was hoping for production of at least 30,000 barrels a day. It has now scaled back those ambitions, but only slightly and probably wisely. Gran Tierra suffered through various operational mishaps in 2019 and 2020 and had to reduce its guidance in both years numerous times. The decision to set a conservative target for 2021, especially in an uncertain market, seemed to meet with investors' approval.
Gran Tierra also emphasized that its 2021 program "prioritizes free cash flow generation over the rate of development, exploration and production growth." Depending on oil prices, it is forecasting anything from nil to $80-million (U.S.) in free cash flow, which it says it will use exclusively to repay debt. Its debt came to $784-million (U.S.) as of Sept. 30, sharply higher than its current market cap of about $180-million. That and the aforementioned operational mishaps have helped send the stock down to just 49 cents from over $5 since late 2018. Indeed, until recently, Gran Tierra was one of relatively few stocks that had managed to plumb depths even lower than the COVID-19-triggered lows of March. It is hopeful that 2021 will bring a turnaround.
Another Colombian producer, little Arrow Exploration Corp. (AXL), shot up 3.5 cents to 6.5 cents on 764,700 shares, after announcing the resumption of production from one of its best wells -- though admittedly its list of wells is rather short. The well in question is known as Rio Cravo Este-1 (or RCE-1) and is located on Arrow's 50-per-cent-owned Tapir block. Arrow cited improving oil prices as the reason for the well coming back on-line.
The RCE-1 well was originally drilled back in April, 2019, as the second exploration well that Arrow had ever drilled. The company itself had only recently entered Colombia, acquiring assets in the fall of 2018 from Canacol Energy Ltd. (CNE: $3.96) for about $40-million (U.S.). Arrow quickly drilled two successful exploration wells in a row, one at its LLA-23 block and one at Tapir. Management was hoping that this strong start would appeal to lenders that would help it secure an increasingly necessary credit facility. Alas, this did not happen, and in November, 2019, Arrow was in such financial straits that it had to start a "strategic alternatives" review (code for going up for sale). The year 2020 proved no better as low oil prices forced Arrow to shut in much of its production, including the RCE-1 well last spring. (It still had about 12 producing wells in Alberta, a relic of the reverse takeover transaction through which Arrow went public in 2018.)
More recently, Arrow has made some progress digging its way out of the financial muck. It got new management in April, and in August it agreed to sell the LLA-23 block for $12-million (U.S.). It is hoping to close the deal by year-end. All the while, the company has continued its strategic review, which has now been in progress for just over a year. There have been no takers yet. With the RCE-1 well now back on-line -- the well from which Arrow has "historically experienced some of its highest-netback production," it carefully emphasized -- Arrow is doubtless hoping for better luck attracting suitors.
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