Stockwatch Energy today
Energy Summary for Jan. 28, 2021
2021-01-28 20:00 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery added 51 cents to $52.34 on the New York Merc, while Brent for March lost 28 cents to $55.53 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.75 to WTI, up from a discount of $12.90. Natural gas for March lost 10 cents to $2.66. The TSX energy index added a fraction to close at 92.07.
The oil patch enjoyed some good news, as one of the more bearish industry forecasters abruptly changed its mind and predicted an increase in 2021 Canadian drilling activity. The Petroleum Services Association of Canada (PSAC) released its updated 2021 predictions this morning, citing "positive signs of increased investment" as it hiked its drilling forecast all the way to 3,350 wells from just 2,600 wells. The original estimate was made in October. It stood out because PSAC was also forecasting that only 2,850 wells would be drilled in 2020, meaning that 2,600 wells in 2021 would be a year-over-year decrease. Other industry groups were predicting a year-over-year increase instead. Now, the once-prominently pessimistic PSAC has joined the bulls. The report also showed that 2020 was better than PSAC had expected, with 2,992 wells rather than 2,850. (Of course, 2,992 wells was still a 50-year low, but sometimes one must take what one can get.)
Within the oil patch, Cenovus Energy Inc. (CVE) added 20 cents to $7.56 on 12.9 million shares, after touting a "disciplined" 2021 budget with "nearly $1-billion of synergies." The guidance comes about three weeks after Cenovus closed its multibillion-dollar all-share merger with Husky Energy. The deal created Canada's third-largest oil and gas producer, with expected production of 750,000 barrels of oil equivalent a day and annual sustaining capital requirements of $2.4-billion a year, said the companies when they announced the merger in October. The guidance released today mostly fits in with those numbers: Cenovus is forecasting average production of 730,000 to 780,000 barrels a day in 2021, on a budget of $2.3-billion to $2.7-billion.
Cenovus added that only $2.1-billion will in fact be needed for sustaining capital, not $2.4-billion as previously announced. Most of the rest of the budget, $520-million to $575-million, is earmarked for rebuilding Husky's Superior refinery in Wisconsin, which suffered an explosion in 2018. Cenovus said a "substantial" portion of this money should be recovered through insurance proceeds. Keen-eyed investors may have noticed that Cenovus's $525-million to $575-million figures are quite a bit higher than the $450-million to $525-million ones previously provided by Husky. As well, analysts have estimated that insurance will cover only about 80 per cent of the cost, which may meet the threshold for "substantial" but would still leave Cenovus up to $115-million out of pocket.
Those were not the numbers Cenovus wanted shareholders to focus on. It had previously talked of $1.2-billion in postmerger "run-rate synergies," and today it boasted that it expects to achieve $1-billion in 2021 alone. This will be cold comfort to the perennial victims of cost cuts: redundant workers. Cenovus is laying off 20 to 25 per cent of the combined company's work force, or about 2,000 jobs.
Another, much smaller company had guidance to release today. Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY), up half a cent to 32 cents on 800,800 shares, is aiming to spend $55-million this year. It expects to boost production from the current level of 17,000 barrels of oil equivalent a day to at least 19,250 barrels a day by midyear, for a full-year average of 18,000. This program "maximizes second-half 2021 free cash flow" so that Surge can spend the final months of 2021 focusing on debt repayment. It hinted, however, that if oil prices strengthen, the company will consider a "more substantial second-half drilling program."
The overall guidance looks quite a bit different from last year's. Back then, Surge was aiming to produce over 21,000 barrels a day on a much higher budget of $98.5-million, while also paying a generous dividend. All of that was unceremoniously cancelled last April amid the COVID-19 crisis. Since then, Surge has mostly just tried to keep a lid on its debt. Net debt came to $369.9-million as of Sept. 30, which was down from $384.6-million as of March 31 -- no small feat in those hellish six months -- but this still towers over Surge's market cap of $108-million. Surge was able to win some financial breathing room in November, when it secured $90-million in credit commitments from the Canadian government as part of the government's COVID-19 liquidity support program. That provided a welcome hit of confidence, at least for Surge's debentureholders. Surge has two sets of debentures that were previously trading at around 30 cents on the dollar but are now up to around 70 cents (still well below par).
Surge reminded investors of the government funds in its new guidance, boasting that it has "significant additional long-term liquidity" with which to "pursue attractive development opportunities." In the meantime, it tried to keep shareholders' focus on its operations. Thirty-one of this year's 32 planned wells are to be drilled at the "top-tier" Sparky oil play in Alberta, while the other will be drilled near a "prolific" existing well in the Valhalla area. Public data show that Surge is keeping its word and has spudded at least nine wells in the last four weeks.
In the Alberta Cardium, Stephen Loukas's Obsidian Energy Ltd. (OBE) lost three cents to $1.09 on 147,000 shares, after announcing another short extension of its credit facility. This reserve-based syndicated credit facility, which in theory goes up to $550-million but in reality restricts the drawn amount to $450-million, was supposed to undergo a review last June, but this review has been repeatedly postponed. This postponement takes the deadline just four weeks out, to Feb. 26 from Jan. 29.
Investors generally do not like short extensions, especially numerous short extensions, as these are suggestive of a company whose bankers are keeping it on a tight leash. The new extension is particularly interesting because it does not cover the full period of the hostile tender offer that Obsidian has been pushing on the shareholders of Bonterra Energy Corp. (BNE: $2.50) since August. As discussed in Monday's Energy Summary, this below-market offer was originally due to expire on Jan. 4, but was extended to Jan. 25 and then was extended again to March 29. Obsidian now faces the possibility that its credit facility will be reviewed, perhaps even reduced, weeks before that (although the bankers could always dole out yet another extension).
None of this went unnoticed by Bonterra itself. It put out a somewhat gloating press release today, declaring that the short credit facility extension "reflects negatively on Obsidian" and proves that the hostile bid "lacks lending syndicate support." Bonterra added that, based on what it is hearing from shareholders, less than 1 per cent of its shares have been tendered to the bid. The bid requires at least 50 per cent of the shares to go forward.
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