Energy Summary for Nov. 14, 2017
WEST TEXAS Intermediate crude for December delivery lost 66 cents to $55.04 on the New York Merc, while Brent for January lost 80 cents to $61.41 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.40 to WTI ($40.64), unchanged. Natural gas for December fell 3.1 cents to $3.07, and the TSX energy index fell 6.55 points to 193.25.
Cenovus Energy Inc. (CVE) lost 68 cents to $13.25 on 9.59 million shares, after agreeing to sell its Weyburn light oil project in southeast Saskatchewan, at a lower price than investors and analysts were expecting. Cenovus is selling Weyburn for $940-million to Whitecap Resources Inc. (WCP), which today gained one cent to $9.12 on 7.06 million shares. (We discuss Whitecap in more detail below.) Cenovus, which had been hoping to raise between $4-billion and $5-billion from asset sales this year, has so far raised only $3.72-billion, including from Weyburn. Canaccord Genuity analyst Dennis Fong is unfazed by the shortfall. He expects Cenovus to sell some more non-core assets to reach its sales target before year-end. In a research note today, he says, “We believe that in a 12- to 18-month time frame, investors would be rewarded even in a modestly recovering oil price environment.” He maintains his buy rating and his $15.50 price target.
Weyburn is the last of four projects that Cenovus had planned to sell to raise money for paying down its debt. In the second quarter, when Cenovus acquired $17.7-billion worth of assets from ConocoPhillips, its net debt rose to $12.92-billion from $2.72-billion. Its share count also rose to 1.22 billion from 833 million. (ConocoPhillips received 208 million shares of Cenovus as part of their deal. The shares will be free trading by the end of this week. ConocoPhillips has the option to sell those shares in a secondary offering.) These debt and share count increases did not please Cenovus’s shareholders, who sent the stock down to about $12 when the ConocoPhillips deal closed in May from $17.45 when the deal was announced in March. Now, Cenovus has sold the four projects that it said it would sell, and a few weeks ago, it appointed a new president and chief executive officer, Alex Pourbaix. Cenovus’s former president and CEO, Brian Ferguson, who arranged the deal with ConocoPhillips, also arranged the first three asset sales: Cenovus sold its Pelican Lake assets to Canadian Natural Resources Ltd. (CNQ: $43.82) for $975-million, its
Suffield assets to International Petroleum Corp. (IPCO: $5.50) for $512-million, and its Palliser assets to Torxen Energy and Schlumberger for $1.3-billion. The $3.72-billion that Cenovus has raised so far is less than its stated sales target, but enough to cover its $3.6-billion bridge facility. Cenovus expects to close all four asset sales and retire the bridge facility before year-end. (The Pelican Lake sale closed already.)
Canaccord’s Mr. Fong notes that “a transition of leadership and the 208-million-share overhang could weigh on the share price.” Cenovus’s new president and CEO, Mr. Pourbaix, does not have direct oil and gas production experience. Before joining Cenovus, he was the chief operating officer of TransCanada Corp. (TRP: $63.16), and he is credited for bringing the Keystone XL pipeline forward amidst political and environmental opposition. He retired from TransCanada earlier this year, after TransCanada received approval for Keystone XL from U.S. President Donald Trump. Now, at Cenovus, Mr. Pourbaix plans to continue working to reduce debt and to develop the assets that were acquired from ConocoPhillips. Those assets are in the Alberta oil sands and the Deep basin, also in Alberta. For 2018, Cenovus expects to produce 459,000 to 492,000 barrels of oil equivalent a day.
As for the buyer of Weyburn, Whitecap, not only did it announce its asset purchase, but it also increased its
monthly dividend for the second time in two weeks. First, it raised the dividend (effective in December) to 2.45 cents from 2.33 cents, and now it has hiked the payout to 2.57 cents (effective in January). The yield is now 3.3 per cent, up from 3.0 per cent before both hikes. Shareholders will remember that in early 2016, Whitecap revised its dividend twice within three months, but those revisions were downward, from 6.25 cents. The company then diverted the money toward expanding production.
