Stockwatch Energy today
Energy Summary for Feb. 8, 2022
2022-02-08 20:38 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery lost 99 cents to $91.32 on the New York Merc, while Brent for April lost 58 cents to $92.69 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.76 to WTI, down from a discount of $13.58. Natural gas for March lost 34 cents to $4.23. The TSX energy index lost 1.59 points to close at 199.50.
West Texas Intermediate crude for March delivery lost $1.96 to $89.36 on the New York Merc, while Brent for April lost $1.91 to $90.78 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.79 to WTI, down from a discount of $13.76. Natural gas for March added two cents to $4.25. The TSX energy index lost 7.87 points to close at 191.63.
Oil sands producer Cenovus Energy Inc. (CVE) slid $1.26 to $18.30 on 31.6 million shares, its heaviest volume in over a year, after disappointing investors with its year-end financials. It posted an unexpected fourth quarter loss of $408-million, or 21 cents a share. Analysts were expecting a profit of 39 cents a share. Cenovus blamed the loss on a $1.9-billion impairment charge in its U.S. manufacturing segment, where some refineries experienced "operational challenges" during the quarter.
While this particular impairment charge came as a surprise, energy investors are used to hefty impairments (and subsequent reversals) causing volatile swings in profit and loss. For this reason, many energy investors also zero in a company's cash flow. There, too, Cenovus fell short. Its cash flow per share of 97 cents was noticeably below analysts' expectations of $1.07 a share.
President and chief executive officer Alex Pourbaix kept a smile on during a conference call this morning. He cheered "record quarterly average production" from Cenovus's core oil sands projects, which contributed to overall output of 825,000 barrels a day (exceeding analysts' predictions of 812,000 barrels a day). As well, he emphasized how much money Cenovus has been shovelling toward shareholders in the form of share buybacks and its quarterly dividend (even if the latter's yield is a relatively uncompetitive 0.8 per cent). Mr. Pourbaix hinted that Cenovus could soon be even more generous, given that it is "rapidly" approaching its debt-reduction target. He said that "increasing shareholder returns will be top of mind for this management team."
If Mr. Pourbaix failed to win over shareholders, he had no trouble impressing an ever-friendly audience of analysts. TD analyst Menno Hulshof dubbed the quarter "a bit of a mixed bag" but still "very strong," adding that the "strategic messaging [is] very consistent." Meanwhile, CIBC's Dennis Fong acknowledged that the quarter was "below expectations," but emphasized the "strong upstream performance" and urged investors to view "any weakness [from the U.S. manufacturing impairment] as a buying opportunity." Their respective price targets on the stock are $23 and $25 (relative to today's close of $18.30). Their respective employers, TD and CIBC, have both done business with Cenovus in the past, most recently helping it with a $1.25-billion (U.S.) debt financing in September.
Speaking of financings, Craig Steinke's Reconnaissance Energy Africa Ltd. (RECO) lost 25 cents to $6.44 on 799,400 shares, after arranging a $38.1-million bought deal and quickly hiking it to $41.2-million. It plans to issue 6.5 million units at $6.35. Each unit will comprise a share and a warrant exercisable at $9.
The financing came as a surprise to investors. Reconnaissance last raised money in May, 2021, when it sold $41.4-million of units at $9.50 (with subscribers currently sitting on a 32-per-cent loss). Before that, it completed a $23-million unit offering in August, 2020, at 70 cents (with subscribers sitting much more happily on an 820-per-cent gain). The sharp difference in the price reflects the two-well drill program that Reconnaissance started in early 2021 at its Kavango basin assets in Namibia. The stock got as high as $13.84 last June after the wells turned up evidence of oil. It has since pulled back, however, given that the data were preliminary and Reconnaissance has faced delays in doing any additional drilling. The main thing is that it still held $69.9-million cash as of Sept. 30 and told investors as recently as November that it had enough money to cover the next few wells.
Now Reconnaissance seems to have changed its tune, announcing that the proceeds of today's financing will go in part toward drilling costs. Another interesting surprise is the underwriter. Reconnaissance is using Canaccord Genuity instead of its past go-to, Haywood Securities. (Investors will recall that David Elliott, a founding partner of Haywood, was an early backer of Reconnaissance and owned 7.3 million of its shares as of August, 2020. It is not clear whether he still owns them; the August, 2020, financing diluted his position to the point where he no longer has to file insider reports.) Up until about three months ago, Haywood analyst Christopher Jones was churning out seemingly non-stop boosterish reports on the stock. Perhaps a Canaccord analyst will soon be taking up the chant.
Both Reconnaissance and its choice of underwriter will be aware that a successful financing is one in which participants make money as fast as possible. With that in mind, there is one last intriguing element in today's financing. Whereas the two previous financings came with three- to five-year warrants, the warrants in today's financing expire in a mere eight months. Reconnaissance seems confident that its current share price of $6.44 could quickly reach the warrant strike price of $9. This in turn suggests optimism that the long-awaited drill program is finally about to begin.
Back in Canada (for the most part), the Lundin family's International Petroleum Corp. (IPCO) added 10 cents to $8.85 on 117,800 shares, after releasing its year-end financials. Investors liked these much better than they liked Cenovus's. For the fourth quarter, International Petroleum turned a profit of $66.9-million (U.S.) or 43 U.S. cents a share. Operating cash flow was a record $111-million (U.S.) or 71 U.S. cents a share, and production of 46,800 barrels a day was above the guidance of 46,000.
Mike Nicholson, International Petroleum's CEO (and someone who has spent the last 18 years at one Lundin promotion or another), cheered the "exceptionally strong" results and forecast more exceptional strength ahead. By his calculations, from 2022 to 2026, the company will generate as much as $1.8-billion (U.S.) in free cash flow. The company is already using some of this cash for share buybacks. Mr. Nicholson dangled another carrot by mentioning "consideration ... of other forms of shareholder distributions," though he did not specify timing or amounts.
Mr. Nicholson was similarly coy about potential acquisitions. International Petroleum spent 2018 to 2020 scooping up assets in Western Canada, spending a total of $1.3-billion. Over the past few months, Mr. Nicholson has hinted that he is ready to resume shopping. Today he reminded investors that International Petroleum raised $300-million (U.S.) in its first ever bond financing last week. "[This] will enable IPC to access a greater universe of opportunities, whilst differentiating us from our peers in terms of certainty of being able to close transactions," he declared. He indicated that the company does not have an "imminent acquisition" but will "remain opportunistic with respect to further M&A."
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