Stockwatch Business Reporter
Energy Summary for Nov. 22, 2019
2019-11-22 20:21 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery lost 81 cents to $57.77 on the New York Merc, while Brent for January lost 58 cents to $63.39 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.15 to WTI, unchanged. Natural gas for December added 10 cents to $2.67. The TSX energy index lost a fraction to close at 132.84.
Oil sands producer MEG Energy Corp. (MEG) got as high as $5.85 in intraday trading before reversing course and closing at $5.60, down three cents, on 2.9 million shares. It released its 2020 guidance yesterday evening. Its planned budget is $250-million, nearly 10-per-cent lower than analysts were forecasting. Production guidance of 94,000 to 97,000 barrels a day is fairly close to analysts' forecasts of a firm 97,000 barrels a day, and represents a roughly 3-per-cent increase over this year's expected production of about 92,500 barrels a day (a target that was hiked last month from about 91,000 barrels a day). The trim budget partly reflects years of cost-cutting efforts. For example, non-energy operating costs (which exclude gas consumption) are forecast at about $4.70 per barrel next year, down from over $8 per barrel in 2014. MEG is optimistic that it will bring in more than enough cash flow to cover its budget, and will use the extra cash flow to keep paying down its debt. It patted itself on the back for having already reduced its debt by about $500-million so far this year.
Half a billion is no small amount, but neither is the remaining debt, which was about $3.1-billion (net) as of Sept. 30. The burdened balance sheet is a large part of why MEG's stock has fallen to $5.60 from its 2011 peak of nearly $53. In a research note this morning, Scotia Capital analyst Jason Bouvier noted that MEG's 2020 debt-to-cash-flow ratio is about 3.9 times, well above its large-cap competitors' average of just 1.3 times. Using free cash flow to repay debt is "the most sensible strategy for MEG," opined Mr. Bouvier. He viewed MEG's 2020 budget announcement as a "modest positive" in light of the "lower-than-expected cost structure." Mr. Bouvier has a "sector perform" rating on MEG and a price target of $7.
All in all, with debt going down and production going up, MEG seems to be in a much more cheerful mood than it was this time last year, when it was trying to fend off a hostile takeover attempt from Husky Energy Inc. (HSE: $9.60). Husky's all-share offer valued MEG at $11 a share. There are plenty of shareholders who would have accepted the offer -- indeed, roughly 60 per cent of the shares were tendered -- but MEG's board insisted the offer was too low, and Husky had no interest in going any higher. The bid was abandoned in January. MEG's stock promptly crashed to around $5, while Husky's stock rose to over $17. After that, however, MEG was mostly able to hold its ground around the $5 mark for the rest of 2019 (so far), while Husky has retreated below $10.
Today, Husky lost 18 cents to $9.60 on a somewhat heavy 10.1 million shares. Much of the volume came from crosses right at the opening bell. Scotia Capital crossed 3.75 million shares at $9.81, while RBC Capital Markets did two crosses at the same price, one for 2.5 million shares and the other for 1.25 million. Husky last released news on Tuesday, when it said it would announce its 2020 guidance on Monday, Dec. 2. It also plans to hold a conference call on the same day. Husky did not hold a conference call when it released its guidance last year, but that presumably reflected the situation with MEG. It did hold conference calls when it released guidance in prior years.
Don Gray's Gear Energy Ltd. (GXE) stayed unchanged at 39 cents on 124,400 shares. President and chief executive officer Ingram Gillmore has published his latest monthly update on Gear's website, going over the company's activities in October. He pegged production for the month at 7,064 barrels of oil equivalent a day. This is up from an average of 6,864 barrels a day in the third quarter, reflecting new wells coming on stream from the eight-well third quarter drill program. Gear announced earlier this month that it would drill at least five additional wells in the fourth quarter and therefore expects its production to "incline slightly." As for its longer-term plans, meaning for 2020, Gear is still working on its guidance and expects to release it next month.
Mr. Gillmore devoted part of his letter to some what-if scenarios regarding 2020 oil prices. By his calculations, if Gear wants to keep its production stable next year, it will need to spend about $50-million. Barring a steep drop in oil prices, that figure should be more than covered by cash flow. For example, at $55 (U.S.) WTI, Gear expects to generate free cash flow of $8-million. That number rises to $30-million if WTI hits $65 (U.S.) and $52-million if WTI hits $75 (U.S.). While those figures range from mildly to wildly optimistic -- for some context, the U.S. Energy Information Administration is forecasting a WTI average of $54.60 (U.S.) in 2020 -- Mr. Gillmore said his point is clear: "If prices were to improve materially from current levels, the scale of strategic investment optionality for Gear would be immense." Gear would consider three main priorities in such a case: share buybacks, debt repayment or boosting production. Mr. Gillmore vowed to do whatever would "maximize long-term value for Gear shareholders."
One insider seems to share Mr. Gillmore's bullishness. Wilson Wang, a director of Gear for the last three months, bought 136,500 shares this week at about 39 cents each. He now controls 4.42 million of Gear's 218 million shares. About 3.5 million of those shares are held through Twin Peaks Capital, a Honolulu-based investment company of which Mr. Wang is the managing partner and founder. He is also the founder of HRI Research, which does not appear to have its own website but offers a subscription-based service through the Seeking Alpha investment website. According to its Seeking Alpha profile, its goal is "to find the next big contrarian opportunity in any markets. Currently, the contrarian bet is the oil market." Those who wish to find out more will have to pay $75 (U.S.) to $150 (U.S.) a month, plus tax.
Another company enjoying insider buying is the Alberta Cardium-focused Yangarra Resources Ltd. (YGR), up three cents to $1.08 on 296,300 shares. The company has drifted dangerously close to sub-$1 territory a few times this month, after hinting at the end of last month that it might not hit its 2019 production goal. Its year-to-date production of 12,574 barrels of oil equivalent a day (up to Sept. 30) is well below its full-year guidance of 13,000 to 14,000 barrels a day. Yangarra announced at the end of last month that it would hike its 2019 budget by $10-million (to $110-million) in order to drill an extra handful of wells during the fourth quarter. So far, however, public records have yet to show any fourth quarter drilling activity by Yangarra (just some licensing activity, on three wells in October). Insiders have been taking the dip as a buying opportunity. Since the start of the month, three directors and officers have spent a total of $284,064 buying 193,000 shares. The busiest buyer was Gurdeep Gill, Yangarra's vice-president of business development, who bought 122,300 shares, including 40,000 this week. Mr. Gill joined Yangarra a little over a year ago, in August, 2018, after spending about 18 years in investment banking and the capital markets. He was most recently the head of investment banking at AltaCorp Capital.