| West Texas Intermediate crude for December delivery added 64 cents to $86.47 on the New York Merc, while Brent for January added $1.02 to $93.67, rising on a U.S. economic report signalling that inflation may finally be cooling down (all figures in this para U.S.). Western Canadian Select traded at a discount of $29.10 to WTI, up from a discount of $29.22. Natural gas for December added 37 cents to $6.24. The TSX energy index lost 11.25 points to close at 257.62. Canadian energy stocks largely rose with prices. A prominent exception was Vermilion Energy Inc. (VET), which tumbled $2.36 to $27.25 on 13.3 million shares, after releasing its third quarter financials. Although these showed production of 84,200 barrels a day and cash flow of $2.95 a share -- consistent with analysts' predictions -- those numbers were overshadowed by a looming windfall tax in Europe and a suspension of Vermilion's share buyback program. The windfall tax began making headlines in September, when the European Union proposed it as a "crisis contribution" or "solidarity contribution." The preferred term in other circles was tax raid. Under the proposal, oil and gas producers in Europe would have to pay a 33-per-cent tax on "surplus" profits in 2022 and perhaps 2023, with "surplus" defined as being 20 per cent higher than a company's average taxable profits from 2019 through 2021 (even though this period includes two pandemic profits where profits were scarce at best). Despite heavy criticism from industry executives and observers, the EU passed the proposal on Sept. 30. Vermilion, which gets about one-third of its production from Europe (soon to rise to one-half when it closes a much-hyped Irish acquisition -- more on that in a moment), is among the producers affected by the tax. The question for weeks now has been how badly. In today's financials, Vermilion said the EU is still sorting out the details, but based on the preliminary information available, the extra tax hit this year "could be in the range of $250-million to $350-million." This estimate is higher than many analysts were expecting. "We estimated the windfall tax at approximately $100-million," wrote the surprised Scotia analyst Jason Bouvier in a new research note. He had been assuming that companies would be able to reduce taxable income through non-capital losses. Apparently the EU has no such lenient intentions. The EU is also slapping on the tax faster than Desjardins analyst Chris MacCulloch thought; his estimate was $250-million, but his timeline for payment was 2023 rather than 2022. "[This] takes wind out of the sails," he sighed. National Bank's Travis Wood had a more cynical bent, grumbling, "Funny what the consequence is following one year of financial success after managing through a challenging decade with no government support...." To investors' further disappointment, the tax had several spillover effects. Most notably, Vermilion has suspended its buyback program for at least the rest of the year, seeking to shore up its balance sheet for the tax hit. It has also delayed its near-term debt targets and the release of its 2023 guidance. Adding a bit of extra insult to injury (though this is unrelated to the tax) Vermilion's above-referenced acquisition of part of the Corrib gas field in Ireland will not close this year after all. The company blamed "administrative delays" and said it now hopes to close the deal in early 2023. Other energy companies enjoyed a much better day. Two Alberta gas producers pleased the market with their third quarter financials, namely Darren Gee's Peyto Exploration & Development Corp. (PEY), up $1.90 to $14.23 on 4.71 million shares, and Jeff Tonken's Birchcliff Energy Ltd. (BIR), up 76 cents to $10.79 on 3.2 million shares. Peyto's habit of posting monthly operational updates on its website ensured that the financials held their usual lack of surprises. Production averaged 104,100 barrels a day, while cash flow came to $1.11 a share. The big news was the big hike in the dividend: Peyto will now offer a monthly payout of 11 cents, more than double the old level of five cents, for a yield of 9.3 per cent. The lofty new yield did raise some eyebrows. In a new research note, TD's Aaron Bilkoski opined that the dividend is only sustainable as long as Henry Hub (HH) benchmark gas prices are at least $2.75 (U.S.), and if they retreat below that level, Peyto's all-in payout ratio will exceed 100 per cent. "While this might seem like a significant commodity price decline from current levels [of around $6 (U.S.)], HH has averaged approximately $3 (U.S.) in the 10 years prior to 2022, and has dipped well below this level many times," he warned. Today's jubilant jump in the stock suggests that investors see this as a problem to deal with if it happens. As for Birchcliff, it posted production of 78,100 barrels a day and cash flow of 97 cents a share for the third quarter, both in line with analysts' predictions. Much of the rest of the update was a rehashing of various announcements from mid-October. These included a 20-cent special dividend (which it already paid on Oct. 28) and the release of preliminary 2023 guidance. As there were few surprises in the financials, today's jump seems in part corrective. Scotia analyst Cameron Bean pointed out that Birchcliff's share price (up to yesterday) has fallen by about 15 per cent since mid-October, "badly lagging the XEG [the iShares S&P/TSX Capped Energy Index ETF], which has gained 5 per cent." He opined that the "negativity is overdone." Of course, a cynic might expect nothing other than positivity from Mr. Bean, given that his employer, Scotiabank, is required to disclose that it owns some unspecified percentage of Birchcliff's shares. In any case, the analyst has a "sector outperform" rating on Birchcliff's stock and a price target of $16.50, well above today's close of $10.79. |