Stockwatch Energy for yesterday
Energy Summary for Jan. 14, 2021
2021-01-14 20:31 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery added 66 cents to $53.57 on the New York Merc, while Brent for March added 36 cents to $56.42 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.00 to WTI, up from a discount of $14.29. Natural gas for February lost six cents to $2.67. The TSX energy index added 2.54 points to close at 102.68.
Canada's energy sector will enjoy a $3.3-billion rebound in capital spending this year, according to the latest forecast from the Canadian Association of Petroleum Producers (CAPP). The group is forecasting total investment of $27.3-billion in the sector in 2021, up from the estimated 2020 level of just $24-billion, which was the lowest level in more than a decade. "It is a positive sign to see capital investment numbers moving up from the record lows of 2020," declared CAPP's president and chief executive officer, Tim McMillan. He added, "With some hard work, we can build momentum from this positive news, and position Canada for success as economies around the world recover."
Getting ahead of the obvious criticism of any 2021 forecast, CAPP was the first to admit that its 2020 forecast was hideously off the mark. The group was originally expecting the oil patch to see $37-billion in spending in 2020. Then the COVID-19 crisis hit, budgets and drill programs were slashed across the industry, and total spending fell by over one-third relative to 2019. The expected rise in 2021 assumes that vaccine rollouts go as expected and spur a recovery in economic activity worldwide. Even if CAPP's forecasts prove correct and the sector spends $27.3-billion in 2021, this will still be well below the 2019 level of $35.1-billion (not to mention 2014, when spending soared to a lofty peak of $81-billion). Of course, if the forecast for 2021 is correct, this will also be the first time in six years that spending in the sector has headed higher -- perhaps the start of an encouraging trend.
CAPP was not alone in stoking enthusiasm for the oil patch. This morning, Scotia Capital analysts Jason Bouvier, Cameron Bean and Gavin Wylie released their quarterly commodity price update, while using the opportunity to upgrade their ratings of various stocks. Notably, the analysts are forecasting that WTI oil prices will hit $60 (U.S.) in the fourth quarter of this year. "We believe the stage is set for healthy share price appreciation. To that end, we recommend that investors increase their exposure to oil-weighed E&Ps [explorers and producers] and integrated names," wrote the analysts. They identified their "top picks" as Suncor Energy Inc. (SU: $24.54) and Canadian Natural Resources Ltd. (CNQ: $33.01). They also like Parex Resources Inc. (PXT: $21.11) among international producers, as well as Seven Generations Energy Ltd. (VII: $7.17) and Tourmaline Oil Corp. (TOU: $20.98) among Canadian gas producers.
South of the border, U.S. shale producer Ovintiv Inc. (OVV) added 48 cents to $22.53 on 1.02 million shares, despite some less than flattering attention from an activist investor. New York-based private equity firm Kimmeridge Energy Management has filed a lengthy presentation on EDGAR about Ovintiv's "track record of value destruction." It pointed out that Ovintiv has achieved a total shareholder return of negative 84.8 per cent since CEO Doug Suttles arrived in 2013. Over the same period, the company has increased its net debt by over 50 per cent (to $7.1-billion (U.S.) from $4.6-billion (U.S.)) and recorded $12.7-billion (U.S.) in impairment charges, yet Mr. Suttles has still received over $75-million (U.S.) in total compensation. "Ovintiv is emblematic of everything that is wrong with the U.S. shale industry," fumed Kimmeridge managing partner Mark Viviano. He said Kimmeridge will strive to "drive the change that the company desperately needs" by nominating directors to Ovintiv's board at the next annual meeting. The proposed nominees have yet to be named, either in the presentation or on Kimmeridge's newly launched website for the proxy battle, straightforwardly named FixOvintiv.com.
Kimmeridge has been spoiling for this fight for months. It first came forward in October, 2020, when it disclosed that it owned about five million of Ovintiv's 259 million shares (a position it has since boosted to 6.2 million, or 2.4 per cent). Mr. Viviano told The Canadian Press in October that he viewed Ovintiv as "the poster child of what's gone wrong from a governance perspective." To Kimmeridge's apparent astonishment, the body overseeing Ovintiv's governance -- its board of directors -- did not take this remark as a compliment. Kimmeridge grumbled today that despite its "best efforts to engage in a constructive dialogue ... we repeatedly encountered an unreceptive board." If Kimmeridge's skills in proxy battle are anything like its skills at diplomacy, Ovintiv's board probably has nothing to worry about.
Kimmeridge is likely hoping to find support among the long-term shareholders of Ovintiv, many of whom will be deep underwater. The stock has plunged to $22.53 from over $130 since 2014 (adjusting for a 1-for-7 rollback in 2020). Shorter-term investors, however, have little to complain about, as the stock has more than septupled from around $3 over the last 10 months. The above-noted Mr. Suttles cheered last week that the fourth quarter of 2020 was "one of our best quarters, [with] outstanding financial and operating results that will likely be well ahead of consensus." Now the board will have to persuade investors that the improvements are here to stay. Ovintiv has not set a date for its 2021 annual shareholder meeting, but the 2020 one was held in April.
Here in Canada, Don Gray's Alberta-focused Petrus Resources Ltd. (PRQ) added two cents to 29 cents on 252,500 shares, on top of the one cent it added yesterday after setting a first quarter budget of $9-million. This is nearly double its fourth quarter 2020 budget of $4.7-million. That budget was itself a steep increase over the $2.5-million that Petrus spent in the third quarter, or the mere $300,000 that it spent in the second quarter. The company has been striving to keep its spending in line with cash flow and to use excess cash flow to repay debt. (In part it has no choice; its bankers informed it last summer that it must make mandatory repayments of at least $2.75-million every quarter.) While debt repayment remains the top priority, drilling has become more of a focus since late in the third quarter of 2020, when Petrus was able to resume drilling activity. It said it would drill one well and bring it on production in December. The plan for the first quarter is even more ambitious, with three wells planned, all in the Ferrier Cardium area of Alberta. Investors seem encouraged: Today, closing at 29 cents, Petrus became one of the only energy stocks to be trading at a 52-week high. It was worth as little as 5.5 cents at the worst part of the COVID-19 downturn last March.
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