Stockwatch Energy today
Energy Summary for Dec. 30, 2021
2021-12-30 20:10 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery added 43 cents to $76.99 on the New York Merc, while Brent for February added nine cents to $79.31 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.65 to WTI, down from a discount of $14.00. Natural gas for February lost 46 cents to $3.56. The TSX energy index lost 1.63 points to close at 162.86.
With 2021 just inches from the finish line, thoughts are quickly turning toward the ability of oil and gas companies to recapture annual profits. U.S. energy giant ExxonMobil filed a regulatory report on EDGAR this morning to lay out some of its preliminary forecasts for the fourth quarter. The company previously reported net income of $6.8-billion (U.S.) in the third quarter. Based on today's report, Exxon expects an increase in net income in the fourth quarter, making it profitable for 2021 as a whole -- a drastic change from the record $22.4-billion (U.S.) loss it reported for 2020 (including writedowns). Exxon said it will release its year-end financials on Feb. 1.
Fourth quarter financials will also be on the mind of U.S. shale producer Ovintiv Inc. (OVV), down 61 cents to $42.49 on 433,300 shares. Ovintiv used to be a Canadian company called EnCana. In January, 2020, it reorganized, changed its name and redomiciled to the United States. One of the stated reasons for the redomiciling was to get attention from U.S. indexes. Ovintiv explicitly mentioned the S&P MidCap 400. Unfortunately, the COVID pandemic derailed its timing.
For context, analysts reckoned at the time that if Ovintiv were to join the S&P MidCap 400, this would create demand among passive funds for about 18 million of its shares -- enough to fully replace the 18 million that had been in S&P/TSX indexes prior to the redomiciling. (Figures are adjusted for a subsequent 1-for-5 rollback.) Ovintiv's market cap at the time was over $5-billion (U.S.), easily clearing the bar for inclusion in the S&P MidCap 400, which sets a minimum requirement of $2.4-billion (U.S.).
The problem is that the index also has profitability requirements, mandating that constituents be profitable in the current quarter and on a trailing 12-month basis. With the onset of a worldwide pandemic and a record collapse in oil prices, this was no longer achievable for Ovintiv. It posted a staggering loss of $6.1-billion (U.S.) in 2020. At the worst of the downturn in March, 2020, Ovintiv's stock touched a low of $2.95, giving it a market cap of a mere $600-million (U.S.).
Ovintiv righted itself in 2021, returning to quarterly profits (for the most part) and watching its stock rebound to $42. Its market cap is now $8.6-billion (U.S.) -- technically enough to clear the $8.2-billion (U.S.) bar for inclusion in the large-cap S&P 500. Yet the S&P MidCap 400 would be perfectly lovely too. During a conference call last month, executive vice-president and chief financial officer Corey Code said Ovintiv expects to meet the profitability requirements of the S&P MidCap 400 "as soon as the end of the fourth quarter," as long as the fourth quarter brings "any positive earnings" at all. He hastened to add that this would not guarantee near-term entry into the index. The S&P makes changes at its discretion, so the timing is unpredictable.
Even further south, Wayne Foo's Colombian oil producer, Parex Resources Ltd. (PXT), added 41 cents to $21.67 on 473,200 shares. It has wasted no time renewing its share buyback program. The previous one expired on Dec. 22. Parex took full advantage of it, buying the maximum allotment of 12.8 million shares. It now has 120 million shares outstanding. The new program, which will start on Jan. 4, will allow Parex to buy back a maximum of 11.8 million shares.
Parex gave the standard reason for conducting a buyback, namely the belief that the current market price of its shares "does not adequately reflect their value." This is an age-old bit of PR fluff designed to soothe investors who might otherwise object that the money should go toward long-term projects. Those objections are getting fewer and further between in the energy sector these days. After years of volatility in oil and gas prices -- not to mention the rise of professional climate activism and a resurgence in predictions of peak oil -- a common attitude now is that energy companies should spend cautiously, pay down debt, and use bumper crops of cash flow for buybacks and dividends. Parex is doing its part. In addition to its weighty buybacks, it introduced a 12.5-cent quarterly dividend in July, for a yield of 2.3 per cent.
A fellow Colombian oil producer, Gabriel de Alba's Frontera Energy Corp. (FEC), lost nine cents to $9.87 on 117,200 shares. It has adopted another common attitude in the sector these days, namely that now is a good time to pounce on acquisitions. The company has just closed its $27-million (U.S.) takeover of local gas producer PetroSud. As well, it is spending $13-million (U.S.) to boost its interest in the El Dificil gas field to 100 per cent.
As discussed when Frontera announced the PetroSud takeover on Monday of last week, PetroSud is primarily a gas producer in Colombia. Its assets include a 65-per-cent interest in the El Difficil field, which is just north of Frontera's existing gassy assets at the VIM-22 block, the VIM-1 block and the La Creciente Field. These contribute relatively little to Frontera's overall production (currently around 40,000 barrels of oil equivalent a day). CEO Orlando Cabrales said last week that he is keen to bolster Frontera's gas production in light of Colombia's "very competitive" gas market. He backed up those words today with the purchase of the remaining 35-per-cent interest in El Dificil (held by PCR Investments) for $13-million (U.S.).
The plan, Mr. Cabrales reiterated today, is to treat this region as an "emerging core area." The two deals will together add about 1,800 barrels a day. While Mr. Cabrales did not set an explicit production target, he indicated that he will take advantage of Frontera's infrastructure, PetroSud's output and future exploration programs to increase production significantly over the next two years.
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