En­ergy Sum­mary for July 17, 2017

Stockwatch Daily - - ENERGY - By Stock­watch Busi­ness Reporter

WEST TEXAS In­ter­me­di­ate crude for Au­gust de­liv­ery lost 52 cents to $46.02 on the New York Merc, while Brent for Septem­ber lost 49 cents to $48.42 (all fig­ures in this para U.S.). West­ern Cana­dian Se­lect traded at a dis­count of $9.30 to WTI ($39.12), up from a dis­count of $9.75. Nat­u­ral gas for Au­gust added four cents to $3.02. The TSX en­ergy index lost a frac­tion to close at 169.57.

Quar­terly re­port­ing sea­son in the en­ergy sec­tor will kick off this week, with En­Cana Corp. (ECA: $11.86) and Husky En­ergy Inc. (HSE: $14.06) sched­uled to re­lease their sec­ond quar­ter fi­nan­cials on Fri­day. Ob­servers are torn as to what to ex­pect from these and other com­pa­nies as they re­lease their fi­nan­cials. “To me, it’s al­most im­pos­si­ble for an E&P [ex­plo­ration and pro­duc­tion] com­pany to not cut the bud­get,” Dan Tsub­ouchi, chief mar­ket strate­gist of Stream As­set Fi­nan­cial Man­age­ment, told The Globe and Mail this morn­ing. He cited a lack of hedge pro­tec­tion and the re­cent oil price drop into the mid- to low $40 (U.S.) range. (Most pro­duc­ers had based their 2017 bud­gets on oil price as­sump­tions of $50 (U.S.) to $55 (U.S.).) The an­a­lysts at CIBC, on the other hand, wrote in a re­search note on Fri­day that they see no signs of im­mi­nent spend­ing cuts. “The mar­ket is still in­cred­i­bly fo­cused on growth,” CIBC an­a­lyst Jon Mor­ri­son told the Calgary Herald. Around 3,000 wells have been com­pleted in West­ern Canada so far in 2017, up from closer to 1,800 this time last year. The num­ber of is­sued well li­cences has more than dou­bled to around 4,600. Mr. Mor­ri­son reck­oned that, if oil prices re­main low, the ear­li­est signs of spend­ing cuts among pro­duc­ers will come in the fall.

Mr. Mor­ri­son did not make

any pre­dic­tions on an even nearer-term event: next Mon­day’s meet­ing in Rus­sia be­tween OPEC and non-OPEC coun­tries to dis­cuss the sta­bil­ity of their pro­duc­tion-cut­ting agree­ment. This agree­ment was reached in Novem­ber, 2016, and was bench­marked against pro­duc­tion in Oc­to­ber, 2016. Since Oc­to­ber, two of the OPEC mem­bers that were ex­empt from the agree­ment, Libya and Nige­ria, have in­creased their pro­duc­tion by a to­tal of 400,000 bar­rels a day. Their in­creases, com­bined with ris­ing U.S. shale pro­duc­tion, have led to height­ened skep­ti­cism about the ef­fec­tive­ness of the agree­ment. This in turn has led to spec­u­la­tion that Libya and Nige­ria will be pres­sured to join the agree­ment at next Mon­day’s meet­ing. OPEC’s sec­re­tary-gen­eral has down­played these ru­mours, telling a re­cent in­dus­try con­fer­ence in Turkey that the at­ten­dees of the meet­ing would dis­cuss Nige­rian and Libyan pro­duc­tion “only at a tech­ni­cal level” (as para­phrased by Bloomberg).

