Stockwatch Energy for yesterday
Energy Summary for March 5, 2021
2021-03-05 19:59 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery added $2.26 to $66.09 on the New York Merc, while Brent for May added $2.62 to $69.36 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.27 to WTI, down from a discount of $11.19. Natural gas for April lost five cents to $2.70. The TSX energy index added 4.01 points to close at 121.79.
Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) lived up to its name, surging 16 cents to 69 cents on 15.8 million shares, after it announced a $106-million asset sale and talked up an "exciting" new drill program. The sale involves assets that are producing 2,700 barrels of oil equivalent a day.
Surge was strangely quiet about where these assets are. The somewhat unfortunate implication is that they are in a core area -- more on that in a moment -- but the overall mood was one of relief, as Surge was in need of this money to shore up a strained balance sheet. The company's net debt was about $370-million as of Sept. 30. That included nearly $300-million in bank debt, with the bankers breathing down Surge's neck about conducting an obligatory "asset sale solicitation process." With a sale now announced, they are terminating this obligation and will go away for a while -- but they are taking that $106-million cheque with them.
If Surge was deliberately vague about its asset sale, it was all too happy to talk about its drill plans. In the first half of 2021, to take advantage of the current "very positive" trend in oil prices, the company is planning a 32-well drill program in its core Sparky and Valhalla areas of Alberta. It drew particular attention to the Sparky play, which is "one of the most economic conventional medium/light oil growth plays in Canada." (Every qualifier has a lessening effect, but the play unquestionably contains many large, low-cost pools.) Through this drill program, Surge expects to boost its production by at least 3,200 barrels a day, more than offsetting the 2,700 barrels a day that it is now selling. For context, as of January, Surge's total production was about 17,000 barrels a day.
Surge owns what it calls "a dominant position" in the Sparky. The $106-million asset sale may lessen some of this dominance. Although Surge did not identify the party on the other side of the sale, the deal would fit into a batch of acquisitions that were separately announced today by Brian Schmidt's Tamarack Valley Energy Ltd. (TVE), up three cents to $2.41 on 14.9 million shares. Tamarack has entered two deals to buy a total of 2,800 barrels a day for $135-million. That includes approximately 2,200 barrels a day in the Sparky. If Surge is the one selling those assets, then its logic for not saying so would probably go something like this: It did not want to spend a press release hyping the Sparky play while simultaneously announcing a partial exit. Undoubtedly it would have preferred to sell non-Sparky assets, but between its impatient bankers and the current weak market for sellers, it likely did not have much choice.
Naturally, the view is much better from where Tamarack is sitting. It has been scooping up assets since July, with today's deals bringing its total purchases up to $213.5-million. Together these have added 7,300 barrels a day of production and 250,000 net acres of land. Tamarack has been focusing on the Sparky and Clearwater plays. The Clearwater has received even more hype lately than the Sparky, with Raymond James analyst Jeremy McCrea recently calling it "one of the top economic plays in Canada." Mr. McCrea was writing not about Tamarack but about Headwater Exploration Inc. (HWX), which entered the Clearwater play in December. Headwater's stock has since more than doubled to $3.92 from $1.93.
Tamarack has also seen a sharp rise in its shares, as evidenced by the financing that it announced today to help finance its latest acquisitions. It is now selling a $68-million bought deal (hiked from the original amount of $55-million) at $2.25 a share. By comparison, a previous $47-million bought deal in December (to help finance a different acquisition) was done at just $1.15 a share. Neither of those amounts covered the full price tag of the assets. To help make up the difference, both then and now, Tamarack sold royalties on the Clearwater assets to Topaz Energy Corp. (TPZ: $14.30).
Elsewhere in Alberta, Darren Gee's Peyto Exploration Ltd. (PEY) added 27 cents to $6.15 on 3.14 million shares, more than regaining the seven cents it lost yesterday after releasing its year-end financials. Mr. Gee's habit of writing monthly president's reports, including estimates of Peyto's production and spending, ensured that the financials held few surprises. Another of Mr. Gee's reports arrived last night. These showed that Peyto is keeping busy. It spent $55-million in January, nearly as much as the $68-million that it spent in the entire fourth quarter of 2020. Production averaged 88,000 barrels of oil equivalent a day for January and February -- or more specifically, 89,000 in the first month and 87,000 in the second month. Mr. Gee said the February drop partly reflected some "freeze-offs during the worst of the polar vortex." (Freeze-offs occur when the weather gets so cold that liquids inside pipelines, valves and wells -- even gas wells -- freeze solid, blocking the flow.) Mr. Gee said operations are now "back up and running smoothly" at 89,000 to 90,000 barrels a day, with "a steady stream of new wells coming on until [spring] breakup."
Further afield, Colombian oil producer Parex Resources Inc. (PXT) added 85 cents to $23.75 on 1.73 million shares, on top of the $1.28 it added yesterday after it too released its year-end financials. These two were relatively unsurprising, as Parex is in the habit of releasing quarterly operational updates. It already announced its fourth quarter production (46,600 barrels of oil equivalent a day) in January. The stock has still enjoyed a lovely rise from just $17.50 since the start of the year, buoyed by higher Brent prices. Parex emphasized yesterday that it has not hedged any of this year's forecast production of 47,000 to 49,000 barrels a day.
Parex's lack of hedges, and the fact that it is conservatively basing this year's guidance on average Brent prices of $45 (U.S.) -- more than $20 (U.S.) below current trading levels -- got analysts all aflutter. Mackie Research Capital's Bill Newman dubbed Parex a "self-funding cash flow machine," reiterating his price target of $27. Scotia's Gavin Wylie, who has a $26 price target, cheered Parex's "impressive FCF [free cash flow] and compelling valuation." Even more bullish was BMO's Mike Murphy, who estimated that Parex will generate $335-million (U.S.) in free cash flow this year -- more than double the company's own estimate of $150-million (U.S.) (which again is based on much lower oil prices). Mr. Murphy hiked his price target to $30 from $28. The stock closed today at $23.75.
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