Energy Summary for May 25, 2021
2021-05-25 20:50 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery edged up two cents to $66.07 on the New York Merc, while Brent for July added 19 cents to $68.65 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.15 to WTI, unchanged. Natural gas for June added two cents to $2.91. The TSX energy index lost 1.04 points to close at 124.30.
Oil prices wobbled but held on to yesterday's gains. While Canadian markets were closed yesterday for Victoria Day, both Brent and WTI added over $2 (U.S.) each, as traders sifted through the latest chatter about a potential Iranian nuclear deal. Such a deal could send Iranian oil exports nearly tripling to nearly 1.5 million barrels a day by the end of this year. They are currently around 600,000 barrels a day, weighed down by sanctions imposed by the U.S. government on various Iranian industries, including oil. Lifting the sanctions would boost global oil supplies and put pressure on prices. With Iran hinting last week that a deal was close, oil prices spent most of last week falling. Yesterday they regained ground as Iranian officials said a deal was not so close after all. Negotiations are being extended another month.
The other big news yesterday was the $17-billion (U.S.) merger proposed by two U.S. energy majors, Cabot Oil & Gas and Cimarex. Cabot is a Marcellus gas producer in Pennsylvania and Cimarex is an oily Permian producer in Texas. Their merger is a surprise, defying the trend of expansions within existing core plays (as seen in other recent megamergers such as Pioneer Natural's purchase of Parsley Energy, Devon's purchase of WPX Energy and ConocoPhillips's purchase of Concho Resources). Shares of both Cabot and Cimarex have fallen in the wake of the deal. The Cimarex shareholders seem particularly unenthused; they would have been hoping for an offer from Cimarex's joint venturer, Chevron. The odds of a bidding war are regrettably low. EDGAR filings reveal that the unexpected tie-up comes with an equally eyebrow-raising break fee of $250-million (U.S.).
Here in Canada, the merger gave rise to some optimism. "With the North American natural gas group shifting, it is time to look north," proclaimed Scotia Capital analyst Cameron Bean in a research note this morning. He explained that nearly one-quarter of the production of the Cabot-Cimarex entity will be oil, which may prompt gas-focused investors to look for alternatives. "In our view, this shift could be a catalyst ... We believe those dollars should look north," said Mr. Bean.
Specifically, he thinks they should look at Tourmaline Oil Corp. (TOU) (which in spite of its "oil"-y name is Canada's largest gas producer). Mr. Bean dubbed Tourmaline a "free cash flow machine." This cash, he said, goes toward supporting a combination of "moderate organic production growth" (with forecast increases of 3 to 5 per cent annually) and a 16-cent quarterly dividend (for a yield of 2.3 per cent). Despite Mr. Bean's best efforts, Tourmaline lost 52 cents today to close at $28.37. The analyst has a "sector outperform" rating on the stock and a price target of $42. He also had a disclaimer in the fine print of his research note, disclosing that his employer, Scotia Capital, owns more than 1 per cent of Tourmaline's shares and receives compensation from Tourmaline for various services.
Another Canadian gas producer, David Wilson's Montney-focused Kelt Exploration Ltd. (KEL), added nine cents to $2.85 on 1.16 million shares. Today it hiked its full-year budget and production guidance for the second time in two months. It is now aiming to produce 21,000 barrels of oil equivalent a day on a budget of $150-million. By contrast, when Kelt set its original budget back in November, it was aiming to spend a cautious $90-million and produce just 17,500 barrels a day -- barely a change from the 16,500 barrels a day it was producing as of August. (August was when Kelt closed a $510-million asset sale to ConocoPhillips, wiping out its debt, but eliminating a sizable chunk of its output as well.) Two months ago, a more confident Kelt hiked the budget to $120-million and boosted the production target to 19,000 barrels a day. Now it has increased both figures yet again.
Mathematically minded investors will no doubt have noticed that the budget is now two-thirds higher than the original number, while the production target is just one-fifth higher. As well, Kelt now expects to be carrying $11-million in debt by the end of this year, whereas it was originally forecasting a $4-million surplus. Management put on a breezy air as it hinted that this year's overspending will show benefits next year too. For example, this summer, the company will be building new infrastructure in its Oak Montney area, which should allow it to bring 10 new Oak wells on production in October -- too late to substantially affect the 2021 average, but certainly benefiting 2022.
Further afield, Craig Steinke and David Elliott's Reconnaissance Energy Africa Ltd. (RECO) edged down one cent to $8.40 on 1.32 million shares, despite mustering a long defence against what it called a "false and defamatory article" in Friday's National Geographic. The article, which Reconnaissance deemed a "hit piece," centred on an alleged whistleblower's complaint to the U.S. Securities and Exchange Commission (SEC). Reconnaissance said it requested a copy of the complaint from the National Geographic and has been met with silence. "Anyone can file a complaint with the SEC," it added, emphasizing that such complaints have "no standards or requirements for accuracy or truth." It then went down a laundry list of defences about its financings, its insiders, its drill program in Namibia and so on. It had a lot to go over because, according to the National Geographic, the complaint allegedly draws from "more than 150 instances of misleading statements."
Criticism of Reconnaissance is nothing new for the National Geographic, which has been publishing increasingly negative articles about the company since October. Reconnaissance has generally ignored them. Its response this time was more forceful. This may reflect the more scandalous nature of the allegations, which are now starting to attract ambulance chasers. (At least three U.S. law firms have already announced that they are willing to leap to shareholders' defence and consider a class action -- call today! All three were also required to disclose that their announcements constitute "attorney advertising.") Moreover, the new article has especially bad timing, as Reconnaissance is currently in the process of trying to close a $36-million bought deal. The prospectus gave the desired closing date as May 26 -- tomorrow. Under the deal, Reconnaissance would issue units, each comprising a share and a warrant, at $9.50. The stock is currently well below the offer price and closed today at $8.40.
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