by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost 45 cents to $57.40 on the New York Merc, while Brent for November lost 21 cents to $62.38 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.13 to WTI, down from a discount of $11.96. Natural gas for October lost one cent to $2.58. The TSX energy index added 3.02 points to close at 134.11.
Cross-border shale producer EnCana Corp. (ECA) reached an intraday high of $6.38 before reversing course and closing at $6.17, down three cents, on 16.7 million shares. It has made some changes at the top. Most notably, it has promoted executive vice-president and chief operating officer Mike McAllister to the role of president. The current president and chief executive officer, Doug Suttles, will remain CEO.
Mr. McAllister, an engineer by background, joined EnCana about 20 years ago and quickly made his mark with a geological gamble in the Western Canadian foothills. Long-time investors will recall that in the early 2000s, the prospects for Western Canadian energy were thought to be waning, until a massive gas play in northeastern British Columbia reignited excitement all over the province. It was known as Cutbank Ridge. In September, 2003, bids in this play drove a record monthly land sale for B.C. (surpassing even Alberta's record, at the time). One bidder swept up nearly all of the parcels. Its identity was kept secret at first, but soon it emerged that EnCana, and particularly Mr. McAllister as vice-president of the B.C. division, had placed a large bet on Cutbank Ridge, following months of analyzing data from exploration wells. All of this ultimately led to a multibillion-dollar Cutbank Ridge joint venture with Mitsubishi. More generally, Mr. McAllister is viewed as instrumental in developing EnCana's overall position in the Alberta/B.C. Montney, now one of its core plays.
Mr. McAllister even survived the purge of 2013, when the above-mentioned Mr. Suttles arrived at EnCana. EnCana was predominantly a Canadian gas producer at the time and was struggling with a protracted downturn in gas prices. Mr. Suttles promised bold action to turn things around. In his six years as CEO, he has cleared out much of the old management, turned EnCana's focus to shale and vastly expanded its operations in the United States. EnCana made a particularly large U.S. move this year by acquiring the Oklahoma-focused Newfield Exploration for $5.5-billion (U.S.). Unfortunately, this deal has not gone over well with investors. EnCana's stock (worth nearly $27 in 2014) has fallen to almost $6 from over $13 since the Newfield deal was announced last year. Analysts have been more receptive to the deal; just yesterday, Scotia Capital analyst Jason Bouvier published a 19-page research note declaring that EnCana's Oklahoma assets have "top-tier economics" that are "just shy of Permian economics and well above Montney economics." (The Texas Permian is another of EnCana's asset bases.) Investors remain unconvinced. It will be part of Mr. McAllister's new job as president to try to reel them back in.
Other companies are taking a different approach to wooing investors. This morning brought the start of Peters & Co.'s three-day 2019 Energy Conference at the Ritz-Carlton in Toronto, an attendance-by-invitation-only event where executives pitch their stories to corporate and institutional clients. The first presenter of the day was Jeff Hart, chief financial officer of Husky Energy Inc. (HSE), up 32 cents to $9.38 on 4.12 million shares. Mr. Hart talked up Husky's "rich portfolio of opportunities." He reminded investors that Husky recently released an updated five-year plan, under which it will spend about $1.7-billion less than its previous five-year plan but still enjoy a production increase of 100,000 barrels of oil equivalent a day (up from current production of 300,000 barrels a day). "The net result is a robust free cash flow profile," proclaimed Mr. Hart. Indeed, Husky is approaching a "free cash flow generation inflection point" in 2021 as it finishes up some of its long-lead spending. Mr. Hart emphasized that Husky does not have to use its free cash flow to reduce debt, and instead has a "bias toward shareholder returns," particularly its dividend. Husky pays a 12.5-cent quarterly dividend for a yield of 5.3 per cent.
Husky's dividend was previously suspended from late 2015 to early 2018. Mr. Hart told the conference that the suspension was the right call, but it drove away Husky's yield investors, many of whom will want to see a longer dividend history before returning. In addition, various "operational incidents" (as Mr. Hart delicately put) have frightened off many investors over the years. These were some of the reasons that Mr. Hart gave for the stock's decline to its current level of under $10 from a high of $37 in 2014. He reckons that Husky is due a "rerate" in its stock as long as it can "execute and do everything in a planned, thoughtful manner that the market can bank on."
Mr. Hart's promotional efforts came at an opportune time for Husky, which has just been publicly kicked out of the S&P/TSX 60 Index (more or less a benchmark of blue-chip companies). The quarterly rebalancing results for this index were announced last week and will take effect Sept. 23. Interestingly, this rebalancing announcement was earlier than expected and did not include any details on the coming quarterly rebalancing of the S&P/TSX Composite Index, which also takes place Sept. 23. This announcement is expected this Friday, Sept. 13. Energy companies considered by analysts to be at risk of deletion include NuVista Energy Ltd. (NVA: $2.16), Kelt Exploration Ltd. (KEL: $3.08), TORC Oil & Gas Ltd. (TOG: $3.78), Peyto Exploration & Development Corp. (PEY: $3.62) and Birchcliff Energy Ltd. (BIR: $2.22). Index deletions can lead to selling pressure from institutional investors.
There is, at present, no index tracking companies that have put themselves up for sale, but if there were, it might be possible to populate it entirely with energy producers. Yet another producer has just added itself to the long list. This morning, Obsidian Energy Ltd. (OBE), up five cents to $1.40 on 528,900 shares, formally launched a "strategic alternatives" review, the preferred euphemism of companies that are searching for a suitor. Obsidian will also consider options such as asset sales or a recapitalization.
This decision comes just two weeks after Obsidian had to cancel a planned $97-million asset sale to Highwood Oil Company Ltd. (HOCL: $19.00), involving Obsidian's 55-per-cent-owned Peace River bitumen assets. The co-owner of the assets did not give all necessary approvals for the sale. This was a blow to Obsidian, which previously described the sale as a "transformational" deal that would allow it to narrow its focus on its core Alberta Cardium assets while paying down its heavy debt. Net debt was $487-million as of June 30, including $416-million drawn on its credit facility. This facility is technically worth $550-million, but only $460-million is actually available to Obsidian, a figure that was supposed to go down to $420-million on the completion of the Peace River sale. Obsidian has not clarified whether or how the collapse of the sale will affect these numbers. In any case, the numbers are all considerably above Obsidian's current market cap of $102-million. This represents a long, long fall from the days when Obsidian (previously Penn West) was one of the largest energy trusts in Canada, with a market cap of well over $10-billion.
To help with its review, Obsidian has hired Tudor, Pickering and Holt. The same firm is also advising Pengrowth Energy Corp. (PGF: $0.35), another debt-laden Western Canadian producer, which put itself up for sale in March. Other energy companies that have climbed up on the auction block this year include BNK Petroleum Inc. (BKX: $0.17), Return Energy Inc. (RTN: $0.015), Traverse Energy Ltd. (TVL: $0.01), Orca Exploration Group Inc. (ORC.B: $6.40) and -- for the second time since 2015 -- Zargon Oil & Gas Ltd. (ZAR: $0.33).