Stockwatch Energy today
Energy Summary for Oct. 27, 2022
2022-10-27 20:51 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added $1.17 to $89.08 on the New York Merc, while Brent for December added $1.27 to $96.96 (all figures in this para U.S.). Western Canadian Select traded at a discount of $28.75 to WTI, down from a discount of $27.25. Natural gas for November lost 42 cents to $5.19. The TSX energy index lost 1.04 points to close at 257.98.
The oil sands had a headline-grabbing day as it witnessed its biggest transaction in years. Suncor Energy Inc. (SU), down 86 cents to $45.38 on 8.36 million shares, has agreed to pay $1-billion to boost its interest in the Fort Hills oil sands project to 75.4 per cent from 54.1 per cent. It will acquire the 21.3-per-cent interest owned by industrial miner Teck Resources, in what will be Teck's exit from the oil and gas sector.
Sitting at opposite sides of the table, Suncor and Teck offered very different perspectives on the deal. Suncor cheered that it "builds upon our strategy to optimize our portfolio around our core operated assets." It added that it is flush with cash to complete the deal (especially as it recently agreed to sell its wind and solar assets for $730-million and its Norwegian energy assets for $410-million). Interim president and chief executive officer Kris Smith expressed "full confidence" in the project.
That confidence is seemingly not shared by Teck. Moreover, the miner has been steadily narrowing its focus on low-carbon industrial metals -- particularly copper -- over past priorities such as oil and coal. The copper-to-carbon shift sparked rumours more than a year ago that Teck was looking to exit Fort Hills. CEO Jonathan Price stuck to the script today, stating that the sale to Suncor helps "rebalanc[e] our portfolio ... to low-carbon metals."
Suncor was always the most likely buyer for Teck's interest. The question was how much it would pay. Analysts' estimates ranged widely from $1-billion to $2-billion (give or take), depending on their views on oil prices, the production outlook at Fort Hills, capital spending requirements, operating and sustaining costs, and so on. Today's deal is at the low end of the range. If it is a bargain, however, it is something of a Pyrrhic one, as it sets a current market value for Fort Hills and will oblige Suncor to take an impairment charge on the higher value that it had assigned to its existing 50.4-per-cent interest. Suncor estimated that it will record an impairment charge of $2.6-billion when it releases its third quarter financials on Nov. 2.
There is likely a third side to Suncor's thought process, involving the third owner of Fort Hills. That would be France's Total, which owns the final 24.6-per-cent interest. Total is also looking to exit the project. It began making noises about this a couple of years ago, before confirming last month that it will either spin off or sell all of its oil sands assets (comprising the Fort Hills interest and a separate interest in Conoco's Surmont project). Selling would be simpler and would not require shareholder approval. Having a reasonably firm idea of market value, courtesy of today's deal with Teck, would also simplify discussions.
While both Teck and Total have cited climate ambitions as their reason for wanting to flee Fort Hills, it will not have escaped them -- or Suncor -- that the project has never been particularly easy to own. It was conceived in 2002, during a sector-wide construction boom, but came of age during a storm of rising costs, weak oil prices, onerous regulations and tight export capacity. As the joint venturers bickered and delayed, Fort Hills ran $2-billion over budget and did not begin production until 2018. That turned out to be just in time to run up against Alberta's production-curtailment policy in 2019. Then 2020 brought record low oil prices and sky-high impairments. It was not until late 2021 that Fort Hills was able to start ramping up toward full capacity, an effort still in progress today.
In other words, to some shareholders, plunking down $1-billion for more of Fort Hills does not look like much of a bargain after all. Management attempted to reassure them today by talking up the launch of a "multiyear performance improvement initiative" at Fort Hills. It promised more details at an investor presentation on Nov. 29.
Outside the oil sands, Grant Fagerheim's Alberta- and Saskatchewan-focused Whitecap Resources Inc. (WCP) lost nine cents to $10.65 on 7.54 million shares, after releasing mixed third quarter financials. Production averaged 145,800 barrels a day, slightly higher than analysts' predictions of 143,000 barrels a day. (It was also up sharply from 115,900 barrels a day in the same period last year, largely reflecting the $1.7-billion takeover of XTO Energy in August.) Despite the higher production, cash flow of 88 cents a share fell short of analysts' predictions of 97 cents a share, on higher costs.
Management patted itself on the back for "another strong quarter" of "outperformance." It also marvelled at Whitecap's "excellent" balance sheet. Although net debt climbed to $2.2-billion as of Sept. 30 from $1.3-billion a year earlier (because of XTO), management reckoned that it can get that figure all the way back down to $1.3-billion in a matter of months, by mid-2023. It reiterated its promise that it will then hike its dividend to a "targeted annual base" of 73 cents. The current dividend is 3.67 cents a month, or 44 cents annualized, for a yield of 4.1 per cent.
Noticeably absent from today's update was a reiteration of Whitecap's other dividend-related goal, which it dangled last month, saying it "expected" to hike its payout by as much as 30 per cent before year-end. Investors were hoping for a firmer update in the new financials. They did not get it, likely accounting for some of today's muted reaction.
Elsewhere in Alberta, Don Simmons and Charlie O'Sullivan's Hemisphere Energy Corp. (HME) lost five cents to $1.50 on 383,500 shares. The drop came despite the determined efforts of a new cheerleader. ATB Capital analyst Amir Arif published his first research note on the stock this morning, calling it an "undiscovered gem." He likes its Atlee Buffalo EOR (enhanced oil recovery) project in Alberta, which should see "production increasing over the coming one to two years even as spending is reduced." He also likes its variable, cash-flow-linked quarterly dividend, which has seen two payouts so far of 2.5 cents each (for a yield of 6.7 per cent). The analyst gave the "undervalued" Hemisphere a price target of $2.25.
Hemisphere was one of five oil and gas stocks that the busy Mr. Arif found time to begin covering today. It may come as no surprise that Mr. Arif's employer, ATB Capital, is affiliated with ATB Financial, which provides (or seeks to provide) financial services to companies that its analysts cover. In Hemisphere's case, ATB Financial has been the company's main lender since last year. There are other past and present links between ATB and the remaining four companies singled out by Mr. Arif, namely Cardinal Energy Ltd. (CJ: $9.38), International Petroleum Corp. (IPCO: $12.77), Kiwetinohk Energy Corp. (KEC: $16.20) and Surge Energy Inc. (SGY: $10.11). He rated all five of them "outperform" and gave them price targets that are an average of 42 per cent higher than where they closed today.
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