Stockwatch Energy today
Energy Summary for Aug. 3, 2021
2021-08-03 20:13 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost 70 cents to $70.56 on the New York Merc, while Brent for October lost 48 cents to $72.41 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.70 to WTI, unchanged. Natural gas for September added nine cents to $4.03. The TSX energy index added 1.06 points to close at 125.35.
While Canadian markets took a holiday yesterday, oil prices fell and then fell again today, weighed down by rising cases of the COVID-19 Delta variant in China. Here in Canada, despite the lower prices, the shortened week got off to a pleasant start for one Alberta oil sands producer. Cenovus Energy Inc. (CVE) added 12 cents to $10.53 on 9.14 million shares. It has won a nod of approval from Fitch Ratings. Nearly a year and a half after Fitch downgraded Cenovus's credit rating into junk territory, the agency has now returned the company to sunny investment-grade status, boosting its rating to BBB- from BB+.
The downgrade came at the start of the COVID crisis in March, 2020. "Price Collapse Weakens Metrics," Fitch blared at the time, fretting over Cenovus's strained balance sheet. Its debt exceeded $9.2-billion at the time. Cenovus strove to reduce it throughout 2020. Then in January, 2021, Cenovus closed a multibillion-dollar merger with Husky Energy, which pushed its debt above $13-billion but added significantly to its production and cash flow. President and chief executive officer Alex Pourbaix has repeatedly vowed to reduce the debt to $10-billion by the end of this year.
Although Fitch took note of the Husky merger, it did not upgrade Cenovus's rating at the time. Now the agency has finally come around. In upgrading Cenovus, Fitch cited "successful synergies since the close of the Husky acquisition," as well as general "structural improvements in netbacks." Cenovus can once again count itself as part of the investment-grade crowd. This adds to several upgrades that it received last week, specifically from analysts, after it released better-than-predicted second quarter financials. RBC's Greg Pardy hiked his price target to $16 from $15, JP Morgan's Phil Gresh hiked his to $15 from $14.50 and Raymond James's Jeremy McCrea hiked his to $14 from $13.50.
Further afield, the Lundin family's Africa Oil Corp. (AOI) added four cents to $1.27 on 520,700 shares, after enjoying another Nigerian payday. It used the money to complete a loan refinancing.
By way of background, all of Africa Oil's production comes indirectly from a 50-per-cent interest in Prime Oil, which operates producing assets in Nigeria and provides its owners with dividends out of this production. To acquire its Prime interest, Africa Oil had to take out a $250-million (U.S.) term loan with a fixed interest rate of 15 per cent. Eliminating this expensive debt was understandably a priority for Africa Oil, which used its dividends from Prime to reduce its loan balance to about $140-million (U.S.) as of May. It then announced that it had entered an agreement to refinance this loan into a $130-million (U.S.) credit facility with a group of banks, at a cheaper interest rate of LIBOR plus 6.5 to 7.5 per cent.
Today brought two updates on those fronts. First, Prime has fired off another dividend, giving Africa Oil another $37.5-million (U.S.) with which to repay debt. Second, the credit facility has officially closed, with an expanded limit of $160-million (U.S.). "I am delighted that we have achieved one of our primary objectives for 2021 with the successful refinancing," cheered chief financial officer Pascal Nicodeme. This will have been a priority for him almost since he joined Africa Oil in late 2019, just before the Prime acquisition closed. Before that, Africa Oil's long-time CFO was Ian Gibbs, who left to become CFO of a different Lundin promotion, junior miner Josemaria Resources.
Yet another Lundin promotion, International Petroleum Corp. (IPCO), edged down one cent to $6.04 on 95,200 shares, after releasing its second quarter financials. It swung to a profit of $21.6-million (U.S.) from a loss of $1.4-million (U.S.) in the same period last year. Production reached 44,600 barrels of oil equivalent a day, exceeding International Petroleum's full-year guidance of 41,000 to 43,000. The company has now hiked this guidance past 44,000. It noted (pointedly) that its operating cash flow was $49-million in the second quarter, "representing close to 10 per cent of [its] market capitalization as of March 31." Today's drop aside, the stock has added about $2 since March 31, and the market cap has climbed to $938-million. Investors did not seem surprised by today's guidance increase. The original guidance was set in February and was markedly cautious, although the company injected hints of ambition by talking up the potential for large acquisitions, share buybacks or even dividends. Today's update left those items in the "potential" category.
Two other, smaller companies had financials worth a mention. Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) lost two cents to 52 cents on 2.38 million shares, on top of the two cents it lost on Friday, as investors mostly frowned on its second quarter report. The reported net profit of $307-million would have been marvellous indeed, were it not virtually entirely the result of a $323-million impairment reversal. Surge's actual revenue was $80-million and its cash flow was a ho-hum four cents a share. Surge used the financials in part to hype an "exciting" agreement that has management feeling "very excited," namely the $160-million takeover of the private Astra Oil. Surge proposed the takeover in June and expects to close it in two weeks. It will rely mostly on its shares to pay for the deal, with those shares being valued at 64 cents each. This is on top of a $23-million share financing done in May at 59 cents each. The market has a lot of new shares to digest, but CEO and promoter-in-chief Mr. Colborne expressed confidence that Surge will be "a top performer" in 2022.
Meanwhile, Don Gray's Gear Energy Ltd. (GXE) lost one cent to 70 cents on 3.51 million shares, giving back the one cent it added on Friday after it too released its second quarter financials. These were largely as expected, given management's habit of publishing monthly production updates. Alas, Gear was unable to join many of its competitors in swinging to a profit. Hedging losses dragged it down to a net loss of $730,000 (still an improvement over its loss of $5.3-million in the same period last year).
Despite the loss, Gear caught the winsome eye of Stifel analyst Robert Fitzmartin, who applauded the financials in a research note this morning. "The company has left [its] 2021 guidance unchanged, as it continues to be focused on deleveraging its balance sheet," wrote Mr. Fitzmartin. (Gear's net debt more than halved to $33-million as of June 30 from $70-million a year earlier.) The analyst upgraded Gear to "buy" from "hold" and left his price target at $1. That would be a 43-per-cent gain over today's close of 70 cents.
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