Energy Summary for Jan. 10, 2019
WEST TEXAS Intermediate crude for February delivery added 23 cents to $52.59 on the New York Merc, while Brent for March added 24 cents to $61.68 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.88 to WTI, up from a discount of $11.28. Natural gas for February lost two cents to $2.97. The TSX energy index added 1.59 points to close at 149.20.
Canada’s largest condensate producer, Alberta Montney-focused Seven Generations Energy Ltd. (VII), lost 30 cents to $11.32 on 2.27 million shares. Investors did not seem to appreciate its 2019 guidance. The company is aiming to keep production flat with the 2018 level at 200,000 to 205,000 barrels of oil equivalent a day (36 to 38 per cent condensate) on a budget of $1.25-billion. This budget “strikes a reasoned balance between current production and future growth prospects,” according to president and chief executive officer Marty Proctor. Of course, “reasoned balance” is not necessarily what investors have come to expect from Seven Generations. Up until now, the company has had one setting only: full speed ahead. Its production has barrelled its way up to 200,000 barrels a day in 2018 from just 7,800 in 2013. The original 2019 goal, as laid out in November, 2017, was to boost production to as much as 240,000 barrels a day. Now, however, the goal is simply to keep production flat with 2018, marking a major change of pace for the company.
Mr. Proctor and the rest of Seven Generations’ management defended the 2019 guidance during an investor day presentation this morning in Calgary. According to the presentation, this year’s program will improve efficiency and margins, reduce production declines and variability, and establish a “firm foundation” for 2020 and beyond. In particular, management highlighted the future development potential of the Nest 1 area. This is immediately east of the core Nest 2 area, which will see $780-million of the $1.25-billion budget. Nest 1 will receive well under $100-million this year, but the company will use the time to “formulate plans for full development ... in 2020 and beyond.” To give a sense of Nest 1’s potential, the wells in this area show condensate-to-gas ratios of 300 to 500 barrels per million cubic feet. In the Nest 2 area, these ratios are just 90 to 300 barrels per million cubic feet.
Seven Generations also has a third Nest area, creatively dubbed Nest 3, where the condensate ratios are much lower (50 to 80 barrels per million cubic feet) but the overall productivity per well is higher (because of greater gas production). Seven Generations plans to spend about one-fifth of its budget at Nest 3 this year, with the aim of boosting production in the second half of 2019 and early 2020.
On the B.C. side of the Montney, Crew Energy Inc. (CR) added four cents to 96 cents on 4.1 million shares, on top of the two cents it added yesterday after touting a productive end to 2018. The company pegged its production for December at 24,200 barrels of oil equivalent a day. Full-year 2018 production came to 23,850 barrels a day, within guidance of 23,500 to 24,500 barrels a day. Crew also provided an update on its drilling in the UCR area of West Septimus. UCR stands for ultra condensate rich and refers to the area’s higher-than-usual condensate content. For context, the wells in what Crew calls its liquids-rich area show condensate levels of 20 to 75 barrels per million cubic feet of gas, whereas the UCR area has condensate levels of over 200 barrels per million cubic feet. Crew started drilling a five-well pad in the UCR area at the beginning of the fourth quarter. It announced yesterday that the first three wells produced for 25 days during December at an average rate per well of 1,528 barrels a day, with a pleasingly high condensate-to-gas ratio of 216 barrels per million cubic feet. Crew will now frack the remaining two wells.
Despite its promotional efforts, Crew’s 96-cent stock has yet to climb back above the $1 mark, which it fell below on Dec. 17. It had released its 2019 guidance one week prior. The guidance calls for production of 22,000 to 23,000 barrels a day on a budget of $95-million to $105-million. Though the budget was exactly in line with the $98-million that analysts had been forecasting, the production target was about 1,000 to 2,500 barrels a day lower. Crew explained that its forecast includes about 2,000 barrels a day of production that is currently shut in because of low prices. The shut-ins are affecting about 1,300 barrels a day of non-Montney gas production and 700 barrels a day of heavy oil production in the Lloydminster area of Alberta and Saskatchewan. Crew previously tried to sell these heavy oil assets, starting a formal marketing process in August, 2016. In August, 2018, it gave up and called the process off.
