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Energy Summary for Nov. 30, 2021
2021-11-30 20:59 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery lost $3.77 to $66.18 on the New York Merc, while Brent for January lost $2.87 to $70.57 (all figures in this para U.S.). Both benchmarks showed their biggest one-month decline since the onset of the COVID-19 pandemic 20 months ago. Western Canadian Select traded at a discount of $19.00 to WTI, up from a discount of $19.55. Natural gas for January lost 28 cents to $4.57. The TSX energy index lost 4.75 points to close at 158.25.
Oil prices took another plunge today, on rising uncertainty about the severity of the new COVID Omicron variant. The U.S. government is proceeding with a plan to release 50 million barrels of oil from its emergency reserves despite the recent sharp drop in prices. Meanwhile, participants in the latest round of U.S.-Iranian nuclear talks (which resumed yesterday after a five-month pause) characterized the talks as "extremely positive," raising the risk that Iran will be able to resume oil exports and increase global supplies by as much as five million barrels a day.
Here in Canada, oil stocks fell with oil prices, even as some of them tried their hardest to stir up some hype. Oil sands producer MEG Energy Corp. (MEG), down 55 cents to $10.40 on 4.67 million shares, has spent weeks talking up the conference call it would hold this morning to trumpet its 2022 guidance. Yet the actual event -- at which MEG unveiled not just a budget but a grand "go-forward capital allocation strategy" -- fell short of investors' hopes.
The 2022 guidance was straightforward: MEG is aiming for production of 94,000 to 97,000 barrels a day, on a budget of $375-million. Those figures are close to their 2021 counterparts of 92,500 to 93,500 barrels a day on a budget of $335-million. Management had already signalled during a conference call on Nov. 9 that it did not have any particularly ambitious production goals. It continues to view debt reduction as a top priority, having already repaid roughly $1.8-billion (U.S.) worth of debt since 2018. Its net debt as of Sept. 30 was $2.5-billion and its near-term goal (as reiterated yet again today) is to reduce this to $1.7-billion (U.S.).
The Nov. 9 call also caught investors' attention because of coy comments made by chief financial officer Eric Toews. Repeatedly dodging questions about whether MEG plans to launch a dividend or a share buyback, he told listeners, "Just be patient -- we'll talk about that at the back end of this month when we come out with our capital budget."
Alas for impatient listeners, to the extent that MEG talked about this today, it was largely to dream about vague future commitments. Management claimed to have an "intention to initiate capital return to shareholders." Yet for now, all free cash flow remains earmarked for debt repayment until MEG achieves its above-noted goal, expected in mid-2022. After that, about 25 per cent of free cash flow will go to shareholder returns (in what form, management did not say). Then, after MEG further reduces the debt to $1.2-billion (U.S.) -- expected in 2023 -- it wants to increase the above percentage (details again left unsaid).
While investors were cool toward these capital spending plans, they did win a round of applause from one typically friendly corner. Desjardins analyst Justin Bouchard applauded MEG's "continued focus on debt repayment and a disciplined capex program" in a research note this morning. "While it may be painful to watch MEG pay down debt ... we view it as prudent positioning," he wrote. He kept a "buy" rating on the stock and hiked his price target to $13 from $12 (relative to today's close of $10.40). A disclaimer on the website of Mr. Bouchard's employer, Desjardins, notes that the firm expects to receive or will seek compensation from MEG within the next three months for unspecified investment banking services.
The other big energy news of the day had to do with Canadian pipeline operator Enbridge Inc. (ENB: $47.93) and its battle over the fate of the cross-border Line 5 pipeline. Today, the State of Michigan dropped its suit in a federal court to enforce a shutdown of Line 5 -- but the state is far from abandoning the fight. It is instead pivoting to the state court, where it plans to resurrect a 2019 legal action with the same aim of closing the pipeline permanently.
By way of background, Michigan Governor Gretchen Whitner previously ordered a shutdown of Line 5 in November, 2020, claiming that the line cannot operate safely in the Great Lakes (despite a seven-decade history of doing just that). Enbridge rejected the order and said pipelines are a federal matter. The state filed a lawsuit in state court to enforce the order, but its efforts to assert its authority met with repeated setbacks, as Enbridge moved to transfer the suit to federal court, the Canadian government invoked a cross-border pipeline treaty, and ultimately a federal U.S. judge ruled that the federal court should have jurisdiction.
The last item on that list happened just last week. In response, Michigan is taking its ball and going home -- where it will immediately start playing ball again in its preferred arena, the state court. The state's attorney-general had filed a separate lawsuit in state court in 2019, aimed at shutting down Line 5 for being a "public nuisance." (That this nuisance supplies over half of the state's heating needs is apparently neither here nor there.) The attorney-general's 2019 lawsuit was put on pause so the governor's more recent one could go ahead. Having received an unfavourable ruling last week, the governor has withdrawn her lawsuit and thrown her support behind the 2019 one instead.
Enbridge seemed unfazed by the legal jockeying. In a statement on its website, it claimed to be "pleased" that Ms. Whitmer had dropped her federal suit, and vowed to continue its efforts to "affirm federal jurisdiction over Line 5." Meanwhile, bilateral treaty talks between the Canadian and U.S. governments reportedly remain in the works. Ottawa said earlier this month that organizing the talks is "well under way." The timeline for formal negotiations -- or, if they fail, a binding international arbitration -- remains unclear.
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