by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost $1.65 to $55.75 on the New York Merc, while Brent for November lost $1.57 to $60.81 (all figures in this para U.S.). The benchmarks tumbled in the wake of a report that U.S. President Donald Trump is considering easing sanctions on Iran, a move that could boost global oil production. In addition, OPEC released a bearish monthly report today, in which it lowered its 2019 and 2020 forecasts for global oil demand. OPEC now expects demand to rise by 1.02 million barrels a day in 2019 (a 60,000-barrel-a-day decrease from last month's report) and to rise by 1.08 million barrels a day in 2020 (an 80,000-barrel-a-day decrease from last month). It cited a weakening in the global economic outlook. Here in Canada, Western Canadian Select traded at a discount of $12.13 to WTI, unchanged. Natural gas for October lost three cents to $2.55. The TSX energy index lost a fraction to close at 134.10.
Oil sands producer Cenovus Energy Inc. (CVE) edged up eight cents to $12.47 on 9.99 million shares. It has filed on SEDAR a preliminary prospectus for a mixed shelf financing worth up to $5-billion (U.S.), valid for the next 25 months. The prospectus does not, of course, require Cenovus to complete a financing; it merely leaves the option open. Cenovus last filed a similar prospectus in October, 2017, which will soon expire. That prospectus would have allowed it to raise $7.5-billion (U.S.).
Although Cenovus did not complete any offerings under the 2017 prospectus, it did raise a good deal of money in 2017, as that was the year it acquired the oil sands and Deep basin assets of ConocoPhillips for $17.7-billion. The acquisition was accompanied by a $3-billion bought deal at $16. The proceeds, along with a great deal of debt, took care of the $14.1-million cash portion of the price tag, while the rest was paid for through the issuance of 208 million shares. Cenovus was then required to register those shares with a prospectus that would allow ConocoPhillips to, if desired, complete a secondary offering -- hence the prospectus that Cenovus filed in late 2017. The new prospectus contains similar language about a potential secondary offering. This does not mean that ConocoPhillips is now obligated to sell the shares; again, it merely leaves the door open.
Coincidentally, the prospectus comes just three days after The Globe and Mail rehashed the terms of the above acquisition and the "deal-induced hangover" that Cenovus has suffered ever since (with the $12.37 stock having tumbled from around $17.50 since the deal was announced). The Globe reporter's suggestion was that Cenovus buy back its shares from ConocoPhillips. This is only now becoming feasible for Cenovus, which has spent the last two years prioritizing debt repayment. Chief executive officer Alex Pourbaix has made no secret of his desire to "relentlessly pursue getting our net debt ... to $5-billion" (down from $8.4-billion at the start of the year). Mr. Pourbaix has suggested that this target could be hit in time for Cenovus's investor day next month. He has further said that once the target is reached, Cenovus will take a "very hard look" at raising its dividend, currently five cents each quarter (for a yield of 1.6 per cent). Decision day is almost at hand. Cenovus's investor day will take place three weeks from now, on Wednesday, Oct. 2.
Elsewhere in Alberta, the Montney-focused Seven Generations Energy Ltd. (VII) lost eight cents to $8.23 on 1.82 million shares, giving back some of the 25 cents it added yesterday. President and CEO Marty Proctor was in Toronto yesterday morning to talk up the company at the 2019 Peters & Co. Energy Conference. "We are making the transition from a rapid-growth company to one that's focused on returns and free cash flow," he declared. Rapid is certainly an apt way to describe Seven Generations' rise to become Canada's largest condensate producer, with total production of over 200,000 barrels of oil equivalent a day in 2018, up from 8,000 in 2013. In 2019, however, Seven Generations is slowing its pace and aiming for flat production of 200,000 to 205,000 barrels a day, while prioritizing cost cuts and cash flow. Mr. Proctor was proud to declare that Seven Generations generated its first ever free cash flow in the second quarter (about $40-million). He estimated that for the full year, Seven Generations will take in $1.4-billion in cash flow, exceeding its budget of $1.25-billion. That budget includes $1.1-billion in sustaining capital and $150-million to be spent on a new target for the company, the Lower Montney formation. Seven Generations has in the past focused on the Upper Montney. Mr. Proctor said the company has now drilled a handful of Lower Montney wells and is "very pleased with the outcome" so far.
Another condensate-minded presenter at the Peters & Co. conference was Crew Energy Inc. (CR), up two cents to 70 cents on 502,200 shares. Crew primarily produces gas from the B.C. Montney, but president and CEO Dale Shwed told the conference yesterday afternoon that condensate is rising through the ranks. Out of Crew's second quarter production of around 22,800 barrels of oil equivalent a day, condensate contributed 3,100 barrels a day, a "very happy" increase of more than one-third compared with the same period last year. By Mr. Shwed's calculations, every additional 1,000 barrels a day of condensate boosts Crew's annual cash flow by $23-million. "That is a game-changer if we continue to add the condensate production we plan on adding," declared Mr. Shwed. Alas, specific details on Crew's plans were scant, the company having long ago abandoned its old habit of providing multiyear forecasts. For example, longer-term investors may recall that in early 2017, Crew released a three-year plan aiming for production of at least 60,000 barrels a day by the end of 2019 -- so, right about now. Current production is instead around 22,500 barrels a day, according to Mr. Shwed. He told the conference that Crew has the infrastructure capacity to reach 40,000 barrels a day, but given the current commodity price environment, the actual achievement of that level of production will take "a couple more years."
Further afield, Turkey-focused Valeura Energy Inc. (VLE) had another lovely day, adding 26 cents to $3.22 on 641,600 shares. It has added a total of 66.5 cents since last Thursday's update on the Inanli-1 well at its BCGA (basin-centred gas accumulation) play in Turkey's Thrace basin. The well is currently undergoing multizone production testing by Valeura and its joint venturer, Norway's Equinor. The results of the first tested zone arrived on Aug. 12, with Valeura announcing an average rate of 643,000 cubic feet of gas a day over the first eight days. Now another zone has been tested and flowed at 185,000 cubic feet a day over four days.
Neither of those numbers is especially impressive (in part because the frack job was fairly minimal), but that is almost beside the point. After all, late last year, Valeura's stock plunged to as little as $1.91 from as much as $4.81 on concerns that the play's performance would be hindered by high water cuts (due to the surprising and still-unexplained discovery of water in one of the joint venturers' other wells). The Inanli-1 results have shown low water cuts so far and have proved that gas can and will flow to the surface. With Turkey being one of the world's strongest markets for would-be gas producers -- gas prices in Turkey are four to five times higher than in North America -- even a small amount of tested gas can stir up excitement. Even the Turkish government seems intrigued by Valeura and Equinor's activities. A recent announcement on the website of Turkey's Ministry of Foreign Affairs (published in Turkish, English, French and Arabic) notes that the Minister visited Norway from Aug. 29 to 30 and stopped in at Equinor's headquarters. There, according to the announcement, the Minister "listened to a briefing on [Equinor's] natural gas exploration activities in Thrace [the basin] and had a live chat with the group conducting activities ... and wished them success."