Stockwatch Energy today
Energy Summary for Jan. 26, 2021
2021-01-26 20:26 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery lost 16 cents to $52.61 on the New York Merc, while Brent for March edged up three cents to $55.91 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.30 to WTI, up from a discount of $13.60. Natural gas for February added five cents to $2.66. The TSX energy index lost 3.53 points to close at 92.14.
North Dakota Bakken producer Enerplus Corp. (ERF) lost 13 cents to $4.15 on 13 million shares. Trading resumed this morning, following a halt yesterday afternoon ahead of the announcement that Enerplus is buying the private Bruin E&P for $465-million (U.S.). Bruin produces 24,000 barrels of oil equivalent a day from assets that are largely near Enerplus's in the Bakken. For context, as Enerplus noted elsewhere in the update, its production in the fourth quarter of 2020 averaged 86,200 barrels a day, in line with its guidance of 84,000 to 87,0000. The company is holding off on releasing official 2021 guidance until after it closes the deal with Bruin, but its preliminary target is 103,500 to 108,500 barrels a day.
Buying Bruin fits in with Enerplus's rising preference for operations in the United States. Eight or so years ago, the company's U.S.-Canadian production split was roughly even, but now only one-10th of production comes from Canada, a shift that Enerplus's management has blamed on Canada's unfavourable regulatory environment. (Whether North Dakota is currently more or less favourable is a topic to be discussed in a moment.)
While the deal is in line with Enerplus's habits, it does mark a departure from a different kind of trend. Unlike several other prominent U.S. takeovers lately, the takeover of Bruin will not be an all-share transaction. Enerplus is forking over cold, hard cash. It will dig up the cash by taking out a $400-million (U.S.) term loan and selling a $115-million bought deal of $4 shares. The term loan will effectively double Enerplus's debt, which was $513-million as of Sept. 30. That still worked out to a low debt-to-cash-flow ratio of just 1.0 times. Enerplus reckons that this ratio will rise to 1.3 times after the term loan, but will eventually head back down to 1.0.
It was noted above that North Dakota's status as a favourable jurisdiction is in some question. The main pipeline for the state's Bakken producers -- the Dakota Access pipeline, or DAPL (rhymes with apple) -- is currently in a high-stakes legal battle to prevent being shut down and emptied. The latest blow fell this afternoon. By way of background, in July, 2020, a district judge ordered the 570,000-barrel-a-day pipeline to be closed and drained so the Army Corps of Engineers could conduct an extended environmental review (even though DAPL has been operating since 2017). The Corps and DAPL's operators insisted that the line could stay open during the review, which is now in progress. A higher court agreed and reversed the shutdown order. Yet the higher court did not reverse the district judge's other order, which vacated a key easement for the pipeline until the environmental review is done. DAPL's operators appealed the loss of the easement. Today, the appeals court gave them their answer: No. The easement is well and truly gone, and without it, the pipeline is technically encroaching on federal land, leaving it vulnerable to a shutdown order from the federal government.
This possibility was not a concern under former president Donald Trump, but under new President Joe Biden -- who killed TC Energy Inc.'s (TRP: $55.44) Keystone XL pipeline with the stroke of a pen last week -- DAPL's fate is far more precarious. The death of Keystone XL may have been a one-time execution to satisfy a campaign promise, or it may have been the start of a bloodbath. Mr. Biden has not indicated a position one way or the other. For now, as DAPL is still legally in the clear to operate, that is exactly what it is doing. Enerplus, for its part, has long maintained that it is prepared for any outcome. It even provided shutdown-or-no-shutdown scenarios in its new 2021 guidance. Should DAPL be closed, Enerplus would just have to return to the old days of moving oil by rail, which would be more expensive but (in its view) not catastrophic.
Another U.S.-focused producer, Ovintiv Inc. (OVV), lost $1.03 to $20.90 on 1.09 million shares, as a dissident investor made good on a promise to wage a proxy war. The dissident is New York-based private equity firm Kimmeridge Energy Management. Kimmeridge owns 2.5 per cent of Ovintiv's 259 million shares (making it a top 10 shareholder). As discussed most recently in the Energy Summary for Jan. 14, Kimmeridge has been spoiling for a fight since October, when it called Ovintiv "the poster child of what's gone wrong from a governance perspective." Shockingly, this did not sit well with Ovintiv's board, and earlier this month Kimmeridge sniffed that the board was being "unreceptive" to its "best efforts to engage in a constructive dialogue" (imagine that). Kimmeridge vowed to "drive the change that the company desperately needs" by nominating directors at the next annual meeting.
Now Kimmeridge has picked its candidates. The first Erin Blanton, a senior research scholar at Columbia University's Center on Global Energy Policy. Next is Katherine Minyard, a former J.P. Morgan analyst and a current partner and investment principal at Cambiar Investors. The third and final candidate is Kimmeridge's own founder and managing director, Ben Dell, who is also the brand new chairman of Extraction Oil & Gas (which emerged from bankruptcy less than a week ago, under new management). These three directors will "restore confidence in [Ovintiv's] shareholder base and hold management accountable," declared Kimmeridge. Specifically, they will focus on fixing the management compensation and share ownership issues, stopping the "misallocation of capital within the asset base," and no longer allowing Ovintiv to be an "environmental laggard."
Ovintiv coolly responded that it has received Kimmeridge's director nominations and will "carefully" evaluate them. It employed a variety of adjectives to defend its practices -- "dynamic," "rigorous," "comprehensive," and on and on -- while insisting that it has consistently taken "decisive actions to drive value." Alas, while the intention may have been to drive value, the outcome for many shareholders has been anything but. A shareholder who invested $10,000 at the stock's peak in 2014 would now have a position worth barely $1,500. Of course, a shareholder who invested at the stock's all-time low in March, 2020, will have watched the stock rocket up to $20.90 from just $2.95 in less than a year, so a lot of the battle lines at the upcoming shareholder meeting may be drawn along timing. Ovintiv has not set a date for this year's meeting, but last year's was held in April.
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