by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost $2.54 to $51.09 on the New York Merc, while Brent for October lost $2.71 to $56.23 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.55 to WTI, down from a discount of $12.46. Natural gas for September lost three cents to $2.08. The TSX energy index lost a fraction to close at 124.28.
Vermilion Energy Inc. (VET) reached an intraday low of $19.77, its first time below $20 since 2005, before settling unchanged from yesterday at $20.69, on 3.43 million shares. Barely a week of August has gone by and the stock has lost a full $3. The drop has come in spite of Vermilion's best efforts to impress investors with its second quarter financials and unwavering dividend commitment. The financials arrived on July 29, showing quarterly production of 103,000 barrels of oil equivalent a day (matching analysts' predictions) and cash flow of $1.44 a share (slightly behind analysts' predictions of $1.52 a share). Vermilion also reaffirmed its 2019 guidance, including its 23-cent monthly dividend, with its sky-high yield of 13.3 per cent. In fact, said Vermilion, cash flow is so strong that the company will even launch a share buyback program. The details of that program were firmed up today; Vermilion plans to buy back up to 7.75 million of its 155 million shares. It used today's announcement to once again remind investors that it has been paying a dividend steadily since 2003.
The dividend was further defended by president and chief executive officer Tony Marino during a BNN interview last week. "We simply do not see a reason for a dividend reduction.... I just don't know where this sentiment is coming from," he declared. He said repeatedly that Vermilion is "fully funded" for this year's budget and dividends, thanks in part to its extensive hedging. "We'll reduce capex rather than cut the dividend," he promised twice. The current plan for 2019 calls for spending of $530-million and production of 101,000 to 106,000 barrels a day.
One analyst views a budget cut as rather likely now that Vermilion has launched a share buyback. In a recent research note, Canaccord Genuity analyst Dennis Fong estimated that at current oil and gas prices, Vermilion will have just $7-million in free cash flow this year. That is barely enough to make a dent in the share buyback and will leave nothing for debt reduction. "Given that management has been adamant in that it would not cut the dividend, we view that capex would have to be moderated to fund an NCIB [share buyback program] or to lower the leverage," wrote Mr. Fong. He sees the company potentially trimming the $530-million budget to $430-million.
The analyst did not appear to challenge Vermilion on the safety of its dividend. Long-time investors, however, will know that dividend defences, no matter how vocally asserted, can crumble quickly in the moment. Perhaps the most striking example of this comes from Crescent Point Energy Corp. (CPG: $3.78). Back in 2015, its CEO at the time, Scott Saxberg, told the Financial Post that there was no imminent danger of a cut to Crescent Point's dividend (which, just like Vermilion's, was 23 cents a month, with a yield of over 10 per cent. Crescent Point and Vermilion were also similar in that both prided themselves on never having cut their dividends, not even in 2008). "We feel very comfortable in this price environment maintaining our dividend," claimed Mr. Saxberg. He made that comment on June 29, 2015. Just six weeks later, on Aug. 12, 2015, the monthly dividend was slashed all the way to 10 cents. It has faced even more cuts over the years and currently stands at one cent quarterly, for a yield of 1.1 per cent.
Crescent Point also got a new CEO in mid-2018. That would be Craig Bryksa, who has set himself the task of reducing the company's lofty net debt. Investors got an update on his progress when Crescent Point released its second quarter financials on July 25. These showed that net debt as of June 30 was $3.55-billion, down from $4.01-billion a year earlier. Investors were not won over. The stock has dropped to $3.78 from $4.22 since the financials were released.
Keith MacPhail and Ronald Poelzer's Alberta Montney producer, NuVista Energy Corp. (NVA), lost 35 cents to $2.24 on 19.7 million shares, after releasing its second quarter financials. Investors were unimpressed with its talk of a "clear line of sight to material free funds flow." As that phrasing suggests, NuVista is not generating free funds flow yet, and indeed lived significantly beyond its means during the second quarter. It spent nearly $90-million while taking in cash flow of about $64-million, or 29 cents a share. That was slightly below analysts' forecasts of 31 cents a share. Production, on the other hand, averaged 50,390 barrels of oil equivalent a day, slightly above analysts' predictions of 49,900 barrels a day. NuVista nonetheless expects to be "at the lower end of the range" of its full-year production guidance of 51,000 to 54,000 barrels a day. It remains confident in its longer-term plan to reach 68,000 barrels a day in 2021, at which point it hopes to start generating the above-mentioned "material free funds flow."
These big dreams have not prevented the stock's nightmarish slide to nearly $2 from nearly $9 in just the last year. NuVista's performance has been so poor that Scotiabank sees the stock potentially getting kicked out of the S&P/TSX Composite Index. In a research note this morning, Scotia Capital analyst Cameron Bean noted that one of his colleagues, index analyst Andrew Moffat, has identified NuVista as a "high-conviction" candidate for deletion during the S&P/TSX Composite's quarterly review next month. To stay in the index, predicted Mr. Moffat, NuVista's stock will need to average at least $2.59 over the period from Aug. 19 to Aug. 30. The stock closed today at an all-time low of $2.24. Should NuVista be deleted from the index, it will follow in the footsteps of at least 14 other oil and gas producers that have been given the boot since June, 2015. Mr. Bean is nonetheless a fan of NuVista thanks to its "stronger balance sheet and better growth prospects" relative to many competitors. He left his rating at "sector outperform" and his price target at $5.50.
Another of Mr. MacPhail and Mr. Poelzer's promotions is Alberta gas and liquids producer Bonavista Energy Corp. (BNP), down 2.5 cents to 46 cents on 1.42 million shares. It has an intriguing new investor. George Armoyan, through G2S2 Capital, has disclosed on SEDAR that he acquired 5.6 million shares yesterday at 50 cents. He now controls 29.4 million or 11.4 per cent of Bonavista's 257 million shares.
Mr. Armoyan is a long-time activist investor who used to make headlines in the mid-2000s by taking positions in struggling companies with turnaround potential. News of his purchases would send stocks racing upward in what analysts dubbed the Armoyan effect, with Mr. Armoyan sometimes reverently referred to as Canada's Carl Icahn. That was many years ago. The shine started to wear off Mr. Armoyan around a decade ago, particularly in the wake of the disaster that was Shermag Inc., a Quebec furniture maker that became a sizable investment of his in 2006 but went under in 2008. As for Mr. Armoyan's rare forays into the energy world, his record is mixed. One standout was Vaquero Energy, which he took an interest in during 2003, when it traded below $1. It was bought in 2005 through a share swap with Highpine Oil at about $7. More recently, however, there was Spyglass Resources. Spyglass was trading at nearly $2 when Mr. Armoyan joined the board in the summer of 2013. Although he left just a year later, Spyglass was already in a downward trend, and made it only to the end of 2015 before being halted at five cents and entering receivership.
Mr. Armoyan's new energy investment, Bonavista, certainly fits the bill for a stock down on its luck. The 46-cent stock has cratered from its 2011 peak of $32 as it wrestles with heavy debt and weak Alberta gas prices. It went below $1 for the first time in May, after suspending its dividend and planting the "going concern" red flag in its first quarter financials. It said at the time that it had entered negotiations with creditors to avoid a possible debt covenant breach within 12 months. Then it fell quiet until releasing its second quarter financials last week. These financials, though more or less as analysts predicted, contained almost no news on the debt negotiations; Bonavista merely talked of "significant progress has been made to date." Mr. Armoyan seems to share Bonavista's confidence that the company will secure "successful and suitable terms" for covenant relief.