Energy Summary for July 26, 2021
2021-07-26 20:34 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost 16 cents to $71.91 on the New York Merc, while Brent for September added 40 cents to $74.50 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.10 to WTI, up from a discount of $14.15. Natural gas for August added four cents to $4.10. The TSX energy index added 1.73 points to close at 127.44.
Oil prices may be reaching multiyear highs, but the damage from earlier lows is not so quickly erased. A new report from Canadian commercial real estate firm Avison Young says Calgary's downtown office vacancy rate hit a record 29.2 per cent during the second quarter. It will likely crack 30 per cent in the third quarter, unprecedented in Canada and the kind of number not seen in a major North American office centre since the Great Depression.
For context, previous Avison Young reports show that the vacancy rate in downtown Calgary was a mere 6.2 per cent when oil prices were at their previous peak in mid-2014. After oil prices collapsed later that year, the vacancy rate climbed rapidly, reaching a then-record 26.4 per cent in mid-2017. It flatlined in the mid-20s for the next few years until experiencing a pronounced rise in early 2021.
Avison Young's report did not lay all the blame at the feet of the oil patch, of course. For one thing, the energy sector is not the only employer in Calgary, although it is the main one, occupying 32 per cent of the downtown office space (down sharply from 57 per cent in 2012). The COVID-19 pandemic certainly played a role in the recent vacancy surge. Yet so did the "ongoing evolution in the energy industry, [which] has sparked a substantial wave of merger and acquisition activity," pointed out Avison Young.
(The firm delicately omitted the other side of that coin, which is substantial layoffs. It also omitted specific names. Investors -- and ex-employees -- will remember cases such as Ovintiv Inc. (OVV: $35.36), which packed up its Calgary headquarters last year and moved to Denver, and Cenovus Energy Inc. (CVE: $10.31), which merged with Husky Energy this year in a move projected to cause over 2,000 job losses. Even more topically, one of the criticisms of the proposed merger of Pembina Pipeline and Inter Pipeline had to do with the high likelihood of job duplications and therefore job cuts. Pembina withdrew its bid just this morning, clearing the way for rival bidder Brookfield Infrastructure, which has said it "would not be seeking to generate significant cost synergies by eliminating duplicative jobs.")
Avison Young's worse-case scenario shows the downtown vacancy rate getting as high as 34 per cent, a North American record. "That kind of vacancy rate has not been seen in a modern major office market since probably the Depression era," insight manager Susan Thompson told BNN. She added, "I sit on conference calls with my global counterparts around the world and they all shake their heads and say, 'That's not a number I can wrap my head around.'" Fortunately, continued Ms. Thompson, there are signs that other industries are starting to move in on Calgary, such as the high-tech sector. The City of Calgary has also taken steps to convert some of the unused office towers to residential space. Real estate is a lagging economic indicator, meaning that vacancy rates take a while to reflect on-the-ground improvements, noted Ms. Thompson. "It takes some time to play out," she said, "but we do eventually see the tide turning."
Within the energy sector, oil sands giant Canadian Natural Resources Ltd. (CNQ) -- which is based in the Bankers Hall skyscraper complex in the heart of downtown Calgary -- added 38 cents to $41.33 on 7.57 million shares. It has filed a preliminary shelf prospectus qualifying the issuance of up to $3-billion in medium-term notes. The notes can be issued at any time over the next 25 months.
While Canadian Natural has not formally announced a note issuance under this prospectus, its investors are used to this sort of thing. Last year, the company issued no fewer than four batches of notes, maturing from 2023 to 2030 and bearing interest at 1.48 per cent to 2.95 per cent. It generally used the proceeds to refinance nearer-term, more expensive debt. At the moment, Canadian Natural's next maturity involves a $1-billion batch of notes that are due in February, 2022, and bear interest at 3.31 per cent. To see the company replace those notes with something longer and cheaper would be no surprise.
Alas, not everyone's finances are in such flexible shape. This morning, Alfred Sorensen's struggling Pieridae Energy Ltd. (PEA) edged up one cent to 34 cents on 159,100 shares, after announcing a "strategic alternatives" review -- code for putting itself up for sale. The company said it is open to "a corporate sale, merger, a sale of a material portion of [its] assets or other transactions." It has hired Peters & Co. as its financial adviser.
The news comes less than a month after Pieridae missed an important investment deadline on its proposed Goldboro LNG (liquefied natural gas) project in Nova Scotia. The project has been in the works for around a decade, and managed to obtain regulatory and environmental approvals, a primary supply source, and a long-term agreement with a major customer. Yet Pieridae was unsuccessful in nailing down enough money to cover the $10-billion (U.S.) price tag. The supposedly final deadline for an investment decision -- not the original deadline, by far -- was June 30, 2021. On July 2, Pieridae announced that it had missed the deadline and was launching a "strategic alternatives" review of Goldboro. Mr. Sorensen (Pieridae's long-time CEO) emphasized that the company was not really looking to sell Goldboro outright, but instead wanted to bring in a deep-pocketed joint venturer. "We really do see one of [the North Atlantic majors] as a potential partner," he told BNN, "and we'll try to see how that might work for us in the next coming weeks." It does not seem to be working especially well. Now Pieridae is up on the chopping block too.
Pieridae has a new interim chief financial officer to help oversee the process. Former CFO Rob Dargewitcz, who had been with the company since November, 2019, abruptly announced his resignation earlier this month to "pursue other opportunities." Adam Gray will replace him as interim CFO. Mr. Gray joined Pieridae in January, 2020, as vice-president and controller. He previously spent five years with PricewaterhouseCoopers. As well, he spent eight years with the North West Redwater Partnership, which is another company that knows a thing or two about recalcitrant projects. North West's Sturgeon refinery in Alberta (a joint venture with the above Canadian Natural, as it happens) was proposed in 2008 but did not start commercial operations until 2020. Over this period, the refinery's costs ballooned to $11-billion from the proposed budget of $4-billion.
© 2021 Canjex Publishing Ltd. All rights reserve