Energy Summary for Dec. 22, 2021
2021-12-22 20:48 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery added $1.64 to $72.76 on the New York Merc, while Brent for February added $1.31 to $75.29 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.70 to WTI, unchanged. Natural gas for January added 11 cents to $3.98. The TSX energy index added 1.98 points to close at 161.07.
Alberta oil sands producer Cenovus Energy Inc. (CVE) added 28 cents to $15.44 on 7.87 million shares, while Alberta Clearwater producer Headwater Exploration Inc. (HWX) lost five cents to $4.89 on 942,700 shares. The former is going to exercise warrants of the latter. Following a planned $30-million warrant exercise tomorrow, Cenovus will hold 15 million shares of Headwater, equal to a 6.9-per-cent interest.
Although the warrants do not expire for another two years, Headwater announced today that it has issued a call notice on Cenovus to exercise them, presumably wanting to pocket the $30-million quickly. Cenovus has no need to kick up any fuss. Given the $2 strike price relative to Headwater's closing price of $4.89, if Cenovus were to sell all 15 million shares, it would get even more money than Headwater, enjoying a tidy profit of $43-million
Cenovus has already reaped the benefits of its earlier investment in Headwater. Their relationship goes back to December, 2020, when Cenovus sold Headwater its Clearwater assets for $100-million, comprising $35-million cash and 50 million shares (plus the 15 million warrants). The 50 million shares were valued at $1.30 each. Thanks to rising oil prices, as well as Headwater's rapid production boosts at the assets once it owned them, the stock more than tripled in less than a year. Through a secondary offering in October, Cenovus sold all 50 million shares at $4.55 each, for a profit of $162.5-million.
As that was a secondary offering, Headwater did not receive any of the proceeds. It will get the full $30-million from the warrant exercise. The announcement comes amid rumours that Headwater is looking to expand further in the Clearwater play. President and chief executive officer Neil Roszell stated last month that the company "continues to evaluate acquisition expansion opportunities ... to participate in the Clearwater consolidation." So far, the bulk of the dealmaking in the region is coming from Tamarack Valley Energy Ltd. (TVE: $3.57), which has announced four Clearwater acquisitions in less than a year, including last week's deal to buy the private Crestwynd Exploration for $185-million.
Elsewhere in Alberta (and Saskatchewan), Paul Colborne's Surge Energy Inc. (SGY) added eight cents to $4.13 on 612,700 shares. It has released, to much self-applause, its inaugural sustainability report. Investors who wonder about such reports have been wondering about Surge's since August, when the company said it would publish its first official ESG (environmental, social and governance) report in the fourth quarter. It has now done so with barely a week to spare.
Like most energy companies, Surge has been keeping ESG records and establishing ESG committees for years. The trend these days is to release glitzy reports filled with polished charts and smiling photographs, and so that is what Surge will do. It at least managed to avoid long-windedness. Some competitors, such as Baytex Energy Corp. (BTE) and Crescent Point Energy Ltd. (CPG), had their most recent ESG reports clocking in at 60 and 102 pages, respectively. Surge wrapped its up in 35.
Further afield, Gary Guidry's Colombian oil producer, Gran Tierra Energy Inc. (GTE), added five cents to 99 cents on 1.65 million shares. Its bankers have finished the semi-annual review of its credit facility. The news got the full spin treatment as Gran Tierra toasted the "successful" review, claiming to have "elected to downsize" its facility to $150-million (U.S.) from $215-million (U.S.). Only $125-million (U.S.) (down from $200-million (U.S.)) will be immediately available; the rest will need the consent of the lenders. Gran Tierra said the reduction will lead to lower fees and will "better align" the facility with the company's expected cash flow and budget in 2022.
More encouragingly, Gran Tierra said it expects to reduce the outstanding balance on the facility to just $70-million by the end of 2021, followed by paying off the facility entirely in the first half of 2022. Investors took heart from the continuing commitment to debt reduction. Gran Tierra stood out during the 2020 pandemic because its stock reached an all-time low in October, 2020, whereas most other energy stocks hit their lows in March, 2020. Gran Tierra's low of 24.5 cents gave it a market cap of just $89-million -- utterly dwarfed by its debt at the time of $1-billion, including the full $200-million (U.S.) that Gran Tierra was able to draw on its credit facility.
Through cash flow and other methods (such as last month's $30-million (U.S.) sale of all of its shares of Petrotal Corp. (TAL: $0.385)), Gran Tierra has made progress whittling this debt down. It still has to contend with future debt obligations, notably $300-million (U.S.) in notes maturing in 2025 and another $300-million (U.S.) in notes maturing in 2027. Those are problems for another day.
Another Colombian producer, Charle Gamba's gassy Canacol Energy Ltd. (CNE), added seven cents to $3.24 on 146,400 shares. It has renewed its one-year share buyback program. Under this program, it can buy back up to 10.5 million shares, out of 176 million outstanding.
Investors seemed mildly pleased. Canacol has had successive one-year buyback programs since 2018, although it mostly uses them to offset dilution from employee stock options or other incentives. Its current share count of 176 million is similar to its share count of 177 million when it started the programs three years ago. Canacol also tries to tempt shareholders with a 5.2-cent quarterly dividend. The yield is a generous 6.4 per cent, but one number that still needs improvement is Canacol's reserve life index (RLI -- a measure of how long a company's reserves will last at current production rates). Canacol's RLI is about nine years, whereas energy investors tend to prefer a decade or more.
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