Energy Summary for July 17, 2017
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.