Energy Summary for Sept. 12, 2022
2022-09-12 20:50 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery added 99 cents to $87.78 on the New York Merc, while Brent for November added $1.16 to $94.00 (all figures in this para U.S.). Western Canadian Select traded at a discount of $20.38 to WTI, unchanged. Natural gas for October added 25 cents to $8.25. The TSX energy index added 4.66 points to close at 238.96.
The oil patch kicked off the week with a splashy acquisition. Brian Schmidt's Tamarack Valley Energy Ltd. (TVE), up one cent to $3.99 on 18.9 million shares, is plunging deeper into the Alberta Clearwater play, having agreed to buy the private Deltastream Energy for $1.42-billion.
"The acquisition of Deltastream solidifies Tamarack as the largest producer in the Clearwater," cheered Tamarack's president and chief executive officer, Mr. Schmidt. He explained that the deal will add 23,000 barrels a day of production and could boost free cash flow by over $500-million annually. Thanks to "industry-leading returns," the break-even WTI oil price to achieve free cash flow on the assets is less than $32 (U.S.) a barrel, marvelled Mr. Schmidt. He showed his confidence by announcing an increase to Tamarack's monthly dividend -- now 1.25 cents instead of one cent, for a yield of 3.8 per cent -- and hinting at further "enhanced return of capital" next year.
In case that were not enough, Mr. Schmidt made his way over to BNN to further promote the deal. "This is just a very strategic and transformative acquisition for Tamarack -- I would say a once-in-a-generation asset. I've been in the business a long time, and this thing's fantastic," he proclaimed. A seven-minute exploration of other synonyms ensued. The deal is "very accretive," the price "very attractive," and the location of course unbeatable in "the most economic play in North America."
Mr. Schmidt got an extra BNN boost later in the day from Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, who appeared separately to continue the hype. "Assets of this quality ... do not come around very often," said Mr. Nuttall (whose Ninepoint Energy Fund lists Tamarack as its 10th-largest holding as of Aug. 31). While Mr. Nuttall has been outspoken lately in his preference to see oil and gas companies using their money to reward shareholders, he told BNN that in Tamarack's case, the assets are so "very strong" that "I give them a pass on this acquisition."
Despite both men's considerable efforts, the deal produced mixed reactions in the market. Of the $1.42-billion price tag, roughly $1-billion will need to be borrowed, a substantial increase to Tamarack's net debt of $470-million as of June 30. The deal will also see Tamarack issue $425-million in shares -- $300-million to Deltastream's owners and $125-million through a bought deal -- at $3.75. A mere three months ago, the stock was worth nearly $6.50, which would have been much less dilutive. Recent dilution is already wearing on investors. Over the last 19 months, as Tamarack has embarked on an increasingly ambitious Clearwater shopping spree, its share count has climbed to 556 million (post-Deltastream) from 222 million.
Tamarack and its cheerleaders seem to be taking the position that lofty debt and a depressed share price should not stand in the way of buying the largest company in Canada's flashiest early-stage oil play. (The entire Clearwater is currently producing about 91,000 barrels a day, with Deltastream doing one-quarter of that on its own.) Certainly the terms do not seem to faze one prominent new institutional shareholder. ARC Financial, the long-time backer of Deltastream (it led the company's $100-million start-up financing back in 2014) declared today that it is "excited to be a shareholder in Tamarack." If all goes to plan, the takeover should close by the end of next month.
Elsewhere in Alberta, oil sands player Cenovus Energy Inc. (CVE) added 40 cents to $24.40 on 9.48 million shares, as it continued hacking away at its debt. Late last month, the company announced that it had launched tender offers to buy up to $1.5-billion (U.S.) of its own debt. Now it has hiked the maximum amount under these offers to $2.2-billion (U.S.). If fully tendered, the offers should wipe out five batches of notes due from 2025 to 2043, while putting a large dent in a sixth batch due in 2039. The offers expire on Sept. 23.
The buyback should help with Cenovus's goal of "deleverag[ing] the balance sheet towards our net debt floor," as chief executive officer Alex Pourbaix put it during a conference call in July. Barely a year and half ago, in early 2021, Cenovus's net debt exceeded $13-billion. This figure was just $7.5-billion as of June 30, 2022. Mr. Pourbaix has indicated that he wants to get it all the way down to $4-billion and then increase Cenovus's dividend and/or buybacks. Its current quarterly dividend of 10.5 cents represents a yield of 1.7 per cent, a relatively modest yield next to fellow oil sands players Imperial Oil Ltd. (IMO: $63.33), Canadian Natural Resources Inc. (CNQ: $73.06) and Suncor Energy Inc. (SU: $42.11), whose yields are 2.1 per cent, 4.1 per cent and 4.5 per cent, respectively.
Up in the Montney, David Wilson's Kelt Exploration Ltd. (KEL) stayed unchanged at $6.38 on 569,200 shares, holding its ground despite reducing its production guidance. It had hoped that it would manage to exceed production of 30,000 barrels a day for the year. Today it nudged this down to a range of 28,500 to 29,500 barrels a day, in large part because gas prices "dropped significantly" and prompted Kelt to enact "prudent" shut-ins of some of its production. (As discussed in Stockwatch on Aug. 19 and Sept. 9, AECO gas prices in Alberta collapsed during August amid summer transportation constraints -- with B.C. gas benchmarks faring even worse -- but began to rebound this month.)
Management kept a smile on, with CEO Mr. Wilson estimating that even with the lower production, annual cash flow should still be "within 3 per cent" of Kelt's previous forecast. He added that he remains "optimistic about the energy industry and the company's ability to provide shareholders with high rates of return on capital deployed."
No doubt contributing to his cheerful mood was the receipt of new drilling licences from the B.C. oil and gas regulator. These are Kelt's first B.C. drill permits since the regulator halted licensing in July of last year, amid a court battle between the province and the Blueberry River First Nation. As discussed on Aug. 18, the regulator finally resumed the flow of licences last month, bestowing the first batch on Ovintiv Inc. (OVV: $69.58), ARC Resources Ltd. (ARX: $18.56) and Malaysia's Petronas. Now (according to the regulator's website) several others have joined the happy list. Recent recipients include Kelt, Whitecap Resources Inc. (WCP: $9.47), Tourmaline Oil Corp. (TOU: $80.37) and the above-mentioned Canadian Natural Resources.
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