Some producers ‘brutalized’ in energy stock sell-off
Canadian crude prices cause concern
Forget spring breakup, a selloff in oil producer stocks that began in the winter is persisting this spring, irking oilpatch investors and executives heading into the second quarter.
It’s the time of year many CEOS blame soggy soil that thwarts drilling plans for lower production numbers. This year, they’re more worried about the price of Canadian crude.
Oil-weighted producers based in Calgary have lost anywhere from 10 per cent to nearly half their market value in the last month as investors flee energy stocks. Money managers are pointing, in part, at steeply discounted Canadian crude prices.
Energy executives who had re-engineered their companies to shift production from cheap natural gas to oil are now facing skittish investors from both sides, as Canadian crude prices languish far below what a refinery will pay for a U.S. barrel thanks to burgeoning crude supplies, tight pipeline space and refinery downtime south of the border. Held almost entirely captive by the U.S. Midwest market, landlocked Alberta producers are largely stuck.
“Vicious” was how portfolio manager Eric Nuttall of Sprott Asset Management characterized the stock sell-off in an interview, highlighting the plight of mid-cap names, in particular.
“Some of them just got brutalized.”
Oil-weighted intermediate Baytex Energy Corp. was down 14 per cent on the To- ronto Stock Exchange Thursday from the month before. Some juniors have been hit worse, with Crew Energy Inc. closing at $8.69, down 43 per cent from a month earlier, and Legacy Oil + Gas Inc. off 28 per cent during the same period.
Big names haven’t escaped the snub by investors of oily stocks. Suncor Energy Inc. is down 14 per cent from a month ago, Canadian Natural Resources Ltd. is 12 per cent lower and heavy oil producer Blackpearl Resources Inc. is off 12 per cent.
Other factors have hit the broader energy sector and oil prices lately, including signs of weak unemployment and manufacturing in Europe and indications China’s future economic growth might be slower, though investors have zeroed in on crude discounts in Canada.
Barrels of heavy Western Canada Select crude for May are selling for $23.15 less than the U.S. benchmark West Texas Intermediate May average and the spread is wider for the rest of the year and into 2013, Thursday prices from crude broker Net Energy Inc. show Light Syncrude barrels are $2.50 cheaper than WTI for May and the discount widens to $5 per barrel by July.
Those warning the pain could persist say planned new pipeline capacity from the oversupplied storage hub in Cushing, Okla., to the U.S. Gulf Coast won’t keep step with fast-growing supplies. CIBC World Markets analyst Andrew Potter said recently that Canadian producers would lose $18 billion a year on the cheaper barrels if differentials linger, as he expects they will.
While some are optimistic for a spring price turnaround — it’s paving season, which could lift demand for heavy barrels, and the Oklahoma-to-Texas Seaway pipeline starts up in June — revised oil price assumptions from Canadian investment banks Peters & Co. and CIBC World Markets on Thursday forecast a wider spread between Canadian and U.S. crudes that will last longer than previously anticipated, into 2014 and beyond.
The price differential between Canadian and U.S. crudes first widened noticeably at the end of January, then again in March.
The average discount of about $18 per barrel for Western Canada Select last year “was already painful,” said Katherine Spector, head of commodities strategy at CIBC World Markets in New York, who said the velocity of the fall in Canadian crude prices was a surprise.
“It got people’s attention when that (discount) doubled,” Spector said.
The North American oil production profile is changing so rapidly that analysts are struggling to get a grip, she said.
More crude unaccounted for in data than normal has been turning up in storage, about 200,000 barrels per day confirmed in a weekly U.S. Energy Information Administration petroleum report on Wednesday, part of a readjustment of volumes back a year. Spector figures U.S. production, thanks to new tight oil plays, has been 125,000 barrels per day higher in 2012 than previously thought.
“Not even government data is keeping up in real time.”
Bill Bonner, portfolio manager at Brickburn Asset Management in Calgary, remembers in early March, when the Edmonton Par sweet crude price slid in a day by about $20 a barrel, widening its discount to WTI and instantly slashing cash flow on oil production for some companies by about 25 per cent.
“Right across the board with some of the more oily names, we just thought we’d take money off the table and we did,” Bonner said, offering an example: “Hot little stories, like Spartan Oil, a really well-run company and great story, but all they produce is oil.”
Shares of Spartan Oil Corp., financed at $4.40 a share last March, were down 11 per cent on Wednesday from a month earlier — at $3.96. Bonner said he sold his Spartan holding at more than $4 a share, “before everything melted down.”
Some producers, including Baytex, have been avoiding the Padd 2 U.S. refining region by moving heavy crude by rail to more lucrative markets.
Chief executive Michael Erickson of light oil-weighted junior Renegade Petroleum Ltd. said the light differentials that are affecting his firm’s southeastern Saskatchewan production are poised to tighten starting in May.
“If it’s looking like short-term very wide differentials, that’s not going to affect us that much,” Erickson said, noting if steep discounts remain, transportation by rail is an option. “Long-term, markets are always efficient.”
Renegade shares are down 31 per cent from their month-ago price of $4.40. Research analyst Gordon Currie of Salman Partners said in a recent interview that some of the most affected names might be buying opportunities. “If you believe that those spreads are going to narrow again, there’s probably some money to be made in those stocks.”
Portfolio manager John Stephenson, of First Asset Capital Corp. in Toronto, said it’s too soon to bet on shrinking Canadian crude discounts. “The real solution is either export to Asia or export to the U.S. (Gulf Coast). It’s a pipeline constraint issue,” Stephenson said. “You’re waiting until at least 2013.”