Energy Summary for Aug. 12, 2021
2021-08-12 20:02 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost 16 cents to $69.09 on the New York Merc, while Brent for October lost 13 cents to $71.31 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.71 to WTI, up from a discount of $13.78. Natural gas for September lost 13 cents to $3.93. The TSX energy index lost a fraction to close at 122.90.
Oil prices wobbled on mixed demand forecasts. In its widely watched monthly report, OPEC downplayed concerns about the rapid spread of the COVID-19 Delta variant, sticking to last month's predictions for rising oil demand in 2021 and 2022. "The global economy continues to recover," proclaimed the report, although it noted that "numerous challenges remain that could easily dampen this momentum." The International Energy Agency (IEA), by contrast, reckoned that the market is already being dampened. In its own report today, the IEA trimmed its demand outlook for the second half of 2021 by about 500,000 barrels a day. It pinned the blame on "new COVID-19 restrictions imposed in several major oil-consuming countries, particularly in Asia."
Here in Canada, companies continued to try to turn heads with their second quarter financials. One of the more successful attempts came from Jeff Tonken's Alberta Montney producer, Birchcliff Energy Ltd. (BIR), up 18 cents to $4.80 on 2.95 million shares. It reported a profit of $44.9-million. This did not reflect any impairment reversals (which have been a common theme this reporting season), nor was it dragged down by hedging losses (another common theme). Birchcliff emphasized that its production is in fact entirely unhedged. "[This] allows all of our production to benefit from strong oil and natural gas prices," cheered Birchcliff's president and chief executive officer, Jeff Tonken. As prices remain strong, Mr. Tonken added that Birchcliff is increasing this year's cash flow guidance to $500-million (from $400-million). This in turn has increased the free cash flow guidance (to $280-million) and decreased the year-end debt guidance (to $510-million).
The guidance indicates that Birchcliff is devoting nearly every penny of its free cash flow to debt repayment. Its debt as of June 30 was $770-million -- still lofty even after falling from $807-million a year earlier. The company's tendency to live beyond its means was a sticking point at the start of the 2020 downturn, when the stock reached an all-time low of 58 cents. Fervent promises to better the balance sheet, and, of course, the gamble on remaining unhedged, helped the stock rally to today's close of $4.80.
Another Alberta gas producer that released its second quarter financials was Darren Gee's Peyto Exploration & Development Corp. (PEY), down 25 cents to $7.20 on 1.09 million shares. Peyto does hedge some of its production, and as a result, it did report a sizable hedging loss of $22-million in the quarter. It was still able to stay in the black and report a net profit of $12.7-million. Its habit of publishing monthly reports on its website about its production and capital spending meant that those figures (88,700 barrels of oil equivalent a day and $57-million) came as no surprise. What did come as a surprise, an unpleasant one for investors, was Peyto's cash flow for the quarter of just 50 cents a share. Analysts had been expecting 60 cents a share. The large hedging loss (plus higher transportation and operating costs) dragged the number considerably downward.
Mr. Gee, Peyto's president and CEO, rose to the defence during a conference call this morning. "I always have to remind everybody, including ourselves, that our hedging program is not designed to win or lose -- it's really designed just to smooth out future volatility," he emphasized. "... We fully expect to have hedging losses as the price is rising, and we'll have hedging gains as the price falls. That's just sort of the nature of forward selling." He preferred to focus on Peyto's "solid" and "very successful" operations. The company has five active rigs, and is confident that it can hit its year-end production target of 100,000 barrels a day. As well, thanks to "additional success" in an up-and-coming area, Peyto is planning to build another gas plant. The plant should come on-line next year. Interestingly, although construction will begin this year, Peyto did not mention any increase to this year's budget. Mr. Gee indicated (optimistically, perhaps) that Peyto will use surplus inventory and repurposed assets from other plants.
Further afield, Gabriel de Alba's Colombian oil producer, Frontera Energy Corp. (FEC), lost 65 cents to $6.65 on 442,600 shares, after it too released its second quarter financials. Cynical investors may have winced to see "operating EBITDA" placed prominently as one of the highlights at the top of the press release, a clue as to what ugliness might lay in store. Frontera had already told investors that the second quarter was operationally difficult. Last month (as discussed in the July 19 Energy Summary), the company lowered its full-year production guidance and estimated that it produced just 35,700 barrels of oil equivalent a day during the second quarter (down from 40,600 in the first quarter). It blamed the recent nationwide strikes and protests in Colombia as well as site-level problems with waste water disposal.
The financials bore this out and more. In addition to the lower production, Frontera was buffeted by hedging losses, income tax expenses and debt extinguishment costs related to a recent bond refinancing. Its overall net loss came to $25.6-million (U.S.). This was nearly twice as high as the first quarter net loss of $14.1-million (U.S.).
Frontera's chairman, Mr. de Alba, maintained that the company "made progress on a number of important fronts in the second quarter of 2021." The above-mentioned refinancing was a big one; Frontera issued $400-million (U.S.) worth of notes in June, using them mostly to repay costlier debt. The company has also picked up speed in Colombia after the second quarter setbacks and currently has five active drill rigs.
Meanwhile, at its exploration-stage assets off the coast of Guyana, Frontera is getting ready to drill a potentially transformational" well. This would be the Kawa-1 well that Frontera is planning to drill at the Corentyne block with joint venturer CGX Energy Corp. (OYL), up 26 cents to $2.40 on 1.19 million shares. CGX was discussed in yesterday's Energy Summary. As noted in the summary, the joint venturers were originally aiming to spud the well "between Aug. 1 and Aug. 15." Today they amended this timeline to "before the end of August." The delay did not put the slightest hitch in Mr. de Alba's promotional stride, as he declared Kawa-1 to be "one of the most exciting exploration wells in the world, with a potential discovery serving as a key value creation catalyst."
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