by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost 66 cents to $55.09 on the New York Merc, while Brent for November lost 43 cents to $60.38 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.50 to WTI, down from a discount of $12.13. Natural gas for October added two cents to $2.57. The TSX energy index added a fraction to close at 134.52.
The Alberta government has launched a constitutional challenge against the federal government's Bill C-69, the controversial law that overhauled the environmental assessment process for infrastructure projects. Critics including Premier Jason Kenney have dubbed the bill the No More Pipelines Act. In a statement yesterday announcing the court challenge, Mr. Kenney declared that Bill C-69 "will make it harder, and maybe impossible, for any future pipelines and similar critical infrastructure projects to be approved in Canada." He called the bill a "flagrant violation" of provincial rights over natural resource development, and vowed to use "every tool to prevent this from happening."
Mr. Kenney is getting some backup from Saskatchewan counterpart Scott Moe. This morning, Saskatchewan Attorney-General Don Morgan announced that Mr. Moe's government will be seeking intervener status in Alberta's case. "It's important and absolutely imperative for us, that we stick up for where the rights of the province are," said Mr. Morgan, adding that Saskatchewan must "do everything in our power to make sure that [the Saskatchewan energy] sector remains vibrant, strong and continues to grow."
Within the oil patch, MEG Energy Corp. (MEG) edged down seven cents to $5.70 on 4.85 million shares, despite being the subject of a completely different announcement from the Alberta government. That announcement had the more uplifting headline, "Alberta green-lights MEG Energy project." This would be the Surmont thermal oil sands project. Surmont, located 85 kilometres south of Fort McMurray, is located along the same geological trend as MEG's existing Christina Lake oil sands project, and right next to an oil sands project operated by ConocoPhillips. Surmont contains an estimated 709 million barrels of probable reserves and is expected to support production of 120,000 barrels a day for 20 years. By comparison, MEG's current oil sands production is a little under 100,000 barrels a day. MEG filed the development plan for Surmont back in 2012 and originally hoped to start construction in 2014 and achieve initial production in 2016. That was obviously overly optimistic, but with approval now received from the provincial government, MEG is at last in a position to make a final investment decision, as well as to apply for environmental licences and local development permits. A recent SEDAR filing suggested that initial production is tentatively scheduled for 2025, "with construction and on-stream timing dependent upon development logistics, market conditions and capital planning."
The Surmont approval comes at a pleasing time for MEG, which has spent much of this year under the shadow of a failed takeover attempt by Husky Energy Inc. (HSE: $9.31). Husky made a hostile bid almost exactly a year ago of $11 a share. MEG, feeling "significantly undervalued," rejected the offer, and Husky, citing "insufficient MEG board and shareholder support," allowed the offer to expire in January. MEG's stock promptly plummeted to $5.50. It went on to touch a low of $4.06 in June. Recent weeks have seen it rally to its current level of $5.70, although it still has a long, long way to climb back to its 2011 peak of nearly $53. One of the reasons for its plunge is its heavy debt load, with over $3.5-billion in long-term debt as of June 30.
A similar tale of debt-related woe could be told by Baytex Energy Corp. (BTE), up three cents to $1.90 on 15.1 million shares. It has fallen from its 2012 high of over $59. In 2016, with its net debt load of around $2-billion, Baytex brought in a new president and chief executive officer, Ed LaFehr. Mr. LaFehr made vague but placating noises about putting "high priority on managing our debt position" and "look[ing] for opportunities to deleverage the balance sheet." Investors will note that Baytex's net debt was still around $2-billion as of June 30. Interestingly, however, Mr. LaFehr has started to open up about his specific plans to reduce the debt. In Toronto yesterday, while promoting Baytex at Peters & Co.'s 2019 Energy Conference, Mr. LaFehr gave not only numbers but specific timelines on debt reduction.
Some steps will be taken as soon as tomorrow. As previously announced, and as Mr. LaFehr repeated in his presentation, tomorrow Baytex will redeem $150-million (U.S.) in outstanding notes, using the free cash flow it generated during the first half of the year. Part of its remaining debt includes $400-million (U.S.) in notes due 2021 and $300-million in notes due 2022. Mr. LaFehr said the company shows "every indication" of being able to term out the 2021 notes to 2017 or 2028, an action it plans to take before mid-2020. It will then repay the $300-million notes using cash by next summer. Over all, the "debt wall" is crumbling, cheered Mr. LaFehr, adding that he is "very excited to make that happen sooner rather than later." So excited was he, in fact, that he even started to muse about what Baytex will do once the debt wall has fallen. If Baytex can achieve Mr. LaFehr's "vision" of a debt-to-cash-flow ratio of 1.5 times -- compared with five to six times when Mr. LaFehr joined, and two to three times as of now -- then ultimately "this company wants to be a 10- to 15-per-cent return, with half of that being growth and half of that being yield in the form of a dividend." Baytex has not paid a dividend since 2015. In the good old days, the dividend was as high as 25 cents a month.
Another presenter at the conference was Alberta Montney producer Advantage Oil & Gas Ltd. (AAV), unchanged at $1.91 on 1.79 million shares. President and CEO Andy Mah talked up the company's recently released three-year plan. The best part of the plan, as Mr. Mah described it, is the doubling of Advantage's liquids production every year. Liquids contributed 2,580 of the 43,935 barrels of oil equivalent a day that Advantage produced in the second quarter, with the rest being lean gas. Although gas is a lower-margin product, Advantage's costs are low enough that the company can still spend below its means and enjoy free cash flow, said Mr. Mah. He calculated that Advantage's core asset and largest producer, Glacier, needs about $100-million annually to keep production flat, yet generates about $160-million in cash flow. The extra money is going toward the development of liquids. Advantage currently has liquids production at East Glacier and at the nearby Valhalla property, and will bring its first well at the Pipestone/Wembley property on production later this month. The Pipestone/Wembley area has been "the centre of a lot of attention" lately, said Mr. Mah, with companies such as Kelt Exploration Ltd. (KEL: $3.25) and Canadian Natural Resources Ltd. (CNQ: $33.52) drilling some lovely liquids-rich wells. Mr. Mah is looking forward to seeing how Advantage's results stack up.
Another of Advantage's properties is also stirring up Mr. Mah's excitement. That property is known as Progress. Until recently, Mr. Mah said Advantage did not publicly talk much about Progress, in part so it could amass land there at a "very, very low cost." It decided to break the silence last week by announcing that it has drilled four Progress wells so far and the most recent one tested over 2,100 barrels a day, with nearly two-thirds of that production being liquids. This result was "even beyond what we thought it could be," marvelled Mr. Mah. He now reckons that Progress could be just as good at Pipestone.
This optimism is shared by Scotia Capital analyst Cameron Bean. He titled his most recent research note "Progress Poised to Become a Factor," noting that he had previously given "minimal consideration" to Progress but now sees it as an "indication of possible upside beyond our current estimates (not that we needed another reason to like the stock)." He concluded that Advantage "continues to be our best idea." Mr. Bean has a "sector outperform" rating on the stock and a price target of $5.50, nearly three times today's closing price of $1.91.