Energy Summary for Nov. 5, 2021
2021-11-05 19:02 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added $2.46 to $81.27 on the New York Merc, while Brent for January added $2.20 to $82.74 (all figures in this para U.S.). Western Canadian Select traded at a discount of $17.32 to WTI, down from a discount of $16.85. Natural gas for December lost 20 cents to $5.52. The TSX energy index added 4.23 points to close at 167.37.
As the first week of the COP26 UN climate conference draws to a close, industry groups in Canada are growing nervous about the scale of the environmental ambitions that Ottawa is pledging. Trying to be greener than anybody else risks scaring off another kind of green, warned the Canadian Association of Petroleum Producers (CAPP). President and CEO Tim McMillan stated that Canada could become an "outlier" with economic competitors if it tries to move too quickly or aggressively on climate commitments. Along with eight other energy associations from around the world (including from Australia, Mexico, India, Croatia and Africa), CAPP published a discussion paper today, calling on the COP26 delegates to recognize the vital role of the energy industry in "working collaboratively with governments ... [to help meet] the ambitions of the Paris Agreement."
Within the sector, quarterly reporting season rolled along. Canada's largest condensate producer, ARC Resources Ltd. (ARX), added 90 cents to $12.87 on 13.3 million shares. (It also hit an intraday high of $13 for the first time since 2018.) ARC filed its third quarter financials last night and touted production of 353,700 barrels a day and cash flow of $1.06, well above analysts' predictions of 344,000 barrels a day and 93 cents a share. The financials also contained an increasingly trendy dividend boost. Cheering its "record quarterly production and free funds flow per share," ARC hiked its quarterly dividend to 10 cents from 6.6 cents, for a new yield of 3.1 per cent.
Analysts chattered approvingly. "Quality shines through," trumpeted Canaccord Genuity analyst Anthony Petrucci, hiking his price target on ARC's stock to $18 from $17. RBC's Michael Harvey hiked his target to $17 from $16 while noting that ARC is on his "Global Energy Best Ideas List." Other target top-ups came from BMO's Randy Ollenberger (up to $17 from $16) and Scotia Capital's Cameron Bean (all the way up to $23 from $22).
None seemed particularly worried about what RBC's Mr. Harvey blithely referred to as the "BRFN file." This is in reference to the Blueberry River First Nation, which won a landmark B.C. Supreme Court ruling in June, giving the band more say in the development of a large northeastern chunk of the province. The ruling affects ARC and many other operators in the B.C. Montney play. To be clear, ARC has not been particularly worried about it either, saying in July that it has a good relationship with the band. It maintained in the new financials that it feels "fully prepared" to go ahead with its next planned B.C. Montney project, Attachie West phase 1. It has already earmarked $75-million of next year's budget for work on this phase.
Separately, Baytex Energy Corp. (BTE) lost six cents to $4.27 on 22.6 million shares, after it too released its third quarter financials. They were roughly as expected. Production averaged 79,900 barrels a day, relative to analysts' predictions of 79,200 barrels a day, while cash flow of 35 cents a share mildly exceeded analysts' predictions of 35 cents a share. The company continued to focus on holding production steady while shovelling as much free cash flow as possible toward the balance sheet. Net debt is now $1.5-billion, down from $1.8-billion at the start of the year. Baytex boasted that it now expects to hit its previously announced debt goal of sub-$1.2-billion in 2022 rather than 2023.
Investors' reaction was muted. The stock is taking a breather after a sharp rally that has sent it up to $4.27 from $1.90 since August. As well, some investors may have been hoping that Baytex would follow in many of its competitors' footsteps and use the financials as a chance to release its 2022 budget. The company said it will do so in December instead, as part of a broader five-year plan that it wants to release at the same time. The best it could offer investors today was (naturally) a taste of carrot. "Throughout the plan period," it vowed, "we will ... [try to] determine the best methods or combination thereof to enhance shareholder returns." It dangled the possibility of paying a dividend for the first time since 2015.
Back in the B.C. Montney, Dale Shwed's Crew Energy Inc. (CR) added four cents to $3.12 on 2.02 million shares. It too released its third quarter financials while telling investors to wait just a few more weeks for fresh guidance. For the third quarter, production averaged 23,700 barrels a day, exceeding analysts' predictions of 21,600 barrels a day. Cash flow of 17 cents a share surpassed analysts' predictions of 14 cents a share. (Incidentally, the financials also provided an example of why energy investors, especially during times of commodity price volatility, tend to focus on cash flow rather than net earnings or loss. Due largely to price-related impairment reversals, Crew reported a net profit in the third quarter of $209-million. This was more than double its actual revenue of $75-million.)
Unlike Baytex, which is updating its guidance because it has some shiny new assets that it wants to incorporate (its new Clearwater assets in Alberta), Crew needs to update its guidance because it just sold an asset. As discussed in the Oct. 29 Energy Summary, Crew finally found a buyer for its Lloydminster heavy oil assets on the border of Alberta and Saskatchewan. It had been marketing them (formally and informally) since 2016. Their production had dwindled over this time to about 1,000 barrels a day from 2,400. Meanwhile, Crew's more important Montney production has risen to around 30,000 barrels a day from 20,000 over the past five years. It will be the sole, star attraction the of guidance that Crew promised to release next month.
One cheerleader is already eager. The above-mentioned Mr. Petrucci of Canaccord said Crew's "growth spurt" in the Montney has been "very well timed," and the company remains "one of the few producers in Canada forecasting meaningful organic production growth through 2021 and 2022." He feels the stock remains "significantly undervalued" (despite its recent doubling to $3.12 from $1.54 since August). Mr. Petrucci has a "speculative buy" rating and a $5 price target on the stock. Investors may wish to direct their attention to the disclaimer section at the bottom of the note, in which Mr. Petrucci disclosed that his employer, Canaccord, expects to receive compensation from Crew for unspecified investment banking services in the next three months.