Energy Summary for Aug. 23, 2022
2022-08-23 20:35 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery shot up $3.38 to $93.74 on the New York Merc, while Brent for October added $3.74 to $100.22 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.70 to WTI, unchanged. Natural gas for September lost 49 cents to $9.19. The TSX energy index added 7.17 points to close at 244.57.
Oil prices raced higher, with Brent returning to the triple digits for the first time in three weeks, on reports that OPEC+ will consider cutting production as a way of boosting prices. "The paper and physical markets [for oil] have become increasingly disconnected," warned Saudi Arabia's energy minister, Prince Adbulaziz bin Salman, in an interview with Bloomberg. His meaning is that the futures market is not reflecting the realities of supply and demand. Instead it is caught up in a "vicious circle of very thin liquidity and extreme volatility," opined the prince. He said OPEC+ has various tools to stabilize a "yo-yo market," including "cutting production at any time."
Natural gas prices had a dramatic day as well. U.S. gas prices reached an intraday high of $10.01 (U.S.), their first time above $10 (U.S.) since 2008. The speculation is that the supply crunch in Europe, where prices are currently around eight times higher, will bolster demand for cheaper U.S. exports. After the brief trip above $10 (U.S.), profit-taking sent prices retreating to today's close of $9.19 (U.S.).
One company hoping to take advantage of lofty U.S. gas prices is Ian Atkinson's Southern Energy Corp. (SOU), which today lost six cents to 95 cents on 4.69 million shares, after releasing its second quarter financials. The company is a gas producer in the U.S. Gulf Coast area (mostly Mississippi). Thanks to higher gas prices, Southern's revenue rocketed to $10.3-million (U.S.) in the second quarter from $3.7-million (U.S.) a year earlier, even as production merely puttered up to 2,400 barrels a day from 2,100. To investors' disappointment, however, net earnings narrowed to $2.8-million (U.S.) from $3.0-million (U.S.), partly because of hedging losses.
Mr. Atkinson, Southern's president and chief executive officer -- and a former Alberta oil sands executive who co-founded Athabasca Oil Corp. (ATH: $2.60) back in 2006 -- kept his smile broad. He trumpeted the addition of "significant unhedged production" from three new wells brought on-line mere weeks ago. These have boosted Southern's current production to about 3,700 barrels a day, and a five-well program is now in the works for next quarter. Chief financial officer Calvin Yau, following Mr. Atkinson's lead, emphasized that Southern is adding "new unhedged production," allowing it to better enjoy "the strength of natural gas spot and basis pricing ... [which] has continued positively over the past month."
Having sown its promotional seeds, Southern reaped boosterish applause from a faithful cheerleader. In a research note this morning, Canaccord Genuity analyst Charlie Sharp marvelled at the company's "very encouraging springboard" to its long-term production goal of 25,000 barrels a day. "The rapidly rising well count, strong U.S. gas prices and largely fixed operating costs point to delivery of step changes in cash flow generation for many years to come," proclaimed Mr. Sharp. He hiked his price target to $2.25 from $2.
All of that was at the top of the nine-page research note. Toward the bottom was a litany of disclosures about Mr. Sharp's employer, Canaccord, which, as investors may wish to note, has a cozy relationship with Southern indeed. Canaccord owns shares of Southern, acts as a "market maker or liquidity provider," receives compensation for investment banking services, and has led financings for the company. It was most recently a broker and bookrunner when Southern raised $40.4-million at 87 cents a share last month. Before that, it helped Southern raise $12.4-million at 40 cents last November, with Mr. Sharp just so happening to publish his first research note on the stock in January.
Further south, in Guyana, Gabriel de Alba and Dr. Suresh Narine's CGX Energy Inc. (OYL) added one cent to 94 cents on 39,600 shares. It has received conditional TSX-V approval for its amended farm-in agreement on the Corentyne block with its joint venturer and majority shareholder, Mr. de Alba's Frontera Energy Corp. (FEC: $10.72). The two of them announced the amendments in July.
The relationship goes back much longer than that, with Frontera first becoming a shareholder of CGX in 2011 and becoming its joint venturer in 2019. Over these many years, Frontera has regularly opened its wallet to help CGX with its Guyanese exploration activities, but these still have yet to result in production. The companies did make a discovery together when they drilled their first well in 2021. They began making plans for a second well in 2022, but CGX's perpetually cash-strapped status led it to lean on Frontera once again in July. As announced July 22 (and reiterated on SEDAR yesterday), Frontera will go from a minority interest in the Corentyne block to a majority interest, in exchange for more than $122-million (U.S.) in financing and loan commitments. CGX will lose a good chunk of its interest in Corentyne, but will wipe out over $50-million (U.S.) in debt and will not have to worry about its share of the costs of the next well.
The deal remains subject to final approval from the TSX-V and the Guyanese government. The companies are hoping to close it prior to the spud date for the next well, expected in October. Frontera will then be hoping for a double dose of excitement from its newfound majority interest in Corentyne and its existing majority interest in CGX. It holds 257 million of CGX's 287 million shares, which it amassed over the years at a cost of about $224-million. The position today is worth $242-million.
Speaking of insider positions, here in Canada, Stephen Loukas's Obsidian Energy Ltd. (OBE) added 90 cents to $12.60 on 1.36 million shares, perhaps on a combination of higher oil prices and recent insider buying. New SEDI filings show that Mr. Loukas, Obsidian's interim president and CEO, spent $94,000 yesterday buying 8,346 shares. These are on top of the 5,000 shares that he bought for about $53,000 earlier this month. Director Shani Bosman also bought 5,000 shares earlier this month, and 10 directors and officers subscribed for a total of $5.7-million in Obsidian's $127-million note financing at the end of last month.
The financing did not see any participation from one of Obsidian's most noteworthy shareholders, the hedge fund FrontFour Capital, where the above Mr. Loukas is a partner, managing member and portfolio manager. FrontFour spent about $40-million amassing a 5-per-cent interest in Obsidian from 2013 to 2019. At the worst of the downturn in 2020, this position (not counting Mr. Loukas's personal holdings) was worth barely $800,000. It has since rallied all the way to $50.5-million.
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