En­ergy Sum­mary for Nov. 14, 2017

Stockwatch Daily - - ENERGY - by Stock­watch Busi­ness Re­porter

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.


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