Energy Summary for May 28, 2021
2021-05-28 19:57 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery lost 53 cents to $66.32 on the New York Merc, while Brent for July added 17 cents to $69.63 (all figures in this para U.S.). Trading was Western Canadian Select traded at a discount of $14.15 to WTI, unchanged. Natural gas for July added three cents to $2.99. The TSX energy index added 1.01 points to close at 127.80.
The Alberta Energy Regulator (AER) is slowly but surely ironing out the details of a planned overhaul of its liability management program. In a newly revised directive on "Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals," the AER said it will increase its financial scrutiny of companies seeking to develop oil and gas assets. It will place more attention on a company's ability to clean up oil and gas wells at the end of their useful life. As well, it will expand its list of financial health indicators, adding criteria such as whether a company has any unpaid tax bills or lease payments.
These are part of a sweeping series of changes that the AER plans to introduce over the next year. The Alberta government ordered the AER last year to make the changes, with the goal of fixing a decades-old problem of inactive and abandoned oil and gas wells (of which there are tens of thousands littering the province, after their owners ran out of money to clean them up). This kicked off the second significant overhaul since 2016. Back then, the AER doubled its requirements for a company's liability management ratio (LMR), which is essentially a credit rating for determining whether a company should be allowed to acquire oil and gas licences. Companies had to have sufficiently high asset valuations -- specifically, at least double the forecast eventual cleanup costs -- or they were effectively barred from buying assets.
Clearly this did not go far enough, and now the AER is looking beyond valuations and tightening its requirements for fiscal health. Moreover, according to a Globe and Mail interview today with AER chief executive officer Laurie Pushor, the regulator will soon require companies not just to have money for cleanup, but to actively spend some of it on a yearly basis. This will reduce the problem of companies sidestepping cleanup costs until it is too late and the money is all gone. Mr. Pushor said the AER has not pinned down the exact amount that energy companies will have to spend each year to clean up aging wells, but it will likely be 4 to 5 per cent of the total value of their environmental liabilities.
It is worth noting that Alberta is using a stick-and-carrot approach to the problem of inactive wells. The above is mostly stick, but the AER also runs the SRP (site rehabilitation program) and ABC (area-based closure) programs, under which companies can apply for grants, enter cost-sharing arrangements or enjoy other perks to do cleanup activities. Companies have been increasingly vocal with investors about their participation in these programs. For example, Bonterra Resources Corp. (BNE: $4.52) mentioned both of them earlier this month as it boasted that it "successfully abandoned" (in the proper way) 84 wells in the first quarter. It plans to abandon another 224 by the end of 2022, representing 60 per cent of its total inactive wells. Meanwhile, other companies have started explicitly including environmental costs in discussions about buying or not buying assets. Whitecap Resources Inc. (WCP: $5.73) recently said it examined Cardium assets being marketed by ARC Resources Ltd. (ARX: $9.18), but did not make an offer because their cleanup bill would be too high.
Speaking of ARC Resources Inc. (ARX), its stock edged up one cent to $9.18 on 5.6 million shares today, in the wake of a virtual investor day that it held yesterday. It made much of its new status as the largest producer in the Montney. Thanks to its merger with Seven Generations Energy on April 6, ARC holds over 1.1 million net acres in the Montney and is producing 340,000 barrels of oil equivalent a day (compared with the 170,000 barrels a day that ARC was producing prior to the merger).
ARC's management used yesterday's presentation to remind investors of all of the "synergies" that it expects from the deal. Another effect of the deal, of course, was to increase ARC's net debt to about $2.4-billion, a figure that management wants to get down to $1.5-billion by the end of the year. ARC will then feel ready to announce share buybacks and/or dividend increases. (The current six-cent quarterly dividend represents a yield of 2.6 per cent.) On the operations front, ARC reiterated its goal of sanctioning its next Montney project, Attachie West phase 1, by the end of this year.
For the most part, ARC's presentation offered little new information, and the market's reaction today was lukewarm. Yet there was reliably resounding applause from the usual corners. BMO analyst Randy Ollenberger marvelled that ARC is "uniquely positioned to generate considerable free cash flow which allows for growth optionality and further ability to increase returns to shareholders sustainably." He hiked his price target to $12 from $11. Scotia Capital analyst Cameron Bean was even jollier, cheering ARC's "compelling strategy" as he hiked his price target to $15 from $14. Both of them have "outperform" ratings on the stock, which closed today at $9.18.
Elsewhere in Alberta, oil sands producer Cenovus Energy Inc. (CVE) added 18 cents to $9.81 on 9.83 million shares. Major shareholder ConocoPhillips filed a SEDAR report today disclosing that it has sold 6.5 million shares of Cenovus at an average of $9.57 each.
Cenovus previously issued Conoco 208 million shares, valued at $17.30 each, as part of an asset sale in 2017. The above sale price represents a 47-per-cent loss in value. Presumably tired of waiting for the share price to recover, Conoco announced earlier this month that it will unload all of its Cenovus shares "in the open market in a disciplined manner by year-end 2022." Subsequent comments from Cenovus's management indicated that Cenovus was taken aback by this decision. In the past, Cenovus has expressed interest in buying back at least some of the shares from Conoco, and while some analysts think the parties could still arrange this -- with Cenovus buying at least half of the shares back, as the general estimate -- neither party has confirmed an agreement.
Now Conoco will no longer even have to file disclosure reports. Its remaining 201.5 million shares represent a 9.9-per-cent interest in Cenovus, which has 2,017 million shares outstanding. This puts Conoco below the 10-per-cent insider reporting threshold.
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