Stockwatch's take on Buyback offer in their Energy Summary
Energy Summary for Sept. 5, 2024
2024-09-05 18:34 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost five cents to $69.15 on the New York Merc, while Brent for November lost a penny to $72.69 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.00 to WTI, down from a discount of $12.40. Natural gas for October added 11 cents to $2.25. The TSX energy index lost 3.91 points to close at 266.09.
Oil prices held steady, pausing their recent slide in tandem with OPEC+ pausing a planned production hike. The group was previously set to unwind 180,000 barrels a day of production cuts in October. Given the weakness in prices, OPEC+ announced today that it will delay the hike to December instead. Traders sighed with relief. Bullish U.S. supply data added to the reprieve. In its latest weekly data release (which came a day later than usual because of Monday's holiday), the U.S. Energy Information Administration said domestic crude inventories fell by 6.9 million barrels last week. Analysts were expecting a much smaller decrease of 993,000 barrels.
Here in Canada, the energy sector's main lobby group is sharpening its criticism of Ottawa's controversial new anti-greenwashing rules. The Canadian Association of Petroleum Producers (CAPP) has published its formal submission to the federal Competition Bureau, which is running a public comment period until Sept. 27. CAPP reiterated that the legislation has "fundamental flaws" and urged the government to repeal it.
By way of background, the legislation was implemented in June as a last-minute addition to the Competition Act, without consultation and without guidance on how companies will be able to comply. All Canadian companies may now face severe financial penalties -- including up to 3 per cent of annual worldwide gross revenues -- if they fail to produce proof that their environmental claims have "proper substantiation in accordance with internationally recognized methodology." The benign wording belies the total lack of clarity on what would satisfy this requirement, particularly in cases where there is no methodology in existence. Moreover, private parties (not just federal watchdogs) can bring accusations without the burden of proof, allowing virtually anyone with an axe to grind to try to drag companies through costly, time-consuming legal processes. Oil and gas companies (whose mere existence is a crime in the eyes of axe-wielding activists) have thus opted to self-censor their environmental claims rather than risk bad-faith harassment.
CAPP has now summarized the industry's concerns -- and offered some intriguing suggestions -- in an 11-page submission to the Competition Bureau. "Implementing a vague law with exceptionally high penalties, with no consultation, and which has an outsized impact on the country's largest industries is both anti-democratic and anti-business," wrote CAPP. It acknowledged the importance of battling deceptive claims, but pointed out the legislation creates disproportionate risk of some sectors being "unfairly and unnecessarily targeted ... [even for] reasonable statements." More broadly, according to CAPP, all sectors should be concerned about the legislation's "chilling effect" on discussions of environmental goals and progress, as this will "drive investment away from Canada" and create even more obstacles for the financing and development of green technologies.
As for suggestions, CAPP was unwavering in its view that the legislation should be repealed. It acknowledged, however, that this is not in the Competition Bureau's mandate. What the bureau can do is draft clearer guidelines on application. Among various ideas for clarification -- criteria for methodology, "safe harbour" eligibility and so on -- CAPP offered the following gem: If the rules are here to stay, they should apply to the whole playing field. "In the same way that [businesses] are under the microscope, the Competition Bureau should make it clear that parties, such as climate advocacy groups, advancing claims against those businesses are subject to the same standards in respect of their own communications," wrote CAPP. In other words, CAPP wants the axe-wielders to play fair or risk becoming targets themselves.
Within the sector, Darren Gee's Alberta gas producer, Peyto Exploration & Development Corp. (PEY), edged down four cents to $13.97 on 1.13 million shares. President and chief executive officer J.P. Lachance has published his latest monthly letter to shareholders on Peyto's website. This month's letter comes almost a year to the day after Peyto announced its $468-million (U.S.) acquisition of the Canadian assets of Spain's Repsol. Mr. Lachance was seemingly in a nostalgic mood as he talked up one of the core assets from this deal, namely the Edson gas plant, which he called "a key piece in Peyto's future growth and commercial opportunities." The plant has a processing capacity of 275 million cubic feet a day (the equivalent of about 46,000 barrels a day), yet Repsol was using only 30 per cent of it, according to Mr. Lachance. He praised Peyto's efforts to increase this figure. He did not, however, say when full capacity might be achieved -- or even what the figure is now -- but investors may recall from last month's financials that the figure was about 45 per cent at the end of June.
The letter also included the usual monthly estimate of Peyto's production. This averaged 121,000 barrels of oil equivalent a day in August, a slight increase from 121,000 barrels a day in July, but still down from 127,000 barrels a day in March. A sanguine Mr. Lachance said the company "continues to manage production during low gas prices."
Further afield, Gabriel de Alba's Colombia-focused Frontera Energy Corp. (FEC) shot up 56 cents to $8.11 on 512,600 shares. It is launching a curious share buyback offer. From Sept. 11 to Oct. 17, shareholders will have the option to tender shares for repurchase by the company, for a maximum take-up of 3.75 million shares (out of 84 million outstanding). Shares tendered but not repurchased will be returned to their holders. So far, so standard -- yet the proposed price is raising eyebrows. Frontera is offering $12 a share, a 59-per-cent premium to yesterday's close.
Frontera did not explain the $12 offer price, or why it would pay such a high premium for a block of shares when it could buy most of them at cheaper market prices through its existing NCIB (normal course issuer bid, the more common type of buyback program) -- Frontera's NCIB does not expire until November and still has room to repurchase 3.1 million shares. Worth noting is that Frontera is controlled by Catalyst Capital and Gramercy Funds, which respectively hold 34.7 million and 11.3 million shares. Both of them have "advised [of] their current intention" to participate in the offer. Naturally, Frontera avoided the slightest whiff of favouritism -- all are welcome to apply, it emphasized -- but the more cynical-minded may well wonder if all are truly on equal footing to partake in the generous offer. The optimists might counter that the offer shows confidence that the stock will soon be worth far more than $12. Based on today's jump in the stock, there is plenty of optimism going around.
Back in Canada, Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) added three cents to $6.11 on 682,200 shares, after closing a $175-million offering of 8.5 per cent five-year notes. It used the proceeds immediately to repay bank debt. The bankers were evidently pleased enough to hand Surge an increase to its $210-million credit facility, which now stands at $250-million. Surge boasted that the line is completely undrawn and provides "significant liquidity."
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