Energy Summary for Oct. 18, 2021
2021-10-18 21:00 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for November delivery edged up 16 cents to $82.44 on the New York Merc, while Brent for December lost 53 cents to $84.33 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.30 to WTI, down from a discount of $13.20. Natural gas for November lost 42 cents to $4.99. The TSX energy index lost 1.89 points to close at 156.21.
Numerous oil patch workers are heading to the polls today, as voters across Alberta pick their next mayors, municipal councillors and school board trustees. One of the most closely watched elections will be the mayoral race in Calgary, where Naheed Nenshi is stepping down after three terms and 11 years on council. There are no fewer than 27 candidates vying to replace him. All have their own ideas on how to lead to a city that looks very different now compared with when Mr. Nenshi started governing in 2010. To give just one example, nearly one-third of the office space in the entire downtown core is now vacant, reflective of the damage of a global pandemic and a prolonged (and only recently reversed) rout in oil prices.
As Albertans pick their next municipal representatives, they will also be asked a much broader question on reforming or even eliminating the constitutional process of equalization. This is a system whereby the federal government takes money from wealthy "have" provinces and distributes it to poorer "have not" provinces, with the goal of sustaining a relatively equal standard of life across the country. Unsurprisingly, it has been a bugbear in parts of the country for decades. Alberta has tended to be firmly in the "have" camp and has not received equalization payments in about 50 years. By contrast, Quebec has received payments every single year since equalization started in 1957 -- providing ample fodder for politicians who gripe that Quebec won't take a pipeline from Alberta but will gladly take its cash.
Alberta is now putting the controversy to a referendum. Voters will be asked to answer yes or no to the question, "Should Section 36(2) of the Constitution Act, 1982 -- Parliament and the government of Canada's commitment to the principle of making equalization payments -- be removed from the constitution?" To be clear, even if a majority of Albertans vote yes, the results will not automatically amend the constitution. The provincial government says it will simply use the referendum results to help guide a potential renegotiation process with Ottawa.
Oil patch executives stuck to their usual habit of refraining from political commentary, instead focusing on the industry itself as it enjoys a rally in oil and gas prices. "We are in a new paradigm," opined Grant Fagerheim, chief executive officer of Whitecap Resources Inc. (WCP: $7.56), in an interview with the Calgary Herald. He suggested that the paradigm (as borne out in the 2022 budget that Whitecap unveiled last week) downplays big budget boosts and emphasizes debt reduction and rewards for shareholders. Paul Colborne, CEO of Surge Energy Inc. (SGY: $5.39), echoed this view, telling the Calgary Herald: "We're all a little gun shy ... of ramping up production. We'd rather pay down debt, keep production flat [and] generate free cash flow." Meanwhile, CEO Mike Rose of Tourmaline Oil Corp. (TOU: $42.90) scored a lengthy and flattering profile in The Globe and Mail, covering everything from his (described by the reporter as "a leading oil and gas company for a post-oil and gas era") to his childhood (playing baseball and exploring limestone quarries in Ontario).
Also basking in outside attention was oil sands producer Cenovus Energy Inc. (CVE: $14.25), down 18 cents to $14.25 on 14.7 million shares. The drop came despite a lovely mention from Raymond James analyst Jeremy McCrea. "We see [Cenovus] turning from a balance sheet repair story to a cash return story [in] 2022," predicted Mr. McCrea in a research note this morning.
By way of background, Cenovus has repeatedly claimed that it can lower its net debt to $10-billion by the end of the year, compared with $13.1-billion at the start of the year. Once that happens, according to the repeated refrain of CEO Alex Pourbaix, Cenovus will be eager to "accelerate shareholder returns." He has hinted that this could include an increase to the company's 1.75-cent quarterly dividend, with its current yield of 0.5 per cent.
Mr. McCrea shares Mr. Pourbaix's confidence. "[Cenovus has] a significantly improved leverage outlook," the Raymond James analyst opined, "... [and] we believe the shares have the potential to offer an above-average cash return profile." The analyst upgraded the stock to "outperform" from "market perform" and hiked his price target to $18 from $14. Investors may wish to note that Raymond James & Associates has been buying shares of Cenovus recently. EDGAR filings disclose that the institution held no shares of Cenovus as of Dec. 31, 2020, but held 13,135 shares as of June 30, 2021.
Another oil sands producer, Athabasca Oil Corp. (ATH) added five cents to $1.13 on 12.2 million shares. It had no news today, but investors are expecting some later this week. The company previously told them that it would close a long-awaited debt refinancing on or around Friday, Oct. 22. It simultaneously plans to offer a "strategic update and corporate guidance."
The debt that Athabasca had wanted to refinance for years is a $450-million (U.S.) batch of notes coming due in February, 2022. The notes bear interest at 9.875 per cent. Investors were hoping that Athabasca would issue cheaper notes -- say, 8- to 9-per-cent interest -- with a longer term to maturity. They were left rather surprised by the refinancing that Athabasca ended up announcing two weeks ago on Oct. 7. Although this refinancing included an issuance of new notes with a longer term (2026), the interest rate of 9.75 per cent is barely any different and Athasbasca threw in an unexpected warrant sweetener. (The new offering is also for $350-million (U.S.) rather than $450-million (U.S.). Athabasca arranged a $110-million (Canadian) credit facility to help close the gap.)
A new filing on SEDAR reiterated Athabasca's expected closing date of Oct. 22. After a somewhat unenthusiastic reaction to the refinancing on Oct. 7, shareholders have since sent the stock up to $1.13 from 94 cents, putting Athabasca back in $1 territory for the first time in 2-1/2 years. They seem to have high hopes for the company's imminent guidance. Athabasca may be one of the few oil companies planning a truly sizable spending boost in 2022, potentially doubling its 2021 budget, according to some analysts. Shareholders should find out by the end of the week.
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