by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery added 91 cents to $39.75 on the New York Merc, while Brent for August added 68 cents to $42.19 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.85 to WTI, up from a discount of $9.05. Natural gas for July added three cents to $1.67. The TSX energy index lost a fraction to close at 77.16.
A former oil bear is giving the bulls something to cheer about, with heady predictions of triple-digit crude prices. "The chances of [Brent] oil going toward $100 (U.S.) at this point are higher than three months ago," Christyan Malek, JPMorgan's head of EMEA (Europe, Middle East and Africa) oil and gas research, told CNN. Mr. Malek has spent the last several years bearish on oil. (One of his more noteworthy calls came in April, 2014, when oil was around $100 (U.S.) and rising. Mr. Malek -- then at Nomura International -- began predicting that it would soon fall below $80 (U.S.). He held firm even as oil kept rising over the next two months. A few months after that, prices collapsed below $80 (U.S.) for the first time since 2010, and with the exception of a brief period in 2018, they have remained below $80 (U.S.) -- far, far below -- ever since.)
Now Mr. Malek is switching sides and predicting the start of a bullish "supercycle" that could see oil prices skyrocket. "Supercycle on the Horizon," blared the title of a 65-page JPMorgan report. The report is not exactly recent; it was published about three months ago, but was mostly ignored amid the carnage of COVID-19 and worldwide market crashes. Even the most remarkable prediction received little attention: "The combination of the supply and demand side dynamics suggests that the global oil market could move into large and sustained deficits past 2022 ... [which could] lead to Brent oil prices rising steadily from 2022 onwards, averaging around $80 (U.S.) per barrel in 2023, $100 (U.S.) per barrel in 2024 and $190 (U.S.) per barrel in 2025."
Mr. Malek maintained during his CNN interview yesterday that those figures are still distinct possibilities. He explained that a huge amount of supply has been taken off-line over the last few years, creating a strong likelihood that a supply-demand deficit will emerge in 2022 and get as high as 6.8 million barrels a day by 2025. Persistently weak prices have dampened producers' enthusiasm (and ability) to invest in long-term projects. The most recent demonstration of this arrived this week in the form of a multibillion-dollar asset writedown by BP -- something Mr. Malek described as "one of the most bullish [developments]" he has seen, as it bolsters his view that very few major long-term projects are moving forward, suggesting that supply will remain low even as demand rises. "The deficit speaks for itself. That implies oil prices will go through the roof," said Mr. Malek. "Do we think it's sustainable? No. But could it get to those levels? Yes."
Here in Canada, no amount of triple-digit price predictions could improve the mood of one debt-burdened junior, Bonavista Energy Corp. (BNP). Its stock plunged 10 cents to 11 cents on 25.3 million shares as it announced a recapitalization to wipe out over $480-million of debt. Alas, this is only around half of its outstanding debt, and the structure of the deal -- which primarily involves shares-for-debt swaps -- means that existing shareholders will be left owning just a fraction of the company. They might even be left with zero ownership. This reflects a unique choice embedded in the proposal. Shareholders will be asked to vote for one of two options that will be binding on all of them: Either they can keep their existing shares, which will be equal to a 7-per-cent interest in the recapitalized company, or they can sell all of their shares at five cents to a current major shareholder, George Armoyan's G2S2 Capital, in which case G2S2 will own the 7-per-cent interest.
Given that Bonavista is valuing its own stock at just a nickel, shareholders can be forgiven their dismay; the stock was worth nearly $18 back in 2014. Even Mr. Armoyan would be hard-pressed to consider this a win. While the cost base of his investment is not clear, he was required to start disclosing his purchases on SEDI starting in August, 2019, when he crossed the 10-per-cent shareholding threshold. He then joined Bonavista's board in November, 2019, and was hailed as "an ardent supporter of Bonavista for many years." According to SEDI, Mr. Armoyan currently controls 41.96 million shares of Bonavista (or 16 per cent), of which 19.3 million were bought from August, 2019, to February, 2020, for a total of $9.47-million. If he were to sell his entire 41.96-million-share position today, he would reap just $4.61-million.
Besides mourning the need for a recapitalization, investors will doubtless be wondering just how much good it will do. The deal bears some resemblance to what the Alberta gas producer Bellatrix Exploration did in June, 2019. Bellatrix wiped out roughly one-quarter of its debt (Bonavista is doing more) while diluting shareholders down to 16.5 per cent (Bonavista is giving them less). Alas, all this did was buy a bit more time (with emphasis on "a bit"): Bellatrix filed for bankruptcy protection in October, 2019. It entered court-supervised restructuring proceedings and agreed to sell its assets to Spartan Delta Corp. (SDE) in a deal that closed earlier this month. Then it began the process of winding up. In other words, just 12 months passed from recapitalization to dissolution. Bonavista presumably feels it can avoid Bellatrix's fate. Investors do not seem so sure.
On a happier note, Brian Schmidt's Alberta- and Saskatchewan-focused Tamarack Valley Energy Ltd. (TVE) added six cents to 85 cents on 2.76 million shares, despite mixed news from its bankers. They have completed their redetermination review of Tamarack's credit facility. Tamarack put on a delighted air, calling itself "pleased to announce that [the] facility has been redetermined at $275-million," while carefully omitting the previous size, which was in fact $350-million. The bankers' decision thus represents a roughly 20-per-cent cut. Things could have been worse, of course, and given that the facility is currently just $209-million drawn, Tamarack was able to emphasize that it has "ample liquidity for the remainder of 2020."
Tamarack's trim balance sheet regularly draws compliments from analysts. Last month, Canaccord Genuity analyst Anthony Petrucci hailed its balance sheet as "amongst the strongest in the junior E&P [exploration and production] space." That was one of his reasons for hiking his price target on the stock to $1.20 from $1. (The stock closed today at 86 cents.)
The balance sheet is not the only matter to which Tamarack has been devoting attention. Last week, its president and chief executive officer, Mr. Schmidt, wrote a special to the Financial Post in which he called for greater federal clarity on resource development and indigenous rights. He noted that Ottawa has talked for years about implementing the United Nations Declaration on the Rights of Indigenous People (UNDRIP). While Mr. Schmidt said he supports UNDRIP, he is concerned that Ottawa has never tried to define the underlying principle of "free, prior and informed consent," instead behaving as if signing a bill will magically remove the vagaries within. Governments and (most) indigenous leaders have already agreed that consent does not mean veto. Yet without a clearly spelled out legal framework on consent, Mr. Schmidt is certain that this issue will "inevitably end up in the courts." This in turn will deter resource development, as no one will "commit millions of dollars for the consultations, feasibility studies and environmental assessments that large projects require, knowing that this legislation is just waiting to be tested in court." It is Mr. Schmidt's experience that companies and indigenous groups have the same goal: "good, environmentally sound projects that have communities' support to proceed." What Ottawa is doing will not achieve that and is merely adding "yet another layer of legal uncertainty to investment on indigenous territories."
Coming from an energy CEO, words like this are often easy to dismiss, but Mr. Schmidt is hoping that even hardened cynics will at least hear him out. Not only is Mr. Schmidt an honorary member of the Kainai/Blood Tribe (which has worked with the oil and gas industry for over 70 years), he is currently its honorary chief.