Stockwatch Energy today
Energy Summary for June 25, 2021
2021-06-25 20:28 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 75 cents to $74.05 on the New York Merc, while Brent for August added 62 cents to $76.18 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.75 to WTI, down from a discount of $13.40. Natural gas for July added eight cents to $3.52. The TSX energy index added a fraction to close at 141.87.
Controversy continued to swirl around Craig Steinke's Reconnaissance Energy Africa Ltd. (RECO), which today lost $2.35 to $10.99 on 4.02 million shares, as a prominent short-seller took aim and fired. The U.S-registered Viceroy Research Group -- whose reports have helped trigger share price collapses at German's Wirecard and South Africa's Steinhoff International -- has disclosed a short position in Reconnaissance and its "borderline imaginary" oil assets in Namibia. Reconnaissance began drilling these assets in January. Excitement about this drilling, which according to Reconnaissance has turned up two potential oil discoveries, has sent the stock quintupling from about $2.25 since the start of 2021 (and from 20 cents in early 2020). Viceroy is not buying it. In a 32-page short report yesterday, Viceroy alleged that Reconnaissance is "drilling blind" and has a "near-zero chance of finding any asset of value."
The criticisms stem in part from Viceroy's skepticism of Reconnaissance's resource reports, which according to Viceroy are "a work of geofantasy built on hypotheticals and assumptions ... [and] even this fiction assigns only a 3.3-per-cent probability of success." That would be exploration success; Viceroy added that commercial success is even less likely because, as unconventional resources, Reconnaissance's assets would require fracking, which is banned in Namibia. Reconnaissance has claimed that it can recover the resources without fracking, but Viceroy is dubious. It views the current drill program as a way to "justify overly optimistic press releases [and] swindle investors."
Viceroy's criticisms did not stop at Reconnaissance's assets. The short-seller also took a dim view of Reconnaissance's management, which has "a long and checkered history of bribery and corporate and environmental scandals." For example, Viceroy noted that Reconnaissance's chairman, Jay Park, was a director of Griffiths Energy, which in 2013 pled guilty to bribing officials in Chad to obtain oil licences. Plenty of others came under Viceroy's fire as well. The whole thing adds up, in the short-seller's view, to a "disaster waiting to happen."
Reconnaissance, naturally, disagrees. A spokesman told The Globe and Mail that the Viceroy report "appears to contain groundless allegations." Reconnaissance has areadly been in defensive mode for weeks, previously lashing out at the National Geographic in May for "facilitat[ing] activist short-sellers attempting to attack Reconnaissance's share price." One major cheerleader remains firmly on Reconnaissance's side. On the same day as the Viceroy report (although there were no time stamps indicating which report came first), Haywood Securities analyst Christopher Jones put out a research note increasing his price target on this "catalyst-rich" stock to $16 from $12.50. (As ever, investors may wish to make note of Haywood's disclaimers. At the bottom of the note, Mr. Jones disclosed that he or a member of his family owns shares of Reconnaissance, and Haywood has managed financings for the company and provided other investment banking services.)
Here in Canada, one stock has been enjoying a much better week. Jim Riddell's Alberta Montney- and Duvernay-focused Paramount Resources Ltd. (POU), up 33 cents to $17.08 on 356,00 shares, has added nearly $4 since announcing last Friday that it wants to start paying a dividend. The proposed two-cent monthly payout represents a yield of 1.4 per cent. Stockwatch noted last Friday that Paramount has been enjoying the rally in oil prices both directly and indirectly, thanks in part to its minority interest in fellow Montney producer NuVista Energy Ltd. (NVA: $3.77). A $10.5-million investment that Paramount made in NuVista last September (triggering takeover speculation) is currently worth $65-million. Now Scotia Capital analyst Cameron Bean has noticed the same and has issued a research note entitled "The POU/NVA Combination Question Revisited."
Mr. Bean expressed mixed feelings about a merger. In his view, it would be "a clear win for POU shareholders," but NuVista's shareholders might show reluctance unless Paramount offers a major premium -- say, 30 to 40 per cent. The new dividend gives NuVista's shareholders an extra incentive, mused Mr. Bean. He added that the combined company would be able to favourably refinance NuVista's lofty debt (including $220-million in notes due in early 2023) and might even muscle its way into the S&P/TSX Composite Index (as Paramount fell just short of the requirements during the latest quarterly rebalancing period). All in all, the analyst sees "a decent balance of potential positives" on both sides. Interestingly, none of this was enough to prompt Mr. Bean to raise his price target on either stock, and those targets are well below current trading levels. NuVista has a price target from Mr. Bean of $2.75, whereas it closed today at $3.77. Paramount has a $15 price target and closed today at $17.08.
Elsewhere in Alberta, George Fink's Cardium-focused Bonterra Energy Corp. (BNE) lost 13 cents to $5.38 on 38,300 shares, after releasing a mixed update on its finances and operations. Naturally, it spun the entire update as purely positive, not mixed at all. The news that the company's bankers are reducing its credit facilities to $265-million from $300-million was cheered as creating "improved financial flexibility." It did not explain its logic. Presumably the explanation is that a greater proportion of the facilities will be in the form of revolving credit, which is more flexible than non-revolving credit because it can be reused after being paid off. Only two-fifths of the old $300-million credit facilities were revolving. That fraction jumps to three-quarters under the new $265-million facilities. Of course, investors are less interested in the fractions than the overall amount that Bonterra's bankers trust it to borrow, which has now gone down, and will soon drop even further: Bonterra said the bankers want to snip another $30-million off the non-revolving bits in November.
Bonterra hoped its operational update would ease investors' frowns. Applauding its own "effective development in the first half of 2021," the company pegged its current production at 13,200 barrels of oil equivalent a day, which is at the top end of its full-year guidance of 12,800 to 13,200 barrels a day. The second-half program has already begun slightly ahead of schedule.
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