Energy Summary for Dec. 17, 2021
2021-12-17 19:24 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery lost $1.52 to $70.86 on the New York Merc, while Brent for February lost $1.50 to $73.52 (all figures in this para U.S.). Western Canadian Select traded at a discount of $17.40 to WTI, unchanged. Natural gas for January lost eight cents to $3.69. The TSX energy index lost 3.27 points to close at 152.71.
Alberta oil sands giant Imperial Oil Ltd. (IMO) lost 51 cents to $42.41 on 4.02 million shares, after setting relatively cautious guidance for 2022. It plans to spend $1.4-billion. For context, during a conference call seven weeks ago, chief executive officer Brad Corson said Imperial has a multiyear plan in which "over the next few years, we'd be averaging around $1.5-billion, $1.6-billion." Today's budget is a step down from that.
It is still above the 2021 budget of $1.1-billion (recently reduced from $1.2-billion). As it happens, when Mr. Corson first unveiled the 2021 guidance in November, 2020, he was forecasting a roughly 30-per-cent jump in annual spending and a 5-per-cent rise in production (which in 2022 is set to average 425,000 to 440,000 barrels a day). These percentage increases are nearly exactly what he is now forecasting for 2022. Given the fact that Mr. Corson had said the 2021 figures reflected the "highly uncertain" nature of a recovery in global energy demand -- and the fact that the budget came in lower than expected -- investors can assume that Imperial is still in the mood for caution.
Mr. Corson had a different term for it: "capital discipline." In his view, the budget shows that Imperial is focused on "maximizing performance of existing assets," while still "prioritizing shareholder returns." (Imperial pays a 27-cent quarterly dividend that represents a yield of 2.5 per cent.) One of the next big items on the list, added Mr. Corson, is "progressing key sustainability initiatives." He promised to talk more about these at the next investor day in March. A likely focal point will be a proposed biofuel project at Imperial's Strathcona refinery near Edmonton, the largest refinery in Western Canada. Imperial announced this proposal in August and is hoping to make a final investment decision next year.
Elsewhere in the oil sands, Cenovus Energy Inc. (CVE) lost 54 cents to $14.52 on 20.6 million shares, after arranging an $800-million asset sale. It will unload its 20,000-barrel-a-day Tucker thermal project to an undisclosed buyer. The proceeds will go toward reducing Cenovus's roughly $10-billion debt.
The mystery buyer will need a strong stomach. Even for an oil sands project, Tucker has a roller coaster of a history. It was opened in 2006 by Husky Energy. Husky was initially thrilled, as the $500-million project opened on time and slightly under budget, a rarity in the oil sands. What the project failed to do was produce anywhere near the expected levels. With a target capacity of 30,000 barrels a day, Tucker was producing a mere 2,700 barrels a day by the end of 2007. Husky decided in 2008 to devote $200-million to rescuing the project, which it insisted would reach peak capacity in 2010. That did not happen either. "Tucker ... is usually considered one of the worst performers in the field," the Calgary Herald unkindly described it in 2013.
Dogged as its namesake, Husky persisted, shifting the goalposts for peak production to 2018 -- and in the fourth quarter of that year, 12 years after opening, Tucker finally reached its design capacity. The exact amount that Husky poured into Tucker over this time is not clear. Sadly, the good times lasted barely a year before 2020 arrived, bringing a global pandemic and a record downturn in oil prices. Tucker was one of the first projects where Husky cut output.
Then Cenovus came along, buying Husky and all of its projects at the start of 2021 for $3.8-billion. It soon began making noises about selling some of Husky's assets, such as its retail gas stations (sold last month for $420-million) and its offshore Asia-Pacific operations (not yet sold). Tucker was not on the shortlist, but given its choppy history, it is not surprising to see Cenovus willing to part with it.
As noted above, Cenovus did not disclose the buyer. The Canadian Press subsequently reported that the buyer is Strathcona Resources, a private portfolio company of Adam Waterous's Waterous Energy Fund. He has been one of the most active acquirers in the Canadian oil patch for years. A report from Fitch Ratings last July estimated that Waterous Energy Fund spent $1.6-billion patching Strathcona together through nine transactions since 2017 (including the $740-million takeover of the once-public Pengrowth Energy in 2019). Just last month, Strathcona added a 10th transaction to the list, buying the private Caltex Energy in a deal rumoured to be worth $700-million. Adding Cenovus's Tucker project should boost Strathcona's production to over 110,000 barrels a day and cement its position as one of the largest private oil companies in North America.
In other acquisition news, Brian Lavergne's B.C. Montney-focused Storm Resources Ltd. (SRX) stayed unchanged at $6.27 on 204,800 shares, in what will be one of its last days of trading prior to its official takeover. The company announced today that it has closed its plan of arrangement with Canadian Natural Resources Ltd. (CNQ), down $1.11 to $49.90 on 9.97 million shares. The larger company is buying Storm for $6.28 a share in cash. Storm expects to cease to be a reporting issuer and to delist its shares in the coming days.
This is the fourth Storm to disappear over the horizon since Mr. Lavergne and his people started the lineup more than two decades ago. They previously sold Storm Energy Inc. to Focus Energy Trust in 2002, then sold Storm Energy Ltd. to Harvest Energy Trust in 2004 and then sold Storm Exploration Inc. to ARC Resources Ltd. (ARX: $10.68) in 2010. The average age of those three Storms was four years old at the time of sale. Investors in the current Storm had to wait 11 years, but the pattern is finally being continued.
As for Canadian Natural, it will use the deal to bolster its existing gas presence in the Montney. President Tim McKay welcomed the closing of the takeover and said the company is already working on "optimiz[ing] and leverag[ing] synergies of the newly acquired assets." He plans to unveil Canadian Natural's 2022 guidance and hold a conference call to discuss it on Jan. 11.
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