Energy Summary for Oct. 27, 2021
2021-10-27 19:43 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery lost $1.99 to $82.66 on the New York Merc, while Brent for December lost $1.82 to $84.58 (all figures in this para U.S.). Western Canadian Select traded at a discount of $15.75 to WTI, unchanged. Natural gas for November added 32 cents to $6.20. The TSX energy index lost 4.23 points to close at 155.73.
The results from Alberta's recent referendum are in, and to the surprise of no one, the people are not a fan of equalization. Alberta asked voters on Oct. 18 if they supported eliminating equalization from Canada's constitution. The results posted on Elections Alberta show that 61.7 per cent of voters said yes, with a majority of voters in all but five municipalities wanting equalization to be scrapped. (Turnout was not specified, but seems to have been around 39 per cent.)
Equalization is a system whereby Ottawa transfers revenue from wealthy provinces, such as Alberta, to less wealthy provinces, such as Quebec. Over the years, Alberta has found itself increasingly resentful of sending billions of dollars to provinces that actively hinder its energy industry. Announcing the referendum in June, Premier Jason Kenney railed against the treatment of Alberta as a cash cow to be milked but never fed. "[Albertans] have always been willing to share in the spirit of patriotism and generosity," he declared, "... [but] when politicians who benefit from the hard work and resources of Alberta turn and cut us off at the knees, blocking pipelines and imposing policies that damage our economy, well, that's where Albertans will draw the line."
Now they have. To be clear, one province's referendum is not enough to amend the whole country's constitution. At best, it will trigger a legal duty for the federal government to enter negotiations with Alberta, but even this is debatable, and there is certainly no guarantee that the negotiations will be in Alberta's favour. Mr. Kenney has nonetheless vowed to use the referendum as a bargaining chip with Ottawa in any way he can.
Within the oil patch, producers are preparing for the frenzy of quarterly reporting season. One of the first to report, later this evening, will be Suncor Energy Inc. (SU), down $1.09 to $28.22 on 14.9 million shares. Investors seem apprehensive. Although Suncor is benefiting from the recent dramatic rise in oil prices, these are less favourable for its downstream refineries (which benefit when feedstock is cheaper). Moreover, Suncor is one of the largest net gas guzzlers in the sector, which means that the just-as-dramatic surge in gas prices is eating away at its bottom line. This is one reason why Suncor's stock has not shown the same level of post-COVID recovery as fellow oil sands players Canadian Natural Resources Ltd. (CNQ: $51.50), Cenovus Energy Inc. (CVE: 14.25), Imperial Oil Ltd. (IMO: $43.69) or MEG Energy Corp. (MEG: $11.12).
As it happens, all five of the above companies got a boosterish mention today from ATB Capital analyst Patrick O'Rourke. He began covering the quintet this morning. Going by his price targets, he likes Cenovus and MEG the best. Cenovus, in Mr. O'Rourke's view, is the "best positioned for asset rationalization" in the wake of its merger with Husky Energy earlier this year (indicating that Mr. O'Rourke thinks Cenovus will be better at operating Husky's assets). As for MEG, it offers "the highest oil price torque" (a reference to its being unhedged in 2022 -- though this will quickly become a problem if prices head down).
Meanwhile, continued Mr. O'Rourke, Imperial has "the healthiest balance sheet," while Canadian Natural has "the most insulation ... to rising gas prices." (Canadian Natural is simultaneously Canada's largest oil producer and second-largest gas producer.) Poor Suncor got the most tepid write-up, with Mr. O'Rourke deeming its "long track record of excellent execution" to be marred by recent operational "missteps." He still gave Suncor a target of $33, above today's close of $28.22. (MEG got a target of $14.75, Cenovus $19.50, Imperial $45 and Canadian Natural $58.)
Another company has been catching the attention of cheerleaders. ARC Resources Ltd. (ARX), down 16 cents to $11.77 on 6.99 million shares, got a pleasant mention on BNN yesterday after the close, courtesy of UBS Canada's head investment strategist, Pierre Ouimet. He opined that ARC's merger with Seven Generations in April "transform[ed] the company into a global winner. There's nothing more to say." There was a little bit more to say, as Mr. Ouimet clarified that ARC, as Canada's largest liquids producer, is "well positioned to benefit" from strong liquids and gas pricing over the winter. Mr. Ouimet's comments happened to come just a day after iA Capital analyst Elias Foscolos also zeroed in on ARC, telling investors on Monday to "be on the lookout for strong cash flows in [the third quarter] and beyond." He hiked his price target on ARC's stock to $17.50 from $15 (relative to today's close of $11.77).
Despite all these efforts, ARC's stock headed down today. The company will have another chance to impress investors when it releases its third quarter financials on Nov. 4.
Toward the bottom, Neill Carson's i3 Energy PLC (ITE) stayed unchanged at 22.5 cents on 951,600 shares. As the "PLC" tag suggests, i3 is a U.K. company by birth, although it entered Canada late last year by buying assets in Alberta (while obtaining a Toronto listing to go with its London one). Yesterday, i3 provided an update on how its Alberta operations are going. It boasted that its third quarter production averaged 13,700 barrels of oil equivalent a day. Chief executive officer Majid Shafiq noted that this figure does not include the full effects of more recent acquisitions, such as one from Cenovus Energy in August. He pegged i3's current production at around 19,000 barrels a day.
Mr. Shafiq remained in a chipper mood during an interview yesterday with The Market Herald (an Australia-based business media and IR platform). "[We're] very pleased with the production performance," he declared. He added that the assets have low decline rates, which is important to i3 as a dividend payer. (Yes, despite trading below one Canadian quarter, i3 decided it wanted a 0.2-pence half-yearly dividend. The implied yield is 2.8 per cent. The implied cost, based on 700 million shares outstanding, is about $4.5-million annually.)
i3 has spent most of its first year in Canada acquiring assets. In 2022, according to Mr. Shafiq, the company wants to pursue a "fairly extensive drilling program" -- though it continues to "actively look" at acquisitions too. "Our business model is essentially to be opportunistic," said Mr. Shafiq. This was about as close to guidance as investors got (although he hinted that firmer numbers could arrive in the coming weeks). It was more than enough for Mr. Shafiq's friendly interviewer. "Hopefully," she said with a smile, "your next quarter continues to show good results like this."
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