Energy Summary for July 29, 2021
2021-07-29 19:54 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery added $1.23 to $73.62 on the New York Merc, while Brent for September added $1.31 to $76.05 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.45 to WTI, down from a discount of $13.95. Natural gas for September added two cents to $4.06. The TSX energy index added a fraction to close at 125.41.
The oil patch is brimming with financials. Today these included the second quarter report of Canada's largest integrated energy company, Suncor Energy Inc. (SU), down 82 cents to $24.89 on 21.9 million shares. The company swung to a profit of $868-million from a loss of $614-million a year earlier (which was weighed down by nearly $400-million in inventory write-offs). Analysts were forecasting second quarter production of 696,000 barrels of oil equivalent a day and cash flow of $1.51 a share. Suncor came in slightly higher on both counts, at 700,000 barrels a day and $1.57 a share.
Investors remained aloof. Many fled to the exits more than a year ago, when Suncor released its financials for the first quarter of 2020 and slashed its quarterly dividend to 21 cents from 46.5 cents. By contrast, key competitors Canadian Natural Resources Ltd. (CNQ: $41.49) and Imperial Oil Ltd. (IMO: $34.87) kept their dividends intact throughout the downturn, and even boosted them once oil prices recovered. Shareholders hoping for a boost from Suncor today were to be disappointed.
They were also to be disappointed by another operational hiccup at Suncor's Fort Hills oil sands project. Fort Hills already had to be partially shut down early last year because of low oil prices. A restart began last October, with a tragic interruption in December when two workers died in an on-site vehicle collision, followed by a third death in January when a worker fell through a frozen tailings pond. Today's update involved no fatalities, thankfully, but Suncor had to lower its production guidance at Fort Hills because of a "slope integrity" issue on the south side of the mine. It seems that the envisioned slope is too steep. Suncor can mine a shallower slope, but it will need to strip away more overburden, delaying the ramp-up to full capacity into 2022. The overall effect is a drag on the 2021 guidance of about 6,000 barrels a day -- practically a rounding error, but enough to unnerve investors, given the past issues. Analysts seemed disappointed as well. TD's Menno Hulshof lowered his price target today to $42 from $44, while Scotia Capital's Jason Bouvier cut his to $33 from $35. The stock closed at $24.89.
Another oil sands producer, Cenovus Energy Inc. (CVE) added 20 cents to $10.37 on 11.6 million shares, garnering a better reaction to its second quarter financials. It swung to a profit of $224-million from a loss of $235-million. Production and cash flow of 766,000 barrels of oil equivalent a day and 90 cents a share, respectively, exceeded analysts' predictions of 755,000 barrels a day and 81 cents a share. Cenovus cheered its "continued strong performance" as it increased its production guidance to a range of 750,000 to 790,000 barrels a day (from 730,000 to 780,000).
The operations thus hyped, chief executive officer Alex Pourbaix turned his attention to Cenovus's "strong financial performance." He said Cenovus is on track reduce its net debt to $10-billion by year-end (from $12.3-billion as of June 30). The company is considering selling non-core assets to accelerate debt reduction. "Once we're in range of that $10-billion mark," said Mr. Pourbaix during a conference call this morning, "there will be room to consider other forms of capital allocation, including increasing shareholder returns." (Cenovus currently pays a quarterly dividend of 1.75 cents, for a thin yield of 0.7 per cent.)
A few other companies had financials worth a mention. Athabasca Oil Corp. (ATH), down two cents to 78 cents on 5.99 million shares, disappointed investors by failing to announce any firm progress on a hoped-for refinancing. The company has $450-million (U.S.) of debt coming due in February, 2022, and has been trying to refinance it for over a year. Its financials merely said that it "continues to advance" discussions. Meanwhile, Cardinal Energy Ltd. (CJ), unchanged at $2.95 on 3.37 million shares, used its financials as an opportunity to stoke dividend speculation. The company previously suspended its dividend in early 2020. It talked today of a desire to bring back a dividend "when appropriate" -- no word on timing or amount. Lastly, Whitecap Resources Inc. (WCP), up nine cents to $5.75 on 3.57 million shares, released its financials and included the news of yet another acquisition. This brings its total number of takeovers this year to four. With the latest addition, a private Saskatchewan company, Whitecap has boosted this year's production guidance to about 111,000 barrels a day from 108,000.
In other acquisition news -- and in a welcome break from the flood of financials -- Rick McHardy's Spartan Delta Corp. (SDE) lost 39 cents to $4.89 on 3.43 million shares, after agreeing to buy the private Velvet Energy for $743-million. Velvet is the largest producer in the oil window of the B.C./Alberta Montney. It is producing 20,600 barrels of oil equivalent a day, enough to boost Spartan's forecast 2022 production to around 70,000 barrels a day.
Velvet was founded in 2011 by CEO Ken Woolner. He and his people previously built and sold three other energy companies over the years, namely Velvet Exploration, Lightning Energy and Veteran Resources. For the new Velvet, they obtained backing from Warburg Pincus, the Canada Pension Plan Investment Board, 1901 Partners Management and Trilantic Capital Partners. As of 2020, Velvet had raised a total of $704-million from these and other equity investors since 2011, and had used the money to boost its production to 30,000 barrels a day. It struggled with debt, however, and its production took a hit during the recent downturn. Takeover rumours began popping up. Notably, in February, Cormark Securities published and then retracted a research note claiming that Velvet was being circled by Russia's Lukoil.
While Lukoil did not make a move, it is interesting to note that a different Russian, the billionaire oligarch Igor Makarov, soon took a sizable interest in Spartan. Mr. Makarov's Areti International Group controlled the private Montney-focused Inception Exploration, which Spartan bought in March, in the process giving Areti a roughly 18-per-cent interest in Spartan's equity. Now Spartan is making another Montney move with the takeover of Velvet. Velvet and Inception are direct neighbours in the Gold Creek area. Other players in this area, should any Russian billionaires wish to take note, include ARC Resources Ltd. (ARX: $9.59), Paramount Resources Inc. (POU: $15.90) and -- another oft-bandied-about takeover target -- the private Hammerhead Resources.
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