En­ergy Sum­mary for Dec. 7, 2017

Stockwatch Daily - - ENERGY - By Stock­watch Business Re­porter

WEST TEXAS In­ter­me­di­ate crude for Jan­uary de­liv­ery gained 73 cents to $56.69 on the New York Merc, while Brent for Fe­bru­ary gained 98 cents to $62.20 (all fig­ures in this para U.S.). West­ern Cana­dian Se­lect traded at a dis­count of $17.30 to WTI ($39.39), unchanged. Nat­u­ral gas for Jan­uary lost 16 cents to $2.76. The TSX en­ergy in­dex closed up a frac­tion to 185.64.

Bay­tex En­ergy Corp. (BTE) fell six cents to $4.04 on 4.52 mil­lion shares af­ter re­leas­ing its 2018 plans, which can be summed up in the fol­low­ing words from pres­i­dent and chief ex­ec­u­tive of­fi­cer Ed LaFehr: mod­estly in­creased ac­tiv­ity (specif­i­cally, drilling ac­tiv­ity). No­tably, there was no men­tion at all of the com­pany’s heavy debt load. On Sept. 30, Bay­tex had net debt of just un­der $1.75-bil­lion. We will re­turn to this in a moment.

Bay­tex has set a cap­i­tal ex­pen­di­ture bud­get of $325-mil­lion to $375-mil­lion for 2018, com­pared with a range of $310-mil­lion to $330-mil­lion for 2017. It plans to spend more than 80 per cent of the 2018 bud­get on drilling and com­ple­tions in its three core areas: the Texas Ea­gle Ford, Al­berta’s Lloy­d­min­ster area and Al­berta’s Peace River area. Much of the re­main­ing bud­get will go to fa­cil­i­ties. For in­stance, Bay­tex plans to build a nat­u­ral gas plant in Peace River to in­crease its ca­pac­ity by 18 mil­lion cu­bic feet (or 3,000 bar­rels of oil equiv­a­lent) a day. All in all, the com­pany e xpect s to pro duce 68,000 to 72,000 bar­rels of oil equiv­a­lent a day in 2018. This range in­cludes within it the pro­duc­tion guid­ance for 2017 of 69,500 to 70,000 bar­rels a day. Al­though Bay­tex is giv­ing it­self some room to in­crease pro­duc­tion, it is also giv­ing it­self a cush­ion, just as it did this year. Its orig­i­nal pro­duc­tion guid­ance for 2017 was 60,000 to 70,000 bar­rels a day, and even af­ter it pro­duced 71,065 bar­rels a day in the first half of the year, it did not lift its full-year guid­ance. This turned out to be a pru­dent de­ci­sion. In the third quar­ter, Bay­tex was forced to shut in pro­duc­tion in the Ea­gle Ford for one week be­cause of trop­i­cal storm Har­vey. (The Ea­gle Ford con­trib­utes half of the com­pany’s to­tal pro­duc­tion.) Then in Oc­to­ber, it tem­po­rar­ily shut in pro­duc­tion in Al­berta while nat­u­ral gas prices were too low. Ac­cord­ing to the com­pany’s web­site, as of De­cem­ber, it has pro­duced 70,473 bar­rels a day in the year to date. Al­though it ex­pects to end the year pro­duc­ing less, be­tween 68,000 and 69,000 bar­rels a day, its full-year pro­duc­tion will likely come in near the high end of its guid­ance.

As for the com­pany’s debt, Mr. LaFehr said at the end of 2016 that debt re­duc­tion was go­ing to be a pri­or­ity in 2017. All that Bay­tex has done this year, how ever, was sel l a $7.3-mil­lion non-core as­set in Al­berta to re­pay a tiny por­tion of the debt. Partly be­cause of a more favourable Cana­dian dol­lar/U.S. dol­lar ex­change rate, the com­pany’s net debt de­creased to just un­der $1.75-bil­lion on Sept. 30, 2017, from $1.77-bil­lion on Dec. 31, 2016. Bay­tex took on much of its debt in mid-2014, when it en­tered the Ea­gle Ford in a $2.8-bil­lion deal that in­cluded the as­sump­tion of $900-mil­lion worth of debts. At the time, Bay­tex was trad­ing be­tween $46 and $50. The Ea­gle Ford deal closed shortly be­fore oil prices (and Bay­tex’s stock) crashed. Among the steps that Bay­tex has taken since then is to re­duce cap­i­tal spend­ing to the $300-mil­lion level in 2017 from about $520-mil­lion in 2015. Of course, pro­duc­tion has also come down to about 70,000 bar­rels a day in 2017 from about 84,650 bar­rels a day in 2015. This is why in­vestors yawned at the “mod­estly in­creased ac­tiv­ity” in 2018.

