by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost $1.48 to $55.30 on the New York Merc, while Brent for September lost $1.73 to $61.93 (all figures in this para U.S.). Western Canadian Select traded at a discount of $14.75 to WTI, down from a discount of $11.60. Natural gas for August lost two cents to $2.29. The TSX energy index lost 2.31 points to close at 135.44.
Vermilion Energy Inc. (VET) lost $1.31 to $26.28 on 3.87 million shares, reaching a 10-year low, as confidence in its generous dividend continued to falter. The 23-cent monthly payout represents a daunting yield of 10.5 per cent. Vermilion has had a dividend since 2003 and has never cut it once, a fact that the company takes evident pride in and gives prominent place on its website. President and chief executive officer Tony Marino has also been working hard to soothe investors' nerves, telling a Calgary energy conference just last week that a dividend cut is "not something we're even entertaining." Skeptics are not so sure. This morning, RBC Capital Markets analyst Greg Pardy fretted that Vermilion is becoming "more vulnerable over time" to a dividend cut as gas prices continue to fall. Mr. Pardy noted that Vermilion has some pricing protection thanks to its "diversified exposure to European gas and Brent pricing." For that reason, despite Vermilion's "quite elevated" yield, he is leaving his dividend-per-share outlook unchanged at $2.76 (the current 23 cents monthly) for 2019 and 2020. He nonetheless downgraded the stock to "sector perform" from "sector outperform" and cut his price target to $33 from $40.
Vermilion can count itself fortunate to have little exposure to a particularly downtrodden gas benchmark, Alberta's AECO. (The company does have assets in Alberta, but focuses on condensate.) For perspective, AECO gas prices averaged about $1.50 in the fourth quarter of 2018, while over in Europe, the NBP benchmark price was over $11. AECO is also notoriously volatile. In the last four weeks alone, it has been as high as $2.28 and as low as minus 11 cents.
Alberta's gas producers are frankly fed up with AECO's paroxysms. This week, the CEOs of nine Alberta gas companies published an open letter to Premier Jason Kenney, calling for "swift and decisive action" to bring AECO to heel. The CEOs, whose companies collectively produce over two billion cubic feet of gas a day (over 15 per cent of Alberta's total), declared the industry to be on the verge of "crisis." Typically the market does not welcome government intervention, but in this case, inaction could lead to "widespread corporate failures, significant job loss and a further deterioration in investor confidence," warned the CEOs. They proposed a solution: restore balance by introducing a program in which producers "manage their working-interest production on an entirely voluntary basis when required to do so."
"Manage production" is easy enough to parse -- it of course means cut production -- but how producers will do this "on an entirely voluntary basis when required" needs some explanation. This was not provided in the letter, but a representative of one of the signing companies, the private Jupiter Resources, told the CBC that the province would be in charge of co-ordinating the fair distribution of output cuts and then doling out royalty credits to anyone that voluntarily produces less. This does not quite seem to square the "voluntary when required" circle, but Jupiter is a proponent of the idea nonetheless. In addition to Jupiter, the letter was signed by the heads of Bellatrix Exploration Ltd. (BXE: $0.76), Peyto Exploration & Development Corp. (PEY: $4.12), Pine Cliff Energy Ltd. (PNE: $0.17), Advantage Oil & Gas Ltd. (AAV: $1.85), Canlin Energy (private), Paramount Resources Ltd. (POU: $6.68), Bonavista Energy Corp. (BNP: $0.435) and Modern Resources (private).
Moving on from gas woes (and into debt woes), the Alberta oil and B.C. gas producer Pengrowth Energy Corp. (PGF) lost 3.5 cents to 49.5 cents on 304,700 shares, despite a nod of support from its largest investor. The billionaire Seymour Schulich announced today that he has just bought two million more shares of the company. He now owns 170 million shares, or 30.4 per cent of the 560 million shares outstanding. (Although over the 20-per-cent threshold, Mr. Schulich is not required to make a tender offer as long as he complies with various buying restrictions.) According to SEDI, the two million new shares were bought at an average price of 50.6 cents. Mr. Schulich told BNN last month that his cost base for his entire Pengrowth position was around $1.10. Although the new purchases may have brought that down a tad, say to $1.09, that is still more than double today's close of 49.5 cents. By contrast, the stock traded as high as $4.48 in 2015 (the year Mr. Schulich began buying) and peaked at over $26 in 2006.
Mr. Schulich presumably has his fingers crossed for a happy near-term ending to Pengrowth's "strategic review" (code for going up for sale). Pengrowth launched this review in March and is working with Tudor, Pickering and Holt in "exploring a comprehensive range of strategic and transaction alternatives." These could include mergers, asset sales, refinancings and more. The only item of note that Pengrowth has reported so far is that its bankers gave it some extra time for the review by extending its $330-million credit facility by six months to Sept. 30, 2019. As well, in about 13 weeks, the company is due to repay $58.6-million in term notes. These notes are just a small fraction of Pengrowth's overall debt of over $720-million, which is well over double its market cap of $277-million. Investors should next get an update on Pengrowth's finances when it releases its second quarter results on Aug. 8.
In happier news, Tim Granger's Alberta-focused Prairie Provident Resources Inc. (PPR) added 2.5 cents to 10 cents on 717,800 shares, after talking up its "continued drilling and operational success." The company has brought a new well on production in its core Princess area. Over a three-week period, the well has produced 700 barrels of oil equivalent a day, including 36 per cent oil. Prairie Provident reckons that the well will pay out in just 10 months. To put the number in perspective, Prairie Provident's current production is around 6,500 barrels a day, up from 5,692 in the first quarter and 6,036 in the second quarter. Its full-year guidance (as reiterated in the update) is 6,100 to 6,500 barrels a day.
Virtually all of Prairie Provident's production comes from three core areas: Princess and Michichi in Southern Alberta, and Evi in the Peace River Arch. It entered each of those areas through acquisitions. Princess and Evi came courtesy of Arsenal Energy, which Prairie Provident merged with and went public through in September, 2016. Michichi is a more recent addition, acquired through the takeover of Marquee Energy last November. Investors will recall that the Marquee deal was trumpeted as "offering numerous strategic benefits for shareholders, which include ... pro forma corporate production [of] approximately 7,700 barrels of oil equivalent a day." Prairie Provident has since backed far away from such lofty production promises. Weak oil prices and the deferral of various planned activities meant that the company was not even able to get above 7,000 barrels a day in the first quarter, as originally hoped. It does, however, look to be in an increasingly good position to achieve its current year-end target of 6,650 barrels a day, if commodity prices and the rest of this year's drill program co-operate.
Meanwhile, a U.S. relative of Prairie Provident continues to pursue its own, very different agenda. As noted above, Prairie Provident went public in 2016 through a merger with Arsenal Energy; Prairie Provident's name at the time was Lone Pine Canada. Lone Pine Canada's parent company is the U.S.-incorporated Lone Pine Resources. That company is about to enter its seventh year of arbitration with the government of Canada. The dispute stems from the Quebec government's decision in 2011 to revoke one of Lone Pine Resources' licences along the St. Lawrence River, a seizure for which the company is seeking $118.9-million (U.S.) in damages. The International Centre for Settlement of Investment Disputes held hearings in October and November, 2017, but there have been no updates since. The matter is classified as pending.