Stock Watch-Energy
Energy Summary for June 24, 2024
2024-06-24 18:42 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 90 cents to $81.63 on the New York Merc, while Brent for August added 77 cents to $86.01 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.10 to WTI, down from a discount of $12.60. Natural gas for July added 10 cents to $2.81. The TSX energy index added 9.36 points to close at 282.92.
Capital spending across Alberta's energy sector rose to a six-year high of $29.5-billion in 2023 and will continue to climb over the coming decade, according to the Alberta Energy Regulator (AER). The AER released its annual Alberta Energy Outlook this morning. The report laid out pricing and supply/demand forecasts for the province's oil, gas and "emerging resources" (hydrogen, geothermal energy, helium and lithium).
Oil sands bitumen remains "the most important driver of energy supply and growth," according to the AER. In 2023, spending in the oil sands came to $13.2-billion, bouncing back from a low of just $7.3-billion in 2020 (though still down from a peak of $33.9-billion in 2014). The AER expects spending to climb to $17-billion in 2033. Production will also rise over this period, although at a relatively slow pace given "continued consolidation of operators and the growing importance of environmental, social and governance criteria."
Outside the oil sands, spending on oil and gas came to $15.6-billion in 2023 and is forecast to reach $20.5-billion in 2033. The AER noted that crude oil basins are beginning to show their age, resulting in productivity declines. Although total crude oil production is expected to rise through 2026 (reflecting high well counts and the new Trans Mountain pipeline expansion), it will then begin to drift downward by 2033, as the number of new wells placed on production will not offset declines from existing wells. In the gas sector, however, production and the number of wells placed on production will keep rising over the coming decade.
All in all, and including "emerging resources" (on which the AER did not bother tracking spending until 2020), the regulator sees spending across the energy sector climbing to $38.6-million in 2033. That is more than double the $16-billion spent during the COVID catatonia of 2020. At no point in the coming decade, however, is this figure expected to rise back to the dizzying heights of 2014, when spending soared past $60-billion.
Within the Alberta oil sector, Brian Schmidt's Tamarack Valley Energy Ltd. (TVE) added 18 cents to $3.67 on 3.89 million shares, as it strove to impress shareholders at today's investor day. The event started only an hour before the close and continued into the evening, but investors too gung ho to wait for management's remarks were able to view a 68-page presentation on the company's website earlier in the day. This presentation talked up Tamarack's "strategic transformation" and its "path forward to grow shareholder returns."
Of those two focal points, Tamarack is using the latter to try to tempt back shareholders who fled because of the former. Most of the company's self-described transformation occurred during 2022, when it went on a major shopping spree -- including the expensive cash-and-share takeover of Deltastream Energy for $1.4-billion -- in a bid to become the largest producer in the Alberta Clearwater. It accomplished this. Yet it also promised a rapid cleanup of its balance sheet, with a nod and a wink toward higher shareholder returns, and here shareholders were left disappointed. The dumping of shares by what had been Deltastream's largest shareholder added to the pressure. Tamarack's stock ended up being one of the worst energy performers of 2023, notching a 25-per-cent drop (compared with a 4-per-cent gain in the TSX energy index).
At today's investor day, Tamarack made an effort to emphasize shareholder returns. It unveiled a five-year plan in which it predicted cumulative free cash flow of $1.8-billion. Close to $500-million of that is earmarked for debt reduction, leaving roughly $1.3-billion for shareholders. If Tamarack opts to keep its 1.25-cent monthly dividend intact during the five-year period, that would eat up about $420-million, with the rest expected to be for share buybacks (management's priority given the current share price). All the while, it expects to increase its production (currently about 62,000 barrels a day) by 3 to 5 per cent annually. This is a "robust" and "prudent balance," proclaimed Tamarack. The jump in the share price suggests that shareholders liked the attention.
Further afield, the Nigeria- and Namibia-focused Africa Oil Corp. (AOI) soared 24 cents to $2.56 on 1.62 million shares, as it proposed a reorganization and "new, strategically aligned cornerstone investor." It has agreed to buy out the remaining interest in a Nigerian investment vehicle called Prime Oil. Prime, which owns stakes in producing Nigerian fields operated by Chevron and TotalEnergies, is owned 50-50 by Africa Oil and a holding company of BTG Oil & Gas. Now Africa Oil will merge with the BTG holding company (thus doubling its interest in Prime to 100 per cent), and in return BTG will own 35 per cent of the merged company.
Management of Africa Oil touted the "superior value creation and shareholder capital returns" resulting from the deal. By doubling its ownership of Prime, Africa Oil is doubling its production, which currently comes entirely from Nigeria. The higher cash flow will go in part toward development of much-hyped assets elsewhere, such as the "world-class" Venus project in Namibia. New major shareholder BTG (which, in addition to its equity interest, will have directors on Africa Oil's board) will also give Africa Oil "a first look at potential equity investments" anywhere in Africa. Lastly, Africa Oil is planning "enhanced" dividends and share buybacks.
Shareholders seemed pleased by the deal, or at least intrigued enough (for now) to set aside concerns about the dilution, valuation and timeline. Africa Oil did not specify exactly how many shares it will issue to BTG. Yet if its current share count of 446 million represents 65 per cent of its share count after the reorganization, then BTG will be getting about 240 million shares, representing dilution to current shareholders of more than 50 per cent. This also means that the additional 50-per-cent interest in Prime is worth about $408-million (U.S.) (based on 240 million shares at Friday's closing price in U.S. dollars). By contrast, when Africa Oil acquired its 50-per-cent initial interest in Prime in 2020, it paid $519.5-million (U.S.). Shareholders must decide for themselves if the company is getting a bargain or doubling down on a rapidly depreciating asset. Overhanging it all is the lengthy timeline, with the deal subject to various approvals and not expected to close until late 2025.
Africa Oil will try to secure shareholder approval much more quickly than that, saying it will seek "yes" votes at a special meeting in October. It needs at least 50-per-cent approval. Skeptics of the deal will have to hope that the circular for the meeting answers any lingering questions.
Back in Canada, Mike Belenkie's Alberta gas producer, Advantage Energy Ltd. (AAV), added 32 cents to $10.61 on 988,500 shares. It has closed an acquisition of its own: the $445-million purchase of Charlie Lake and Montney assets, as announced only 14 days ago. (Deals move a lot faster when, among other things, the approval of an African government is not a factor.) Advantage relied largely on debt to pay for the assets. Investors, disapproving of Advantage's related decision to pause share buybacks until it reaches a net debt target in late 2025, have sent the stock down by nearly $1 since the deal was announced. Advantage (like the above Tamarack) is hoping to woo them back at a planned investor day. It has yet to set a date, but hopes to hold the event some time in the fall.
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