Energy Summary for July 8, 2021
2021-07-08 20:29 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 74 cents to $72.94 on the New York Merc, while Brent for September added 69 cents to $74.12 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.44 to WTI, up from a discount of $13.54. Natural gas for August added nine cents to $3.69. The TSX energy index lost a fraction to close at 135.25.
Oil prices had a wobbly day. Both benchmarks were down in early trading, as several Asian countries reported a resurgence in COVID-19 cases. Thailand and Indonesia are entering more lockdowns, and Japan has declared a state of emergency just two weeks before Tokyo is set to host the Olympics. The Games are still on but spectators are banned. The rough morning gave way to a bullish afternoon, as the U.S. Energy Information Administration reported a surprisingly large drop in U.S. crude inventories. These fell by 6.9 million barrels last week. Analysts were expecting a drop of just four million.
Within the energy sector, Colombian oil producer Parex Resources Inc. (PXT) added $1.11 to $21.80 on 1.64 million shares, after announcing two asset acquisitions and -- for the first time in its history -- a dividend. Parex had previously been inactive on the acquisition front since 2019 and had never shown much interest in a dividend. In February, 2021, however, it got a new chief executive officer, former Shell executive Imad Mohsen. Mr. Mohsen quietly started to make his mark in April. He told the Scotiabank CAPP Energy Symposium that month that he saw acquisitions and "possibly" a dividend in Parex's future. Now both are here.
Parex has declared an initial quarterly dividend of 12.5 cents, for a yield of 2.3 per cent. This will cost an annualized total of $62.4-million, based on the 124.9 million shares currently outstanding. Parex is an active buyer of its own shares; since 2018, it has reduced its share count from 155 million. Mr. Mohsen said today that the company still has $110-million earmarked for share buybacks in the second half of the year. Regardless, he indicated no concerns about the dividend's affordability. In the first quarter alone, Parex's free cash flow was $85-million (U.S.), and it had $341-million (U.S.) in working capital as of March 31.
As for the acquisition, it is taking the form of a "strategic partnership" -- more accurately an expanded partnership -- with Colombia's state-owned Ecopetrol. The two of them have been working together at various blocks for at least seven years. Now Parex will acquire a 50-per-cent operated interest in two Ecopetrol blocks, Arauca and LLA-38, both in the Llanos basin. This is Parex's favourite basin and is home to the LLA-34 block, where it gets about three-quarters of its total production. The Arauca block is a past producer ready for a "reactivation opportunity" (as Parex put it), while the LLA-38 block, right beside Aracua, is in the exploration stage.
The similarity of the names LLA-38 and LLA-34 is not an indicator of proximity. LLA-34 is in the southern part of the basin, while LLA-38 is hundreds of kilometres to the northeast. It is much closer (about 40 kilometres north) of Parex and Ecopetrol's jointly owned Capachos block. They signed a deal to work on Capachos in 2014, but did not drill their first well until 2017 (fortunately it was a winner). Mr. Mohsen apparently has no intention of making investors wait that long at LLA-38 or at the neighbouring Arauca. He said Parex will start operations in Arauca later this year and drill the first exploration well at LLA-38 next year.
Parex was not the only company introducing a dividend. The British-born but Canada-focused i3 Energy PLC (ITE), unchanged at 21.5 cents on 3.99 million shares, excitedly declared a "maiden special dividend" this morning. Investors did not share in the excitement. i3 has spent all year hyping an imminent dividend, an unusual move for such a small company. The dividend would have to be small, too, as i3 had set aside just $2-million for the payment but has 700 million shares outstanding. Indeed, the company announced today that the dividend will be 0.16 pence per share. This is slightly more than one-quarter of a Canadian penny.
As discussed in yesterday's Energy Summary, i3's share count is about to head even higher. The company has arranged a $65-million Alberta asset acquisition from Cenovus Energy Inc. (CVE) and is pursuing a 40-million-pound financing to help pay for it. If approved by shareholders, the financing will see i3 issue 363 million shares at 11 pence. It appears that subscribers will not be entitled to the dividend. The record date for the dividend is July 16; the financing is not up for a shareholder vote until July 26.
Elsewhere in Western Canada, Crescent Point Energy Corp. (CPG) edged down seven cents to $4.94 on 11.7 million shares. Crescent Point happens to have a similarly sized dividend -- one-quarter of a cent -- but it pays this quarterly. In the glory days of 2014, the dividend was as high as 23 cents a month. Crescent Point has slashed it repeatedly as it seeks a tighter grip on its balance sheet. A new SEDAR filing today may play a role in that. The company has just filed a preliminary shelf prospectus to qualify up to $350-million in equity or debt financings over the next 25 months.
At $350-million, this filing is a long way down from the last preliminary shelf prospectus that Crescent Point filed, back in 2015. That one qualified up to $2.5-billion in financings. Crescent Point used it in late 2016 to sell $650-million shares at $19.30. The market's reaction was memorably poor, primarily because then-CEO Scott Saxburg had pooh-poohed the idea of a financing only two months earlier. In fairness to Mr. Saxburg, what he actually said was, "You're not going to see us do a big equity funding to pay for a deal," and the subsequent financing was not for a deal but rather for "strong organic growth." Investors were still upset and the stock plunged rapidly from over $20. By mid-2018, the stock was in the $5 range, and Crescent Point found itself a new CEO, Craig Bryksa. He had little luck turning the stock around -- especially once COVID-19 hit and sent the stock to a low of 75 cents in March, 2020 -- but it has since rallied to today's close of $4.94.
While Crescent Point has shied away from financings, it has issued shares to pay for acquisitions. Notably, three months ago, it bought Shell Canada's assets in the Alberta Duvernay for $900-million, comprising $700-million cash and 50 million shares valued at $4. Those shares are already up 24 per cent on paper. In fact, the new prospectus on SEDAR reveals that Shell has already started locking in some gains. Shell has unloaded 20 million of the 50 million shares, and future sales in the form of secondary offerings are qualified by the new prospectus. Shell does not have to rely on the prospectus and can sell the shares by other means too.
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