Stockwatch Energy today
Energy Summary for Nov. 3, 2021
2021-11-03 20:18 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery tumbled $3.05 to $80.86 on the New York Merc, while Brent for January lost $2.73 to $81.99 (all figures in this para U.S.). Prices dropped to a five-week low on bearish U.S. inventory data and skittishness ahead of tomorrow's OPEC+ meeting. Western Canadian Select traded at a discount of $15.62 to WTI, down from a discount of $15.10. Natural gas for December added 13 cents to $5.67. The TSX energy index lost 1.66 points to close at 161.63.
Canadian oil stocks largely fell with oil prices. One exception was oil sands producer Cenovus Energy Inc. (CVE), which fought its way up 18 cents to $15.03 on 18.9 million shares -- and all it had to do was double its dividend. It will now have a quarterly payout of 3.5 cents instead of 1.75 cents, for a new (yet still fairly unimpressive) yield of 0.9 per cent.
The dividend update came as part of the third quarter financials that Cenovus released this morning. President and chief executive officer Alex Pourbaix dubbed the results "outstanding," noting that production in the quarter averaged 804,800 barrels of oil equivalent a day (exceeding Cenovus's full-year guidance of 750,000 to 790,00 barrels a day). The company enjoyed $1.7-billion in free cash flow during the quarter and used part of it to continue reducing its net debt, which is now $11-billion. Cenovus expects to get to its targeted debt level of below $10-billion "imminently" and has therefore decided to hike the dividend, while also starting a buyback program for up to 146.5 million shares (10 per cent of the public float).
Investors seemed pleased, but were likely not surprised. After Suncor Energy Inc. (SU: $31.44) doubled its dividend last week, the general speculation was that Cenovus would do the same. Suncor and Cenovus were among the companies that sharply reduced or suspended their dividends at the onset of the COVID pandemic in 2020. Their doubled dividends are still below pre-COVID levels. Meanwhile, rivals such as Canadian Natural Resources Ltd. (CNQ: $52.58) and Imperial Oil Ltd. (IMO: $41.66) did not touch their dividends during COVID and have even increased them since then. In terms of yield, Cenovus has the lowest of the four at 0.9 per cent, followed by Imperial at 2.6 per cent and Canadian Natural at 3.6 per cent, with Suncor having just surged into the lead with 5.3 per cent.
South of the border, U.S. shale producer Ovintiv Inc. (OVV) lost $1.39 to $45.43 on 863,800 shares, after it too released its third quarter financials. Production averaged 535,000 barrels of oil equivalent a day, while cash flow came to $3.24 (U.S.) a share. Both figures were mildly better than analysts' predictions of 525,000 barrels a day and $3.16 (U.S.) a share. Yet the headline-grabbing number was the net loss of $72-million (U.S.). During a rollicking rally in oil prices, such a number is not what investors like to see, any more than they liked it when Ovintiv reported a net loss of $205-million (U.S.) in the second quarter. In both quarters, hedging losses dragged Ovintiv deep into the red.
The reason for the substantial recent hedging activity is Ovintiv's desire to ensure enough cash coming in to achieve its balance sheet goals. The company, which owed about $7.5-billion (U.S.) as of mid-2020, has repeatedly vowed to reduce this to $4.5-billion (U.S.) by year-end 2021. It reiterated this target in today's press release and pegged its debt at $4.8-billion (U.S.) as of Sept. 30. This lowers the need for future hedges, and Ovintiv has correspondingly hedged relatively little of its 2022 output (although it is still hedging some, as its next goal is to get the debt down to $3-billion (U.S.) in late 2022 or 2023).
Another U.S. producer, Enerplus Corp. (ERF), lost 25 cents to $11.73 on 2.38 million shares. It has closed a $115-million (U.S.) asset sale, just a bit behind schedule. The company had announced the sale in August and wanted to close it in October. It did not mention the delay today, merely noting that the assets in question were "non-strategic." They were Enerplus's Sleeping Giant field in Montana and its Russian Creek acreage in North Dakota. Together their production was averaging about 3,000 barrels a day, apparently not enough to affect Enerplus's full-year guidance of 112,000 to 115,000 barrels a day, as the company has not mentioned any reduction to this guidance. It has promised to use the proceeds to repay debt and buy back shares.
Here in Canada, an Alberta oil company is scooping up assets. Stephen Loukas's Obsidian Energy Ltd. (OBE) plummeted 60 cents to $4.75 on 2.43 million shares, after announcing that it would buy out its joint venturer in the Peace River oil partnership (PROP). Obsidian already owns a 55-per-cent interest in PROP. The joint venturer, which went unnamed in the press release but is China Investment Corp. (CIC), will sell Obsidian the remaining 45-per-cent interest for $43.5-million.
Investors seemed dismayed. PROP has a less than endearing history. Things certainly started out grandly; when Obsidian (then Penn West) and CIC formed the joint venture way back in 2010, CIC agreed to pay $845-million for its 45-per-cent interest, valuing the little-known bitumen assets at an eye-watering $1.8-billion. They were producing just 2,700 barrels a day. Over the years, production got up to 10,000 barrels a day in 2018, but Obsidian had long since lost interest -- or rather, it needed money to repair a debt-laden balance sheet -- and started trying to sell its 55-per-cent interest in 2014. It did not find a willing buyer until 2019. By this point, a lack of drilling had sent PROP's production down to 8,000 barrels a day (and it is currently closer to 5,000). In 2019, a predecessor of Highwood Asset Management agreed to buy Obsidian's interest for $97-million, but this deal collapsed a few months later. Obsidian said it would keep looking for a buyer in order to narrow its focus on its core Cardium assets.
So much for that. Now Obsidian is going all in on PROP, buying CIC's interest for $43.5-million (otherwise known as one-20th of what CIC paid 11 years ago). Interim president and CEO Mr. Loukas indicated that the change of heart reflects "improved economic returns from higher oil prices, [making] future development of the Peace River area highly compelling." Yet oil prices have been rallying for an entire year and Obsidian has seemingly found the Cardium to be more compelling. It was even pursuing a hostile takeover bid for Bonterra Energy Corp. (BNE: $6.75) as recently as April.
Perhaps it was the ultimately unsuccessful battle with Bonterra that prompted Obsidian to focus on deals that it can actually close. PROP should fall into that category. To help pay for the $43.5-million deal, Obsidian plans to close a $12.5-million to $22.5-million equity financing. It is still figuring out the financing terms.
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