Energy Summary for Nov. 29, 2021
2021-11-29 20:59 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added $1.80 to $69.95 on the New York Merc, while Brent for January added 72 cents to $73.44 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.55 to WTI, down from a discount of $19.30. Natural gas for December lost 60 cents to $4.85. The TSX energy index added 2.02 points to close at 163.00.
After plunging 10 per cent on Friday on concerns about the new COVID Omicron variant, oil prices rallied today on beliefs that the sell-off was overdone. Saudi Energy Minister Prince Abdulaziz bin Salman told reporters today that he is "very relaxed" and "not concerned" about the variant (as quoted in Bloomberg). Fellow senior officials from OPEC+ echoed this view. Even so, to give itself more time to assess the new strain, OPEC+ has postponed tomorrow's meeting of its joint ministerial monitoring committee (JMMC). The JMMC will instead hold its meeting on Thursday, the same day as the main OPEC+ ministerial meeting.
Here in Canada, pipeline giant Enbridge Inc. (ENB: $48.74) has lost its two-year fight to overhaul the country's largest oil export system, the Mainline. The Canada Energy Regulator (CER) issued the decision late on Friday to deny Enbridge's proposal to offer transportation contracts on the Mainline. Enbridge released a brief statement on Friday after the close, saying it had received the decision and would provide further comments after review.
The battle goes back to the summer of 2019. That was when Enbridge first floated the idea of a sweeping change to the commercial structure of the Mainline, which makes up nearly three-quarters of Western Canada's oil export capacity. Historically, ever since the Mainline entered service 70 years ago, it has operated under common-carrier principles: Fully 100 per cent of its capacity was available for uncontracted (spot) transportation, open to any shipper regardless of size. Shippers were thus surprised when Enbridge abruptly proposed to use only 10 per cent of the system on a spot basis and convert the remaining 90 per cent to long-term contracts. It launched a two-month open season on the idea in August, 2019.
The reaction was immediate and polarized. Some producers, such as Canadian Natural Resources Ltd. (CNQ: $53.43), MEG Energy Corp. (MEG: $10.95) and Shell Canada, strongly opposed the idea, saying it would force shippers to either lock themselves into lengthy contracts or gamble on getting enough spot capacity to meet their changing needs. Shell even called Enbridge's proposal an outright "abuse of market power." Others, such as Imperial Oil Ltd. (IMO: $42.85), Cenovus Energy Inc. (CVE: $15.86) and BP, liked the idea, favouring the certainty of contracts at a time when Canada is still struggling to open new export routes. The bickering reached such a pitch that the CER took the unusual step of halting Enbridge's open season after just a month. It told Enbridge that it would first have to seek regulatory approval (the opposite of the normal procedure) to make sure the idea was even legal. Enbridge duly filed the application with the CER in December, 2019.
Now, after nearly two years, rivers of written filings and one of the largest hearings in the history of the CER, Enbridge has received its answer: No dice. The CER ruled on Friday that the 90-per-cent-contracting proposal would cause a "foundational shift" in Canadian oil transportation. "While certain companies would benefit from long-term stability, others would lose access to the pipeline," wrote the regulator. "This would not meet the CER Act's common-carriage obligation. ... [A] pipeline company must provide service to anyone who wants to ship their products on the pipeline, within reason."
It is the "within reason" comment that has undoubtedly intrigued Enbridge as it reviews the decision. The CER's 154-page ruling found that firm (contracted) service on the Mainline was "not, in and of itself ... necessarily inconsistent with the principle of common carriage," and Enbridge had actually provided "strong justification for some firm service on the Canadian Mainline." This suggests that the regulator simply felt that 90-per-cent firm service was too much. Although it did not specify what percentage it might allow, it effectively left the door open for Enbridge to resume negotiations with shippers and try to nail down a more acceptable proposal.
Another newsmaker today was international oil and gas producer Vermilion Energy Inc. (VET), up $1.15 to $12.65 on 4.35 million shares. The company is reviving its dividend -- just a fraction of its former self, but alive nonetheless. Vermilion has also announced a gassy acquisition in Europe.
The dividend will return in the new year at a quarterly rate of six cents, for a yield of 1.9 per cent. The annualized rate of 24 cents is almost equal to the 23-cent dividend that Vermilion used to pay every month. It kept this 23-cent monthly dividend up until March, 2020, breezily insisting for months beforehand that its "dividend policy is not based on the market price of our shares." (The yield at the time of that comment was 14 per cent.) Ultimately, however, Vermilion capitulated and cancelled the dividend. It even overhauled its management shortly afterward in a bid to wipe some of the egg off its face.
In its third quarter financials earlier this month, Vermilion said it was finally ready to bring back the dividend, but needed to "stress test" it before unveiling the rate. Analysts predicted that it would opt for a quarterly dividend of five to 10 cents. Today's announcement of a six-cent quarterly dividend is in line with those expectations, if at the low end.
Investors were nonetheless pleased. Today's other announcement also seemed to cheer them up: Vermilion is buying a 36.5-per-cent interest in an Irish gas field called Corrib, adding 7,700 barrels a day of gas production and boosting its total interest in Corrib to 56.5 per cent. The Corrib field has been on production since 2015 and makes up nearly 100 per cent of Ireland's total gas output. Its operating costs are relatively low, which makes netbacks relatively high, especially at current record-breaking European gas prices. (It is a nice bit of timing that Vermilion's announcement came around the same time that Russia's Gazprom was boasting of record quarterly profits.)
Vermilion understandably kept the focus on Corrib's near-term money-making prospects. The longer-term picture is less bright (and therefore absent from the press release), as the field is due to run out of reserves in the next decade or so, and the Irish government vowed last February to stop issuing any more oil or gas licences in the country. That does not faze Vermilion. During a conference call this morning, management predicted that European gas will make up just 22 per cent of Vermilion's production in 2022, yet contribute 42 per cent of funds from operations. It expects today's $435-million (U.S.) acquisition to have a payback period of just two years.
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