by Stockwatch Business Reporter
West Texas Intermediate crude for June delivery lost 11 cents to $62.76 on the New York Merc, while Brent for July lost 41 cents to $72.21 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.94 to WTI, unchanged. Natural gas for June lost one cent to $2.63. The TSX energy index lost 2.51 points to close at 152.01.
The long weekend is getting off to a good start in the oil patch. On the heels of one Senate committee's rejection of Ottawa's proposed Bill C-48 (the B.C. oil tanker ban), another Senate committee has approved nearly 200 amendments to the even more controversial Bill C-69. This bill is ostensibly designed to improve the way that environmental assessments are carried out on major energy and transportation projects. It has been nicknamed the "No More Pipelines Act" by Alberta Premier Jason Kenney (among others) due to the perception that, as stated in no uncertain terms by the Canadian Energy Pipeline Association, "It is difficult to imagine that a new major pipeline could be built in Canada" if the bill becomes law. Pro-energy groups have been hard at work attempting to have the bill killed or at least softened.
Their efforts have paid off. The Senate's energy, environment and natural resources committee has now approved nearly 200 amendments to the bill, some of which are exactly as proposed by industry proponents. Among other things, the amendments would change the way climate change effects are considered, reduce cabinet discretion to intervene in the assessment process and make it harder for people to launch court challenges to decisions. Tim McMillan, chief executive officer of the Canadian Association of Petroleum Producers, told CBC News that the amendments have put the bill in "the best possible structure that this bill could be in at this point" (which is still not exactly an endorsement). The above Mr. Kenney also declared himself pleased with the changes, but said he still wants to see what happens with the final law. The revamped bill will now go before the full Senate.
The above Senate developments have prompted many a victorious headline in Calgary, but not everyone is sharing in the celebration. A particularly bad day was had by North African junior SDX Energy Inc.(SDX), down 15 cents to 41 cents on 656,600 shares. This morning it reduced its guidance and announced the abrupt departure of president and CEO Paul Welch. The guidance reduction largely affected SDX's producing gas assets in Morocco and its not-yet-producing South Disouq gas block in Egypt. The latter project has been near the top of SDX's promotional list for six years, with Mr. Welch tirelessly hyping the "fantastic," "exciting" and "company-making" block even as it was plagued by delay after delay. Production from South Disouq was originally supposed to start in early 2018. It was repeatedly postponed, mostly recently to mid-2019, although Mr. Welch warned last month that production might not actually start until the fourth quarter of 2019. Now SDX has formalized that warning and changed the guidance.
The news of yet another South Disouq delay is one thing, but investors were likely a good deal more surprised to see a guidance reduction in Morocco. Mr. Welch has been his usual effusive self in describing SDX's plans to take advantage of Morocco's strong gas prices and energy-hungry, open-for-business environment. In January, he laid out a goal of roughly doubling SDX's Moroccan production to a range of nine million to 11 million cubic feet a day in 2019, thanks in part to a 12-well drill program that was supposed to start next quarter. Now SDX has dropped the production target closer to six million cubic feet a day and vowed not to drill any Moroccan wells until South Disouq in Egypt achieves production (the logic being that the wait will show "fiscal discipline"). SDX also noted that its second-largest customer in Morocco has reduced its volumes by 30 per cent compared with 2018, and that efforts to find new customers are being hindered by a slowdown in the Atlantic Free Zone (a Moroccan industrial park near SDX's infrastructure).
All in all, this is a blow for SDX's investors, who had been hoping that 2019 would prove to be what Mr. Welch recently called a "landmark year." It will not, and now there are many questions as to how 2020 will shape up. One thing is clear: Mr. Welch will not be involved. He is resigning (SDX's word) effective May 31, with chief financial officer Mark Reid taking over until a permanent replacement can be found.
Back in Canada, Alberta Cardium producer Obsidian Energy Ltd. (OBE) added 1.5 cents to 40 cents on 1.25 million shares, after agreeing to sell its 55-per-cent operated interest in the Peace River Oil Partnership (PROP) in Alberta for about $97-million before adjustments. It did not disclose the buyer, but in a separate press release, Highwood Oil Company Ltd. (HOCL), unchanged at $24.50 on no volume, identified itself. Highwood pegged the proceeds at $93.8-million, including $5-million in shares. The deal is expected to close by July 31.
Highwood's press release was far longer and made much of PROP's "world-class" resources and "premier" opportunities. These are the same sort of comments that Obsidian made when it first established the partnership nine years ago. In May, 2010, Obsidian -- then called Penn West -- and China Investment Corp. (CIC) formed a 55-45 joint venture to develop little-known but potentially valuable bitumen assets in the Peace River area. The assets were valued at $1.8-billion but were simply languishing in Penn West's portfolio. CIC agreed to pay $817-million for a 45-per-cent interest, with $312-million payable on closing and $505-million applied to Penn West's future costs. The idea was that with proper attention, the Peace River assets' production could eventually rise to 50,000 gross barrels a day, compared with 2,700 as of mid-2010.
Things did not go as planned. Four years after the partnership was struck, Penn West found itself in deep financial trouble, admitting in 2014 that it had discovered some serious accounting misstatements. Then oil prices crashed and the handcart to hell picked up speed. In mid-2015, Penn West obtained some creditor relief by agreeing that any asset sale proceeds over the next two years would be used to repay bonds -- with one of the assets on the chopping block being the PROP interest. Penn West ended up not selling PROP (it sold everything it owned in Saskatchewan instead, in mid-2016). Then, at the end of 2017, CIC's carrying commitments at PROP ran out. By then Penn West was trying to reinvent itself as a Cardium producer, complete with a new name, Obsidian. Obsidian announced in the spring of 2018 that it would once again look to sell its PROP interest. This was about eight years after the initial partnership announcement, and after all that time, the assets' production was still no more than 5,000 gross barrels a day. Now it is under 4,200 barrels a day as a result of little work being done in 2018 and no work whatsoever being budgeted for 2019.
Highwood sees itself as the company to turn this sad story around. It is a newcomer, having gone public just four months ago through a reverse takeover of a shell called Predator Blockchain. The transaction was unusual in a number of respects. For one thing, the accompanying financing was minuscule, just $68,400. For another, the financing price was an abnormally high $9. The reason for this valuation was not clear. Highwood is not a big producer; its output is about 1,500 barrels of oil a day, mostly from the Red Earth area of Alberta. That has not stopped the thinly traded stock from rocketing into the mid- to high $20s over the last four months. It released no news in this time, other than its 2018 financials. These showed a loss of $1.8-million for 2018. They also showed a working capital deficit of $29.6-million as of Dec. 31. Highwood will rely on debt to cover the cash portion of price tag for Obsidian's PROP interest.
As for Highwood's people, they will be familiar to many energy investors. Founder and major shareholder Joel MacLeod is the president and CEO of the public Tidewater Midstream, and previously sold Predator Midstream to the public Secure Energy Services in 2014. Highwood's president and CEO, Greg Macdonald, was a senior executive at both Tidewater and Predator Midstream. Geologist Kelly McDonald is Highwood's vice-president of exploration. He has worked for several producers over the last two decades, including predecessors of Peyto Exploration & Development Corp. (PEY: $5.65) and Gear Energy Ltd. (GXE: $0.72), and also provides services through KJ McDonald Consulting.