2021-11-11 20:36 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added 25 cents to $81.59 on the New York Merc, while Brent for January added 23 cents to $82.87 (all figures in this para U.S.). Western Canadian Select traded at a discount of $19.16 to WTI, down from a discount of $19.06. Natural gas for December added 27 cents to $5.15. The TSX energy index added a fraction to close at 165.57.
Canadian oil and gas drilling is finally returning to pre-COVID levels. According to a new forecast from the Petroleum Services Association of Canada (PSAC), the industry will drill 5,400 wells across Canada in 2022, the highest level since the 4,900 wells drilled in 2019. These figures compare with an estimated 4,650 wells in 2021 (not yet finalized) and a mere 2,990 wells drilled in 2020.
"The activity outlook is brighter than a year ago," declared PSAC president and chief executive officer Gurpreet Lail. Yet she quickly added that 2022 is "not going to be near where we were pre-[2014]-downturn." This has been an oft-repeated lament of PSAC for years; a peek at the PSAC media archives since 2015 turns up headlines such as, "Drilling Forecast Declines," "The Pain Continues," and "Oil Patch Downturn -- Five Years and Still Counting." For context, the industry drilled 11,200 wells in 2014, a high water mark it has not come close to approaching since. The best it did was 7,600 wells in 2018.
The new headline is a comparatively chipper, "PSAC Forecasts 16-Per-Cent Increase in Drilling Activity for 2022." Ms. Lail made sure to throw in some more familiar pails of cold water. "[The sector is] seeing a severe labour shortage, which has the potential to impact how much growth the industry can achieve in the coming year," she warned. She also flagged a "major setback for Canada and our industry" in the form of the trendy but damaging narrative, as expressed by activists and pandering politicians alike, that "hydrocarbons can't be a part of a sustainable future." She demanded "coherent policy approaches" to help the sector thrive.
Within the sector, the mood remained upbeat as quarterly reporting season hummed along. Jeff Tonken's Montney-focused Birchcliff Energy Ltd. (BIR) added 56 cents to $7.66 on 5.49 million shares -- its best close since 2017 -- after cheering "exceptional" results for the third quarter. Production averaged 84,900 barrels of oil equivalent a day, in line with analysts' predictions of 84,600 barrels a day. Cash flow of 63 cents a share exceeded analysts' predictions of 60 cents a share. Net earnings came to $138-million (or 52 cents a share), while debt fell to $637-million from $784-million a year earlier.
Unlike many of its competitors, Birchcliff's results showed nary a single hedging loss. Birchcliff keeps its production unhedged and is thus taking "full advantage of robust oil and natural gas prices," cheered president and CEO Mr. Tonken. He has been banging this drum for the past year. His hope at the time was that Birchcliff would enjoy free cash flow in 2021 of about $140-million, a figure that has risen repeatedly over the months as oil and gas prices have kept climbing. Today he hiked the free cash flow forecast to $350-million (from $280-million).
Investors are likely expecting Birchcliff to use some of this cash to increase its quarterly dividend, which is currently just half a penny (for a yield of 0.2 per cent). Again unlike several of its competitors, Birchcliff did not announce a higher dividend alongside the new financials. Yet Mr. Tonken did make sure to mention that the company is putting together its plans for 2022 and sees itself as having "optionality to increase shareholder returns, including increased dividends."
Another company that impressed investors with its third quarter financials was Neil Roszell's Headwater Exploration Inc. (HWX), up 33 cents to $5.15 on 6.17 million shares. The company talked up its rising production in the Clearwater oil play of Alberta. It acquired its Clearwater assets from Cenovus Energy Inc. (CVE: $16.07) for $100-million last December, when they were producing about 2,800 barrels of oil equivalent a day. Headwater boosted their production to an average of about 7,700 barrels a day in the third quarter and to the current level of over 9,000 barrels a day. The company also boosted its full-year and fourth quarter production guidance to account for recent drilling that has "exceeded expectations."
"Headwater is highly encouraged by [its Clearwater] results," cheered president and CEO Mr. Roszell. He noted that the company, which is debt-free with over $63-million in working capital, is "evaluat[ing] acquisition expansion opportunities in the Clearwater fairway" as it pursues its "next leg of growth." Then, showing that he can read the writing on the wall as well as anyone else, he talked of a second leg, the "leg of free cash flow generation ... [with an] increased focus on returning excess free cash flow to shareholders." He promised more details over the next 18 months.
Such teasing may strike a familiar chord. Mr. Roszell's previous promotion, Raging River Exploration, spent 2016 predicting that it would "run into a wall of free cash" in a couple of years and perhaps want to pay a dividend. That did not happen because Raging River instead accepted a takeover from Baytex Energy Corp. (BTE: $4.26) in 2018. Mr. Roszell's two promotions before that, Wild Stream and Wild River -- he likes his water themes -- were also sold, in 2009 and 2012, both times to Crescent Point Energy Corp. (CPG: $5.85). Cheerleaders expect a similar eventual outcome for Headwater.
South of the border, the North Dakota Bakken-focused Enerplus Corp. (ERF) added 20 cents to $12.83 on 2.15 million shares. The stock has more than doubled since mid-August, and has added roughly $1 since announcing its third quarter financials a week ago, complete with a dividend increase (the new yield is 1.3 per cent). President and CEO Ian Dundas tried to keep the excitement going with an interview today on BNN. He got plenty of help from the friendly-as-ever BNN interview. "Fundamentally, the business just continues to perform really well," declared Mr. Dundas, while the interviewer nodded along and reminded the audience of choice bits from last week's update.
The interviewer did dig up a new morsel or two for Enerplus's shareholders. With gas prices at their current high levels, and given that Enerplus is primarily focused on North Dakota oil, Mr. Dundas said the company is "open-minded" about selling its Marcellus gas assets in Pennsylvania. The proceeds could go toward improving the balance sheet. Mr. Dundas added that the balance sheet is already "really strong," so "we would only part ways with [the Marcellus assets] if we could get an attractive price." Long-term investors may recall that Enerplus was previously rumoured to be shopping these assets around in 2016 (with their production having remained virtually unchanged since then). Their 2016 valuation from analysts was about $500-million (U.S.).
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