2021-11-10 20:05 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery lost $2.81 to $81.34 on the New York Merc, while Brent for January lost $2.14 to $82.64 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.06 to WTI, down from a discount of $19.04. Natural gas for December lost 10 cents to $4.88. The TSX energy index lost 3.69 points to close at 165.09.
Less than a week after signalling renewed interest in "strategic growth/acquisition opportunities," Canada's largest oil and gas producer has pounced on one. Oil sands giant Canadian Natural Resources Ltd. (CNQ), down $1.23 to $53.01 on 4.72 million shares, plans to buy B.C. Montney player Storm Resources Ltd. (SRX), up 37 cents to $6.28 on 20 million shares. The cash offer of $6.28 per Storm share values the target at $960-million, including the assumption of about $186-million in debt and other liabilities.
The deal will add about 28,300 barrels of oil equivalent a day (about 80 per cent gas) to Canadian Natural's production. This is not a large amount next to Canadian Natural's existing production of 1.2 million barrels a day (23 per cent gas), but will expand its presence in the B.C. Montney, an increasingly core play. The company already bought Painted Pony Energy, a fellow B.C. Montney producer, in 2020. President Tim McKay made much of the "opportunity for synergies" that will "complement our current assets in the area."
Mr. McKay also acknowledged that Canadian Natural had previously -- as in six days ago -- said it would not pursue acquisitions until its debt was below $15-billion. It was $15.9-billion as of Sept. 30. The company is not quite there yet, but according to Mr. McKay, debt is "targeted to be below $15-billion [by the time] the transaction closes in December" -- quite all right, then.
Storm's investors will be feeling all right too. The price tag of $6.28 a share is nearly 10 times the stock's 2020 low of 78 cents, and even surpasses its all-time 2014 high of $6.17. The deal also marks the fourth version of Storm that president and CEO Brian Lavergne and his people have sold together over the decades. They started with Storm Energy Inc. in 1998, selling it to Focus Energy Trust in 2002. Then came Storm Energy Ltd., which went to Harvest Energy Trust in 2004. Storm Exploration was next and went to ARC Resources Ltd. (ARX: $12.51) in 2010. The current Storm reached the ripe age of 11 years, a longer wait than shareholders were likely expecting, but it has finally continued the pattern.
A different gas producer over in Alberta, Darren Gee's Peyto Exploration & Development Corp. (PEY), edged up five cents to $10.69 on 3.74 million shares, after releasing mixed financials for the third quarter. Cash flow of 63 cents matched analysts' predictions to a tee. Production of 90,000 barrels of oil equivalent a day, however, came in slightly below 90,400 barrels a day, and Peyto backed slightly away from its target of hitting 100,000 by year-end (claiming that the exact rate will "depend on timing of year-end activity").
Investors had more than the financials to digest. The above-noted Mr. Gee, who has been Peyto's president and CEO for about 15 years, announced today that he will turn over the president's role to Jean-Paul Lachance, chief operating officer. The move is naturally stoking succession rumours. Mr. Lachance has been with Peyto since 2011 and was promoted to COO in 2018. Before Peyto, he worked for ProspEx Resources (acquired by Paramount Resources Ltd. (POU: $23.99) in mid-2011), as well as Chevron and Marathon.
Perhaps to welcome the new president (or offset the middling financials), Peyto proudly proclaimed, "Monthly Dividend Reinstated." Long-time investors may remember that Peyto used to pay a monthly dividend that was as high as 11 cents. It dropped to six cents in 2018, dropped again to two cents in 2019 and then morphed into a one-cent quarterly dividend in 2020. The yield as of yesterday was a nominal 0.4 per cent. Now Peyto is shifting back to a monthly dividend and boosting it all the way to five cents, for a new yield of 5.6 per cent.
Peyto was not the only one with dividends on its mind. Vermilion Energy Ltd. (VET) lost $1.67 to $13.12 on 10 million shares, despite vowing -- or at least hoping out loud -- to reintroduce a dividend in early 2022. Investors may have suspected that this was coming; the stock has risen from less than $10 since late September. Yet today's correction might not have been as steep if the announcement had contained some specifics. Vermilion is mulling a quarterly dividend that will represent 5 to 10 per cent of cash flow, but still needs to be "stress-tested" at different oil prices. BMO analyst Ray Kwan took a stab at what this could mean, reckoning this morning that Vermilion will unveil a quarterly dividend of five to 10 cents.
This implies a yield of 1.5 to 3.0 per cent. The dividend trepidation reflects two things: a debt-laden sheet, and a somewhat embarrassment-laden past. This time two years ago, Vermilion owed about $2.1-billion and its share price was struggling, but it was still paying a sky-high monthly dividend of 23 cents, while boasting that it had never cut its dividend in 16 years and did not intend to start now. This confidence persisted almost right up until the sheepish suspension of the dividend in early 2020. Vermilion also got some new management around that time, which immediately turned the focus to the debt. This remained the priority in the new announcement, which made clear that the dividend is not a guarantee.
As it happened, the announcement included an update on the debt, as the whole thing formed part of Vermilion's newly released third quarter financials. Production and cash flow were both better than expected: Vermilion averaged 84,600 barrels of oil equivalent a day and took in cash flow of $1.62 a share, relative to analysts' predictions of 82,900 barrels a day and just $1.37 a share. Net debt now stands at $1.7-billion. Alas, the headline-grabbing number was the net loss of $147-million, as Vermilion was dragged deep into the red by about $350-million worth of hedging losses. These were particularly pronounced in Europe. Vermilion has a sizable amount of European gas production, and should be reaping the benefits of a gas crisis that has blown prices out to record highs. Hedges restricted the full benefits to only about one-third of Vermilion's gas production.
In other words, Vermilion could have raked in much, much more. This may be the case for a while, as an update on the company's website shows that it is carrying sizable hedges for the rest of 2021 and for 2022 as well -- likely accounting for some of today's disappointment. Vermilion (like many in its position) defended its hedges as a way to "increase the stability of our cash flows" while it tackles its debt. It promised to provide more information about its near-term plans when it releases its 2022 budget in December.
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