Energy Summary for March 14, 2022
2022-03-14 19:50 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery tumbled $6.32 to $103.01 on the New York Merc, while Brent for May lost $5.77 to $106.90 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.49 to WTI, down from a discount of $12.37. Natural gas for April lost six cents to $4.66. The TSX energy index lost 9.79 points to close at 210.28.
Oil prices fell to their lowest level in two weeks as fresh COVID outbreaks in China led to renewed lockdowns, prompting fears of falling demand in the world's largest importer of oil. On the supply side, one of the world's top exporters, Russia, saw its energy industry dodge another round of Western sanctions announced today in response to its invasion of Ukraine. Russian and Ukrainian negotiators also struck an optimistic tone after a weekend of diplomatic negotiations. "Russia is already beginning to talk constructively," said Ukranian negotiator Mykhailo Podolyak in a video on-line, adding, "I think we will achieve some results literally in a matter of days."
Here in North America, oil stocks fell with oil prices. U.S. shale producer Ovintiv Inc. (OVV) lost $2.38 to $56.17 on 734,200 shares. The drop came in spite of two lovely recent mentions from third parties. The first came on Friday just before the close, when Fitch Ratings upgraded Ovintiv's credit rating to BBB- from BB+ (with a "stable" outlook). This means Ovintiv has officially left junk territory and is now breathing the rarefied air of an investment-grade energy producer.
"The main drivers for the upgrade centre on the company's significant gross debt reductions and strong financial results achieved in 2021, and the good visibility on incremental debt repayment in the near term," wrote Fitch analyst Mark Sadeghian and his colleagues. They also noted that Ovintiv has "publicly linked doubling shareholder distributions to achieving its [near-term] net debt target." (The company currently pays a 20-U.S.-cent quarterly dividend that represents a yield of 1.8 per cent.)
The second lovely mention came this morning from RBC analyst Greg Pardy. In a new research note, Mr. Pardy wrote of his recent meeting with Ovintiv's chief executive officer, Brendan McCracken, who left him with "reinforced confidence" in the "disciplined game plan." Mr. Pardy reiterated the guidance that Ovintiv laid out last month. As well, again regurgitating a promise from last month, he noted that Ovintiv plans to get its net debt down to just $3-billion (U.S.) in the second half of this year and then hike its dividend. The analyst kept his "outperform" rating on the stock and raised his price target to $53 (U.S.) from $50 (U.S.), relative to today's close of $43.83 (U.S.). (A disclaimer in the fine print noted that the analyst's employer, RBC, "makes a market in the securities of Ovintiv.")
Back at Fitch Ratings, analyst Mr. Sadeghian and his colleagues were a busy bunch, for today they also revised their take on Vermilion Energy Inc. (VET), down $2.73 to $25.88 on 4.92 million shares. They upgraded their outlook to "stable" from "negative." The credit rating they left at BB-, which is in junk territory, but not by much. They continue to see room for "improved financial flexibility."
The Fitch analysts gave Vermilion kudos for its "price-advantaged oil and gas exposure." In particular, they noted that "record European natural gas prices relating to geopolitical turmoil in Europe [will] support Vermilion's historically strong cash netbacks." (The company has assets in France, the Netherlands, Germany, Ireland, Croatia, Hungary and Slovakia. One of its most eye-catching European projects at the moment is Corrib, an Irish gas field in which Vermilion increased its interest to 56.5 per cent from 20 per cent last November. It calculated at the time that European gas would make up just 22 per cent of its 2022 production, but contribute 42 per cent of its funds from operations. The latter figure would be even higher now.)
Price exposure, aside, the Fitch analysts feel that Vermilion continues to lack "meaningful scale," with overall production still stuck below 100,000 barrels a day (the guidance for 2022 is about 85,000). The company also has relatively lofty net debt for its size (net debt was $1.6-billion as of Dec. 31 -- about half of Ovintiv's desired target, but Ovintiv's production is about six times greater). The Fitch analysts implied that they would like to see a lower debt load and closer to 150,000 barrels a day of production before they would upgrade their rating. Based on recent comments from Vermilion's management, the analysts should not have to wait too long to get their first wish, but may not want to hold their breath on the second.
In Canada, John Jeffrey's Saskatchewan-focused Saturn Oil & Gas Inc. (SOIL) lost 13 cents to $2.85 on 107,000 shares, after releasing its guidance for 2022. It plans to produce 7,800 to 8,200 barrels of oil equivalent a day on a budget of $50-million. The production target is nearly double Saturn's 2021 average of about 4,100 barrels a day, reflecting a sizable acquisition that Saturn closed last June (followed by another in January). This time last year, Saturn was producing barely 200 barrels a day.
Unsurprisingly, Saturn went heavily into debt to pay for its new assets (while also closing about $50-million in equity financings over the nine months). CEO Mr. Jeffrey vowed today that 2022 will be a year of not just increasing production but also tidying up the balance sheet. His stated goal is to get Saturn's net debt down to about $39-million by the end of the year, relative to $71-million at the start of the year. (Saturn's current market cap is about $92-million. It has just 32 million shares outstanding, a trimness largely accomplished through a 1-for-20 rollback in October.)
Mr. Jeffrey remained upbeat during an interview today with The Market Herald (an Australia-based media and PR firm). "We believe this will be a fantastic year for Saturn," he declared. Noting that the budget is based on a WTI oil price assumption of just $75 (U.S.) a barrel, Mr. Jeffrey speculated that if oil prices stay at their current levels of over $100 (U.S.) a barrel, Saturn could boost its budget and production guidance, while accelerating debt repayments. He said he would make a decision on a revised budget by midyear.
Lastly, and again unsurprisingly, Mr. Jeffrey opined that this company is undervalued in the market. He sees "substantial upside value to be created for shareholders," and hopes to prove it over the rest of the year.
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