Back in the oil patch, Cen­ovus En­ergy Inc. (CVE) added 12 cents to $9.38 on 5.22 mil­lion shares. It is fac­ing ru­mours of its own, swirling around the iden­tity of its next pres­i­dent and chief ex­ec­u­tive of­fi­cer. The cur­rent holder of those po­si­tions, Brian Fer­gu­son, re­cently an­nounced that he will be re­tir­ing on Oct. 31. His de­par­ture took in­vestors by sur­prise given that he cham­pi­oned Cen­ovus’s re­cent $17.7-bil­lion as­set ac­qui­si­tion from Cono­coPhillips. The ac­qui­si­tion has not been par­tic­u­larly pop­u­lar with in­vestors, who have sent the stock down to $9.38 from around $17.50 since the deal was an­nounced in March. Mr. Fer­gu­son’s suc­ces­sor will have to be some­one who likes a chal­lenge. Pos­si­ble can­di­dates, ac­cord­ing to un­named sources quoted in a Reuters ar­ti­cle on Fri­day, in­clude Devon Canada pres­i­dent Rob Dut­ton, MEG En­ergy Corp. (MEG: $3.86) founder and CEO Bill McCaf­frey, ARC Fi­nan­cial di­rec­tor Chris Sea­sons, and for­mer Shell Canada pres­i­dent Lor­raine Mitchel­more.

ARC Fi­nan­cial’s Mr. Sea­sons may strike some as a bit of an out­lier on that list, with ARC Fi­nan­cial be­ing a pri­vate eq­uity firm rather than an oil and gas pro­ducer, but what Reuters did not men­tion is that Mr. Sea­sons was pres­i­dent of Devon Canada from 2004 to 2014. Just be­fore Mr. Sea­sons left, he re­shaped Devon Canada’s oper­a­tions by sell­ing its con­ven­tional oil and gas busi­ness to Cana­dian Nat­u­ral Re­sources Ltd. (CNQ: $37.33) for $3.1-bil­lion. This en­abled Devon Canada to fo­cus on heavy oil and the oil sands. (In­ci­den­tally, many years ear­lier, Mr. Sea­sons had played a role in a ma­jor ex­pan­sion of Devon’s Cana­dian oper­a­tions. He was vice-pres­i­dent of ex­ploita­tion at the Calgary-based North­star En­ergy, which Devon ac­quired in 1998 for about $800-mil­lion.) As noted above, Mr. Sea­sons left Devon Canada in 2014, with Mr. Dut­ton tak­ing his place. Mr. Dut­ton was Devon Canada’s vice-pres­i­dent of cap­i­tal projects be­fore his pro­mo­tion. He is also the youngest on the Reuters-re­ported list of pos­si­ble can­di­dates to suc­ceed Mr. Fer­gu­son in the top job at Cen­ovus, with Devon’s web­site peg­ging his age at just 47. Ms. Mitchel­more is the sec­ond-youngest can­di­date; the for­mer pres­i­dent of Shell Canada is in her mid-50s. Mr. Sea­sons is 57, and MEG’s Mr. McCaf­frey is the same age as Mr. Fer­gu­son, 60.

An­other com­pany seek­ing a can­di­date for its top job is Saskatchewan oil pro­ducer Cona Re­sources Ltd. (CONA), up two cents to $3.10 on 21,300 shares. To­day was the com­pany’s first day of trad­ing as Cona. Its old name was North­ern Bliz­zard Re­sources. North­ern Bliz­zard had not pre­vi­ously said why it wanted to be called Cona, but on its new web­site, Cona ex­plains that the name comes from Don­ald Smith, Lord Strath­cona, “the most suc­cess­ful oil man in Cana­dian his­tory.” Lord Strath­cona’s ac­com­plish­ments in the oil in­dus­try in­cluded chair­ing the com­pany that drilled the first suc­cess­ful oil well in the Mid­dle East, back in 1908. He was in his late 80s at the time. Wealth and promi­nence had been achieved long be­fore that; among other things, Lord Strath­cona co-founded the Cana­dian Pa­cific Rail­way and in 1885 drove the fa­mous Last Spike in Craigel­lachie, B.C. Cona says it will strive to “hon­our Lord Strath­cona, by pur­su­ing in­no­va­tion [and] ex­cel­lence in ev­ery­thing we do and sup­port­ing our lo­cal com­mu­nity.”

