En­ergy Sum­mary for Oct. 12, 2017

Stockwatch Daily - - ENERGY - By Stock­watch Busi­ness Re­porter

WEST TEXAS In­ter­me­di­ate crude for Novem­ber de­liv­ery lost 70 cents to $50.60 on the New York Merc, while Brent for De­cem­ber lost 69 cents to $56.25 (all fig­ures in this para U.S.). Western Cana­dian Select traded at a dis­count of $11.15 to WTI ($39.45), un­changed. Nat­u­ral gas for Novem­ber added 10 cents to $2.99. The TSX en­ergy in­dex lost 3.07 points to close at 182.88.

Al­ber­tans had good rea­son to be up­beat to­day, af­ter the prov­ince’s lat­est land sale brought in the high­est to­tal in nearly six years. Bids in yes­ter­day’s sale came to $124-mil­lion, mark­ing the first time they have topped $100-mil­lion since Dec. 14, 2011, when the prov­ince took in $145-mil­lion. Sales dropped pre­cip­i­tously af­ter 2011 and were not at all helped by the oil price crash in 2014. For the en­tirety of 2016, which was prov­ince’s worst year for land sales since it adopted its cur­rent sys­tem in 1977, sales came to just $137-mil­lion. This year has seen a lovely rally, with year-to-date sales now at $412-mil­lion. Nearly one-third of that to­tal poured in at yes­ter­day’s $124-mil­lion sale. By com­par­i­son, the pre­vi­ous 2017 record was set at a Fe­bru­ary sale that brought in $35-mil­lion.

Once again, the East basin Du­ver­nay was the belle of the bid­ding ball. Over $70-mil­lion of the sales yes­ter­day cov­ered land in this emerg­ing area. No­tably, one 14-sec­tion pack­age in the Twin­ing re­gion was sold to a land bro­ker for $22-mil­lion, or over $1.5-mil­lion a sec­tion. For con­text, less than four months ago one could buy land in the Twin­ing re­gion for less than $800,000 a sec­tion, and a few years ago the cost was be­low $100,000 a sec­tion. InPlay Oil Corp. (IPO: $1.59) has land at Twin­ing and has pre­vi­ously boasted of pay­ing just $90,000 a sec­tion. It has yet to drill any wells at that acreage, but li­censed its very first Du­ver­nay well last week, ac­cord­ing to pub­lic data. Other pub­lic com­pa­nies in the East basin, just a lit­tle north of Twin­ing, in­clude Rag­ing River Ex­plo­ration Inc. (RRX: $7.37) and Tra­verse En­ergy Ltd. (TVL: $0.40). Rag­ing River spud­ded its first Du­ver­nay well last month and is hop­ing for re­sults by year-end. Tra­verse is cur­rently work­ing to close a $3.5-mil­lion pri­vate place­ment — which was boosted to $5.4-mil­lion to­day af­ter the close — and says it is aim­ing to spud its first Du­ver­nay well next week.

Colom­bia-fo­cused Parex Re­sources Inc. (PXT) lost 19 cents to $15.72 on 1.27 mil­lion shares, de­spite re­leas­ing a boos­t­er­ish op­er­a­tional up­date and rais­ing its pro­duc­tion guid­ance for the fourth quar­ter. The stock touched $16 yes­ter­day for the first time in nearly three months, mark­ing a sig­nif­i­cant re­cov­ery from its late Au­gust low of $12.18, so some of to­day’s drop may have been profit tak­ing. The up­date em­pha­sized the re­sults of Parex’s lat­est wells in Colom­bia. No­tably, at the LLA-34 block (a joint ven­ture with New York-listed GeoPark, which also put out an op­er­a­tional up­date this morn­ing), the Cu­ru­cucu-1 ex­plo­ration well is pro­duc­ing about 1,600 bar­rels of oil a day. In ad­di­tion, two new ap­praisal wells at LLA-34 have been drilled and are await­ing test­ing. Parex gave few de­tails about th­ese ap­praisal wells, but in GeoPark’s up­date, both wells were said to sug­gest “the pres­ence of hy­dro­car­bons” based on pre­lim­i­nary data. Test­ing will start be­fore year-end.

In­vestors also got a brief up­date on the in­trigu­ing Ca­pa­chos block. Roughly 3-1/2 years have passed since Parex reached a farm-in agree­ment with state-owned Ecopetrol to ac­quire a 50-per-cent in­ter­est in Ca­pa­chos, and in­vestors have yet to see the re­sults of any drilling. This was in part be­cause of reg­u­la­tory de­lays that forced Parex to post­pone its plans to drill a well in early 2015. It fi­nally man­aged to spud its first Ca­pa­chos well in July, 2017, and said to­day that the well should reach its tar­get depth next week. Hopes are high be­cause past wells at Ca­pa­chos have flowed at over 3,000 bar­rels of oil equiv­a­lent a day. For per­spec­tive, Parex’s new pro­duc­tion guid­ance for the fourth quar­ter of 2017 is 38,500 bar­rels a day, up from 38,000 bar­rels a day pre­vi­ously.

Back in Canada, an­other com­pany was feel­ing con­fi­dent enough to hike its pro­duc­tion guid­ance. Saskatchewan oil pro­ducer Spar­tan En­ergy Corp. (SPE), down 18 cents to $6.30 on 1.65 mil­lion shares, now plans to pro­duce an av­er­age of 22,000 bar­rels of oil equiv­a­lent a day this year, up from 21,600 pre­vi­ously. This is the sec­ond time it has in­creased its full-year pro­duc­tion guid­ance. In Au­gust, it boosted the guid­ance from 21,080 bar­rels a day, cit­ing the “out­per­for­mance of its drilling pro­gram.” At the time, it left its 2017 bud­get in­tact at $145-mil­lion, but to­day it said it can achieve its even higher guid­ance on a bud­get of just $140-mil­lion.

