Stockwatch Energy today
Energy Summary for May 6, 2021
2021-05-06 20:04 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for June delivery lost 92 cents to $64.71 on the New York Merc, while Brent for July lost 87 cents to $68.09 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.40 to WTI, down from a discount of $12.18. Natural gas for June lost one cent to $2.93. The TSX energy index added 1.19 points to close at 125.36.
Canada's largest oil and gas producer, Canadian Natural Resources Ltd. (CNQ), breached the $40 mark by adding 54 cents to $40.38 on 11.4 million shares, after releasing its first quarter financials. It touted "record quarterly production" of 1.24 billion barrels of oil equivalent a day. This exceeded analysts' predictions of 1.23 billion barrels a day, while cash flow of $2.29 a share surpassed analysts' predictions of $2.19 a share. Canadian Natural also swung to a net profit of $1.37-billion in the first quarter of 2020 from a loss of $1.28-billion in the same period last year. It took a hit last year from foreign exchange losses (although, interestingly, no impairment charges, which were widespread in the sector at the time). Accounting for these and other provisions, Canadian Natural's adjusted net earnings from operations improved to $1.21-billion from a loss of $295-million.
Investors seemed pleased, if not especially bowled over. Canadian Natural had already signalled that it was expecting a good 2021. In early March, it hiked its quarterly dividend to 47 cents from 42.5 cents (for a yield of 4.7 per cent) and announced a buyback program for up to 59.2 million shares (or 5 per cent of its share count). Today it patted itself on the back for having "returned approximately $1.1-billion [to shareholders] by way of dividends and share repurchases" in the first four months of the year alone. Shareholders have seemed appreciative, with the stock having risen to $40 from $28.50 since late January.
Now Canadian Natural plans to give some attention to its creditors. In its initial budget for 2021, released last December, chief financial officer Mark Stainthorpe was forecasting $2-billion to $2.5-billion in free cash flow (meaning after its capital budget and dividends). Today Mr. Stainthorpe hiked that forecast to around $6-billion. He noted that the company is not planning to boost this year's budget for the year and will instead focus on debt repayment and share buybacks. President Tim McKay agreed during a conference call this morning. "I just don't really see anybody in the industry getting really aggressive on any kind of major capital program," said Mr. McKay. He would rather aggressively pay down net debt, which was $19.8-billion as of March 31.
Canada's sixth-largest energy company (and the very largest in the Montney), ARC Resources Ltd. (ARX), added 70 cents to $8.92 on 15.5 million shares, after it too released its first quarter financials. The highlight of the quarter was the agreement to merge with Seven Generations in an all-share deal valued at $8.1-billion. The merger closed just after quarter-end, on April 6. The first quarter financials therefore covered ARC on its own, but they did include the first official 2021 guidance for the combined company.
On an ARC-alone basis, production and cash flow for the quarter came to 170,400 barrels of oil equivalent a day and 77 cents a share, respectively. These figures surpassed analysts' expectations of 166,000 barrels a day and 74 cents a share. ARC also swung to a net profit of $178-million from a loss of $558-million in the same period last year. (In ARC's case, unlike Canadian Natural's, the change in fortunes largely reflects impairment charges and reversals. This is likely to be a theme in much of the oil patch throughout 2021.)
ARC noted that if the Seven Generations takeover had closed on Jan. 1, the combined company's production for the first quarter would have been 351,200 barrels a day. As it happens, however, the timing of the closing on April 6 coincided right with spring breakup and maintenance season. This means that ARC is expecting the rest of the year to show a fairly sizable drop from first quarter levels. The company reckoned it will produce an average of 327,000 or so barrels a day in the second quarter, rising slightly to 340,000 barrels a day in the second half of the year. Investors were unfazed. ARC had already estimated when the merger was announced in February that its production would hover around 340,000 barrels a day once the deal closed. If the first quarter was better than expected, then the worse-than-expected second quarter will simply balance things out.
An ocean away, Craig Steinke and David Elliott's Reconnaissance Energy Africa Ltd. (RECO) lost 24 cents to $10.05 on 3.82 million shares. It has arranged a $36-million bought deal. Originally, in fact, it arranged a $25-million bought deal, but then quickly boosted it to $36-million this morning. The plan is to sell 3.78 million units (each comprising a share and half a warrant) at $9.50.
The last time Reconnaissance raised money was just nine months ago, in August, 2020. The changes it has seen since then are best reflected in the offering price: The August financing (for $23-million) was done at just 70 cents. Given today's closing price of $10.05, subscribers are sitting on gains of over 1,300 per cent. The first big jump came in January, when Reconnaissance spudded its very first well, a wildcat in the Kavango basin of Namibia. Yet the real excitement came last month, when Reconnaissance released the preliminary results of the well and cheered the "clear evidence of a working conventional petroleum system."
Wildcats are expensive, of course. Reconnaissance's year-end financials (filed quietly about one week after the drill results came in) showed that it tore through the proceeds of its August financing rapidly, with its cash pile dwindling to around $6-million as of Dec. 31 from over $18-million three months earlier. Considering that drilling did not begin until January, it is no surprise that the company is once again in need of some fresh money. The mark of a successful financing is that participants make money as quickly as possible. To that end, Reconnaissance already announced yesterday that it has spudded its second well, targeting a similar system and depth as the first.
It is also no surprise that Reconnaissance has picked a familiar face to lead the financing. Just like in August, the underwriter is Haywood Securities, one of Reconnaissance's most devoted cheerleaders. The above-mentioned Mr. Elliott is a founding director, partner and vice-president of Haywood. One of Haywood's analysts, Christopher Jones, just so happens to have published a boosterish research note on Reconnaissance yesterday, hiking his price target to $12.50 from $10. "[This is] one of the most interesting and compelling opportunities in the sector," declared Mr. Jones. He "encourage investors to add to or initiate new positions ahead of a catalyst-rich 2021."
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