Energy Summary for April 9, 2021
2021-04-09 19:59 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery lost 28 cents to $59.32 on the New York Merc, while Brent for June lost 25 cents to $62.95 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.05 to WTI, down from a discount of $10.03. Natural gas for May added one cent to $2.53. The TSX energy index lost 1.61 points to close at 116.54.
Enerplus Corp. (ERF) added 29 cents to $6.87 on 4.44 million shares, on top of the 41 cents it added yesterday after another sizable acquisition in its core play, the North Dakota Bakken. The company already acquired one of its neighbours, Bruin E&P, for $465-million (U.S.) cash just four weeks ago. Now it is forking over another $312-million (U.S.) cash to acquire Hess Corp.'s assets in the same region.
The Hess assets are largely undeveloped, adding 6,000 barrels of oil equivalent a day. For context, Bruin added 24,000 barrels a day (and Enerplus was already producing about 86,000). Despite having just one-quarter of the production of the Bruin assets, the Hess assets are fetching about two-thirds of the purchase price because of their high development potential. Enerplus reckoned that the Hess assets will add two to three years worth of "tier one" drilling inventory (the highest category of desirability). The Bruin assets were described as "complementary" but clearly not equal to Enerplus's pre-existing tier one assets.
Enerplus's president and chief executive officer, Ian Dundas, cheered the Hess assets a "strong strategic operational fit." He added that the company has released a five-year outlook to go alongside the deal, with the highlight being the free cash flow forecast of $1.2-billion to $1.8-billion for 2021 through 2025 (cumulatively, not per year). This will allow the company to "sustainably grow [its] base dividend." Enerplus has not raised its dividend in about 13 years. In fairness, neither has it cut the dividend in about five years, holding it steady even during the worst of the 2020 downturn. The last time it touched the dividend was in 2016, when it snipped the monthly payout to one cent from three cents. The current yield is 1.7 per cent. Mr. Dundas did not reveal the size or timing of a potential increase.
If nothing else, the acquisition (and the coy hints at a dividend increase) provided a timely distraction from the other big news in the North Dakota oil patch: the precarious fate of the Dakota Access pipeline, or DAPL (rhymes with apple). DAPL is the main pipeline used by Bakken oil producers. Without it, producers would have to rely on costly rail transportation, which is why they were less than pleased when a federal judge ordered DAPL to be shut down last year for a lengthy environmental review. A higher court allowed the pipeline to keep operating. Technically, however, the pipeline is operating without a key easement, leaving it vulnerable to a shutdown by the U.S. federal government. Native tribes and eco-activists have been pressuring President Joe Biden to re-enact his TC Energy Corp.'s (TRP: $58.68) Keystone XL cancellation and shut DAPL down. They have also asked the above-mentioned federal judge for an injunction.
That brings the story to a widely watched status hearing today, when the government had to decide whether or not to intervene. The good news is that it appears Mr. Biden is not wading into this fight. The federal Army Corps of Engineers, which is conducting the environmental review, announced at today's hearing that DAPL does not need to be shut down while the review is in progress. This means there will be no shutdown order from the feds. DAPL is not out of danger, however, as this decision punts the matter back to the above-mentioned federal judge, who will now take up the injunction request. Today he told the media that he was "surprised" by the Corps' decision and said he will consider ruling on the injunction within 10 days.
Another oil producer in North Dakota is Bruce Chernoff's PetroShale Inc. (PSH), which today stayed unchanged at 19.5 cents on 14,100 shares, after completing a complicated recapitalization. Investors were unenthused. PetroShale did its best to sell them on the benefits, promising them that the deal serves to "improve and simplify the company's balance sheet and enhance [its] business prospectus going forward, for the benefit of all stakeholders." Yet as far as many shareholders are concerned, the overarching effect of the deal was to send PetroShale's share count ballooning to 520 million from just 188 million in one fell swoop.
More than 182 million of the new shares were issued to PetroShale's former preferred shareholder, a private equity firm called First Reserve, which has now had all of those preferred shares converted into common shares. This eliminates the preferred shares' recurring dividend obligations as well as a roughly $86.9-million (U.S.) liquidation/repayment obligation that was coming up in January, 2023. That obligation has its roots in the original issuance of the preferred shares in January, 2018, when PetroShale first caught First Reserve's eye. Worth noting is that the original exchange right under these preferred shares was set at $2.40 a share, a testament to PetroShale's impressive share price performance at the time. The stock had climbed to about $2.40 from just 80 cents over the prior 12 months. Alas, although the stock reached a peak of $2.50 just as First Reserve was writing its cheque, it then began a painful plunge to a low of just 7.5 cents in early 2020. It then fought its way back up to about 30 cents by the time the recapitalization was announced last month. Presumably hoping that the rally will continue, First Reserve and PetroShale settled on a conversion price of 60 cents for the recapitalization -- a steep drop from $2.40, to be sure, but less dilutive than it could have been.
The remaining shares under the recapitalization were issued at 20 cents under two different financings, namely a $5.9-million rights offering (for existing investors) and a $24.1-million private placement with two subscribers (First Reserve and PetroShale's executive chairman, Mr. Chernoff). The two financings together raised a total of $30-million. PetroShale had been hoping to raise more, perhaps as much as $60-million, but the rights offering saw less participation than hoped. PetroShale kept its chin up and said it will use the proceeds to repay some of its $327-million net debt.
With a tidier (if still quite cluttered) balance sheet, the company will look to turn investors' focus back to its operations. Last month, trying to stir up excitement about 2021, it spoke of the coming months as a "period of unprecedented opportunity." It also hired a new chief operating officer to help seize some of this opportunity. New COO Richard Kess has been in the oil and gas business in both Canada and the United States for 38 years. Mostly recently he was COO of Painted Pony Energy, a B.C. Montney producer that was acquired last fall by Canadian Natural Resources Ltd. (CNQ: $38.57).
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