Stockwatch Energy today
Energy Summary for March 1, 2021
2021-03-01 20:10 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery lost 86 cents to $60.64 on the New York Merc, while Brent for May lost 73 cents to $63.69 (all figures in this para U.S.). Over the weekend, the U.S. House of Representatives passed a $1.9-trillion (U.S.) stimulus package, which will now head to the Senate. Oil prices initially headed higher on the news, but retreated in the wake of bearish Chinese manufacturing data and concerns about Thursday's OPEC+ meeting. Western Canadian Select traded at a discount of $11.05 to WTI, unchanged. Natural gas for April added one cent to $2.78. The TSX energy index added 1.24 points to close at 111.62.
In Alberta, ARC Resources Ltd. (ARX) lost 13 cents to $7.49 on 8.35 million shares, while Seven Generations Energy Ltd. (VII) lost 24 cents to $8.16 on 9.2 million shares, after the companies jointly filed an information circular about their proposed Montney megamerger. They will ask their shareholders to approve the merger at special meetings on March 31. Assuming the meetings go well, the companies have already said they expect to close the deal in the second quarter, a timeline that the circular pinned down to April 6.
The circular also laid out the sometimes thorny path to the merger. ARC apparently decided that it was interested in buying Seven Generations as far back as March, 2020. ARC's chairman, Hal Kvisle, made a pitch to his Seven Generations counterpart, Mark Monroe, in June. Months of talks began, but Mr. Monroe and Marty Proctor, Seven Generations' president and chief executive officer, were concerned that their company would not get a fair shake in light of the stock's relatively poor performance since the start of the COVID-19 crisis. (Both stocks began 2020 at over $8, but Seven Generations hit a low of $1.15 during the worst part of the downturn in March, while ARC never went below $2.41.)
The talks fell apart on Nov. 9, after Mr. Monroe told Mr. Kvisle that Seven Generations was "not receptive to pursuing a transaction with ARC at that time." ARC let it lie and began to think about other targets. On Jan. 6, 2021, however, Mr. Kvisle again reached out to Mr. Monroe, this time proposing a "merger of equals." This was much more to Seven Generations' liking. Barely a month later, on Feb. 10, the companies announced their all-share merger.
As noted in the Feb. 10 announcement, ARC's president and CEO, Terry Anderson, will continue in the same position at the combined company, which will continue under ARC's name. The companies did not discuss directors at the time, other than to say that the mix would be roughly equal. The new circular set out the specifics. Mr. Kvisle will stay on as chairman, while Mr. Proctor will come over as vice-chairman. Mr. Anderson will serve on the board as well, along with four other ARC representatives. Seven Generations will have five people on the board, including Mr. Proctor, but not Mr. Monroe. The board will also no longer include Avik Dey, who sat on Seven Generations' board as the nominee of the Canada Pension Plan Investment Board (CPPIB). The CPPIB holds a 16.8-per-cent interest in Seven Generations and is voting in favour of the merger.
Separately, ARC got a pleasant mention today from DBRS Morningstar, which issued its first ratings report on the company -- if a preliminary one. DBRS was clear that its rating is provisional and assumes the closing of the merger with Seven Generations. Based on the combined company's "strong credit metrics," its "competitive cost structure" and its "enhanced scale in the liquids-rich Montney," DBRS gave ARC a provisional rating of an investment-grade BBB. The above circular repeatedly listed "an expected investment-grade credit rating" as one of the reasons to vote in favour of the merger. Now DBRS appears to be the first ratings agency to fulfill that expectation.
Elsewhere in Western Canada, Brian Schmidt's Tamarack Valley Energy Ltd. (TVE) added 11 cents to $2.26 on 6.54 million shares, after releasing its year-end 2020 financials. Investors shrugged off the full-year net loss of $311-million. Steep losses have been the norm this reporting season in the oil patch, which has had to record severe impairment charges related to the 2020 drop in oil prices. In Tamarack's case, the full-year impairment charge came to $399-million. Beyond that, the financials were somewhat better than expected. Tamarack told investors in January that it expected to exceed, by some unspecified amount, its full-year production guidance of 21,500 barrels of oil equivalent a day. It would have needed to produce at least 20,000 barrels a day in the fourth quarter to accomplish that. Actual fourth quarter production came to 22,049 barrels a day, for a full-year total of 22,207.
Tamarack also patted itself on the back for a sizable year-over-year increase in its reserves. This partly reflected over $70-million in acquisitions. To finance the acquisitions, Tamarack relied on cash flow, a royalty sale and a $45-million equity financing, but this was not quite enough to cover the gap. As a result, net debt rose to $219.3-million as of Dec. 31, 2020, from $199.6-million a year earlier. Tamarack claimed that it is still in a position of "financial strength." The higher figure represents a debt-to-cash-flow ratio of just 1.9 times, which Tamarack expects to reduce to 1.5 times by midyear.
Further afield, the Lundin family's Africa Oil Corp. (AOI) stayed unchanged at $1.27 on 678,100 shares, after it too released its year-end financials. Africa Oil gets its production by virtue of its 50-per-cent ownership of a producing company in Nigeria, Prime Oil. Prime's hedging activity in 2020 lessened the effects of low oil prices. Unfortunately, the same could not be said of Africa Oil's exploration-stage assets in Kenya, where the company had to take a $215-million (U.S.) impairment charge. Africa Oil emphasized that without the impairment charge, it would have recorded a full-year net profit of $198-million (U.S.), but alas, its actual net loss came to $17.6-million (U.S.).
In a research note this morning, Scotia Capital analyst Gavin Wylie dubbed the results "mixed." He was less concerned with 2020 and more concerned with how 2021 is shaping up. Prime has already shown itself vulnerable to big swings: By Mr. Wylie's calculations, Africa Oil's share of Prime's sales worked out to just 17,910 barrels a day in the fourth quarter of 2020, down sharply from 39,809 in the third quarter. The drop reflects the fact that Prime could get only three cargo liftings of its crude in the fourth quarter, down from seven in the third. This can balance out -- Prime generally assumes four to five liftings each quarter -- but with the overhang of Nigeria's role in the OPEC+ production quotas, Mr. Wylie believes that Africa Oil's full-year 2021 guidance of 24,000 to 28,000 barrels a day could be in trouble. He nonetheless kept his "sector perform" rating on Africa Oil's stock and left his price target at $1.60. The stock closed today at $1.27.
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