Energy Summary for Jan. 20, 2022
2022-01-20 20:07 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery edged down six cents to $86.90 on the New York Merc, while Brent for March lost seven cents to $88.38 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.70 to WTI, down from a discount of $12.53. Natural gas for February lost 23 cents to $3.80. The TSX energy index lost 1.72 points to close at 189.90.
The main lobby group for Canada's energy sector is forecasting a second straight year of rising investment. CAPP, the Canadian Association of Petroleum Producers, released its projections for 2022 this morning, forecasting that the oil and gas industry will spend a total of $32.8-billion. This would be a 22-per-cent increase from $26.9-billion in 2021, which itself was a 12-per-cent increase from $24-billion in 2020.
CAPP expects the greatest percentage increase to take place in the oil sands. There, it sees a 33-per-cent jump in capital spending this year to $11.6-billion (from $8.7-billion last year). Conventional oil and gas spending will rise by about 17 per cent to $21.2-billion (from $18.1-billion).
It would not be a CAPP report if it were not a little bit dour. "While this is great news for the struggling Canadian economy, within the context of total global investment, Canada is continuing to lose market share to other jurisdictions," warned the group. It fretted that Canada no longer seems to be viewed as a "top-tier international investment jurisdiction" for oil and gas. In 2014, when the country had that reputation, investment in its oil and gas sector reached $81-billion. That was more than 10 per cent of global oil and gas investment. By comparison, calculated CAPP, this year's percentage is likely to be just 6 per cent, "a four-percentage-point drop which represents over $21-billion in potential investment."
Within the sector, companies focused on their own budgets. Jeff Tonken's Birchcliff Energy Ltd. (BIR) lost 25 cents to $6.09 on 5.75 million shares, after releasing its 2022 guidance and an updated five-year plan for its mostly Montney-based assets. Both were generally in line with preliminary or prior versions that Birchcliff put out last year. Birchcliff is continuing to emphasize debt reduction, with chief executive officer Mr. Tonken stating that this will "reduce the risks to our business and create optionality when considering sustainable increases to our common share dividend."
Investors seemed unconvinced. Birchcliff's attitude toward risk was significantly different when it was racking up over $630-million in debt by the end of 2019 (and then hit $780-million in 2020, but those were different circumstances). Even now, the company takes the risky position of keeping all of its production unhedged, leaving itself fully exposed to fluctuations in commodity prices. This worked out excellently in 2021 -- the company enjoyed soaring cash flow and was one of few in the sector that did not have to book impairment losses -- but it is not exactly risk-mitigating behaviour. Today, gas prices took a tumble, which is likely one of the reasons that Birchcliff's stock did the same.
Another reason was likely Mr. Tonken's seeming lack of interest in a competitive dividend. Birchcliff did in fact double its dividend in December, but the result was simply a one-cent quarterly payout instead of half a cent, for an uncompetitive yield of 0.7 per cent. Mr. Tonken talked today of "significantly reducing" debt before hiking the dividend again. He was vague on amounts or timing, to investors' displeasure. Happily, analysts are never put off by vagueness, and set about gleefully predicting large increases if investors will only be patient. (RBC's Michael Harvey, for example, predicted that the current four-cent annualized dividend will be 24 cents by late 2023.) Despite these efforts, the stock ended the day down.
One of the most intriguing gainers of the day was Michael Binnion's Questerre Energy Corp. (QEC), up eight cents to 40 cents on 1.47 million shares. The company has signed a joint energy development agreement with the Wolinak of Abenaki First Nation in Quebec. They want to create a "net zero emissions energy hub," including gas production projects, within traditional tribal territories in the Becancour region.
The location is critical. The Quebec government does not want oil or gas projects anywhere in the province, having officially banned hydrocarbon exploration and development in October. Questerre's new agreement will test the government's stomach for enforcing that ban if it means scuttling economic opportunities for first nations. Council Chief Michael Bernard laid out his position clearly in Questerre's press release, declaring the agreement could "bring prosperity to our nation" and show that "reconciliation has to move beyond words and to real action."
Questerre CEO Mr. Binnion did not mince his words either. "This is setting up an interesting showdown with the government," he told The Globe and Mail this morning. He noted that the Abenakis of Wolinak have a long history in Quebec, predating the arrival of French settlers. "Our view," he said, "is they [the Quebec government] should let us go ahead."
The reporter did not mention Mr. Binnion's tone, but a touch of glee would certainly be warranted. Questerre has been in Quebec since 2001 and played a first-hand role in discovering that Quebec may hold enough gas to supply the province for a century. It also witnessed first-hand as the Quebec government played hot and cold with oil and gas companies for decades, until finally shoving them away in October. The province is also loath to pay compensation for assets it has effectively revoked, with Premier Francois Legault grumbling last month that local explorers (those of them that are left) deserve "as little compensation as possible." Mr. Binnion is going to give the premier quite a headache, and in an election year, no less. Good for him.
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