Energy Summary for Dec. 2, 2021
2021-12-02 19:50 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added 93 cents to $66.50 on the New York Merc, while Brent for February added 80 cents to $69.67 (all figures in this para U.S.). Western Canadian Select traded at a discount of $18.38 to WTI, up from a discount of $19.00. Natural gas for January lost 20 cents to $4.06. The TSX energy index added 2.21 points to close at 157.54.
Oil prices headed higher, the market seemingly having already priced in the outcome of today's OPEC+ meeting. The group is sticking with its existing policy of monthly production increases of 400,000 barrels a day. Rumours swirled last week that the group might pause or lower these increases to counter extra supplies from the United States and other countries that had decided to open emergency fuel reserves. Such an action would have put OPEC+ in even worse books with the U.S., which has been pressuring the group to accelerate its production in order to tamp down prices. OPEC+ evidently decided the safest course was the status quo.
Here in Canada, the Alberta Energy Regulator (AER) has finalized new rules to make the oil and gas industry clean up its messes. "We're pushing industry to clean up their sites sooner and ensuring the cost and responsibility of the cleanup rests on the shoulders of the industry -- where it should be," declared AER president and chief executive officer Laurie Pushor. Among other things, the regulator is setting mandatory industry-wide targets for cleanup spending, including $422-million in 2022.
The changes are part of a lengthy, continuing overhaul of the AER's liability management program. The Alberta government ordered the AER in 2020 to make these changes in an attempt to fix a long-standing but worsening backlog of inactive and abandoned wells in the province. From 1989 to 2014, the number of these wells soared to about 80,000 from 25,000. The AER responded in 2016 by stiffening up its requirements for a company's liability management ratio (essentially a credit rating for determining whether a company should be allowed to acquire oil and gas licences). Unfortunately, a prolonged downturn and a rash of bankruptcies proved that the 2016 changes did not go far enough. These days, according to the AER, the number of abandoned wells stands at 170,000, or 37 per cent of all wells in the province.
As a result, since 2020, the regulator's focus has shifted from ascertaining that companies theoretically have enough money to pay for cleanup, to requiring them to spend some of that money on a yearly basis. This will reduce the problem of companies sidestepping cleanup until it is too late. Under the new rules, the AER will set industry-wide "closure spend targets" on a running five-year basis -- with the next five years ranging from $422-million in 2022 to $513-million in 2026 -- and will set companies' targets individually. The AER has previously suggested that a company's required annual spending will be equal to about 4 to 5 per cent of the total value of its environmental liabilities. The new rules did not confirm this, although they did clarify that the targets will take into account a company's financial position.
Speaking of spending, the Western Canada- and Texas-focused Baytex Energy Corp. (BTE) lost six cents to $3.50 on 15.9 million shares, after releasing its 2022 budget and a new five-year plan. It previously released a five-year plan in April that included preliminary guidance for 2022. In the months after that was released, however, Baytex claimed to be making great strides in a new core play, the Alberta Clearwater (its third core play after the Viking, the Eagle Ford and Peace River). It promised to put out an update with a greater Clearwater contribution in December. Now that day has arrived.
It was largely as investors expected. Baytex plans to produce more, and spend more, but not in earth-shaking amounts. The biggest surprise was likely in the 2022 part of the plan, with its proposed budget of up to $450-million -- well above the earlier guidance of $366-million and analysts' predictions of $375-million. About 10 per cent of the 2022 budget will go to the Clearwater. On a five-year basis, Baytex plans to boost its overall production to a range of 85,000 to 90,000 barrels a day, which is a 5,000-barrel-a-day increase from the old plan, on roughly 10-per-cent-higher annual budgets. The company also expects to enjoy $2.1-billion to $2.8-billion in free cash flow over the total five-year period. That is well above the old number of $1-billion, but that mostly reflects higher oil prices.
As to what Baytex will do with its cash, president and CEO Ed LaFehr vowed to "maintain capital discipline." In practice, this means continuing to try to push debt down to a targeted level of $1.2-billion. That compares with $1.5-billion as of Sept. 30 and $2.3-billion three years ago. Mr. LaFehr promised that once Baytex hits this target, it wants to announce "enhanced shareholder returns, which could include share buybacks and/or a dividend." In the good old days of 2014, Baytex paid a 24-cent monthly dividend and its stock traded at $50. It canned the dividend in 2015 and currently trades at $3.50. The lesson is that paying debt off is never as much fun as racking it up.
Elsewhere in Alberta, Athabasca Oil Corp. (ATH) edged up one cent to $1.18 on 7.89 million shares, after it too released its 2022 budget. It plans to spend $128-million and produce 33,000 to 34,000 barrels of oil equivalent a day. The production is slightly lower than this year's target of 34,250 barrels a day, even though the budget is well above this year's budget of $100-million. Most of this year's budget is going toward Athabasca's core oil sands operations. In 2022, it plans to do some more work at its light oil assets too.
The main priority, investors were hardly surprised to hear, continues to be debt reduction. Athabasca gave investors a good scare recently by getting painfully close to a $450-million (U.S.) debt deadline in February, 2022. After more than a year of effort, it finally succeeded in refinancing the debt in October, pushing most of it out to 2026 and turning the rest into a credit facility. It has since emphasized that it wants to spend some time reducing the debt properly. To that end, it vowed today to use the majority of its free cash flow -- supported by substantial production hedges -- to halve its debt to $175-million (U.S.) by 2023.
Management resisted the urge to drop Baytex-like hints about eventually using extra cash to reward shareholders. It seemed to have a different audience in mind: potential suitors. After emphasizing its "resilient production" and "long-reserve-life assets," Athabasca made sure to mention its vast $3.2-billion in tax pools, $2.4-billion of which is immediately deductible. Tax pools are useful because they can help keep the tax man at bay. Just this week, when PrairieSky Royalty Inc. (PSK: $13.51) announced an asset acquisition, it specifically mentioned tax pools as a key benefit. This will not have gone unnoticed by Athabasca and others potentially interested in luring a suitor.
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