Energy Summary for March 9, 2021
2021-03-09 20:11 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery lost $1.14 to $63.91 on the New York Merc, while Brent for May lost 94 cents to $67.30 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.27 to WTI, unchanged. Natural gas for April added seven cents to $2.67. The TSX energy index lost a fraction to close at 120.56.
Canadian and international oil and gas producer Vermilion Energy Inc. (VET) added 16 cents to $9.19 on 4.06 million shares, after releasing its year-end financials. Investors shrugged off the full-year net loss of $1.51-billion, which largely reflected $1.68-billion in impairment charges. The results other than that were better than expected. Vermilion produced an average of 87,900 barrels of oil equivalent a day in the fourth quarter, matching analysts' predictions, while cash flow of 85 cents a share was well ahead of analysts' predictions of 70 cents a share.
All in all, the update was much better received than the one that Vermilion put out almost exactly a year ago, when it slashed its 2020 budget and gutted its dividend (after spending the previous several months insisting that the dividend was completely safe). It then suspended the monthly dividend last April. In May, it overhauled its management, putting Lorenzo Donadeo in charge as president and promising to tidy up its balance sheet. The new financials showed some progress on that front: Net debt as of Dec. 31 was $2.10-billion -- still lofty, but down from the most recent high of $2.16-billion as of June 30. Vermilion forecast in January that it would be able to reduce its debt by another $200-million or so in 2021. In the new financials, citing improving commodity prices, Mr. Donadeo hiked that target to $350-million. (Improving commodity prices also explain why Vermilion's stock has shot up past $9 from about $5.50 since the start of the year.)
Another noteworthy change at Vermilion from this time last year is the new favourite guessing game among analysts. For them, early 2020 was about predicting when Vermilion would surrender and cut its dividend, particularly as the yield reached increasingly ludicrous heights. (At one point it was 69 per cent.) Now the goal is to guess when Vermilion will bring the dividend back. This morning, Raymond James analyst Jeremy McCrea opined that Vermilion's "increasing balance sheet flexibility" may allow it to "reinstate a dividend in 2022." He hiked his price target on the stock to $11 from $8. Meanwhile, Scotia Capital's Gavin Wylie said he sees "the conversation around dividends potentially returning" in 2021, although he reckons that Vermilion will first want to get its debt-to-cash-flow ratio down to 2.5 times (it was about 4.2 times as of Dec. 31). He hiked his price target to $9.25 from $8.50. CIBC's David Popowich boosted his target to $10 from $7, RBC's Greg Pardy boosted his to $10 from $9 and BMO's Ray Kwan boosted his to $11 from $7. The stock closed today at $9.19.
In Alberta, oil sands giant Canadian Natural Resources Ltd. (CNQ) edged down to $38.59 on 11.7 million shares, after firming up its share buyback plans. The company hinted at these plans when it released its year-end financials last week. Now it says it has received TSX approval to buy back up to 59.2 million shares, or 5 per cent of the 1.18 billion shares currently outstanding. Canadian Natural is the second energy company in four days to revive its share buyback plans, with Crescent Point Energy Corp. (CPG: $5.44) making its own 5-per-cent buyback announcement last Friday. In both cases, the companies are looking to offset some expected dilution. Canadian Natural says it is aiming to repurchase roughly the same number of shares that it expects to issue over the coming year under its stock option program. Crescent Point, which can buy up to 26.4 million shares (out of 530 million outstanding), is about to issue 50 million shares to Shell Canada as part of an asset acquisition announced last month.
Elsewhere in Alberta, Rick McHardy's Spartan Delta Corp. (SDE) added one cent to $4.12 on 344,400 shares. Yesterday it closed a $45-million bought deal of 11.25 million subscription receipts at $4. It announced this bought deal three weeks ago, along with a still-in-progress private placement for $75-million, to help pay for three planned acquisitions. These will cost $147.9-million and add a total of 9,700 barrels of oil equivalent a day in the Montney, Cardium and Spirit River plays. Spartan expects to close the acquisitions and the private placement by March 18.
Investors have shown fairly little interest in the deal, so Spartan's underwriters are hopping to attention. Analyst Cameron Bean of Scotia Capital, one of the firms involved in the $45-million bought deal, cheered the "major move forward for the company." He focused particularly on the "high-impact" new Montney assets. The bulk of the $147.9-million price tag reflects the $123.7-million that Spartan is paying to acquire Inception Exploration, a private Montney company that is reportedly controlled by Russian oligarch Igor Makarov (through his Areti International Group). BNN mentioned Mr. Makarov in a report in early February (before Spartan's announcement) amid speculation that Russia's Lukoil was looking to amass a sizable position in the Montney, perhaps beginning with the private Velvet Exploration and then moving on to Inception, the private Hammerhead Resources and potentially even Seven Generations Energy Ltd. (VII: $8.70).
Nothing has come of BNN's speculation as of yet. Lukoil has announced no deals in Canada, and both Inception and Seven Generations have accepted different offers (Inception from Spartan and Seven Generations from ARC Resources Ltd. (ARX: $7.97)). Scotia's Mr. Bean still drew attention to BNN's reporting as he praised Spartan for "making moves in the Montney." He has a price target of $7 on Spartan's stock, compared with the bought deal price of $4 and today's close of $4.12.
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