Energy Summary for Oct. 12, 2017
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.”