Energy Summary for Jan. 20, 2023
2023-01-20 20:52 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery added 98 cents to $81.31 on the New York Merc, while Brent for March added $1.47 to $87.63 (all figures in this para U.S.). Western Canadian Select traded at a discount of $23.35 to WTI, up from a discount of $23.50. Natural gas for February lost 10 cents to $3.17. The TSX energy index added a fraction of a point to close at 248.97.
Oil prices notched their second weekly gain in a row, buoyed by predictions of higher demand from China as it continues to relax its COVID restrictions. Prices are also getting a boost from a brightening U.S. economic outlook. Speaking at the University of Chicago yesterday, U.S. Federal Reserve vice-chairman Lael Brainard said the chances of a "soft landing" for the U.S. economy are improving, suggesting that the Fed could slow down its pace on interest rate hikes. The Fed will hold its next rate-setting meeting from Jan. 31 to Feb. 1.
Here in Canada, Jeff Tonken's Alberta Montney-focused Birchcliff Energy Ltd. (BIR) added 25 cents to $9.22 on 4.18 million shares, as it continued to bask in approval of yesterday's big dividend boost. The company is hiking its quarterly dividend all the way to 20 cents from two cents, for a yield of 8.7 per cent. Its chief executive officer, Mr. Tonken, headed to BNN yesterday to hype -- and defend -- the generous new payout.
Both the hype and the defence took the form of rattling off numbers. Based on current commodity price predictions for 2023, Mr. Tonken said Birchcliff expects to generate $570-million in cash flow this year, whereas the capital budget and the dividend combined will cost just $483-million, leaving an $87-million cushion. Oil and gas benchmarks would have to weaken considerably from today's levels to make this cushion disappear. "We're good to $70 (U.S.) oil and $3 (U.S.) gas, so we're pretty comfortable," said Mr. Tonken. Asked whether Birchcliff might try to plump up the cushion through hedges, Mr. Tonken gave a resounding no, quipping, "The road to hell is paved with hedging." He said if necessary, Birchcliff would reduce its capital budget before trimming its dividend.
Mr. Tonken was not the only one making use of BNN's promotional reach. President Dion Hatcher of Vermilion Energy Inc. (VET), up 12 cents to $21.03 on 1.73 million shares, gave his own interview to the network this morning. Rather than discussing a windfall for investors in the form of a 900-per-cent dividend increase, however, Mr. Hatcher was there to soothe investors' ruffled feathers over a 33-per-cent windfall profit tax in Europe, where Vermilion is a sizable gas producer. Its stock has lost about one-third of its value since the tax was announced last fall.
Mr. Hatcher also made his case in numbers. He noted that the tax does not apply to gas prices below the Canadian-dollar equivalent of $15. Prices are currently around $30, so the tax applies to the extra $15 and works out to around $5. Ultimately, Vermilion is still realizing prices of around $25, which is more than eight times what it would be getting in North America, pointed out Mr. Hatcher. His conclusion was that the business remains "robust." He acknowledged, however, that the abrupt implementation of the tax shook investors' confidence in Europe as a stable place to do business. "The market obviously doesn't like uncertainty," he sighed. Based on today's lukewarm trading, the market's mood has not thawed.
On a different continent, Charle Gamba's Colombian gas producer, Canacol Energy Ltd. (CNE), added 16 cents to $11.41 on 166,000 shares. Today was its first day of trading following a 1-for-5 share rollback. It now has 34.1 million shares outstanding, down from 170.5 million.
Management is hoping that the rollback will bring more institutional attention to the stock. Mr. Gamba, president and CEO, floated the idea during a conference call last October. "Many corporate accounts have discussed trading fees with us. We believe that [a rollback will decrease] the price they pay on a per-share basis and they can lower their trading costs, perhaps attract more interest [to Canacol]," he told shareholders. Canacol could certainly use the boost. In December, its stock got as low as $1.75 (or $8.75 when adjusting for the rollback), its lowest level since 2014.
So far, 2023 has proved kinder to Canacol, with the stock closing today at $11.41. The company is pursuing a 10-well drill program to boost its production and reserves ahead of the planned opening of a large new pipeline next year. Whether institutional investors jump aboard with enthusiasm remains to be seen. Some of them may well want to see some more attention paid to the balance sheet; Canacol is one of the rare energy companies that did not explicitly mention debt reduction when releasing its full-year guidance a few weeks ago. Its total debt as of Sept. 30, 2022, was $552-million, exceeding its current market cap of $389-million.
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