Stockwatch Energy today
Energy Summary for May 27, 2022
2022-05-27 20:07 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery added 98 cents to $115.07 on the New York Merc, while Brent for July added $2.03 to $119.43 (all figures in this para U.S.). Western Canadian Select traded at a discount of $18.00 to WTI, unchanged. Natural gas for July lost 17 cents to $8.73. The TSX energy index added 4.38 points to close at 270.48.
Oil prices climbed to their highest levels in 11 weeks, as North Americans headed into the unofficial start of the summer driving season (the U.S. Memorial Day long weekend). U.S. gasoline stockpiles are at their lowest seasonal level in eight years. At a meeting today in Berlin, ministers from the G7 group of economies urged OPEC -- and other oil-producing countries, but largely OPEC -- to "act in a responsible manner" and help curb oil prices by rapidly increasing production. OPEC has resisted calls like these for months. The group will hold its next monthly meeting on June 2.
Here in Canada, oil companies continued to enjoy the windfall of high prices. Oil sands producer Cenovus Energy Inc. (CVE) hit a new 52-week high, adding 62 cents to $28.80 on 16.5 million shares. It announced this week that it is using some of its extra money to redeem an entire batch of 3.55 per cent notes due in 2025. According to SEDAR, the notes had a balance of $750-million as of March 31.
Redeeming the notes will move Cenovus closer to what it calls its "ultimate net debt target" of $4-billion. For context, Cenovus pegged its net debt at $8.4-billion as of March 31, and at $13.3-billion one year before that. President and chief executive officer Alex Pourbaix has vowed that Cenovus will be "a leader in delivering total shareholder returns" -- referring to dividends and buybacks -- just as soon as it achieves its debt target. The company currently pays a 10.5-cent quarterly dividend, for a yield of 1.5 per cent.
Cenovus is not the only one hacking away at its debt. Fellow oil sands producer MEG Energy Corp. (MEG), up 14 cents to $21.96 on 2.55 million shares, has been gobbling up notes through buybacks, according to a series of rapidfire disclosures on SEDI. From May 5 to May 24, MEG bought back and cancelled nearly $125-million worth of 7.125 per cent notes due in 2027.
Based on previous promises to shareholders, MEG's SEDI filings should soon start to show something else too: buybacks of shares. The company received approval for a share buyback program in March but vowed not to launch it until its net debt reached $1.7-billion (U.S.). As of March 31, net debt was $1.72-billion (U.S.). Given the current pace of debt buybacks, share buybacks should start by midyear.
Elsewhere in Alberta, Scott Ratushny's Cardinal Energy Ltd. (CJ) lost 11 cents to $9.20 on 1.89 million shares. The drop came despite a lovely mention from RBC analyst Luke Davis, who released a research note about his recent chat with management. The analyst said the reason for the chat was the first quarter financials that Cardinal released over two weeks ago. These included the unveiling of a five-cent monthly dividend starting next month, for an implied yield -- at the time of the announcement -- of 8.8 per cent. The share price has since winged up to $9.20 from $6.85, and the implied yield is now 6.5 per cent.
"Shifting to FCF [free cash flow] harvesting," is how Mr. Davis described Cardinal's launch of a dividend. He marvelled at management's estimate that even if oil prices plunged all the way to $55 (U.S.), the generous dividend could stay intact (at least for "a few quarters," he amended). Cardinal is currently devoting half of its free cash flow to dividends and half to debt reduction. Once the company reaches $50-million in net debt, which Mr. Davis expects to happen next quarter, extra free cash flow could go toward "further debt reduction, increased dividend payments/share buybacks, and potential acquisitions." On the last topic, Cardinal has been trying to scoop up some new assets, but "recent bids have not been successful given wide bid-ask spreads," reported Mr. Davis. He breezily waved this aside, noting that Cardinal is enjoying "strong results" at the assets it owns already.
Despite his boosterish comments, Mr. Davis left his price target on Cardinal's stock unchanged at $10, not much higher than today's close of $9.20. His rating of "sector perform" is RBC's (his employer's) equivalent of "hold" or "neutral." RBC's website discloses that it "makes a market" in Cardinal's securities, receives compensation for various products or services, and owns at least 1 per cent of its shares. It does not disclose how many shares or how long it has owned them.
Over in the B.C. Montney, Rob Zakresky's
Leucrotta Exploration Inc. (LXE) lost one cent to $2.19 on 2.76 million shares, after releasing its first quarter financials. It turned a profit of $6.6-million on revenue of $20.7-million. Production averaged 4,500 barrels a day, slightly above Leucrotta's earlier estimate of 4,300 barrels a day.
The main news in the quarter was the $500-million takeover offer that Leucrotta accepted in March from Vermilion Energy Inc. (VET: $27.93). Shareholders will receive $1.79 cash and a share in a spinout company for each share of Leucrotta. As the spinout is currently valued at 27 cents a share, this implies a total value for Leucrotta's stock of $2.06, yet the stock has been trading well above that level for weeks (closing today at $2.19). Leucrotta will be the sixth company that Mr. Zakresky and his people have built and sold together since 1993. Investors seem eager to see what they will do with No. 7, the spinout, which they have named Coelacanth Energy (after the fish species pronounced "see-la-canth"). Mr. Zakresky made sure to include an update on Coelacanth in Leucrotta's. He talked up the spinout's forecast cash balance of $80-million and production of over 350 barrels a day, and vowed to provide more details on its business plans "in the upcoming weeks."
Back in Alberta, Doug Bailey and Frank Muller's Razor Energy Corp. (RZE) lost nine cents to $3.00 on 209,300 shares, after it too released its financials. Revenue nearly doubled to $36.0-million from $15.1-million a year earlier, while production rose to 4,500 barrels a day from 3,000. Alas, Razor was unable to cut a profit. It narrowed its net loss to $776,000 from $5.6-million.
As well, Razor announced the appointment of Michael Blair as chief operating officer. Mr. Blair is an engineer and has worked for companies such as Baker Hughes and Penn West Exploration (the predecessor of Obsidian Energy Ltd. (OBE: $12.04)). He replaces the above-mentioned Mr. Muller. Mr. Muller, alongside the above Mr. Bailey, was previously behind Striker Exploration, an Alberta oil promotion that the two of them sold to Gear Energy Ltd. (GXE: $1.62) in 2016. They then co-founded Razor. Mr. Bailey is its president and CEO, while Mr. Muller, until now, has been COO and senior vice-president. He is stepping down from those roles for health reasons, but will remain on the board of directors.
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