Energy Summary for Feb. 12, 2021
2021-02-12 20:09 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for March delivery had a strong end to the week, adding $1.23 to $59.47 on the New York Merc, while Brent for April added $1.29 to $62.43 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.36 to WTI, unchanged. Natural gas for March added four cents to $2.91. The TSX energy index added 2.25 points to close at 104.44.
The new Montney megamerger is proceeding at a fast clip. Barely a day after announcing their $8.1-billion proposed combination, ARC Resources Ltd. (ARX), up 12 cents to $7.90 on 10.1 million shares, and Seven Generations Energy Ltd. (VII), also up 12 cents to $8.60 on 6.86 million shares, have filed SEDAR notices about their respective shareholder meetings to approve the deal. Both meetings will be held March 31 and the record date is Feb. 24.
As noted in yesterday's Energy Summary, ARC is offering 1.108 shares of itself for each share of Seven Generations, which will result in about 369 million new ARC shares being issued. This will roughly double ARC's current share count of 354 million -- a proper merger of equals, as ARC's shareholders will own 49 per cent of the resulting company and Seven Generations' shareholders will own 51 per cent. Seven Generations' largest shareholder is the Canada Pension Plan Investment Board. It has already voiced its support of the deal, which will turn its 16.8-per-cent interest in Seven Generations into an 8.6-per-cent interest in the new ARC.
Others have also rushed in with outpourings of support. "The proposed Seven Generations and ARC Resources combination is a gateway to a larger, more relevant Montney producer," opined BMO Nesbitt Burns analyst Ray Kwan this morning, hiking his price target on Seven Generations to $12.19 from $9. The oddly specific number reflects that fact that his colleague, fellow BMO analyst Randy Ollenberger, hiked his price target on ARC to $11 from $9 (with $12.19 being equal to 1.108 times $11). Separately, Scotia Capital analyst Cameron Bean boosted his price target on ARC to $11 from $9, while Raymond James analyst Jeremy McCrea boosted his to $12 from $10. Ratings agencies piped up as well. "[The] merger of ARC Resources and Seven Gen is credit positive," declared Moody's Investors Service. S&P Global Ratings said it has put Seven Generations on "CreditWatch Positive."
S&P's favourable opinion marked a change from its other recent opinions. The agency has just downgraded its ratings on two oil sands producers, Imperial Oil Ltd. (IMO) (up 20 cents to $25.74 on 1.48 million shares) and Canadian Natural Resources Ltd. (CNQ) (up 81 cents to $34.15 on 8.91 million shares). Imperial's old AA rating moved down by one notch to an AA- rating -- still high on the investment-grade ladder. S&P emphasized that the downgrade "reflects our negative outlook on ExxonMobil." Given that Exxon is Imperial's parent and majority shareholder, S&P considers Imperial to be Exxon's subsidiary. Exxon just got a downgrade and therefore so did Imperial, even though S&P noted that Imperial has been adhering to "prudent financial policies," has "meaningfully" cut costs, and is expected to generate $1.5-billion in free cash flow in 2021 and 2022.
S&P was less kind to Canadian Natural. "Financial performance is hampered by high debt levels and reduced cash flow generation," it intoned. It pointed out that the company's debt has risen by over one-third since the end of 2016 (with long-term debt being over $21-billion as of Sept. 30, 2020). Over the same period, low oil prices have weakened the company's revenue and cash flow. "Limited visibility to a material improvement in [oil prices] ... will continue to constrain the company's profitability, despite our expectation of ongoing cost discipline," concluded S&P. It lowered its rating to BBB- from BBB. This is still investment-grade, but only barely. One more downgrade would put Canadian Natural in junk territory.
Elsewhere in Alberta, Neil Roszell's Headwater Exploration Inc. (HWX) added seven cents to $3.40 on 905,700 shares. It had no news today -- in fact it has released no news since Dec. 14 -- but this week it confirmed via a SEDAR filing that it successfully closed an important acquisition on Dec. 22. That acquisition involved Cenovus Energy Inc.'s (CVE: $8.57) assets in the Marten Hills area of the Clearwater oil play. The rising popularity of this play means that the assets cost Headwater a grand total of $100-million, comprising $35-million cash and 50 million shares valued at $1.30. The rising popularity of this play is also why Headwater's share price has since more than doubled to $3.40.
Raymond James analyst Jeremy McCrea tried to add to the excitement this morning, writing his first research note about Headwater and assigning it an "outperform" rating. "We can safely say we have never seen play economics quite as strong as the results coming from the Clearwater at Marten Hills," proclaimed Mr. McCrea. He opined that the Clearwater in general is "one of the top economic plays in Canada." Between that and management's "track record of execution" (a reference to the three previous companies that Mr. Roszell and his people have sold since 2009), Mr. McCrea sees Headwater becoming "a new favourite name with institutional investors." He set a price target of $4. The stock closed today at $3.40.
Another recent entrant into the Clearwater play is Brian Schmidt's Tamarack Valley Ltd. (TVE), up two cents to $2.03 on 8.85 million shares. It closed two Clearwater acquisitions for a total of $74-million on Dec. 21, the day before Headwater made its entry. Tamarack's stock has since risen past $2 from $1.39. Both Tamarack and Headwater are planning to keep busy in the Clearwater, with Tamarack saying it will spend $80-million in the play by the end of 2022 and Headwater saying it will spend $100-million in the same period.
In light of Mr. McCrea's prediction that Headwater will become an institutional favourite, Tamarack might point out that it already has an institutional investor, Thomas Claugus's GMT Capital. GMT has arguably not shown the hoped-for reaction to Tamarack's splash into the Clearwater. In a SEDAR filing yesterday, GMT disclosed that it sold 3.03 million shares of Tamarack during January. (It still controls 59 million of Tamarack's 263 million shares, with a further 5.6 million held by a related party, so its interest remains significant.) A separate SEDAR filing yesterday showed that GMT has also been paring its interest in Colombian oil producer Gran Tierra Energy Inc. (GTE: $1.30). It has been using the money to buy more shares of Pipestone Energy Corp. (PIPE: $1.40). Pipestone operates in the same play that the above-mentioned ARC Resources and Seven Generations have turned into one of the most talked about in Canada, the Alberta Montney.
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