Energy Summary for Sept. 15, 2017
WEST TEXAS Intermediate crude for October delivery was unchanged at $49.89 on the New York Merc, while Brent for November added 15 cents to $55.62 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.15 to WTI ($37.74), unchanged. Natural gas for October lost five cents to $3.02. The TSX energy index lost a fraction to close at 179.62.
Alberta Montney producer Seven Generations Energy Ltd. (VII) reached an intraday low of $18.04 before settling at $18.35, down 35 cents, on 11.2 million shares. Much of the volume came from TD Securities, which crossed one block of 6.39 million shares at $18.21 this morning. RBC Capital Markets later crossed another block of 906,000 shares at $18.35. Both of those prices are nearly $1 lower than the price at which Seven Generations began September. It has had a rocky time lately, following its Aug. 3 announcement that it would be lowering its 2017 production guidance amid worse-thanplanned facility outages and higher-than-planned operating costs. Investors immediately sent the stock down to just $16.35 on Aug. 4 from $20.51 on Aug. 2. Over the following weeks, the stock rallied to as much as $19.62 on Sept. 5, but now it is back flirting with the $18 mark.
Seven Generations has not released any news since the Aug. 3 debacle, other than a bit of fluff yesterday in which it showed off its charitable side. It talked up its latest charity golf tournament, which has raised $1.7-million since 2013 for regional hospital services. Executive director Keith Curtis of the Grande Prairie Regional Hospital Foundation obligingly gushed about Seven Generations’ “remarkable and inspiring” support and said the golfers seemed to view the company as a “friend or family member.” The golfers were evidently in a much better mood than shareholders, who are awaiting updates on the company’s cost-improvement efforts. President and chief executive officer Marty Proctor told an industry conference in New York last week that the company is hard at work reducing its operating costs and expects these costs to head back to a normal range “wit hin a quarter o r two .” More information may arrive with the company’s 2018 guidance, which Mr. Proctor said would be released in mid-November.
Fall being a popular time for conferences, another one was being held this week, the 18th Annual Peters & Co. Energy Conference in Toronto. One of the presenters was Baytex Energy Corp. (BTE), down 15 cents to $3.28 on 5.33 million shares. P res i dent and CEO Ed LaFehr talked up the company’s operations in the Texas Eagle Ford and Western Canada. Each core area contributes roughly half of Baytex’s production, but the Eagle Ford has seen far more attention over the last few years; this year it is receiving close to three-quarters of Baytex’s 2017 budget of $310-million to $330-million. Mr. LaFehr said the company expects to come in the low end of that budget guidance while still achieving its production guidance of 69,000 to 70,000 barrels of oil equivalent a day. “We’re clicking on all cylinders,” he declared. Investors might disagree, at least if they consider one of the cylinders to be Baytex’s net debt, which at $1.8-billion is more than double the company’s current market cap of $768-million. Mr. LaFehr has been trying to calm fears about the debt since he took over as CEO in May. Around that time, he said he would like to see Baytex take steps to reduce its debt in 12 to 18 months. Few specifics were provided then, and few were provided at the conference, although Mr. LaFehr did say that the debt-reduction efforts “will require, over time, some portfolio manoeuvring.” He said he wants to see Baytex’s debt-to-cash-flow ratio drop to less than two times from the current level of five to six times. “We don’t have a gun at our head; we’re not compelled to do anything today,” he emphasized, “but I am compelled to bring investors back into the stock.”
In case the lure of lower debt was not enough, Mr. LaFehr began musing of even grander things to come. Although Baytex is not generating much if any free cash flow at current oil prices, it expects to have “significant” free cash flow if oil prices rise to $55 (U.S.) or above. “At some point in time,” said Mr. LaFehr, “... there’s enough free cash flow in the business to support a dividend.” Such talk is fantasy at this point, but it is nonetheless interesting to hear Baytex bring it up. The company was once a dividend stalwart, having started making monthly payouts in 2003. The monthly dividend got as high as 24 cents in mid-2014 (when Baytex’s stock was also trading at highs of over $50, or more than 15 times today’s close of $3.28).
By the end of 2014, the monthly dividend had been chopped to 10 cents, and in the summer of 2015, it was eliminated. Baytex used to talk of reinstating it once oil prices recovered, but then stopped mentioning it at all, until now.
Alberta oil producer Obsidian Energy Ltd. (OBE) added two cents to $1.27 on 1.23 million shares, despite receiving its third non-compliance warning from the New York Stock Exchange in just two years. Once again, the company’s share price has fallen below the minimum level of $1 (U.S.). Although the stock closed in New York today at exactly $1 (U.S.), its average closing price for the 30 trading days leading up to Sept. 12 was just 99 U.S. cents, prompting the exchange to send its letter on Sept. 14. The letter gives the usual warning that Obsidian must regain compliance within six months or face a possible delisting. Obsidian will be very familiar with this warning. It received similar ones on Sept. 4, 2015, and again on Jan. 4, 2016. After each of those letters, it regained compliance before the six-month deadline was up. Both recoveries saw plenty of drama. About a month after Obsidian received its September, 2015, letter, Suncor Energy Inc. (SU: $41.55) made a takeover offer for Canadian Oil Sands, prompting a wave of speculation that Obsidian could be next. It was not, but its shares happily rode the wave up to around $2 in early November from around 60 cents in early October. By the end of November it had regained NYSE compliance. That did not last, however, and in January, 2016, Obsidian got another NYSE letter. At the 11th hour, it managed to snatch its imperiled listing back to safety for the second time, after arranging $1.1-billion worth of asset sales in June, 2016.
Now, surely much to its frustration, Obsidian’s NYSE listing is in trouble again. Interestingly, there is one noticeable difference in Obsidian’s press release today compared with its press releases after the previous two warnings. Neither of the older press releases explicitly mentioned the possibility of a rollback. Certainly there were vague mentions of “evaluat[ing] all available options” and potentially taking “action[s] that could require shareholder approval,” but that was as detailed as Obsidian got. This time, however, Obsidian specifically says it could regain compliance by deciding to “consolidate its outstanding equity float to a level more suitable to the current size of the company.” Obsidian currently has 504 million shares outstanding.
If Obsidian decides to roll back, it will be following in the footsteps of Alberta gas producer Bellatrix Exploration Ltd. (BXE: $3.45), which did a rollback this past July in order to save its NYSE listing. It decided to roll back 1 for 5. This decision was announced in April, when Bellatrix’s stock was trading at around 80 U.S. cents. At that price, a 1-for-2 rollback would have been enough to push the stock back over $1 (U.S.), but Bellatrix aimed for a 1-for-5 rollback instead, something cynics took as evidence that: (a) Bellatrix expected its stock to keep falling after the rollback; and (b) the rollback would have to be significant or the stock would quickly fall back below $1 (U.S.), rendering the entire exercise pointless. The 1-for-5 rollback was completed on July 6. Bellatrix opened that day at $2.83 (U.S.) (its stock having fallen further since the April announcement) and did indeed plunge over the next several days to just $2.24 (U.S.). Since then, however, it has recovered to its current level of $2.83 (U.S.), or $3.45 in Toronto. It officially regained NYSE compliance 30 trading days after the rollback.
The rollback was doubtless an effective method of saving Bellatrix’s NYSE listing. Yet for some other companies, the listing does not seem to be worth taking such drastic action to save. Pengrowth Energy Corp. (PGF: $0.77), which received a NYSE non-compliance warning this past May, said last month that it is not considering a rollback. If its stock does not get above $1 (U.S.) by mid-November, it expects to receive a NYSE delisting notice.