En­ergy Sum­mary for Jan. 10, 2019

Stockwatch Daily - - ENERGY - by Stock­watch Busi­ness Re­porter

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.


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