Stockwatch Energy today 2022-09-19 20:49 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery added 62 cents to $85.73 on the New York Merc, while Brent for November added 65 cents to $92.00 (all figures in this para U.S.). Western Canadian Select traded at a discount of $21.20 to WTI, down from a discount of $20.38. Natural gas for October lost one cent to $7.75. The TSX energy index added 1.73 points to close at 236.67.
International oil and gas producer Vermilion Energy Inc. (VET) lost 32 cents to $30.35 on 2.22 million shares, slowing but not stopping its slide from nearly $40 over the last three weeks. Today's intraday low of $29.30 was the stock's first time below $30 in six weeks. Investors are worried about a recently proposed windfall tax in Europe, where Vermilion gets about one-third of its production (soon to rise to one-half with the closing of a large Irish acquisition by year-end. The rest comes mainly from North America).
The tax, proposed by the European Union last Wednesday, is part of a package of ostensibly temporary measures seeking to counteract soaring power bills by nabbing an estimated 140 billion euros from the oil, gas, coal and utility sectors. "In these times, it is wrong to receive extraordinary record profits benefiting from war and on the back of consumers," European Commission President Ursula von der Leyen stated last week. She said energy companies are making "huge profits" and must "pay a fair share."
"Fair share" was just one of the terms used by the commission, along with other euphemisms such as "crisis contribution" and "solidarity contribution." In other circles, the preferred term was tax raid. Looking specifically at the proposed windfall tax on oil and producers (which would bring in an estimated 25 billion of the 140-billion-euro total), it would apply to at least 33 per cent of taxable "surplus" profits in 2022, with surplus defined as being 20 per cent higher than a company's average taxable profits from 2019 through 2021.
The proposal has come under fire from energy executives and analysts. Alfred Stern, chief executive officer of Austrian oil and gas multinational OMV, told Reuters last week that the tax could have a "massive impact." He also criticized the decision to use a three-year baseline, seeing as this includes two pandemic years when companies were barely staying afloat. Meanwhile, JPMorgan analyst Christyan Malek told Bloomberg that the tax could deter investment and new production, right when Europe needs it most. "If you're planning your capital budget [as an energy producer], you have to think twice now," he said. "... It's the uncertainty, the unpredictability of this. There's a risk this becomes recurring."
As for Vermilion, even a temporary tax would be a "headwind," according to a research note last Friday from Scotia analyst Jason Bouvier. He estimated that the tax would strip away up to 6 per cent of Vermilion's free cash flow in 2022. This figure assumes that Vermilion can partially shelter itself using tax pools and hedging losses, which the EU has not confirmed. Mr. Bouvier went on to assume that the tax will stay in place for 2023 (also unconfirmed), by which point Vermilion's tax pools will be nearly dry and the hit to its free cash flow could be as high as 26 per cent.
Vermilion has made no comment on the situation, but shareholders have made their feelings clear by fleeing for the exits. The stampede slowed today as a raft of recent op-eds cast doubt on whether the windfall tax and other proposals will go ahead. They require unanimous approval by all 27 EU member countries, and several of them (such as Poland, Portugal and Spain) have voiced opposition. The measures also look "impossible to work out and implement in time for winter even if there were political consensus behind them -- which there isn't," opined S&P Global analyst Laurent Ruseckas. The EU will meet to discuss the proposals further on Sept. 30.
Elsewhere in Europe, Dr. Art Halleran's Trillion Energy International Inc. (TCF) added one cent to 48 cents on 4.13 million shares, after trumpeting the start of a drill program in Turkey. The company is spudding the first of seven wells at its offshore SASB gas field in the Black Sea. Production could follow in as little as six to eight weeks, according to CEO Dr. Halleran. He sombrely observed that the program is beginning right as gas shortages are "menacing Europe ... [and] the prospect of a cold winter looms." Yet he could not contain his glee at watching gas prices screech to record highs, cheering that the drilling is a "transformative step towards the company's bright future."
His enthusiasm is understandable in light of a long, long drilling hiatus. The last time the SASB field saw a well drilled was in 2011, and in the 11 years since, its production has collapsed from around 30 million cubic feet a day to virtually nothing. Trillion took an interest in the field in 2013, but years of political turmoil kept interest at bay. It did not begin promoting a "revitalization" of SASB until 2020. Efforts to raise money in 2020 and 2021 brought little success. Finally in 2022, gas prices skyrocketed and the equity markets opened up for Trillion. It has raised $40.3-million so far this year, at prices ranging from 16.5 cents to 31 cents. The stock closed today at 48 cents.
Another international explorer, Philip O'Quigley's Falcon Oil & Gas Ltd. (FO), lost half a cent to 13.5 cents on 2.75 million shares, on unwelcome news in Australia. Its joint venturer in the Beetaloo shale basin, Origin Energy, has announced that it will exit the joint venture and sell its 77.5-per-cent interest in the project for $60-million (Australian). The buyers are Tamboran Resources (a fellow Beetaloo explorer) and Tamboran shareholder Bryan Sheffield. Investors seemed disquieted.
Falcon (which owns the remaining 22.5 per cent of the project) and Origin have been working together since 2014. Although there have been plenty of bumps along the way, such as a two-year fracking ban from 2016 to 2018 and some disappointing test results in 2020 and 2021, the companies have still been happily hyping their work to date in 2022. Falcon was also set to have the majority of this year's expenses carried by Origin. Today's press release from Origin did not specify whether Tamboran will continue with the program and carrying commitments as designed.
Falcon, for its part, put out a brief press release acknowledging the deal, though this too was scant on details. The company said it will "consider the impact" of Origin's decision. It has a right of first refusal on Origin's interest and has 30 days to decide on a potential exercise.
Interestingly, although Falcon made no comment on the proposed buyers of Origin's interest -- not even mentioning Tamboran or Mr. Sheffield by name -- it is quite familiar with the latter figure. Mr. Sheffield, the billionaire U.S. oilman and founder of Parsley Energy (sold to Pioneer Natural Resources in 2020), disclosed himself as a large shareholder of Falcon earlier this year. He bought 62.5 million shares at 20 cents in March. This boosted his position to 90.4 million shares out of Falcon's unfortunate share count of 1.04 billion, or about 9 per cent. Falcon hailed Mr. Sheffield at the time as a "highly successful investor" whose interest in the company makes it feel "very pleased."
As Mr. Sheffield is also a major shareholder of Tamboran (in which he acquired a roughly 7.5-per-cent interest in 2021), today's deal suggests that he is bullish on the Beetaloo. The size and composition of the basin have drawn starry-eyed comparisons with the U.S. Marcellus and other large gas plays. Despite years of effort, however, the basin remains underexplored and bereft of any commercial production.
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