by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery added 35 cents to $58.61 on the New York Merc, while Brent for May lost 32 cents to $67.23 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.70 to WTI, up from a discount of $10.77. Natural gas for April added four cents to $2.86. The TSX energy index added a fraction to close at 156.58.
Li Ka-shing's Husky Energy Inc. (HSE) lost 26 cents to $13.89 on 3.87 million shares, after arranging a $750-million (U.S.) senior note offering. The notes bear interest at 4.4 per cent and mature in 2029. Husky says it will use the proceeds for general purposes, including the repayment of debt due this year. The note offering will not actually cover all of the debt due this year; according to Husky's latest financials, the amount of notes due in 2019 exceeded $1.4-billion as of Dec. 31, 2018. Husky is unconcerned, as even before this latest note offering, it had $2.9-billion in cash and $4.3-billion in unused credit facilities.
Despite the overall health of its balance sheet, Husky has had a trying time lately, dropping from nearly $23 in September to just under $14 now. It vexed investors in October by making a hostile takeover offer for MEG Energy Corp. (MEG: $5.08), a debt-laden oil sands producer. The unpopular bid was abandoned in January. This sent Husky's shares on a short-lived rise to around $17.50 from $15.50, but then February brought the release of Husky's fourth quarter financials, which showed operational missteps, significantly lower-than-expected cash flow and a reduction to Husky's 2019 guidance. Several analysts promptly downgraded the stock.
Another downgrade arrived just this morning, this time from Credit Suisse analyst Manav Gupta. "[Husky's] free cash flow yield lags peers," he wrote, "and investors are skeptical of management's claim it is not actively pursuing another deal after MEG fell through." (The word "actively" is important. Husky has not said that it is no longer interested in deals at all. During a conference call last month, chief executive officer Robert Peabody responded to a question about potential acquisitions by simply stating, "We don't comment specifically on M&A stuff ... [but] we look at everything that looks like it is relevant." Mr. Gupta will be perfectly aware of that response, as he was the one who asked the question.) In any case, this morning, Mr. Gupta downgraded Husky's stock to "neutral" from "outperform" and cut his price target to $18 from $24.
Alberta Montney producer Birchcliff Energy Ltd. (BIR) added 14 cents to $3.68 on 4.02 million shares, after providing an eagerly awaited update on its drill program in the Gordondale and Pouce Coupe areas. Investors were originally hoping that Birchcliff would release this update a month ago, alongside its year-end 2018 financials. That did not happen, but any disappointment was offset by the news that did come alongside the financials: Birchcliff hiked its quarterly dividend to 2.625 cents from 2.5 cents, for a current yield of 2.9 per cent. Now the company has put out its drilling update as well. So far, Birchcliff has drilled 10 of the 17 wells that it plans to drill this year, with "encouraging" and "strong" initial results. Four wells from a multiwell pad in the Gordondale area showed total IP30 (initial 30-day production) rates of 3,589 barrels of oil equivalent a day, with average liquids content per well of about 400 barrels per million cubic feet. At a different pad in the Pouce Coupe area, three wells showed IP50 (initial 50-day production) rates of 2,835 barrels a day, with average liquids content per well of about 80 barrels per million cubic feet.
These numbers were significantly better than Scotia Capital analyst Cameron Bean had been expecting, as he wrote in a new research note. In particular, the liquids levels were about twice as high as he had expected. This makes Birchcliff "a great stock for exposure to liquids production growth, free cash flow growth and a sustainable (and potentially growing) dividend," declared Mr. Bean. He left his price target at $7, compared with today's close of $3.68. The new drill results also drew praise from Canaccord Genuity analyst Dennis Fong, who reckoned that Birchcliff's "strong Montney liquids rates could drive cash flow outperformance." Even so, Mr. Fong left his price target at just $4.25. Birchcliff was trading around $4.25 as recently as November, but stumbled later that month after releasing disappointing 2019 production guidance of 76,000 to 78,000 barrels a day, lower than the widely expected target of least 80,000 barrels a day. Birchcliff is nonetheless content with its guidance and reiterated it in its latest press release.
Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) lost two cents to $1.38 on 2.12 million shares, giving back some of the four cents it added yesterday after releasing its year-end 2018 financials and reserves. Production in the fourth quarter came to 21,047 barrels of oil equivalent a day, below analysts' predictions of 21,300 barrels a day, while cash flow of two cents a share was just half of analysts' predictions of four cents a share. On the plus side, Surge's 2P (proved and probable reserves) soared to 122.6 million barrels at year-end 2018 from 95.2 million at year-end 2017. About 25 million barrels of the 2P reserve additions came from Surge's takeover last October of a private light oil producer, Mount Bastion Oil, which also boosted Surge's production by about 5,500 barrels a day. Thanks in part to the takeover, Surge hailed 2018 as a "transformative year" that has left the company "well positioned to execute its 2019 guidance." It left unmentioned the fact that it previously had to lower this guidance in January, dropping the production target to 22,000 barrels a day (down from 23,000) and the budget to $135-million (down from $160-million). This time, the guidance was left intact. Surge maintained that it can achieve its targets while still paying its 0.8333-cent monthly dividend, for a current yield of 7.2 per cent.
Elsewhere in Alberta, gassy Pine Cliff Energy Ltd. (PNE) was unchanged at 26 cents on 211,100 shares, despite releasing an intriguing update on its latest well. It also released its 2018 financials, but these were not as intriguing given that the company already released a fourth quarter production update and its year-end reserves last month. The fourth quarter was largely noteworthy in that Pine Cliff, in a break from business as usual, decided to drill its first oil well. The company has never been a particularly active driller; from 2012 through to the third quarter of 2018, it drilled a grand total of 36 gross (7.8 net) wells. The fact that its production rose during this period to around 19,500 barrels a day from just 100 barrels a day reflects Pine Cliff's tendency toward acquisitions, particularly gassy ones (the company's production is about 94 per cent gas). In the fourth quarter of 2018, however, Pine Cliff spudded a well targeting the Pekisko formation, a large, conventional light oil trend.
Now Pine Cliff has released the well's initial results. Over its first 30 days (including 14 days of restricted production), the well flowed at 410 barrels of oil equivalent a day, including 238 barrels a day of oil. This is a promising result, given that past IP30 projections used by other companies in the Pekisko have ranged anywhere from 105 to 170 barrels a day of oil. Pine Cliff continues to see "growth opportunities" in the Pekisko. In its 2019 guidance released last month, it said it would drill another Pekisko well this year.
One insider seems to have been looking forward to the Pekisko result. Since the well was spudded in late November, Robert Disbrow, a Vancouver broker and major backer of Pine Cliff for years, has bought a total of 891,612 shares, including 144,500 shares since Feb. 12 (when Pine Cliff released its 2019 guidance). He now owns just over 35 million of Pine Cliff's 307 million shares.