Stockwatch Energy for yesterday
Energy Summary for March 23, 2021
2021-03-23 20:24 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery plunged $4.02 to $57.54 on the New York Merc, while Brent for May lost $4.08 to $60.54 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.40 to WTI, up from a discount of $11.18. Natural gas for April lost two cents to $2.56. The TSX energy index lost 4.64 points to close at 111.99.
Oil prices tumbled on fresh supply-and-demand concerns after Europe's biggest oil consumer, Germany, extended strict COVID-19-related lockdowns to April 18 in order to "break the exponential growth of the third wave," said Chancellor Angela Merkel. France and Italy are also facing extended lockdowns, while vaccination rates in many parts of Europe continue to lag the United States. "The road to oil demand appears to be full of obstacles," sighed Bjornar Tonhaugen, head of oil markets at Rystad Energy (quoted in Bloomberg). Bob Yawger, director of energy futures at Mizuho, added: "The German situation kicked it off, but there's a lot of crude oil out there. ... We are awash in oil."
The mood was somewhat brighter in the United States, where the shale industry is enjoying the cheapest borrowing costs in seven years. According to Bloomberg, shale companies have sold $11-billion (U.S.) in new junk-rated debt through the first 10 weeks of 2021, with the first quarter "shaping up to be the busiest [for debt deals] in at least half a decade." Yields last month hit their lowest levels since 2014. Hearing "the siren song of historical low interest rates," shale companies "jumped at the chance to refinance debt [at lower rates]," wrote Bloomberg Intelligence analyst Spencer Cutter. Chesapeake Energy Corp. (U:CHK: $41.70) offers an illustration of the improving environment. It announced a $1-billion (U.S.) note financing last month, including $500-million (U.S.) of six-year notes bearing interest at 5.873 per cent. That is nearly half of the 11.5-per-cent coupon that it attached to a previous batch of six-year notes sold in late 2019.
Canadian companies have also been taking advantage of the brighter borrowing environment. Yesterday, the private Teine Energy proposed a $400-million (U.S.) offering of eight-year notes. The interest rate has yet to be specified, but presumably it will be lower than 6.875 per cent, which is the rate on the notes that Teine is planning to refinance. Moody's has given the new notes a rating of B3 -- deep in junk territory. MEG Energy Corp. (MEG), down 55 cents to $6.20 on 6.62 million shares, got the same rating when it issued $600-million (U.S.) worth of 5.875 per cent notes last month. It used the proceeds to redeem a higher-cost batch of notes bearing interest at 7.00 per cent.
Speaking of MEG, it got a pleasant mention recently from Fitch Ratings, which last week upgraded MEG's credit rating to B+ from B and kept its outlook at "stable." Although B+ is still firmly in junk territory, another four steps forward would propel MEG into the promised land of investment-grade status. Fitch attributed the upgrade to MEG's "improving credit metrics, below-average refinancing risk, no major bond maturities until 2025, abundant liquidity [and] the expectation that the company will generate FCF [free cash flow] over the forecast period."
Fitch drew attention to MEG's ability to send a large chunk of its production to the desirable U.S. Gulf Coast market. As MEG trumpeted in December, this year will be the first full year in which the company can use its newly doubled capacity on Enbridge Inc.'s (ENB: $45.57) Gulf-Coast-bound Flanagan South and Seaway pipelines (the doubling took effect in July, 2020). By Fitch's estimates, MEG will send at least half of its 2021 output to the high-priced Gulf Coast -- where it will enjoy a $2- to $3-a-barrel premium to Canadian prices -- compared with just one-quarter of its output in 2018.
Fitch had sterner words for Vermilion Energy Inc. (VET), down 79 cents to $9.12 on 4.92 million shares. The ratings agency left its credit rating on Vermilion at BB- (which is junk, though one step above MEG) and reiterated its "negative" outlook. The company's "high revolver balance may keep refinancing risk elevated," opined Fitch. It was referring to Vermilion's $2.1-billion credit facility, which was $1.55-billion drawn as of Dec. 31. The facility is subject to three key covenants. Vermilion was within the covenants at Dec. 31, but not by much, and in Fitch's view, "Headroom on key covenants has tightened given higher debt and weaker pandemic-linked results." Yet even Fitch acknowledged that Vermilion has a "supportive bank group" (which is certainly more than some of its competitors can say).
Vermilion has been talking up debt reduction as a core priority ever since it overhauled its management and suspended its dividend roughly a year ago. Yet according to a new presentation on its website, the company -- which, after all, was an income trust before it became a company -- is already eyeing a return of the dividend. "[Our assets are] ideally suited to support a growth-and-income capital markets model," Vermilion declared. It expects rising oil and gas prices to "support our near-term priority of reducing debt and facilitate the transition back to a dividend-paying model." The above-mentioned Fitch, for its part, does not foresee a return of the dividend until 2024.
In Alberta, Rick McHardy's Spartan Delta Corp. (SDE) lost 13 cents to $3.90 on 222,400 shares. A new filing on its SEDAR profile has disclosed that ARETI Energy now owns 23.5 million of Spartan's 113 million shares, acquired as payment once Spartan closed its takeover of the ARETI-backed Inception Exploration last week. ARETI is part of the ARETI International Group. The founder and president of this group is Russian billionaire Igor Makarov, who has a personal website that devotes nearly the same amount of attention to his business activities as it does to his athletic prowess. (The 59-year-old Mr. Makarov is a past member of the USSR Olympic cycling team and apparently holds the title "International Master of Sports.") ARETI used to have its own gas subsidiary, which focused on Siberia until Rosneft bought it for about $3-billion (U.S.) in 2013. Mr. Makarov's website says he "re-energized" the business in 2015, and Areti now has investments across Europe, the Middle East and North America.
Now these investments will include a 20.6-per-cent interest in Spartan. For as long as this interest stays above 20 per cent, Areti will be allowed to nominate two directors to Spartan's board. Presumably to that end, Spartan has appointed Steve Lowden and Elliot Weissbluth as directors. Mr. Lowden is the former chairman and CEO of New Age (a private oil and gas producer in Africa) and has also worked for Marathon Oil and Premier Oil. Mr. Weissbluth is the former chairman of Hightower, a U.S. financial services company that he founded in 2007 and retired from last year.
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