Stockwatch Energy for yesterday
Energy Summary for June 24, 2021
2021-06-24 20:48 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 22 cents to $73.30 on the New York Merc, while Brent for August added 37 cents to $75.56 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.40 to WTI, up from a discount of $13.88. Natural gas for July added nine cents to $3.42. The TSX energy index lost a fraction to close at 140.27.
The Canadian oil sands have shaken off the worst of the "COVID-19 shock," but its effects will linger for years, according to a new forecast from IHS Markit. The London-based research and analytics firm noted that oil sands production recovered rapidly to exceed pre-COVID levels by the end of 2020. Post-COVID, however, many companies remain reluctant to open their wallets and invest in large-scale expansions. This has prompted IHS Markit to reduce its outlook for oil sands production in 2030 to 3.6 million barrels a day from 3.8 million. (For context, the oil sands produced 2.7 million barrels a day in 2020 and will likely produce 2.9 million in 2021.)
COVID is not entirely to blame. Kevin Birn, vice-president of North American crude oil markets at IHS, also pointed to "delays to critical transportation infrastructure" (such as pipelines) and "rising energy transition pressures" (such as the adoption of emission reduction targets). This has created a general environment of uncertainty even though oil prices are at their highest levels in nearly three years. "Although oil prices have rebounded and even exceeded prepandemic levels, producers are prioritizing rebuilding their balance sheets, paying down debt and returning cash to shareholders ... which will delay a rise in upstream spending," said Mr. Birn. He reckoned that the majority of the next decade's rise in oil sands production will come from incremental ramp-ups of existing projects, not new ones.
One oil sands producer is certainly bearing out this theory. Imperial Oil Ltd. (IMO), up four cents to $39.98 on 1.78 million shares, has already told investors not to expect ambitious new project announcements any time soon. "For the next few years, we want to continue to focus on our existing assets. We're being very conscious about not progressing major new greenfield projects," chief executive officer Brad Corson said during a conference call in February. Today brought a reiteration of Imperial's new focus on -- just like IHS Markit said -- shareholder returns, in the form of share buybacks. Imperial was inactive on this front in 2020. It cheered today that it has bought back 24.7 million shares in the last two months. Now it is launching a new program whereby it can buy back up to 35.5 million additional shares over the next year. It currently has 711 million shares outstanding.
Outside the oil sands, the mood has been bolder, and far more acquisitive. Today another company joined the feeding frenzy. Alex Verge's Journey Energy Inc. (JOY) added 14 cents to $1.33 on 149,300 shares, after agreeing to buy a private Alberta company for $2.9-million cash and 3.5 million shares. The private company is producing 610 barrels of oil equivalent a day. As a result, Journey now expects to produce 7,600 to 7,900 barrels a day this year, up from the old range of 7,300 to 7,600.
Journey did not identify the private company. It identified itself, however, as junior Cardium producer Briko Energy. The name will ring a bell for some energy investors. Briko, a promotion of Mike Kohut, John van de Pol and Tim de Freitas, was formed in 2018 as part of Pieridae Energy Ltd.'s (PEA: $0.46) takeover of Ikkuma Resources. Pieridae was interested in Ikkuma's conventional Alberta gas assets, not the earlier-stage Cardium ones. Ikkuma's shareholders thus received some equity in Pieridae and some equity in a Cardium-focused spinout, Briko. The value of Briko was not specified, but the equity component came with warrants exercisable at $1.10, giving a sense of where Briko wanted to go. Unfortunately, where Briko wanted to go is not where it ended up. The cash-strapped company put itself up for sale in January, 2021, and has now signed an agreement with Journey that values each Briko share at 59 cents.
Journey is pleased with the deal. Briko's production, while small in scale, is stable and enjoys a low decline rate. Briko also owns 200,000 net acres of undeveloped land (providing a large inventory of potential wells) and its balance sheet, rather remarkably, is debt free. It even has a small working capital surplus of about $800,000. (Journey's working capital as of March 31 was negative $16.5-million and its net debt was $83.7-million.) The companies are aiming to close the deal in August.
Separately, Paul Colborne's Surge Energy Inc. (SGY) lost two cents to 71 cents on 3.75 million shares, giving back some of the five cents it added yesterday after announcing a much larger acquisition. Surge is planning to buy Andrew Greenslade's Astra Oil for $160-million. The deal will add production of 4,100 barrels of oil equivalent a day in Saskatchewan. As a result, Surge's total production across Alberta and Sasktatchewan is forecast to reach 20,200 barrels a day by year-end.
Surge's Mr. Colborne and Astra's Mr. Greenslade have done business together before. In January, 2014, a company called Renegade Petroleum, where Mr. Greenslade was serving as interim CEO, sold some Saskatchewan oil assets to Surge for $109-million -- this being Surge's fifth major acquisition since Mr. Colborne had taken over as CEO in May, 2013, and turned it into an expansion-focused dividend payer. Much has changed since then. Later in 2014, Renegade sold itself to Spartan Energy (which itself was sold to Vermilion Energy Inc. (VET: $11.30) in 2018; the Spartan people are now leading the similarly named Spartan Delta Corp. (SDE: $5.54)). Astra was born two months after the sale and Mr. Greenslade has been there ever since. As for Surge, both its shopping habit and its dividend began to dissipate after oil prices crashed in late 2014. Its last major acquisition was in 2018 and the dividend disappeared in 2020.
Surge has spent most of the last year trying to shore up its balance sheet. As of March 31, its net debt was $303-million, which is lofty, but is an $81-million decrease from the same period last year. While most of the Astra price tag will be paid using shares, Surge will absorb about $15-million of additional debt. It told investors not to worry. The new assets boast "high light oil netbacks, low-cost production efficiencies and quick drilling payouts," and Surge is glad to have the "exciting opportunity" to acquire them, declared Mr. Colborne. He even hinted that the company may be ready to readopt old habits. In his view, Surge's "track record of execution ... positions the company for both organic and acquisitive growth.
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