Energy Summary for July 13, 2021
2021-07-13 19:51 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added $1.15 to $75.25 on the New York Merc, while Brent for September added $1.33 to $76.49 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.19 to WTI, up from a discount of $13.22. Natural gas for August lost five cents to $3.70. The TSX energy index added a fraction to close at 135.35.
Oil prices rallied despite fretful forecasts from the International Energy Agency (IEA). In its latest monthly oil report released this morning, the Paris-based agency worried over the continuing impasse at OPEC+, whose negotiations to increase production stalled out last week. "The OPEC+ stalemate means that until a compromise can be reached, production quotas will remain at July's levels ... [and] oil markets will tighten significantly," warned the IEA. This in turn might prompt members to increase production and engage in price wars to gain market share. "Oil markets are likely to remain volatile until there is clarity on OPEC+ production policy," concluded the agency.
According to JPMorgan, the volatility could last well into August. The bank predicted this morning that OPEC+ will take up to six weeks to reach a compromise. It expects Saudi Arabia to "get its way" in the end, and does not foresee a dissolution into price wars.
Within the energy sector, Gary Guidry's Colombian oil producer, Gran Tierra Energy Inc. (GTE), hovered unchanged at 90 cents on 2.15 million shares. It provided a long-awaited operational update last night. Nearly two months ago, Gran Tierra said it had shut in some of its production amid nationwide protests in Colombia (which were directed at the government rather than the oil industry, but still caused shutdowns at several oil sites because of road blockades). Gran Tierra said it might have to reduce its full-year production guidance if the shutdowns lasted more than two weeks. Eight weeks later, the company has finally given in and reset its guidance at 27,500 to 28,500 barrels of oil a day, down from the previous range of 28,000 to 30,000.
Mr. Guidry, Gran Tierra's president and chief executive officer, offered some good news to offset the disappointment. For one thing, the Colombian government has negotiated an end to the blockades, and Gran Tierra has brought its production back to the April level of around 29,000 barrels a day. For another, thanks to rising oil prices, the company is now forecasting higher cash flow despite the lower production. "[This] is the second time that we have increased our financial forecast this year," cheered Mr. Guidry. He was previously expecting cash flow to match Gran Tierra's planned budget of $140-million (U.S.). In May, the company hiked its cash flow forecast to $215-million (U.S.), and now it has nudged even higher to $225-million (U.S.). The budget is staying intact, meaning that Mr. Guidry is expecting plenty of extra cash with which to pay down Gran Tierra's debt -- a number he understandably steered clear of mentioning, as the debt was an eye-watering $779-million (U.S.) as of March 31. Gran Tierra's current market cap is $330-million (Canadian). Investors stayed on the fence.
Another international producer, the Lundin family's Shamaran Petroleum Corp. (SNM), edged up one cent to seven cents on 560,800 shares, after announcing a major expansion in Kurdistan. Shamaran has been operating in this semi-autonomous region of Iraq since 2009. Its sole asset is its 27.6-per-cent interest in the Atrush block, which has been on production since 2017 and is currently flowing 44,000 gross barrels of oil a day. Now Shamaran plans to acquire an 18-per-cent interest in a second Kurdish asset, Sarsang, which is forecast to double the company's net production by mid-2022. The "transformative" asset will cost the company $155-million (U.S.).
The news sent the stock up by over 16 per cent -- but that is still just one penny. Shamaran has never been a high flier. It reached a peak of $1.43 way back in 2011, on the back of its Lundin connections and high hopes for its Atrush block. Alas, amid a four-year delay in achieving production at Atrush (which was originally meant to come on-line in 2013), Shamaran faced liquidity crunches and relied heavily on its shares to resolve them. By the time Atrush started production in 2017, Shamaran had, and still has, 2.1 billion shares outstanding. Debt has been an issue too, especially last year, although Shamaran was able to renegotiate some terms with its bondholders at the beginning of this year. Overhanging it all is the political risk in this tumultuous corner of the world. The Lundins have never minded a bit of tumult, of course, and have been the most steadfast supporters that Shamaran could ask for. Over the last 10 years, the family has increased its interest in Shamaran from 64 million shares (12 per cent) all the way to 509 million shares (23 per cent).
Today's announcement indicated that the faith of the Lundins remains unshaken. To help cover the $155-million (U.S.) price tag for the Sarsang asset, Shamaran has arranged a $30-million (U.S.) equity rights offering, with a Lundin-owned entity providing a full standby commitment. Shamaran is also proposing a $300-million (U.S.) debt offering. It would not need all of that for the acquisition, of course; more than half would go toward refinancing older debt (including some owed to the Lundins). Shamaran will start marketing the offerings immediately.
Another Lundin promotion may be mulling acquisitions. That would be International Petroleum Corp. (IPCO), up three cents to $6.00 on a heavier-than-usual 232,300 shares. It did not have any news (indeed, it has not issued any in more than two months), but it got a lovely mention yesterday from an analyst. Scotia Capital's Gavin Wylie upgraded his rating to "sector outperform" from "sector perform" and called the company "extremely well positioned to bid on attractive additions to its portfolio." International Petroleum currently has assets in Canada, France and Malaysia. Mr. Wylie sees European or Asian acquisitions as possible, but given the recent "steady deal flow in Canada," he would bet on this country as "the most likely area to expand." (Canada certainly has been International Petroleum's favourite area in the past. From 2018 to 2020, the company closed three significant Canadian acquisitions, spending a total of $1.3-billion.)
Mr. Wylie mused that International Petroleum's "impressive" balance sheet would allow it to be acquisitive. His employer, Scotiabank, would presumably be thrilled to help on that front (the research note included the usual boilerplate that Scotia does business or seeks to do business with the companies covered by its analysts). It may come as no surprise to investors that Mr. Wylie chose this moment to hike his price target on the stock to $8.50 from $6. The stock closed today at $6.00 exactly.
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