Whitecap expects to produce 57,000 barrels of oil equivalent a day for the full year 2017, up from 50,612 barrels a day in 2016 and 42,067 barrels a day in 2015. Its assets are in the Saskatchewan Viking, southwest Saskatchewan, the Alberta Cardium and the Deep basin. With the addition of Weyburn, as well as expected production increases at its current assets, Whitecap’s production guidance for 2018 is 73,600 to 74,800 barrels a day. Its capital budget for 2018 is $430-million to $450-million, of which $60-million will go to Weyburn. Whitecap confidently calculates that in 2018, after spending its budgeted capital and paying its dividends, it will have $134-million of free cash flow left over, up from about $66-million of free cash flow estimated for this year.
In connection with its $940-million cash acquisition of Weyburn, Whitecap plans to increase its credit facilities to $1.7-billion from $900-million (the facilities were $402-million drawn as of Sept. 30). It also plans to raise a total of $425-million by selling subscription receipts at $8.80, through a private placement and a bought deal. Its share count would then increase to 418 million from 369 million. Whitecap has a buyback program in place, and so far it has bought back 438,611 shares at prices ranging from $8.77 to $9.41. It may buy back up to 18.4 million shares un til May, 2018.
Africa Oil Corp. (AOI), a Lundin company, lost four cents to $1.51 on 122,200 shares, on top of the two cents it lost yesterday. It announced yesterday morning that it is acquiring a 19.77-per-cent equity interest in Eco Oil & Gas Ltd. (EOG), which today closed unchanged at 44 cents, but yesterday gained six cents on the news. Africa Oil will spend $14-million to acquire 29.2 million Eco Oil shares at 48 cents. It can easily afford this, as it had $423-million cash on Sept. 30. (It received nearly $440-million last year from Maersk Oil as part of a farm-out.) Africa Oil is also nominating its president and CEO, Keith Hill, to Eco Oil’s board.
In the nine months to Sept. 30, Africa Oil spent $45.4-million to drill exploration and appraisal wells in the South Lokichar basin in Kenya. It has joint venture partners in South Lokichar: Tullow Oil and Maersk Oil. (Maersk Oil is in the process of being taken over by France’s Total.) So far in 2017, Africa Oil and its partners have yielded mixed results from four exploration wells drilled in South Lokichar, with two of the wells encountering “significant” oil sands. A third well turned up dry, and the remaining well was deemed non-commercial despite oil shows. Partly because of these mixed results, Africa Oil’s stock has fallen to today’s $1.51 from about $2.65 since the beginning of the year. The company has also made slow progress on its pipeline development project in Kenya. It had hoped to sign a development deal with the Kenyan government in 2016, but this did not happen until three weeks ago. Now, the company may finally b e gin engineering, environmental and economic studies.
Evidently, Africa Oil is also hopeful about Namibia, where Eco Oil has four offshore exploration blocks. One of Africa Oil’s other investments, fellow Lundin company Africa Energy Corp. (AFE: $0.165), has exploration blocks next to Eco Oil’s.
As for Eco Oil, its stock has climbed to 44 cents from about 26 cents since the beginning of the year. It has been busy lately, arranging this Africa Oil investment, working to identify a drilling location at its Cooper block in Namibia and adding a JV partner for its Orinduik block offshore Guyana. That JV partner, Total, joins Eco Oil and its existing Orinduik partner, Tullow Oil.
Eco Oil’s new director, Mr. Hill, has been with the Lundin Group for 18 years and was a senior director of the group’s Middle Eastern promotion, Tanganyika Oil, which was acquired for $31.50 a share by Sinopec in 2008. Mr. Hill is a director of Africa Energy. To make room for his addition to Eco Oil’s board, Derek Linfield has resigned. Mr. Linfield, a lawyer, is with Fasken Martineau in London, but calls himself a consultant. He is also the chairman of Cornish Lithium, a private company that hopes to find lithium in Cornwall, England. Mr. Linfield will remain with Eco Oil as a consultant.