Stockwatch Energy for yesterday
Energy Summary for March 4, 2022
2022-03-04 20:56 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery shot up $8.01 to $115.68 on the New York Merc, while Brent for May added $7.65 to $118.11 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.92 to WTI, down from a discount of $11.58. Natural gas for April added 30 cents to $5.02. The TSX energy index added 7.35 points to close at 217.45.
Oil prices ended a volatile week with an overall gain of more than $20 (U.S.). Today's jump came after the U.S. government softened its tone on a potential ban on Russian oil imports as a response to Russia's invasion of Ukraine. The White House firmly dismissed this idea as recently as yesterday, but (under pressure from pundits and lawmakers) said today that it is "considering a range of options."
Most of the West's sanctions so far have avoided targeting Russian energy because of Europe's heavy reliance on it. Even so, financial sanctions and the shunning of Russian energy within the private sector have already caused significant supply disruptions. JPMorgan predicted yesterday that global oil prices could soar to $185 (U.S.) by year-end if the disruptions continue.
Here in Canada, fourth quarter earnings season continued. Oil sands producer MEG Energy Corp. (MEG) added $1.04 to $18.24 on 10.3 million shares, after releasing financials that were mildly better than analysts had predicted. Production in the fourth quarter averaged 100,700 barrels a day (finally hitting six digits) and cash flow came to 87 cents a share (despite some hefty hedging losses -- MEG is now going hedge-free in 2022). The company turned an overall profit of $177-million.
Derek Evans, MEG's president and CEO, also trumpeted his "intention to initiate capital return to shareholders." For the moment, it is an intention only: He wants to launch a share buyback program and still needs approval for that from the TSX. Mr. Evans said this approval should arrive shortly and should enable MEG to buy back up to 27 million shares (10 per cent of its public float) over the next year.
Mr. Evans added that MEG will dedicate only one-quarter of its free cash flow to buybacks for now. The rest will continue to go toward reducing net debt, which was $2.4-billion as of Dec. 31, 2021, but could (according to Mr. Evans) get as low as just $1.5-billion by Sept. 30, 2022. MEG would then accelerate its share buybacks, said Mr. Evans. He did not mention any plans to start a dividend.
Meanwhile, Craig Bryksa's Crescent Point Energy Corp. (CPG) added 29 cents to $9.51 on 11.6 million shares, regaining the 24 cents it lost yesterday after releasing its year-end financials. Fourth quarter production of 130,400 barrels a day and cash flow of 74 cents a share were both in line with analysts' predictions. Investors initially seemed disappointed that the financials did not include a dividend increase. Crescent Point's 4.5-cent quarterly dividend (for a yield of 1.9 per cent) was previously hiked from three cents in December, when oil prices were more than $40 (U.S.) lower than they are now.
Instead of another dividend boost, Crescent Point proposed expanding its share buyback program to $150-million from $100-million. It seemed aware that this would not be investors' first choice. President and CEO Mr. Bryksa stated that Crescent Point would like to pursue "a more defined return-of-capital framework" (as opposed to a less defined buyback program, which can be curtailed or shelved without consequence), but wants to tidy up its balance sheet a bit more first. Net debt was about $2-billion as of Dec. 31. Within six months, claimed Mr. Bryksa, Crescent Point can get this down to $1.4-billion or less.
Even if Crescent Point had raised its dividend, that would not guarantee a favourable reaction from shareholders, as a different company found out this week. Jim Riddell's Paramount Resources Ltd. (POU) added $1.19 to $29.50 today, but had lost a total of 76 cents since releasing its year-end financials on Wednesday, even though they included the second dividend boost in five months. Paramount has been paying the dividend for less than a year in total. It unveiled an inaugural two-cent monthly dividend last summer, tripled it to six cents in November and has now hiked to eight cents, for a yield of 3.3 per cent.
Although Paramount's financials were mostly unsurprising, cash flow came in below analysts' predictions on higher-than-expected costs. Analysts brushed it easily aside. A flurry of research notes this week saw several analysts hike their price targets on Paramount, including RBC's Michael Harvey (to $33 from $30), Raymond James's Jeremy McCrea (ditto), BMO's Ray Kwan (to $35 from $33) and Stifel's Cody Kwong (to $37.50 from $31). They all nodded in approval of Paramount's balance sheet. Net debt was around $450-million as of Dec. 31, but would be nearly nothing if one adds in the value of Paramount's investments in other companies.
As it happens, one of Paramount's wiser investments during the downturn was picking up 17.3 million shares of NuVista Energy Ltd. (NVA: $10.70) in September, 2020, at just 61 cents each. It paid $10.5-million. Today, those same shares are worth $185.3-million.
NuVista and another oil and gas producer had some lovely news to end the week. Today after the close, as part of its quarterly rebalancing review, the S&P/TSX Composite Index -- the self-billed "headline index for the Canadian equity market" -- announced the additions of both NuVista and Headwater Exploration Inc. (HWX: $7.16). They will join the index effective Monday, March 21.
Index additions tend to create buying support from index-tracking funds. They will have been buying a lot of energy stocks lately, with NuVista and Headwater becoming the 11th and 12th such stocks added to the S&P/TSX Composite Index in just six months. Birchcliff Energy Ltd. (BIR: $7.08) started the trend last September. Then no fewer than nine stormed the gates in December, including the above-mentioned Paramount Resources, as well as Peyto Exploration & Development Corp. (PEY: $11.73), Advantage Energy Ltd. (AAV: $7.90), Baytex Energy Corp. (BTE: $5.92), Tamarack Valley Energy Ltd. (TVE: $5.46) and more.
With any luck, the pleasing trend will continue. As of Feb. 28, energy carried an index weight of 15.8 per cent. This is up from about 11 per cent in late 2020, but down from over 20 per cent in 2018 and about 25 per cent in 2010.
© 2022 Canjex Publishing Ltd. All rights reserved.