Stockwatch Energy today
Energy Summary for April 4, 2022
2022-04-04 20:24 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery added $4.01 to $103.28 on the New York Merc, while Brent for June added $3.14 to $107.53 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.69 to WTI, down from a discount of $11.40. Natural gas for May lost one cent to $5.71. The TSX energy index added 3.29 points to close at 230.16.
After ending last week with their largest weekly loss in about two years, oil prices rebounded today, with WTI getting back into the triple digits. Last week's drop partly reflected commitments from the U.S. government and the International Energy Agency to release large (and as yet not fully specified) amounts of oil from emergency reserves. Today, traders' attention swung back to China, where the most populous city, Shanghai, has extended COVID lockdowns. The Chinese transportation ministry is forecasting a 20-per-cent drop in road traffic and a 55-per-cent drop in flights during a three-day public holiday running from yesterday through tomorrow.
Here in Canada, the big energy newsmaker was the oil sands producer Cenovus Energy Inc. (CVE), up 44 cents to $21.63 on 9.25 million shares. It announced this morning that it is suspending its oil hedging program. Hedging is a common industry practice by which companies lock in prices for some of their production, thus cushioning themselves against sudden price declines. Yet when prices rise, as they have done lately, those companies find themselves on the wrong end of the bat. Cenovus estimated today that it will post hedging losses of $970-million for the first quarter, with another $410-million in projected losses for the current quarter.
Cenovus is not the first to make this kind of announcement this year. U.S. shale major Pioneer Natural Resources Co. kicked off the trend in early January, announcing that it would unwind its hedges for 2022, even though it would have to pay $328-million (U.S.) to back out of the contracts. (To put that number in perspective, its hedging losses in the first three quarters of 2021 had surpassed $2-billion (U.S.).) Hess Corp. followed suit and ditched hedges last month at a cost of $325-million (U.S.). Other companies, such as Canada's MEG Energy Corp. (MEG: $17.79), have emphasized that they are simply not entering hedges that they normally would, so as to stay unencumbered.
Like the above companies, Cenovus saw its investors shrug off the short-term costs and focus on the implied long-term bullishness. Once Cenovus dumps its hedges, it will have greater exposure to oil prices that it expects to keep strengthening. "[The company] expects to have no significant financial exposure to [its hedging] positions beyond the second quarter of 2022," it declared in today's press release. As if to give investors extra reason to smile through the pain, it also promised that when it releases its first quarter financials on April 27 -- complete with their big hedging loss -- it will also release "details on its plan for increasing shareholder returns." (The company currently pays a 3.5-cent quarterly dividend, for an uncompetitive yield of 0.6 per cent.)
Further afield, Craig Steinke's Namibian wildcatter, Reconnaissance Energy Africa Ltd. (RECO), added 18 cents to $5.95 on 782,300 shares. It has released a long-awaited update on its Kavango basin project. The stock briefly soared to an intraday high of $6.37, before retreating as investors realized that the most eagerly awaited news of all -- the start of a drill program -- was not actually present.
What was presented was a new white paper on the continuing evaluation of Reconnaissance's Kavango project. Reconnaissance drilled two test wells at the project in early to mid-2021, both of which found early-stage indications of oil and gas. It then turned its attention to a lengthy 2-D seismic program. The update today went over the seismic data and, according to chief executive officer Scot Evans, "increased our confidence that the Kavango basin is highly prospective." In particular, Reconnaissance is intrigued by what it has dubbed Central Graben West (CGW), "a prospective area with 18 leads and five prospects." The CGW will be the focus of the next drill program.
Investors would have liked more information on this next drill program. Reconnaissance was originally aiming to start the program in September, 2021, but then postponed it to "early Q1 2022" and then kicked it into "the first half of 2022." The first half of the first half ended last week. The current goal is to spud a well at some unspecified point in the second quarter, as reiterated in today's white paper. Between the delayed drilling and the low-certainty data provided so far (even in the white paper), Reconnaissance's stock has more than halved to $5.95 from last summer's high of $13.84. It retains plenty of cheerleaders, however, and easily closed a $47-million bought deal at $6.35 last month.
The above Mr. Steinke, Reconnaissance's founder and chairman, tends to have little trouble raising money for his promotions. His last two companies, Realm Energy and Renaissance Oil, were both promotions with prominent Canadian mining financier Ian Telfer. Mr. Telfer likely had a hand in Reconnaissance too; his wife, Nancy Burke, was one of Reconnaissance's major founding shareholders. Financings diluted her below the 10-per-cent insider disclosure threshold in January, 2020.
Another international operator, Charle Gamba's Colombia-focused Canacol Energy Ltd. (CNE), added two cents to $3.14 on 299,900 shares. This morning, Canacol released the latest monthly update on its gas operations. It pegged its average sales for March at 189 million cubic feet of gas a day (or about 33,150 barrels of oil equivalent a day).
This is mostly flat with 188 million cubic feet a day in February, as investors would have expected. Canacol sells most of its gas through take-or-pay contracts. It is also limited in its ability to increase production until it builds a long-awaited new pipeline, something it has been talking about doing since 2019. Its current schedule -- by no means the ultimate one, if history is anything to go by -- puts the pipeline start-up in late 2024. To try to please investors in the meantime, Canacol pays a 5.2-cent quarterly dividend, which stayed intact throughout the COVID downturn and represents a current yield of 6.6 per cent.
Canacol is also trying to bulk up its reserves and resources ahead of the hoped-for eventual increase in production. To that end, it plans to drill 12 exploration wells this year. Today's update included the news that the Cornamusa-1 exploration well is coming up next. President and CEO Mr. Gamba previously promised that some of this year's exploration wells will go after "very large targets, much larger than we normally drill." Canacol could use a very large hit. A report last month showed a drop in its year-end reserves, giving the company a reserve life index (a measure of how long it would take to deplete the reserves) of just eight years. Investors generally prefer a minimum of 10 years.
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