Energy Summary for July 19, 2021
2021-07-19 20:21 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery plunged $5.49 to $66.42 on the New York Merc, while Brent for September lost $4.97 to $68.62 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.20 to WTI, unchanged. Natural gas for August added 11 cents to $3.78. The TSX energy index lost 4.77 points to close at 120.91.
Oil prices had their worst day in four months, after OPEC+ overcame an internal impasse and agreed to boost production. The resolution came on Sunday, a full 17 days after negotiations began on July 1. They ended in deadlock on July 5 as Saudi Arabia and the United Arab Emirates began bickering over baselines (the thresholds at which OPEC+ determines each member's production quota). Now, according to an official OPEC+ statement yesterday, the group has agreed to hike production by 400,000 barrels a day every month, starting Aug. 1. The increases will continue until the current cuts of 5.8 million barrels a day are fully unwound. That will take until the end of September, 2022, an extension from the prior deadline of April, 2022. Several countries will receive adjustments to their baselines, not just the UAE but also Iraq, Kuwait, Saudi Arabia and Russia.
While the resolution was no particular surprise, it came on a jittery day for oil traders. "The market is very fixated on ... the Delta variant [of COVID-19]," noted the Chicago-based Price Futures Group. It likened today's drop in oil prices to "a run on the bank." The heavier-than-usual volume gave the drop "the look of a speculative liquidation," added New York's Again Capital (meaning it thinks funds are bailing out). Others were unfazed. Goldman Sachs argued that the OPEC+ deal is bullish for oil prices, as the planned production increases are "moderate" and will "keep the market in deficit in the coming months." The bank reckoned that the deal adds up to $5 (U.S.) of "upside" to its forecast that Brent will average $75 (U.S.) next year.
Here in Canada, the big newsmakers were gas companies -- seven of them in particular. The seven are Birchcliff Energy Ltd. (BIR: $4.72) (the leader of the group), ARC Resources Ltd. (ARX: $9.12), Advantage Oil & Gas Ltd. (AAV: $4.38), Peyto Exploration & Development Corp. (PEY: $6.79), NuVista Energy Ltd. (NVA: $3.45), Paramount Resources Ltd. (POU: $15.06) and the private Bonavista Energy. They are collectively responsible for one-fifth of Canada's entire gas output and have formed a group called Rockies LNG. Now they have taken the first official step in crafting their LNG (liquefied natural gas) promotion, a planned export facility in Northern British Columbia.
The LNG project has been dubbed Ksi Lisims -- the "k" is silent -- named after the Nass River in the Nisga'a language. The Nisga'a First Nation will be helping Rockies LNG to build the project, as will a U.S. energy company called Western LNG. The three of them have now filed the "initial project description" with B.C. regulators. According to the 135-page document, the project will be located in Wil Milit, about 80 kilometres north of Prince Rupert. It would cost $10-billion and produce about 12 million tonnes of LNG annually. Construction (if approved) would begin in 2024, with the site operational in late 2027 or late 2028.
The above-noted seven gas producers, which will help provide feedstock for Ksi Lisims, have had their eye on entering the LNG industry for the last two years. Initially they were looking at Vancouver Island, but they have clearly turned their attention northward. The Nisga'a have been trying to attract investment to their communities for a decade and should make friendly partners. As well, the Ksi Lisims project will have its choice of two pipelines, both of which have already received regulatory approvals. Those would be Enbridge Inc.'s (ENB: $48.23) Westcoast Connector and TC Energy Corp.'s (TRP: $60.25) Prince Rupert Gas Transmission. Neither is built, as both were designed to serve different B.C. LNG projects that have since been cancelled, but the fact that they have received regulatory clearances should speed up the negotiations with Ksi Lisims.
Further afield, Colombian oil producer Frontera Energy Corp. (FEC) lost 13 cents to $6.77 on 236,600 shares. On Friday after the close (never a good news start to a sentence), the company lowered its full-year production guidance. Chief executive officer Orlando Cabrales pinned the blame on waste water disposal challenges and "community concerns ... [which] impacted some of our operations."
Frontera's investors were already aware that the Colombia community has been airing some concerns lately. At least 60 people have been reported dead in waves of anti-government protests that have sporadically rocked the country since April (not directed at the oil industry, but rather at a proposed tax hike and other economic policies). Mr. Cabrales took note of the protests in May, but said Frontera was seeing "no material impacts" and would therefore maintain its full-year production guidance of 40,500 to 42,500 barrels of oil equivalent a day. Also in May, Mr. Cabrales mentioned the water disposal issues very briefly, but again reassured investors that Frontera's production guidance remained intact. Investors were thus not particularly impressed to see the guidance reduced today to a range of 37,500 to 39,500 barrels a day.
Frontera is the second Colombian oil producer to lower its production guidance in just a week. Gran Tierra Energy Inc. (GTE: $0.77) did so last Monday, informing investors that it now expects to produce 27,500 to 28,500 barrels a day instead of 28,000 to 30,000. Happily, Gran Tierra added that rising oil prices were paving the way for higher EBITDA despite the lower production. Mr. Cabrales was able to use the same tactic in Frontera's announcement. The company was previously forecasting about $300-million (U.S.) in operating EBITDA this year. Now, even with the reduced production guidance, Mr. Cabrales cheered that he sees operating EBITDA coming in at $350-million (U.S.).
Back in Canada, oil sands producer Cenovus Energy Inc. (CVE) lost 36 cents to $9.86 on a heavier-than-usual 19.1 million shares. Today's drop in oil prices dragged it below $10 for the first time in two months. It still fared better than many other oil stocks today, perhaps thanks to a bullish research note from Credit Suisse analyst Manav Gupta, whose cheerful comments even made their way into Reuters and The Globe and Mail. Mr. Gupta upgraded Cenovus to "outperform" from "neutral" and applauded its efforts on debt reduction. By his calculations, the company can reduce its net debt by a range of $800-million to $1-billion in each of the next three quarters. (Net debt as of March 31 was $13.3-billion.) Cenovus could speed up debt reduction by selling non-core assets that it obtained through January's takeover of Husky Energy, noted Mr. Gupta. He hiked his price target on the stock to $15 from $13, relative to today's close of $9.86.
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