The mys­tery of the new name may have been solved, but plenty of other un­cer­tain­ties re­main. Cona has been the sub­ject of much spec­u­la­tion since it an­nounced in April that its two largest share­hold­ers would sell all of their shares, rep­re­sent­ing about two-thirds of the 101 mil­lion shares out­stand­ing, to Adam Water­ous’s Water­ous En­ergy Fund. Mr. Water­ous then be­came chair­man of Cona at the share­holder meet­ing last month. The for­mer chair­man, John Rooney, did not stand for re-elec­tion to the board. For now, Mr. Rooney re­mains Cona’s CEO, but the com­pany said in May that he would re­tire once a suc­ces­sor had been ap­pointed. The com­pany also said in May that Jim Artin­dale would re­tire as pres­i­dent at the share­holder meet­ing. No suc­ces­sor for Mr. Rooney or Mr. Artin­dale has been named yet. Other fac­tors “in flux,” as TD Se­cu­ri­ties an­a­lyst Aaron Bilkoski put it in May, in­clude North­ern Bliz­zard’s as­sets, guid­ance and div­i­dend (a two-cent monthly div­i­dend that yields 7.7 per cent). Mr. Bilkoski said he con­sid­ered it “pos­si­ble, if not prob­a­ble, [that] guid­ance and gen­eral cor­po­rate strat­egy could be re­vised in the com­ing months.”

Down to­ward the bot­tom, Madalena En­ergy Inc. (MVN) was un­changed at 17 cents on 897,700 shares, fail­ing to im­press in­vestors one way or the other with the re­sults of its CAS.x-15 well in Ar­gentina. This well was the com­pany’s first hor­i­zon­tal mul­ti­frac well tar­get­ing the Vaca Muerta shale at the CASE block. Madalena owns 35 per cent of this block. It used to hold more, but farmed out a 55-per-cent in­ter­est ear­lier this year to Pan Amer­i­can En­ergy in ex­change for (among other things), a work com­mit­ment that will in­clude two well re-entries. To­day’s re­sults

are from the first of those re-entries. The CAS.x-15 well tested at 430 gross bar­rels of oil a day (which would be 150 bar­rels a day net to Madalena) over a four-week pe­riod, af­ter be­ing re-en­tered and drilled hor­i­zon­tally for about 1,000 me­tres. “To ob­tain these test re­sults from just 1,000 me­tres ... is clearly sat­is­fy­ing,” de­clared Madalena’s chief ex­ec­u­tive of­fi­cer, Jose Pe­nafiel. The “just 1,000 me­tres” may be in ref­er­ence to the fact that Madalena pre­vi­ously said that Pan Amer­i­can would drill hor­i­zon­tally for 1,500 me­tres. Mr. Pe­nafiel did not ex­plain the change in plans, merely stat­ing that he found the test re­sults “ex­tremely en­cour­ag­ing.”

In­vestors did not seem quite as en­thu­si­as­tic. The test re­sult is in­deed a good sign for Madalen a’s acre age, but Madalena it­self (some­what like the above-men­tioned Cona Re­sources) is still caus­ing some leer­i­ness among in­vestors in the wake of its re­cent man­age­ment changes. Its CEO, Mr. Pe­nafiel, took over in May as part of a “trans­for­ma­tive” fi­nanc­ing agree­ment with His­pania Pe­tro­leum, a fam­ily-owned Span­ish com­pany. (Mr. Pe­nafiel is CEO of His­pania as well.) Part of the agree­ment re­mains sub­ject to share­holder ap­proval, which Madalena pre­vi­ously said it would seek at a spe­cial meet­ing that would likely be held in July. Yet July is more than half over and the meet­ing has not even been sched­uled. In­vestors and an­a­lysts, who have been hop­ing that more de­tails about Madalena’s plans will be pro­vided at the meet­ing, will just have to keep wait­ing.


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