Stockwatch Energy today
Energy Summary for Feb. 9, 2021
2021-02-09 20:19 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery added 39 cents to $58.36 on the New York Merc, while Brent for April added 53 cents to $61.09 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.44 to WTI, up from a discount of $11.66. Natural gas for March lost five cents to $2.84. The TSX energy index lost a fraction to close at 100.60.
Canada's third-largest oil and gas producer, Cenovus Energy Inc. (CVE), lost 32 cents to $7.89 on 15.6 million shares, after releasing disappointing financials for the fourth quarter of 2020. Cenovus was not the third-largest producer during this period; it did not claim that title until Jan. 4, 2021, when it closed its multibillion-dollar takeover of Husky Energy. The fourth quarter results therefore cover Cenovus's operations alone. Analysts were expecting Cenovus to report production of 460,000 barrels of oil equivalent a day, cash flow of 24 cents a share and an operating loss of 10 cents a share.
Cenovus managed to exceed the first two expectations, reporting production of 467,000 barrels a day and cash flow of 28 cents a share. It fumbled the third, however, posting a hefty operating loss of $551-million or 45 cents a share. On a full-year basis, Cenovus had an operating loss of $2.6-billion and a net loss of $2.4-billion. It blamed these figures partly on impairment charges exceeding $1-billion.
In addition, Cenovus recorded a $100-million loss related to the cancellation of the Keystone XL pipeline. This loss arose from the shipping contract that Cenovus signed with pipeline builder TC Energy Corp. (TRP: $54.28). TC Energy, smarting from the $4.5-billion write-off it suffered by itself when Keystone XL hit a stumbling block in 2016, subsequently told would-be shippers that they would have to share in the risk by committing to contingency payments if the line were to be cancelled before March 31, 2021. That is exactly what happened -- U.S. President Joe Biden killed it on his first day in office on Jan. 20 -- and now the bill is coming due. Suncor Energy Inc. (SU: $22.73) recorded a $142-million charge related to Keystone XL when it released its financials last week. Now Cenovus is taking its version of the hit, while Canadian Natural Resources Ltd. (CNQ: $32.43), Athabasca Oil Corp. (ATH: $0.385) and others will likely follow when they release their own financials.
Incidentally, Keystone XL showed a flicker of potential life today, when U.S. Senator Joe Manchin -- a Democrat, if a famously conservative one -- urged Mr. Biden to reverse his opposition to the pipeline. Mr. Manchin, who serves as head of the U.S. Senate energy committee, published a letter to Mr. Biden in which he argued that Keystone XL provides good union jobs and is a safer way to move oil into the United States than trucks or trains. "Pipelines continue to be the safest mode to transport our oil and natural gas resources," pointed out Mr. Manchin, "and they support thousands of high-paying, American union jobs." He added that revoking Keystone XL's permit could also have a negative effect on energy security, as Canada is one of America's largest and most reliable trading partners.
Mr. Manchin was not the only one mailing out a pro-pipeline letter to the President. Fourteen Republican attorneys-general sent Mr. Biden a separate letter, warning him that his decision to reject Keystone XL "will result in devastating damage to many of our states and local communities." They claimed that "all Americans," even ones in states not crossed by the pipeline, will suffer "serious, detrimental consequences."
Getting back to Cenovus, it kept its chin up despite its heavy losses. President and chief executive officer Alex Pourbaix praised the company's "flexibility, strength and reliability" throughout 2020's "unprecedented challenges." He added that 2021 will bring the benefits of the "compelling combination" with Husky. As announced last month, the combined company is aiming to produce 755,000 barrels a day this year on a budget of $2.3-billion to $2.7-billion. If it takes in cash flow over and above its budget, it will use the free cash flow to repay debt. Cenovus had not actually specified what its net debt was, but today it put the figure at $13.1-billion (postmerger). The company is aiming to get this down to $10-billion, with a longer-term target of $8-billion. It has not provided a timeline for either goal.
Over in the B.C. Montney, Dale Shwed's Crew Energy Inc. (CR) added five cents to $1.00 on 1.95 million shares, its first time in $1 territory since May, 2019. Investors took heart from the year-end 2020 reserve report that Crew released yesterday after the close. The company managed to keep its 2P (proved and probable) and 1P (proved) reserves mostly unchanged from last year. (While investors generally like to see reserves head higher, keeping them stable is perfectly acceptable in a downturn.) The highlight of the report, or at least the part that Crew wanted investors to focus on, was the "significant" increase in its PDP reserves (proved developed producing -- the highest level of certainty). Crew boasted of adding 12.0 million barrels of PDP reserves during 2020. Most of that, of course, was promptly subtracted through production, for a net PDP increase of 4.0 million barrels. Yet the gross figure of 12.0 million barrels is noteworthy because it surpasses the 11.3 million gross barrels that Crew added in 2019. For context, Crew spent $114-million in 2019, but just $86-million in 2020. The company patted itself on the back for its "strong capital efficiencies."
Raymond James analyst Jeremy McCrea joined in the adulation, marvelling in a research note this morning that Crew has "backstopped the strength of its upcoming drilling plans with one of its most encouraging reserve reports in recent years." He reminded investors of Crew's "50-per-cent production growth" forecast over the next two years. (In December, Crew set itself a target of producing 31,000 to 33,000 barrels a day in 2022, relative to the estimated 2020 average of 21,900 barrels a day.) "There is more and more evidence Crew is emerging from the challenges it has faced over the last few years," concluded Mr. McCrea. He upgraded the stock to "outperform" from "market perform" and hiked his price target to $1.50 from $1.
Less optimistic was Scotia Capital analyst Cameron Bean, who liked Crew's "positive" reserve report but is not so sure about the two-year plan. "The company's last attempt to ramp production in 2017 fell flat," he fretted. (Indeed, the main effect of the 2017 program was to take a $250-million debt load and boost it to $350-million, where it remains now. Production gains were short-lived as Crew produced less in 2020 than it did in 2017.) Mr. Bean left his price target at 75 cents. That is well below today's close of $1.
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