Along with its 2018 guid­ance, Bay­tex has also an­nounced the re­tire­ment of two di­rec­tors, John Brussa and Rusty Goe­pel, ef­fec­tive in May. Mr. Brussa, who is a part­ner at Cal­gary law firm Bur­net, Duck­worth & Palmer, is a fre­quent di­rec­tor of oil and gas com­pa­nies, cur­rently seven oth­ers be­sides Bay­tex. Mr. Goe­pel, a se­nior vice-pres­i­dent of Ray­mond James, has been a di­rec­tor of about half a dozen pub­lic com­pa­nies in var­i­ous sec­tors, cur­rently only Bay­tex.

An­other oil and gas pro­ducer that has re­leased its 2018 guid­ance, Athabasca Oil Corp. (ATH), fell four cents to $1.13 on 3.07 mil­lion shares. It ex­pects to pro­duce 38,500 to 41,000 bar­rels of oil equiv­a­lent a day in 2018, up from 35,000 bar­rels a day in 2017. Al­though the 2018 fig­ures are higher than the 2017 es­ti­mate, they are slightly lower than an­a­lysts’ pre­dic­tions of about 42,270 bar­rels a day. The com­pany’s 2018 capex bud­get of $140-mil­lion is also lower than an­a­lysts’ pre­dic­tions of about $148-mil­lion, but Canac­cord Ge­nu­ity an­a­lyst Den­nis Fong re­mains op­ti­mistic about Athabasca Oil. In a re­search note this morn­ing, he mused that the lower-than-ex­pected capex for 2018 might turn out to be good for deal­ing with oil price volatil­ity. He also noted that Athabasca Oil plans to re­assess its bud­get in mid-2018, at which point it could de­cide to in­crease its spend­ing in the Placid Mont­ney. Mr. Fong has high hopes for the Mont­ney, where four of Athabasca Oil’s re­cently drilled wells pro­duced an av­er­age of 1,100 bar­rels a day per well. This is higher than the com­pany’s pre­dic­tion of 1,000 bar­rels a day and higher than Mr. Fong’s own pre­dic­tion of 845 bar­rels a day. He is thus quite pleased . He main tains his rat­ing of “spec­u­la­tive buy” and his price tar­get of $2.25.

For its part, the com­pany ex­plains that it set its 2018 bud­get at $140-mil­lion to keep it within the ex­pected 2018 cash flow of $145-mil­lion. For con­text, its bud­get for 2017 is $210-mil­lion, while its cash flow es­ti­mate is $80-mil­lion. When the year be­gan, Athabasca Oil was hop­ing to spend cap­i­tal to boost pro­duc­tion at its Hang­ing­stone ther­mal oil project to the full ca­pac­ity of 12,000 bar­rels of oil equiv­a­lent a day from the cur­rent pro­duc­tion level of about 8,000 bar­rels a day. Since then, how­ever, the com­pany ap­pears to have re­al­ized that it will take a while to reach full ca­pac­ity at Hang­ing­stone, as a re­sult of the Fort McMur­ray fire last year. In any case, Hang­ing­stone and an­other ther­mal oil project, Leis­mer, are ex­pected to con­tribute over 70 per cent of to­tal pro­duc­tion next year. The rest will come from light oil projects in the Mont­ney and the Kay­bob Duver­nay.

Sco­tia Cap­i­tal an­a­lyst Ja­son Bou­vier re­mains neu­tral on the stock and is “look­ing for a longer his­tory of sus­tain­abil­ity be­fore be­com­ing more bullish.” No­tably, in 2016, the com­pany pro­duced only 12,000 bar­rels of oil equiv­a­lent a day. That was be­fore it ac­quired Leis­mer from Nor­way’s Sta­toil. Mr. Bou­vier main­tains his rat­ing of “sec­tor per­form” and his price tar­get of $1.40.


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