Spar­tan con­tin­ued to at­tribute its im­proved guid­ance to the “out­per­for­mance” of its as­sets. Th­ese in­clude as­sets ac­quired last De­cem­ber from ARC Re­sources Ltd. (ARX: $15.94). Spar­tan drilled its first wells on th­ese new as­sets in the third quar­ter and says it is “very en­cour­aged” by the early re­sults. In a dif­fer­ent early-stage area for Spar­tan, the Torquay play (which is the Cana­dian ver­sion of the U.S. Three Forks play and lies be­neath the bet­ter-known Bakken), the com­pany re­cently drilled its first op­er­ated well. Spar­tan has been show­ing in­creased in­ter­est in the Torquay since late last year, when it abruptly ex­panded its land­hold­ings to 22 sec­tions from just four. The play had al­ready caused some­thing of a stir be­fore that, par­tic­u­larly in the spring of 2014, when Cres­cent Point En­ergy Corp. (CPG: $9.38) boasted that it had boosted its Torquay pro­duc­tion to over 5,000 bar­rels a day from noth­ing in a mere 12 months. The oil price crash soon took at­ten­tion away from the play,

but in the last year or so, com­pa­nies such as Spar­tan and TORC Oil & Gas Ltd. (TOG: $5.94) have shown re­newed in­ter­est. Spar­tan did not pro­vide the re­sults of its first op­er­ated Torquay well in to­day’s up­date be­cause the well is still in the cleanup stage. In­vestors may still have raised an eye­brow, how­ever, be­cause Spar­tan did say that it plans to drill only one more Torquay well this year, whereas in pre­vi­ous up­dates it said it would drill a to­tal of three Torquay wells.

Pen­growth En­ergy Corp. (PGF), a siz­able in­vest­ment of bil­lion­aire Sey­mour Schulich (who owns 130 mil­lion of its 542 mil­lion shares, in­clud­ing 21 mil­lion shares that were bought late last month and dis­cussed in the Oct. 2 En­ergy Sum­mary), lost four cents to $1.31 on 1.71 mil­lion shares. It has fi­nally firmed up its pre­vi­ously an­nounced agree­ment to re­lax the covenants on its heavy debt load. The re­lax­ations were sup­posed to be fi­nal­ized last quar­ter, but took longer than Pen­growth ex­pected. They will give the com­pany a bit of ex­tra breath­ing room un­til the re­lax­ation pe­riod ends on Sept. 30, 2019. Pres­i­dent and chief ex­ec­u­tive of­fi­cer Derek Evans cheered the re­lax­ations as a “key mile­stone” that will pro­vide the com­pany with “ad­di­tional fi­nan cial run way.” He also noted that Pen­growth has just used cash on hand to re­pay about $350-mil­lion in notes due in 2018. The com­pany’s to­tal debt is now around $700-mil­lion, down sharply from around $2-bil­lion in mid-2015. Much of that re­duc tion is t hanks to as set sales. Pen­growth has just two as­sets that it now con­sid­ers core, namely its Lind­bergh ther­mal as­set in Al­berta and its Ground­birch/Ber­nadet Mont­ney as­set in Bri­tish Columbia.

In­vestors re­mained unim­pressed with the up­date. Much of to­day’s news was al­ready ex­pected; it was just late in ar­riv­ing. As well, Pen­growth’s to­tal debt load re­main daunt­ing next to its mar­ket cap of about $723-mil­lion, and many ques­tions re­main as to how Mr. Evans will achieve his stated goal of “grow­ing the com­pany go­ing for­ward.” One can­di­date for “grow­ing” Pen­growth is an ex­pan­sion of Lind­bergh. Lind­bergh’s cur­rent pro­duc­tion is in the neigh­bour­hood of 15,000 bar­rels a day, and Pen­growth has es­ti­mated that it would need about $600-mil­lion to in­crease that pro­duc­tion by 27,500 bar­rels a day. Yet the com­pany has not of­fi­cially com­mit­ted to this ex­pan­sion, let alone ex­plained where it might get the money. All Mr. Evans would say to­day is that the de­ci­sion to pro­ceed with the ex­pan­sion is “on hold await­ing stronger com­mod­ity prices” — or, in other words, don’t get your hopes up.

Canac­cord Ge­nu­ity an­a­lyst Den­nis Fong raised this point in a re­search note last week. “Even if [Pen­growth] sanc­tions the ex­pan­sion this year,” he wrote, “it may be dif­fi­cult for in­vestors to look past the up­front cost given the above-av­er­age lever­age . ... In ad­di­tion, even if [the ex­pan­sion[ is sanc­tioned in late 2018, it will take two to three years of construction be­fore we could see pro­duc­tion growth.” He added that Pen­growth has es­sen­tially run out of as­sets that it could sell to raise money, and is also un­likely to is­sue eq­uity at to­day’s de­pressed prices. Although Mr. Fong was will­ing to raise his price tar­get on Pen­growth’s stock to 90 cents from 85 cents (still lower than the Oct. 3 close of $1.29 and to­day’s close of $1.31), he nonethe­less down­graded the stock to “sell” from “hold.”


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