Energy Summary for Feb. 11, 2021
2021-02-11 20:18 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery lost 44 cents to $58.24 on the New York Merc, while Brent for April lost 33 cents to $61.14 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.36 to WTI, unchanged. Natural gas for March lost four cents to $2.87. The TSX energy index lost a fraction to close at 102.19.
A nine-day winning streak for oil (the longest streak in two years) came to an end, with prices falling today on the prospect of weaker-than-expected demand recovery combined with faster-than-expected supply increases. In a monthly report today, OPEC forecast that demand will rise by just 5.79 million barrels a day this year. This is a 110,000-barrel-a-day decrease from last month's report. Separately, the International Energy Agency (IEA) released its own oil outlook, noting that demand is still strong enough that it "sets the stage for OPEC+ to start unwinding cuts" in the second half of the year. Traders sifted through the mixed headlines and came down on the bearish side.
Here in Canada, the big energy headline was a massive Montney merger. ARC Resources Ltd. (ARX), up 36 cents to $7.78 on 16 million shares, is offering 1.108 shares of itself for each share of Seven Generations Energy Ltd. (VII), up 46 cents to $8.48 on 8.85 million shares. The total price tag (including net debt) works out to $8.1-billion. The deal will turn ARC into Canada's largest condensate producer and third-largest gas producer.
As has become typical in the oil patch, ARC is offering barely any premium -- just 2.5 per cent, using yesterday's closing prices. This comes despite clear optimism in the market about Seven Generations; its stock has more than doubled to over $8 from less than $4 since September. Yet Seven Generations also carries over $2.1-billion in net debt and has a notoriously high rate of production declines. Both of these are a holdover from when it devoted itself to boosting production as fast as possible. This worked -- production got to over 200,000 barrels a day in 2018 from 8,000 in 2013 -- but it required a lot of new wells. Because production falls faster from new wells than from mature wells, Seven Generations' overall decline rate was as high as 45 per cent. The result was that it kept spending money it did not have in order to counter the declines with more drilling.
Seven Generations stepped off that treadmill in 2019, letting its production slide to the current level of around 170,000 barrels a day, in order to moderate the declines and protect cash flow. Yet progress has been slow. The company has not mentioned an exact decline rate in some time, but in a recent presentation on its website, it talked of wanting to "initiate [a] sustainable dividend when appropriate ... [including when it has a] mid-30s-per-cent decline rate." This suggests that current declines are in the high 30s or worse.
The company will get its dividend wish once it merges with ARC, which pays a six-cent quarterly dividend, for a yield of 3.1 per cent (a payout that will stay in place following the merger). ARC likes the merger because it reckons that its healthier balance sheet and lower decline rate can absorb Seven Generations without much fuss. The main benefit of the deal for ARC is to turn it into a true senior energy producer, the sixth largest in Canada, with production of over 340,000 barrels a day and plenty of new assets to develop. ARC had been criticized as somewhat unfocused lately -- particularly after its former chief financial officer and its former chief executive officer resigned within weeks of each other last year -- but the merger appears to have squashed such concerns.
Elsewhere in the Montney, Jeff Tonken's Birchcliff Energy Ltd. (BIR) added 34 cents to $3.01 on 14.9 million shares, crossing $3 for the first time since July, 2019. Investors liked its new reserve report. (It also released preliminary fourth quarter financials, but these were largely as expected given that Birchcliff put out an operational update last month, pegging its fourth quarter production at 78,500 barrels a day.) Birchcliff's 1P (proved) and 2P (proved and probable) reserves held relatively steady as of Dec. 31, 2020, with 1P dipping by 1 per cent from Dec. 31, 2019, and 2P rising by 1 per cent. Stability is about the best investors can hope for after a year like 2020.
Notably, Birchcliff's PDP reserves (proved developed producing -- the highest level of certainty) saw a 14-per-cent rise for liquids and condensate. Birchcliff has been deliberately trying to increase its production of these high-margin hydrocarbons. From the fourth quarter of 2019 to the fourth quarter of 2020, its liquids and condensate production rose to about 14,900 barrels a day (19 per cent of total production) from 12,700 barrels a day (16 per cent of total production). This offset a small year-over-year decline in lower-margin gas output. Both liquids/condensate and gas will factor into Birchcliff's stated plan to boost its overall production to 91,000 barrels a day in 2025.
Another gassy producer, Alberta junior Pine Cliff Energy Ltd. (PNE), edged down one cent to 31 cents on 1.08 million shares, after releasing its own year-end updates as well as its budget for 2021. It pegged its fourth quarter production at 19,130 barrels of oil equivalent a day. This brought its full-year average to 19,005 barrels a day, "exceeding the company's 18,500 to 19,000 annual 2020 guidance range," as it boasted proudly. Capital spending for the year came to $9-million. Pine Cliff opted not to remind investors that it had told them in November that it would likely spend only $7.6-million. Apparently a couple of extra million got freed up in December as Pine Cliff watched winter gas prices start to rally. Considering that the previous 2020 budget was $10.2-million, $9-million with higher-than-forecast production seems quite reasonable.
A few more million will be freed up in 2021. Pine Cliff has set a budget of $13-million, including $6.3-million for drilling. The drilling will include two oil wells in the Pekisko play, an underexplored area for Pine Cliff. It drilled its first well there (also its first oil well ever) in 2018 and followed it up with two more wells in 2019. Another well or two was to be drilled in 2020, but Pine Cliff cancelled that plan amid the downturn. Now it is finally ready to go back. Unfortunately, it does not expect the drilling activity to lead to higher production, and has set a 2021 production target of 18,000 to 18,500 barrels a day. The company pointed out, however, that it will "consider opportunities ... which may include asset acquisitions." The company went on a shopping spree from 2012 to 2019 that boosted its production to around 20,000 barrels a day from just 100. That shopping spree has been on hold for the last year and a half, but perhaps in 2021 Pine Cliff will stage a return on that front, too.
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