Stockwatch Energy today
Energy Summary for July 4, 2022
2022-07-04 20:13 ET - Market Summary
by Stockwatch Business Reporter
Canadian markets eased back after the Canada Day long weekend, while U.S. markets were closed today for Independence Day. West Texas Intermediate crude for August delivery added $2.23 to $110.66 in electronic trading on the New York Merc, while Brent for September added $1.87 to $113.50 (all figures in this para U.S.). Western Canadian Select traded at a discount of $18.25 to WTI, up from a discount of $18.40. Natural gas for August added 15 cents to $5.88. The TSX energy index added 6.14 points to close at 235.11.
The Canadian oil patch made headlines heading into the second half of the year, as a new Bank of Canada survey found that oil and gas companies are keeping a tight lid on spending, despite soaring prices. "Investment in new projects and sites is less robust than it was in previous commodity price booms," reported Bank of Canada. It found that oil and gas companies are setting aside just 40 per cent of this year's estimated cash flow for capital spending, compared with an average of more than 100 per cent in the prior nine years. (The high point was 149 per cent in 2013 and the low point was 60 per cent in 2021.)
The central bank attributed the spending slide to several factors. At the top of the list was "financial discipline." The price crash that started in 2014 stressed many companies' balance sheets, prompting them to use the current windfall to reduce debt, as well as reward and attract shareholders with dividends. Also holding up near-term spending is a widespread labour and rig shortage. Over the longer term, pipeline bottlenecks remain a concern, as do the shifting goalposts of climate change laws. For these reasons, the survey found that companies are opting for only "modest" spending increases, mostly limited to existing projects that can be improved or expanded. (The lone region where megaprojects are still in fashion is offshore Newfoundland.)
The survey confirms what the industry has been signalling for months. As recently as last week, new president Lisa Baiton of the Canadian Association of Petroleum Producers (CAPP) told a Calgary conference that oil and gas companies have "changed their focus from survival to rebuilding their businesses after all of those hard years." She added that the hard years made companies leaner and more efficient, further reducing the need for big spending boosts. "An industry known for outspending its cash flow is now focused on generating value," she said. The new priorities are "repairing their balance sheet [and] compensating shareholders for their patience while working to attract them back."
Within the sector, international oil and gas producer Vermilion Energy Inc. (VET) added $2.14 to $26.64 on 3.17 million shares, after launching its first share buyback program since 2019. The TSX has approved Vermilion's proposal to buy back up to 16 million of its 165 million shares over the next year. The company called the idea "one of the most compelling options for returning capital, as we believe our common shares are trading at a price that does not appropriately reflect value" -- in other words, the same old stuff.
Vermilion also emphasized its "long history of returning capital to shareholders," with over $40 per share paid out in dividends since 2003. Memorably -- although Vermilion opted not to go down this part of memory lane in the press release -- the dividend yield once exceeded 21 per cent in early 2020. Management at the time clung stubbornly to the fact that Vermilion had never once slashed its payout and did not want to do so this time. Ultimately, it accepted defeat, suspended the dividend in April, 2020, and shook up its management the very next month. The new crop focused on debt reduction. In April of this year, Vermilion finally brought back a dividend -- though the yield is a much lower 0.9 per cent -- and now it is adding buybacks to the mix. It hinted today that it may have more to say about the currently conservative dividend when it releases its second quarter financials next month.
In the Alberta oil sands, MEG Energy Corp. (MEG) added 70 cents to $18.52 on 2.34 million shares. It is losing one director and gaining another. Grant Billing, the 70-year-old chairman of the TSX-listed Secure Energy Services Inc., is resigning from MEG's board after three years of service. Taking his seat is Gary Bosgoed. Mr. Bosgoed is the former senior vice-president and general manager of WorleyParsons Canada and is now in charge of his own engineering consulting firm, Bosgoed Project Consultants. He is also a member of the Peepeekisis First Nation and the vice-chairman of Alberta Indigenous Opportunities Corp.
This is the second newcomer that MEG has welcomed in under three weeks. In mid-June, to replace retiring chief financial officer Eric Toevs, it hired new CFO Ryan Kubik. He is likely best known for his past work as the CFO, and then the president and CEO, of Canadian Oil Sands Ltd. until its takeover by Suncor Energy Inc. (SU: $46.00) in 2016.
Elsewhere in Alberta, Neil Roszell's Headwater Exploration Inc. (HWX) added 34 cents to $5.75 on 1.56 million shares, trying to fight its way back toward $6. It traded above $8 just a month ago. The drop largely reflects the recent dip in oil prices, as Headwater has not released any news since mid-May. It opted at the time to hike this year's budget to $230-million from $145-million to carry out more drilling in its core Clearwater oil play.
Insiders have been taking the slump as a buying opportunity. In the last week alone, five directors and officers have spent a total of $2.71-million buying 475,000 shares. These include 150,000 shares bought for $873,000 by chairman and CEO Mr. Roszell, as well as 100,000 shares bought for $595,000 by president and chief operating officer Jason Jaskela. The two of them, along with several others at Headwater, have built and sold three other companies since 2007, namely Wild River Resources (sold to Crescent Point Energy Corp. (CPG: $9.62) in 2009), Wild Stream Exploration (sold to Crescent Point in 2012) and Raging River Exploration (sold to Baytex Energy Corp. (BTE: $5.75) in 2018). They continued their stream of water-themed promotions by surging into Headwater in 2020.
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