Back in the Alberta Montney, the new Pipestone Energy Corp. (PIPE) lost 11 cents to $2.29 on 21,900 shares, more than giving back the five cents it added yesterday in its first official day of trading. Before yesterday, it was Blackbird Energy Inc., with the ticker BBI. The new Pipestone was created through Blackbird’s reverse takeover of the private Pipestone Oil. Both companies focus on the Pipestone area of the Alberta Montney, with Blackbird producing about 1,700 barrels of oil equiv alent a day and Pipestone Oil producing about 9,000. The goal of the new Pipestone Energy is to boost production all the way up to a range of 14,000 to 16,000 barrels a day by the end of this year.
The private version of Pipestone had just one shareholder, Canadian Non-Operated Resources LP (CNOR). It now owns 103 million of
Pipestone’s 189 million shares as a result of the reverse takeover. CNOR is backed by Riverstone Holdings and managed by Rick Grafton’s Grafton Asset Management. Mr. Grafton’s name is likely familiar to energy investors; he is an active financier in the energy world and previously co-founded and served as managing director of FirstEnergy Capital. He and his colleagues have a strong presence at the newly public Pipestone. Paul Wanklyn, a senior partner at Grafton and the former CEO of the private Pipestone, is president and CEO of the new version. The new board includes Geeta Sankappanavar, co-founder and president of Grafton Asset Management, as well as Robert Tichio, a partner at Riverstone. As for Mr. Grafton, he is Pipestone’s “strategic adviser.” Down in Argentina, Jose Penafiel’s Madalena Energy Inc. (MVN) edged up one cent to 16 cents on 156,800 shares, after announcing an increase in its production and a decrease in its spending commitments. The production increase was courtesy of the Palmar Largo block. This used to be a small contributor to Madalena’s production, because Madalena owned just a small stake, 14 per cent. A mere 5 per cent of Madalena’s third quarter production of 1,590 barrels of oil equivalent a day came from Palmar Largo. In the fourth quarter, Madalena struck a two-year agreement to take over 100-per-cent operatorship of Palmar Largo on Dec. 1, thereby boosting Madalena’s production by about 550 barrels a day. Today, Madalena’s president and CEO, Mr. Penafiel, declared how “happy” he was that the Palmar Largo arrangement had gone through as planned, boosting the company’s to tal pro ductio n to 2,100 barrels a day for the month of December. He is expecting production to stay around that level for the first quarter of this year. As for the rest of this year, Mr. Penafiel said he is still working out the details, but he promised “a very active year operationally.” Financially, Madalena had some news to share as well. It has renegotiated its spending commitments at its largest producing block, Puesto Morales. To keep Puesto Morales in good standing with the provincial regulator, Madalena agreed in 2015 to various spending commitments, of which $32.5-million (U.S.) were outstanding as of year-end 2015. Unfortunately, by year-end 2015, Madalena had realized that it did not actually have the money to meet its commitments. It kept its grip on the block by lumping each year’s commitment into the next year, while n ot ac tu ally spending much money. As a result, by Dec. 31, 2018, $24.7-million (U.S.) in commitments remained outstanding — just a $7.8-million (U.S.) difference from three years earlier. Madalena was supposed to have spent close to $25-million (U.S.) during this time. The regulator is not holding this against Madalena, however, and has now agreed to a new commitment schedule. This year requires a doable $2-million (U.S.) in spending, while the remaining commitments have been pushed out to 2020 and 2021. This outcome did not make Mr. Penafield as “happy” as the Palmar Largo deal, but it did render him “pleased.” He added that the company will drill an exploration well at Puesto Morales in the second half of the year.