Energy Summary for Feb. 15, 2022
2022-02-15 19:58 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery tumbled $3.39 to $92.07 on the New York Merc, while Brent for April lost $3.20 to $93.28 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.69 to WTI, unchanged. Natural gas for March added 11 cents to $4.31. The TSX energy index lost a fraction to close at 200.39.
Oil prices retreated after Russia claimed to be pulling troops from the Ukrainian border, in what traders are taking as a sign of de-escalating geopolitical tensions. Several news outlets had reported yesterday that Russia was days away from an invasion. This raised the threat of sanctions that could disrupt oil supplies from one of the world's largest exporters.
Canadian oil stocks showed little reaction to today's drop, much like their non-reaction to yesterday's sharp rise. One Canadian money manager seems pleased that stocks are (as he described it) "looking through" the hysteria. "Geopolitics is never a good thing. It's a distraction and it keeps people from seeing what really matters," opined Eric Nuttall, a staunch oil bull and the manager of the Ninepoint Energy Fund, in an interview today on BNN. In his view, what matters is that demand is surging, inventories are falling at the fastest clip in history and there are "structural challenges to supply growth" (meaning years of underinvestment in oil and gas assets). He sees prices heading higher regardless of a Ukrainian war, an Iranian nuclear deal or other whiz-bang geopolitics.
This will be a boon to energy investors, added Mr. Nuttall. He calculated that at $80 (U.S.) oil, the average Canadian energy company has enough free cash flow to become debt-free and buy back all of its shares in just five years, yet is sitting on 15 years of reserves -- a whole decade's worth of returns for shareholders. Mr. Nuttall called it "the golden age of free cash flow." This "multiyear bull market ... will last at least five to six years and will end in all-time high oil prices," he predicted. Quipping that the challenge in energy investing right now is that "everything looks good," he managed to single out three favourites: MEG Energy Corp. (MEG: $16.04), Enerplus Corp. (ERF: $15.27) and ARC Resources Inc. (ARX: $14.73). (None of those stocks showed much movement today, suggesting that stocks are equally as capable of shrugging off alarming geopolitical headlines as they are boosterish BNN cheerleaders.)
Within the sector, Brian Schmidt's Tamarack Valley Energy Ltd. (TVE) added seven cents to $4.99 on 4.97 million shares, after closing its takeover of the private Crestwynd Exploration. Crestwynd is producing about 4,500 barrels of oil equivalent a day in the Alberta Clearwater play. Its owners are already sitting on a nice gain since agreeing to the sale in December. Tamarack pegged the purchase price at the time at $184.7-million, comprising $92.6-million cash and 26.2 million shares at a deemed price of $3.50. The market price of the shares today is just about $5.
To help cover the cash part of the price tag, Tamarack closed a debt financing late last week, issuing $200-million of "sustainability-linked" notes. As explained in Stockwatch on Feb. 4, sustainability-linked bonds (SLBs) include a punitive increase in the interest rate if the issuer fails to achieve sustainability-based goals (which do not necessarily have to be environmental goals, distinguishing SLBs from stricter "green" bonds). Tamarack tied its financing to a decrease in carbon emissions and an increase in the number of indigenous employees. If it fails to meet its targets, the current coupon (7.25 per cent) will rise by as much as 100 basis points.
The whole thing won a round of applause yesterday from S&P Global Market Intelligence. "Small Alberta E&P issues first ESG-linked bond by North American producer," read the approving headline. Interestingly, the article noted that Tamarack "did not have to offer a higher interest than its peers to sell the bonds." It would be more bizarre if it did; sellers of SLBs typically enjoy a lower cost of capital, sometimes called a green-ium. Yet S&P Global said Tamarack's rate was "roughly in the middle" of other B-plus-rated bonds in the past year. Presumably Tamarack is hoping to see reputational benefits from the financing, even if its borrowing cost does not seem to have improved relative to issuing conventional debt.
South of the border, Brett Herman's new promotion, PetroShale Inc. (PSH), lost three cents to 82 cents on 1.55 million shares. The "new" is not a reference to PetroShale but to Mr. Herman's involvement with it. After selling TORC Oil & Gas to Whitecap Resources Inc. (WCP: $9.44) for $565-million last year, Mr. Herman and his people popped up last month to take charge of PetroShale, an oil producer in the North Dakota Bakken. Earlier this month, the new board and management closed $54.5-million in financings at 40 cents. Participants have already doubled their money on paper.
PetroShale got a lovely mention today from BMO analyst Ray Kwan. In his first research note on PetroShale this morning, Mr. Kwan marvelled that Mr. Herman and his people have a "successful acquisition and development track record" and have already sold three other companies over the years. (They were TORC, mentioned above, Result Energy, sold in 2010, and TriStar Oil & Gas, sold in 2009.) Those three companies were all active in Western Canada. Now Mr. Kwan sees the executives turning their attention south of the border and making PetroShale "a key consolidator ... [that is] aggressive on the M&A [merger and acquisition] front, especially in the U.S. North Dakota Williston basin." PetroShale currently produces about 11,000 barrels a day from this basin, mostly lightly oil. The new executives have already expressed interest in pursuing acquisitions. "[We] believe the company will be the next oil-weighed roll-up' story," predicted Mr. Kwan.
Mr. Kwan gave the stock an "outperform" rating and a price target of $1.25, relative to today's closing price of 82 cents. It will surely come as no surprise to investors that the analyst's employer, BMO, was one of several agents involved in the above-mentioned financings. Others included Peters & Co., Haywood Securities, National Bank, RBC, CIBC and ATB Capital Markets.
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