Stockwatch Energy today
Energy Summary for Jan. 19, 2021
2021-01-19 20:05 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery added 64 cents to $52.98 on the New York Merc, while Brent for March added 87 cents to $55.90 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.84 to WTI, unchanged. Natural gas for February lost 10 cents to $2.55. The TSX energy index added 1.84 points to close at 98.94.
The big news in the energy sector continued to be the potentially imminent cancellation of TC Energy Corp.'s (TRP: $56.57) Keystone XL pipeline. As discussed in yesterday's Energy Summary, transition documents written by the incoming administration of U.S. president-elect Joe Biden began to be circulated over the weekend, indicating that Mr. Biden would rescind Keystone XL's presidential permit on his first day in office -- tomorrow. This was less than welcome news to proponents of the project, such as Alberta Premier Jason Kenney. He has threatened legal action if the permit is retroactively revoked.
Today, Prime Minister Justin Trudeau went for a smoother approach, telling reporters in Ottawa that he will call Mr. Biden this week to mount a defence of the pipeline. He said he will press the themes of jobs, cross-border energy security and Canada's status as a "global leader in the fight against climate change."
Mr. Biden is also hearing endorsements of the pipeline from closer to home. Three U.S. labour unions and a major trade group have jointly published an open letter to Mr. Biden, calling Keystone XL "an aspirational vision for modern, sustainable energy infrastructure." They pointed out that Keystone XL will create thousands of jobs and millions of tax dollars, is committed to operating with net zero emissions, and has brought in indigenous communities as equity owners. This is "a true 21st-century infrastructure project aimed at meeting future energy demand in the most sustainable way possible," concluded the unions. They implored Mr. Biden to "fairly evaluate" the pipeline for the "huge opportunity" that it is.
The hope is that all of this will persuade Mr. Biden to, at the very least, refrain from killing the pipeline as one of his very first acts. Already there seems to have been some backtracking from Mr. Biden's camp. An unidentified source described as familiar with the pipeline matter told the Associated Press that the circulating transition documents are weeks old -- meaning they were written before TC Energy made its net-zero-emissions promise, for example -- and the items listed in them "may not happen on day one." Perhaps the proponents of the line will have a little bit longer to make their case.
Within the energy sector, the North American oil and European gas producer Vermilion Energy Inc. (VET) added 52 cents to $7.02 on seven million shares, pleasing investors with its 2021 guidance. The company is planning to spend $300-million and produce 83,000 to 85,000 barrels of oil equivalent a day. These figures are considerably below analysts' predictions of $380-million and about 90,000 barrels a day. As well, the production target represents a sizable year-over-year drop from the 2020 target of 94,000 to 96,000 barrels a day. Investors seemed to accept Vermilion's defence that the 2021 guidance "reflects a transition to a more efficient, level-loaded capital program." Past capital programs have done little but turn Vermilion into the worst performer in the TSX energy index for two years running (2019 and 2020). Now, having overhauled its management last year, Vermilion is trying to rebrand as a cautious spender that prioritizes cash flow over production.
The 2021 guidance fit in with this goal, to investors' relief. Analysts' reaction was more mixed. National Bank analyst Travis Wood and TD Securities analyst Menno Hulshof were unimpressed, with both of them reducing their price targets to $6.50 from $7 (below today's close of $7.02). Scotia Capital's Gavin Wylie had a friendlier outlook, saying the new guidance provides "a reasonable floor to rebase expectations." He left his price target at $8.50. Lastly, ATB Capital's Patrick O'Rourke expressed confidence in Vermilion as "fully capable of turning the story around over time." Although he lowered his price target to $8.50 from $9.50, citing a slower pace of development, the new price target is still above today's close of $7.02.
In Alberta, oil sands producer MEG Energy Corp. (MEG) added 20 cents to $4.61 on 4.55 million shares, after releasing preliminary operating results for year-end 2020 and arranging a $600-million note financing. The company reckoned that it produced 90,500 to 91,750 barrels a day in the fourth quarter of 2020. If so, its full-year production will have averaged 82,300 to 82,600 barrels a day, largely matching its guidance of 82,250 to 82,500 barrels a day. This likely did not surprise investors: MEG updated its 2020 guidance as recently as Dec. 7, when it would have had a good idea of how the fourth quarter was shaping up. Dec. 7 was also when MEG announced its 2021 production target of 86,000 to 90,000 barrels a day. Based on production levels exiting 2020, this is off to a good start.
MEG also announced a $600-million note financing this morning, taking the rest of the day to price the notes. It revealed after the close that the notes will bear interest at 5.875 per cent and will come due in 2029. The notes are a little on the expensive side (no surprise; both Fitch and Moody's have rated them junk), but they will still result in interest cost savings for MEG, which will use the money to repay a different $600-million batch of notes bearing interest at 7 per cent. Those notes would have come due in 2024, so the new financing also represents an extension to what MEG calls its debt "runway." It now has no major maturities until 2025.
Further afield, Gary Guidry's Colombian oil producer, Gran Tierra Energy Inc. (GTE), added four cents to 68 cents on 2.02 million shares. It has cancelled its previously announced sale of the majority of its interest in Peruvian oil producer Petrotal Corp. (TAL: $0.29). Gran Tierra sold Petrotal all of its Peruvian assets in 2017, in the process becoming its largest shareholder, with 246 million of its 816 million shares. It announced last month that it would sell 218 million of shares (the rest being tied up in escrow) for approximately $37-million. This sale was somewhat surprising, as the market value of those shares was in fact closer to $45-million, but Gran Tierra seemed to want the cash. (It is trying hard to reduce a debt load that exceeded $780-million (U.S.) as of Sept. 30.)
In any case, Petrotal's stock has risen nicely over the last month, buoyed by rising production, new sales agreements and a potential $100-million (U.S.) bond issue to bolster the balance sheet. Today the value of the above-noted 218 million shares is over $63-million -- more than two-thirds higher than the $37-million that Gran Tierra was going to sell them for originally. It has now decided to hang onto them after all.
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