Stockwatch Energy today
Energy Summary for Oct. 6, 2022
2022-10-06 20:44 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for November delivery added 69 cents to $88.45 on the New York Merc, while Brent for December added $1.05 to $94.42 (all figures in this para U.S.). Western Canadian Select traded at a discount of $24.40 to WTI, unchanged. Natural gas for November added four cents to $6.97. The TSX energy index added 4.71 points to close at 247.26.
Oil prices marched higher on continued enthusiasm for yesterday's OPEC+ announcement, signalling its largest production cut in years. Bankers and analysts jockeyed for position among the bulls. "By December of this year, Brent would reach over $100 (U.S.) per barrel, up from our earlier call for $89 (U.S.)," Jorge Leon, senior vice-president of the Oslo-based Rystad Energy, predicted to Reuters. Rohan Reddy, director of research at the New York-based Global X Management, told Bloomberg that he sees prices reaching $110 (U.S.) next year. Goldman Sachs has raised its forecasts to $104 (U.S.) in 2022 (up from $99 (U.S.) and $110 (U.S.) in 2023 (up from $108 (U.S.)).
Not everyone shared in the merry mood. "Disappointment," was the response of U.S. President Joe Biden, when asked by reporters at the White House for his reaction to the OPEC+ announcement. (The U.S. government unsuccessfully lobbied OPEC+ to refrain from cutting production, as it would prefer lower fuel prices for U.S. consumers, many of whom just so happen to be getting ready to vote in next month's midterms.) In a subsequent interview with Bloomberg, U.S. energy adviser Amos Hochstein said that the White House is still weighing a response. "We're going to take a multitude of steps ... to make sure we have every tool available to us," he vowed.
Here in Canada, oil sands giant Suncor Energy Inc. (SU) added 88 cents to $45.11 on 15.6 million shares. It has agreed to sell its wind and solar assets to Canadian Utilities for $730-million. Interim president and chief executive officer Kris Smith cheered that the sale will enhance Suncor's focus on hydrogen, renewable energy and other projects that are "more complementary to its core businesses as the company progresses to net zero by 2050."
Investors seemed mildly pleased. The assets include eight wind power projects across Saskatchewan, Alberta and Ontario, along with the proposed Fort Mile solar project in Alberta. They are non-core assets, and Suncor already announced in April that it was putting them up for sale, billing this as a move to "accelerate progress toward its objective to be a net-zero company by 2050." More measurably, the sale should accelerate Suncor's progress toward reducing its net debt to $9-billion, the milestone at which it has hinted at a possible dividend increase. Net debt was $15.6-billion as of June 30. The current quarterly dividend of 47 cents represents a yield of 4.2 per cent.
Fellow oil sands producer MEG Energy Corp. (MEG) added 77 cents to $19.04 on 3.9 million shares. It has now added nearly $4 in as many days, buoyed by rising oil prices, with the added benefit of fawning analyst attention. RBC analyst Greg Pardy published a research note yesterday in which he reiterated his "outperform" rating on MEG and his price target of $24.
Mr. Pardy was evidently in a boosterish mood after having a lovely chat with MEG's president and CEO, Derek Evans, and its new chief financial officer, Ryan Kubik. (Mr. Kubik is new to MEG, which he joined in August, but he is not new to the courtly dances performed by analysts and executives. He was previously the CFO and then the CEO of Canadian Oil Sands, which the above Suncor bought for $6.6-billion in 2016.) According to Mr. Pardy, the conversation was "upbeat and pointed towards favourable progress in terms of [MEG's] operating performance, debt reduction and shareholder returns initiatives."
More specifically, the executives are apparently mulling a $400-million to $450-million budget next year, with the goal of either increasing production modestly or keeping it at the current level of 100,000 barrels a day. The existing production is providing a "resounding" amount of cash, according to Mr. Pardy, who estimated this year's free cash flow at $1.4-billion. MEG is using most of this for debt reduction and a bit for share buybacks. As debt goes down, the amount earmarked for buybacks will go up. (MEG does not pay a dividend, and the executives seemingly played coy on whether they plan to change that.)
"Our bullish stance towards MEG reflects its capable leadership team, top-quartile oil sands operations ... balance sheet deleveraging and rising shareholder returns," concluded Mr. Pardy. As noted above, he has a prominent "outperform" rating on the $19 stock and a price target of $24. Less prominent were the fine-print disclosures about the ties between MEG and Mr. Pardy's employer, RBC. The bank is required to disclose that it "makes a market" in MEG's securities and receives compensation for unspecified products or services.
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