Energy Summary for April 18, 2022
2022-04-18 20:49 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery added $1.26 to $108.21 on the New York Merc, while Brent for June added $1.46 to $113.16 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.00 to WTI, unchanged. Natural gas for May shot up 52 cents to $7.82, continuing its rapid rise toward $8 for the first time since 2008. The TSX energy index added 6.88 points to close at 244.64.
Fotis Kalantzis and Rick McHardy's Alberta-focused Spartan Delta Corp. (SDE) added $1.35 to $12.48 on a heavier-than-usual 1.61 million shares. The excitement likely reflects flattering analyst attention -- notably from Cormark Securities' Garett Ursu, who hiked his price target today to $22.50 from $20 -- but the company did have a bit of news to share. It announced that its shareholders elected six nominees to its board of directors at its annual meeting last Thursday.
Up until recently, there were eight nominees up for election, so recently that Spartan listed all eight in its management information circular last month. Two directors, Steve Lowden and Elliot Weissbluth, abruptly stepped down at the start of this month. They had both joined the board in March, 2021. That was when Spartan bought Inception Exploration, a private Montney producer backed by Areti Energy. Areti became Spartan's largest shareholder and was allowed to nominate two directors. It chose Mr. Lowden, Inception's chairman, and Mr. Weissbluth, one of Inception's directors.
The problem with Areti's interest in Spartan arose about two months ago. Areti is controlled by the Russian oligarch Igor Makarov, and after Russia invaded Ukraine in late February, any connections to Russia became, at best, uncomfortable. For clarity, Mr. Makarov is not among the Russians who have been hit with sanctions over the invasion. (He was put on the U.S. government's 2018 "Putin List," a dossier of individuals thought to have close relationships with Russian President Vladimir Putin, but Mr. Makarov's spokesmen have since denied any such ties.) Amid rising scrutiny, Areti abruptly announced on March 28 that it was privately selling 15 million of its Spartan shares. Its stated reasons were to "generate immediate liquidity and reduce [its] overall economic exposure to Spartan."
Immediately after the sale, Areti held 12.8 million shares of Spartan -- a sizable amount, but below the 10-per-cent insider threshold. This triggered the end of its representation rights on Spartan's board, and led to the above resignations of Mr. Lowden and Mr. Weissbluth. (It also means that Areti will not have to file insider reports about what it does with the remaining shares.) Spartan has not commented on any aspect of its ties to Areti, beyond announcing the resignations of Mr. Lowden and Mr. Weissbluth and thanking them for their service. It has also not said whether it plans to appoint new two directors to fill their seats.
One mystery in the above matters may have a partial answer in a recent SEDAR filing. Although Areti did not disclose the buyers of the 15 million shares, the U.S. hedge fund GMT Capital -- already a major shareholder of Spartan -- has disclosed on SEDAR that "during the month of March," its managed accounts acquired a total of 8.03 million shares of Spartan through unspecified transactions. GMT and its affiliates now control 35.4 million of Spartan's 153 million shares.
Further afield, Gabriel de Alba's Colombian oil producer, Frontera Energy Corp. (FEC), added 25 cents to $15.25 on 341,300 shares. A fellow Colombian oil producer, Gary Guidry's Gran Tierra Energy Ltd. (GTE), added eight cents to $2.23 on 5.29 million shares. Both of them received an outpouring of compliments today from Canaccord Genuity analyst Roman Rossi, who published no fewer than three boosterish notes this morning -- one on each company and another about Latin America in general. These represent his first coverage on the companies. (Long-time investors may recall that a different Canaccord analyst covered both companies until leaving Canaccord in 2019, at which point coverage was "suspended." Clearly there was no hurry to find a replacement.)
Mr. Rossi, who joined Canaccord last October -- he was previously a researcher and analyst at JPMorgan and Balanz Capital -- had many lovely things to say this morning. The core country for both Frontera and Gran Tierra, Colombia, was lauded by Mr. Rossi as "one of the most stable and investor-friendly jurisdictions in Latin America." He then immediately noted that Colombia's reserves and production have been declining for the last eight years, and that the current frontrunner in its presidential election, Gustavo Petro, is a leftist and no fan of the oil and gas industry. None of that fazes Mr. Rossi. Politicking aside, the Colombian energy sector is established and resilient, and Mr. Rossi recommended that investors simply "keep an eye on the polls [in May] and the noise they will bring to the market."
Both Frontera and Gran Tierra also have exploration-stage assets in another country, Ecuador. Ecuador had an election last year and now has a centre-right government, much to the delight of Mr. Rossi. He is hopeful that Ecuador's oil and gas industry will be able to reverse the "stagnation" of the last several years and enjoy "market friendly-movements [that] have increased the country's appeal to international investors."
Turning to the companies themselves, Mr. Rossi gave them both "buy" ratings and premium price targets. He likes Frontera's status as "one of the leading oil and gas producers in Colombia," with exploration assets not just in Ecuador but Guyana as well. The company may have a less-than-impressive corporate history, having previously been known as Pacific Exploration until a spectacular bankruptcy in 2016, but it is under new management now and is "a very different company from its predecessor," said Mr. Rossi. The stock has roughly doubled over the last four months but still "looks cheap" to the analyst. He gave it a price target of $17.50, relative to today's close of $15.25.
As for Gran Tierra, it too is enjoying a rally, after suffering what Mr. Rossi dismissed as "bumps in the road" in 2020. (Investors likely felt bumped and bruised indeed as Gran Tierra veered dangerously close to financial ruin, even appearing on Fitch Ratings' list of "bonds of top concern," which was more or less a default prediction. Only a fortuitously timed rise in oil prices saved Gran Tierra from Frontera's 2016 fate.) Mr. Rossi expressed excitement about Gran Tierra's plan to resume exploration drilling in 2022 for the first time in two years. It will drill six to seven exploration wells, split between Colombia and Ecuador. "Updates around [this] campaign will act as catalysts for the stock," opined Mr. Rossi. He set a price target of $2.70, relative to today's close of $2.23.
The reports on the companies were each 34 pages long, and the one on Latin America went on for another 26 pages. Investors who made it all the way to the fine print at the bottom would have seen some worthwhile if unsurprising disclosures. Notably, Mr. Rossi's employer, Canccord, expects to receive payments from both Frontera and Gran Tierra for unspecified investment banking services in the next three months.
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