by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery added $1.45 to $52.54 on the New York Merc, while Brent for October added $1.15 to $57.38 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.67 to WTI, down from a discount of $12.55. Natural gas for September added five cents to $2.13. The TSX energy index added 1.87 points to close at 126.15.
Alberta gas producer Peyto Exploration & Development Corp. (PEY) edged down 11 cents to $3.18 on 4.11 million shares, garnering a mixed response to its second quarter financials. The quarter was plagued by an unseasonably wet spring breakup, as well as persistently poor AECO gas prices (the benchmark in Alberta). Peyto was able to bring only one well on production between early May and early July. It also shut in some of its uneconomic gas production. As a result, gas production fell to 422 million cubic feet a day from about 494 million a year earlier, a drop that was not quite offset by a year-over-year rise in oil and liquids production (to 11,100 barrels a day from 9,200). Peyto has been increasing its focus on high-margin liquids, particularly in the Alberta Cardium, but gas is still by far its main product. In total, Peyto's production dropped to 81,500 barrels of oil equivalent a day in the second quarter of 2019 (from 91,500 a year earlier). Analysts had been predicting slightly higher production of at least 83,000 barrels a day. They were also predicting cash flow of around 50 cents a share; the actual figure was just 46 cents a share.
Peyto did have some bright spots in the quarter. It talked vaguely of a "new targeting technique" that has uncovered "several Cardium sweet spots." As well, it recently completed its very first Alberta Montney well, spudded in late 2018. No rates were mentioned, but Peyto said the well has been successfully put on production. Peyto also drew attention to one of its directors, John Rossall. Mr. Rossall is an engineer and a former Repsol executive. He was nominated to Peyto's board in April and joined it in May, but Peyto decided to give him a special mention in August too.
Another energy company recently had an even higher-profile addition to its board. Last week, Whitecap Resources Inc. (WCP), up eight cents to $3.90 on 5.08 million shares, welcomed former Saskatchewan premier Brad Wall as a director. He is already earning his keep. "I'm honoured to be part of a great organization at Whitecap," he told BNN on the same day as his appointment. Not only is Whitecap "excellent," but its president and CEO, Grant Fagerheim, is "among the best CEOs in the country." Mr. Wall is particularly pleased that Mr. Fagerheim is "stepping up in advocacy for the sector." The Canadian energy industry has been weighed down over the years by pipeline constraints and unsupportive federal policies. The increasingly grim situation is prompting more and more CEOs to, as Mr. Wall put it, "step up and let Canadians know what's at stake in the [federal] election campaign." Most of these CEOs have been careful to avoid publicly favouring one party or candidate over another. Mr. Wall does not share these qualms, telling BNN that the odds of Justin Trudeau's Liberal government having a "Damascus-road conversion [to] change their policies to support the Canadian energy sector" are about as good as the odds of "a Rider fan converting to a Bomber fan." He likes Conservative Leader Andrew's Scheer's idea for a national energy corridor.
As for Whitecap specifically, Mr. Wall said its story exemplifies the extent to which political risk is hurting companies. He pointed out that Whitecap enjoyed over $100-million in free cash flow during the second quarter, after spending and dividends (its 2.85-cent monthly dividend represents a yield of 8.8 per cent). The company also hit its production targets, said Mr. Wall. (Whitecap had not previously set a quarterly production target, but its second quarter output of 70,611 barrels a day was above analysts' predictions of 68,900 barrels a day. Cash flow matched analysts' predictions at 41 cents a share.) Investors are not rewarding these efforts. The stock is currently below $4, down from nearly $9 this time last year and nearly $19 in 2014.
One company is enjoying a more pleasant reaction to its second quarter results. George Fink's Alberta Cardium-focused Bonterra Energy Corp. (BNE) released its financials after the close yesterday and jumped up 27 cents to $4.46 today. (A correction may have been due, however, as the stock lost 90 cents over the four prior trading days.) Bonterra patted itself on the back for reducing its debt during the quarter. Net debt came to $310-million as of June 30, down from $326-million as of March 31. Bonterra took in nearly $26-million in cash flow during the quarter while spending just $9-million. That figure does not include what was spent on its dividend, although that was also made much cheaper recently, following Bonterra's decision to chop its monthly payout all the way to one cent from 10 cents late last year. The current yield is 2.7 per cent.
Bonterra's financials drew praise from Canaccord Genuity analyst Anthony Petrucci, who praised the company for decreasing its debt while increasing its production to 12,674 barrels a day (from 12,020 in the first quarter). That figure is just barely within Bonterra's full-year guidance of 12,600 to 13,200 barrels a day. Bonterra is keeping that guidance intact, but says it will likely be on the low end. Mr. Petrucci is unfazed, noting that Bonterra's low-decline assets "enable the company to spend a relatively minimal amount on capex and still maintain production levels." He left his rating at "buy" and his price target at $8.
Bonterra's Mr. Fink has another energy promotion, namely Alberta gas junior Pine Cliff Energy Ltd.(PNE). Pine Cliff added half a cent to 13 cents on 267,500 shares today, regaining the half cent it lost yesterday after it too released its second quarter financials. As with the above-mentioned Peyto, the financials were hard hit by weak AECO gas prices. Pine Cliff mildly described the situation as "challenging" as it pointed out that second quarter AECO prices reached "the lowest quarterly average in decades." (Nineteen years, to be precise.) This resulted in cash flow of negative one cent a share, the worst quarterly result since mid-2016. Even so, Pine Cliff managed to produce 19,123 barrels a day during the quarter, exceeding analysts' predictions of about 18,900 barrels a day. As well, nearly 8 per cent of that production came from higher-margin oil and liquids, up from 6 per cent a year earlier. Pine Cliff (again like Peyto) has been striving to expand beyond dry gas. It drilled its first oil well last year and likes its results so far; the well has averaged 130 barrels a day over its first seven months. Pine Cliff is planning to spud a second oil well toward the end of this year.
Pine Cliff also expressed optimism that the Alberta government will take steps to improve the situation for local gas producers. The company is particularly keen to see a lightening of its tax load. As some gas producers (notably Perpetual Energy Inc. (PMT: $0.24)) have been pointing out for years, there is a wide gap between municipal property tax assessments of gas assets and the actual market valuations of those assets. This results in absurd situations where, in Pine Cliff's case, property taxes made up just 9.1 per cent of adjusted cash flow in 2014, but 109 per cent in 2018. (In Perpetual's case, high taxes were one of the reasons behind an asset sale for a nominal dollar in 2016. Perpetual even took out a farewell ad in a community paper exclaiming, "We couldn't afford the taxes -- so we basically gave away our assets!") Pine Cliff's president and CEO, Phil Hodge, seems confident that the government will act quickly to find both short- and long-term solutions to the gas sector's woes. In a BNN interview two weeks ago, he described the government as being "very supportive" and willing to engage in discussions. There is good reason for this, he added. That reason is named Trident Exploration. Trident went bankrupt earlier this year and dumped 4,700 orphaned wells, plus their $329-million cleanup bill, into the reluctant lap of the Alberta Energy Regulator. Mr. Hodge said he sees a risk of further bankruptcies among gas producers unless the government takes decisive action.