Stockwatch Energy today
Energy Summary for June 8, 2021
2021-06-08 21:00 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery added 82 cents to $70.06 on the New York Merc, closing above $70 for the first time since October, 2018, while Brent for August added 73 cents to $72.22 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.93 to WTI, up from a discount of $14.25. Natural gas for July added six cents to $3.13. The TSX energy index added a fraction to close at 139.36.
The B.C. LNG (liquefied natural gas) industry got a rare dose of encouragement today, after Pembina Pipeline Corp. (PPL: $39.38) agreed to buy a 50-per-cent interest in the proposed Cedar LNG project. Pembina will pay a total $90-million (U.S.). This includes the cost to acquire the interest as well as estimated predevelopment costs over the next two years.
The Cedar project is small but intriguing. It will be a floating terminal, moored in the Douglas Channel on land owned by the Haisla Nation, which owns the other 50 per cent of the project. The estimated construction cost is $3-billion and the output would be three million to four million tonnes of LNG annually. By contrast, the other major LNG project currently in the works in Kitimat, the Shell-backed LNG Canada terminal, would produce about 14 million tonnes of LNG annually and has a price tag of $40-billion. Part of the cost difference stems from LNG Canada's inclusion of TC Energy Corp.'s (TRP) Coastal GasLink, a 670-kilometre pipeline that will deliver gas straight to LNG Canada's door. The Cedar project is designed to piggyback off this by way of a much cheaper eight-kilometre pipeline connecting to Coastal GasLink.
LNG Canada is ahead of Cedar in several respects, having already obtained federal and provincial environmental clearances, made its final investment decision (FID) in 2018, and started construction in 2020, with an expected in-service date of 2025. Cedar is still on the first of those steps. The investment from Pembina is a sign of confidence, however, bolstering Haisla Nation's forecast that Cedar will get its FID in 2023 and enter service in 2027.
The show of support marks a nice change for the battered B.C. LNG industry. Just six years ago, there were about 20 LNG proposals dotting the B.C. coast, but nearly all of them have folded. The most recent companies to bail were Chevron and Woodside Petroleum. They were planning to build the $12-billion (U.S.) Kitimat LNG project, but Chevron put its share up for sale in 2019 and then cut off all financing for the project in 2020. Woodside capitulated last month and said it too would try to sell its interest, but if it cannot find a buyer, it will wind the project up.
In the upstream sector, Crescent Point Energy Corp. (CPG) stayed unchanged at $5.64 on 7.76 million shares, after announcing that it has sold $93-million of non-core conventional assets in southeast Saskatchewan. The assets are producing 6,500 barrels of oil equivalent a day. Crescent Point noted that the assets were generating about $55-million in annual cash flow, but because of their high sustaining costs and abandonment liabilities, their free cash flow was "minimal." The company calculated that the sale will wipe out $220-million or one-quarter of its future cleanup obligations.
(As discussed in the May 28 Energy Summary, the Alberta Energy Regulator is currently considering a proposal that would require companies to spend up to 5 per cent of the total value of their environmental liabilities every year to clean up aging wells. The rising scrutiny has led several companies to explicitly include environmental costs in their dealmaking.)
While Crescent Point's deal was largely ignored by shareholders (who may have had an inkling about it weeks ago -- more on that in a moment), it garnered the usual friendly applause from analysts. "We like management's strategy of selling non-core assets into a robust oil market," said Scotia Capital analyst Jason Bouvier. He noted that the sale reduced Crescent Point's full-year production guidance by about 3 per cent (to 130,000 barrels a day from about 134,000) but lowered its full-year operating costs by 5 per cent (to $535-million from $605-million). Mr. Bouvier has a "sector outperform" rating on the stock and a price target of $6. Meanwhile, ATB Capital analyst Patrick O'Rourke called the sale "positive," praising Crescent Point's "willingness and ability to dispose of non-core assets in order to unlock unrecognized value." He sees particular value in Crescent Point's new assets in the Alberta Duvernay, which it bought from Shell Canada in April for $900-million. Mr. O'Rourke maintained an "outperform" rating on Crescent Point and hiked his price target to $7 from $6.75. The stock closed today at $5.64.
As for the buyer of the assets, Crescent Point chose not to identify it. All the clues, however, point to John Jeffrey's Saturn Oil & Gas Inc. (SOIL), down one cent to 15.5 cents on 2.77 million shares. Saturn first announced on May 13 that it had arranged a "transformational" deal to buy southeast Saskatchewan assets producing 6,700 barrels a day for $93-million -- all right in line with Crescent Point's details (particularly as Crescent Point was already known to be marketing the assets). In a new press release, which happened to arrive within 10 minutes of Crescent Point's, Saturn confirmed that the deal has closed and Crescent Point was the seller. The minor mystery had a speedy resolution. Mr. Jeffrey, Saturn's CEO, cheered the deal for having "truly elevated Saturn to new heights." (As previously discussed in the June 1 Energy Summary, the deal also elevated Saturn's share count to new heights -- it was a cash deal, but Saturn had to raise cash for it -- with the result that the company is planning to ask shareholders to approve a rollback of 1 for 20. The meeting has been scheduled for June 22.)
Over in Alberta, Stephen Loukas's Obsidian Energy Ltd. (OBE) shot up 37 cents to $3.42 on 1.57 million shares, pleasing investors with an operational update from the Cardium. The company has decided to start its 23-well drill program for the second half of 2021 a few weeks ahead of schedule. The decision follows what Mr. Loukas, Obsidian's interim president and CEO, dubbed a "strong" first-half program with "some new drilling records and pace-setter wells." He did not specify a record or pace. As well, he did not repeat Obsidian's earlier promise that the 2021 program would aim to "restor[e] production to pre-COVID-19 levels" of 27,000 barrels of oil equivalent a day (up from 23,200 barrels a day in the first quarter of 2021).
Obsidian will likely have more to say when it holds its shareholder meeting and an on-line investor presentation next Wednesday, June 16. In the meantime, shareholders are in a bullish mood. The stock has rallied from last year's COVID-induced low of 20 cents all the way to today's close of $3.42.
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