Stockwatch Energy for yesterday
Energy Summary for May 4, 2021
2021-05-04 20:59 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for June delivery added $1.20 to $65.69 on the New York Merc, while Brent for July added $1.32 to $68.88 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.70 to WTI, up from a discount of $11.75. Natural gas for June was unchanged at $2.97. The TSX energy index lost a fraction to close at 120.89.
Oil sands giant Suncor Energy Inc. (SU) edged up just one cent to $26.94 on 17.5 million shares, wavering on mixed first quarter financials. They were certainly better than the first quarter of last year, when the COVID-19 crisis triggered asset impairments and other charges that tipped Suncor into a net loss of $3.5-billion. In the new financials, it swung to a profit of $821-million. It also pegged its quarterly production at 786,000 barrels of oil equivalent a day and its cash flow at $1.39 a share, both in line with analysts' predictions.
Investors remained aloof. Today's financials mark the one-year anniversary of Suncor's unexpected and widely criticized decision to slash its quarterly dividend, which fell all the way to 21 cents from 46.5 cents, for a current yield of 3.1 per cent. (Fellow oil sands giants Canadian Natural Resources Ltd. (CNQ: $38.38) and Imperial Oil Ltd. (IMO: $36.51) left their dividends intact and have both enjoyed a stronger rally exiting the downturn. Imperial even raised its dividend when it released its first quarter financials last week.) Suncor also included some disagreeable new forecasts in its financials. Notably, its forecast tax expenses and oil sands royalties are heading sharply higher (one of the less pleasant side effects of rising oil prices). The company is also deferring major maintenance at its oil sands base plant until at least June because of spiking COVID-19 cases in the region.
Chief executive officer Mark Little kept his spirits up during a conference call this morning. He said he expects "no material impact to our 2021 guidance" from the above-noted maintenance deferral -- Suncor's budget of $3.8-billion to $4.5-billion and its production target of 740,000 to 780,000 barrels a day remain unchanged -- and emphasized the company's continuing commitment to debt reduction and share buybacks. The latter resumed in February and Suncor has since repurchased about $530-million worth of shares, he said. (Specifically, it bought back 20.2 million shares, leaving 1.52 billion currently outstanding.) Mr. Little specified that two-thirds of this year's free cash flow will go toward debt repayment and the remaining one-third will go toward buybacks. (In other words, dividend watchers, there is nothing to see here until at least next year.)
Another oil sands producer, Cenovus Energy Inc. (CVE), lost 48 cents to $9.43 on a heavier-than-usual 19.5 million shares. It did not have news today -- its first quarter financials are not due for release until Friday -- but investors undoubtedly had their attention grabbed by a third party's financials, specifically ConocoPhillips. The U.S. major released its financials this morning and simultaneously announced a plan to sell all of its shares of Cenovus over the next 20 months. The shares will be unloaded "in the open market in a disciplined manner by year-end 2022," said Conoco.
Conoco obtained 208 million shares of Cenovus in the spring of 2017, when the former company sold the latter company nearly all of its Canadian assets. The price tag of $17.7-billion comprised $14.1-billion cash and the rest in shares. Based on that, the 208 million shares had a deemed value of $3.6-billion, or $17.30. Cenovus was trading at $17.45 when the companies made the announcement in March. The deal proved unpopular, with Cenovus's stock dwindling to less than $10 over the next three months, at which point its then-CEO (Brian Ferguson) opted to "retire." Cenovus is currently led by CEO Alex Pourbaix (a former TC Energy Corp. (TRP: $61.05) executive). Mr. Pourbaix has known for years that Conoco had no real desire to be a long-term shareholder. In a BNN interview in late 2019, Mr. Pourbaix hinted that Cenovus might even buy back the shares from Conoco, musing that this idea was "one of the things we've really taken a hard look at." Then COVID-19 hit, Cenovus's stock got as low as $2.06 in March, 2020, and Conoco was in no rush to crystallize such a massive loss.
Conoco will likely still crystallize a loss in the end, of course. At $9.43, Cenovus's stock is still down sharply from its deemed value of $17.30 in the 2017 deal, and the average one-year price target among analysts is only about $12. Conoco has nonetheless been waiting about four years, and undoubtedly has an eye on the cash the sale will produce. Given that it specifically said it will sell the shares on the open market, Mr. Pourbaix's idea of a Cenovus-led buyback seems to have vanished -- Cenovus has shown no interest even in regular buybacks these days -- so investors seem to be girding themselves for a steady stream of selling pressure over the next year and a half. Cenovus may take the chance to react to Conoco's news when it releases its own first quarter financials this Friday.
One last oil sands producer is worth a mention. MEG Energy Corp. (MEG), down 14 cents to $7.15 on 5.2 million shares, released its first quarter financials this morning. They were generally better than analysts expected. Production came to 91,000 barrels a day, compared with analysts' predictions of 90,000, while cash flow of 41 cents a share nicely exceeded analysts' predictions of 37 cents a share. MEG also took its full-year 2021 production guidance of 86,000 to 90,000 barrels a day and nudged the bottom figure up to 88,000. "Better-than-expected" performance in the first quarter "has given us the confidence to tighten our production guidance and sets us up well for the balance of 2021," cheered CEO Derek Evans. The budget is staying unchanged at $260-million.
As with Suncor, not all of the guidance updates were agreeable. MEG noted that because of "increased apportionment on the Enbridge Mainline" -- a pipeline system for which demand regularly exceeds capacity, forcing Enbridge Inc. (ENB: $47.98) to ration (or apportion) space -- MEG was not able to get as much oil as expected to the high-margin U.S. Gulf Coast market. Just 38 per cent of MEG's sales volumes reached the U.S. Gulf Coast in the first quarter of 2021, down from 48 per cent in the fourth quarter of 2020. The apportionment issue has forced MEG to lower its 2021 forecast for the amount of oil it expects to export southward. Investors seemed disappointed by the reduced exposure to this high-margin market. They may take heart from Enbridge's explicit vow (on its website) to "reduce apportionment" and "restore flexibility to the Enbridge Mainline System" through its Line 3 expansion project. This is already under construction and should be in service by the end of the year.
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