Stockwatch Energy for yesterday
Energy Summary for May 20, 2022
2022-05-20 20:21 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for June delivery added $1.02 to $103.23 on the New York Merc, while Brent for July added 51 cents to $112.55 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.55 to WTI, unchanged. Natural gas for June lost 23 cents to $8.08. The TSX energy index added 1.16 points to close at 253.54.
Oil prices wrapped up another volatile week. For Western Canadian oil producers, the week brought political upheaval too. Notably, Jason Kenney unexpectedly announced his decision to resign as premier of Alberta on Wednesday, after receiving just 51.4 per cent of the votes in a leadership review. The decision was a surprise not because Mr. Kenney was particularly popular -- far from it, with approval rankings among the lowest in the country -- but because he had vowed to stay on even if he won just 50 per cent plus one in the leadership vote. He has now agreed to remain premier until his party picks a new leader.
Mr. Kenney was known for his brash style of politics and his dedicated cheerleading of the oil patch. One of his first moves when he became premier in 2019 was to create what he called an "energy war room," which (as he described it when first sharing the idea in 2018) would "rebut every lie told about the green left about our world-class energy industry." He once called a U.S. governor "brain dead" over her opposition to a pipeline. In the days before the leadership results on Wednesday, he travelled to Washington to pitch U.S. politicians on a new cross-border pipeline and other energy security matters. Now, toppled by anger over his handling of the COVID-19 pandemic, the man sometimes nicknamed the oil patch premier will be stepping down.
Meanwhile, over in British Columbia, the province has revealed the steps it is taking to fix its "broken" oil and gas royalty system. The government launched a review of the 30-year-old system last year, seeking to "modernize" it to account for changes in technology, market conditions and concerns about the environment. Announcing the changes from Victoria yesterday, Premier John Horgan cheered that his government had successfully overhauled "a broken system of fossil fuel subsidies." In translation, the industry's costs (and the government's take) are heading much higher.
Specifically, a new minimum royalty rate of 5 per cent is taking effect, up sharply from the current minimum of 3 per cent. Royalties may get as high as 40 per cent once drilling costs are recovered. On the topic of drilling, the province is eliminating its deep-well drilling credit, which was introduced in 2003 to offset the higher costs of wells considered especially deep and hard to drill. (This is the one that gets critics up in arms about "fossil fuel subsidies.") The government will start phasing in the changes on Sept. 1, 2022, with full implementation by Sept. 1, 2024. Existing credits will expire in four years unless transferred to "an environmentally focused land healings and emissions reductions pool."
The new royalty system, while not unexpected, will increase costs for oil and gas drillers. Three of the province's largest drillers are Tourmaline Oil Corp. (TOU: $72.64), ARC Resources Inc. (ARX: $17.91) and Ovintiv Inc. (OVV: $60.56). All three have options to redirect some of their spending, if they wish, to Alberta (or ]to the United States, in Ovintiv's case). Relatively few public companies get all of their production from British Columbia. Two that do are Crew Energy Inc. (CR: $5.27) and Leucrotta Exploration Inc. (LXE: $2.16) (the latter of which is in the process of being acquired by Vermilion Energy Inc. (VET: $24.80)).
Over in Alberta and Saskatchewan, Grant Fagerheim's Whitecap Resources Inc. (WCP) lost 23 cents to $10.04 on 11 million shares. (Whitecap does in fact have a smattering of assets in British Columbia, but they are non-priority and were not scheduled to see any drilling this year. Last year's drilling schedule called for just one well in the province.) The company has been courting retail investors, with the help of RBC Capital Markets. In a new research note, RBC analysts Luke Davis and Michael Harvey provided an obligingly boosterish writeup of a retail conference call with Mr. Fagerheim, Whitecap's president and chief executive officer, and Thanh Kang, its chief financial officer.
According to the analysts, a focus of the call was the acquisitions that Whitecap completed in 2021 and early 2022, including NAL Resources, TORC Oil & Gas, Kicking Horse and Timber Rock. These are "likely to pay out in two years, given where commodity prices are sitting," wrote the analysts. Yet high prices are also making any future acquisitions tricky because of sellers' high expectations. The company will focus either way on "stronger operational execution" and "incremental efficiencies," which it hopes will offset or mitigate inflation. (Investors are less sure about this and are expecting Whitecap to have to increase its current full-year budget of $520-million.) As well, management hyped Whitecap's share buybacks and its three-cent monthly dividend (for a yield of 3.6 per cent), while adding that special dividends could be considered later this year.
Concluding that Whitecap is doing a bang-up job, Mr. Davis and Mr. Harvey reiterated their "outperform" rating and their price target of $14. The stock closed today at $10.04. Investors may wish to note that the analysts' employer, RBC, is required to disclose that it "makes a market" in Whitecap's securities and receives compensation from it for various services.
South of the border, in the North Dakota Bakken, Brett Herman's new promotion, PetroShale Inc. (PSH), edged up one cent to 69 cents on 167,300 shares. Mr. Herman and his people were the ones who sold TORC to Whitecap last year. Earlier this year, they recapitalized PetroShale and overhauled its board and management. They announced this morning that two more steps of their plan received approval at a shareholder meeting yesterday. Shareholders approved a name change to Lucero Energy Corp. -- expected to occur "shortly," along with a ticker change to LOU -- as well as a potential rollback of 1 for up to 15 shares. (There are 660 million shares outstanding, or 705 million fully diluted.)
The meeting came just a day after the soon-to-be Lucero released its first quarter financials. It produced 10,700 barrels a day, right in line with its full-year guidance of 10,500 to 11,000 barrels a day. CEO Mr. Herman already told investors that he is looking to keep production fairly stable and work on reducing net debt to $50-million by the end of the year (compared with $121-million as of March 31). That could all change, of course, if Mr. Herman makes progress on a third goal, to "execute on a disciplined corporate strategy of accretive acquisitions." He reminded investors of this goal in the latest financials, but did not give them any clues as to location, pricing or timeline.
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