by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery added 71 cents to $40.46 on the New York Merc, closing above $40 for the first time since early March, while Brent for August added 89 cents to $43.08 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.00 to WTI, down from a discount of $8.85. Natural gas for July lost one cent to $1.66. The TSX energy index added a fraction to close at 77.35.
Li Ka-shing's Husky Energy Inc. (HSE) edged up three cents to $4.70 on 2.92 million shares, despite having yet another safety incident to report at its SeaRose production and storage vessel at the White Rose field off the coast of Newfoundland. According to the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB), Husky was releasing 1.91 million litres of water for reservoir injection last Thursday, when it inadvertently spilled 1,098 litres of an anti-microbial agent called X-Cide 450. This limits bacteria growth in the injection system and cargo tanks. In a statement to the CBC, Husky explained that SeaRose uses two pumps to apply the agent, and in this case, "The wrong pump was activated" -- note the conveniently blame-avoiding passive tense -- "adding the agent into the system that discharges seawater from the vessel." There were no injuries and (given the high level of dilution) no immediate reports of affected wildlife. The C-NLOPB is monitoring the area and waiting on an investigation into what happened. Depending on the results, "possible regulatory enforcement action will follow in due course."
Although this is a minor spill, it adds to a list of incidents that together paint an unflattering picture of Husky, especially in today's era of rising ESG (environmental, social and governance) importance. SeaRose has now racked up three high-profile incident reports in 2-1/2 years. In January, 2018, the C-NLOPB ordered Husky to suspend SeaRose's operations and revamp its safety procedures following a close call with an iceberg in 2017. An iceberg had entered the quarter-mile exclusion zone, meaning that SeaRose should have disconnected and sailed away; Husky chose to stay put and reportedly told its crew to "brace for impact." The regulator was not pleased. "[We] have learned from this incident," promised Husky's chief executive officer, Rob Peabody, following the two-week suspension. Disappointingly, less than a year later, SeaRose suffered a flowline failure during a storm and leaked about 1,600 barrels of oil, the largest spill in the province's history. This time the suspension lasted about nine months and the field did not resume production until August, 2019. Meanwhile, in June, 2019, Husky faced the repercussions of an entirely different incident, receiving a $3.8-million fine over a spill in Saskatchewan in 2016. Yet another incident in 2018 saw Husky's Superior refinery in Wisconsin burst into flames and prompt the temporary evacuation of thousands of residents.
All in all, the past few years have not been Husky's best, from an ESG perspective. The company tried to undo some of the reputational damage by appointing Peter Rosenthal to the newly created position of senior vice-president, safety, operations integrity and environment, in April, 2019. Mr. Rosenthal has some experience with this sort of thing: He previously spent five years at BP, joining its safety and operational risk division shortly after the Deepwater Horizon spill in 2010. At Husky's 2019 investor day, Mr. Rosenthal opined that Husky "is on a good trajectory to becoming a high-reliability organization," but it needs time to become "world-class." The C-NLOPB and other regulators continue to wait.
Out west, Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) lost half a cent to 36.5 cents on 2.21 million shares, on a barrage of updates about its finances and operations. The company was particularly pleased with what it dubbed the "exciting" internal technical analysis of its core Sparky play in Alberta. The gist of the analysis was that Surge's infill wells are producing just as much as its primary wells. This is important because it suggests that Surge is doing a good job with well spacing. Spacing is a tricky business: too great a distance can mean that the productive rock in between wells is never tapped; too close can lead to well-to-well interference, causing lower production and steeper declines. Surge has now drilled 138 wells in the Sparky and reckons it has a good handle on things. It cheered the play's "top-tier production efficiencies" and "excellent rates of return," while patting itself on the back for increasing its Sparky production to 9,000 barrels a day from 1,200 over the last six years.
Surge also provided a long-awaited update on its credit facility. This was scheduled to undergo a borrowing base review on May 31, a date that came and went without comment; the bankers may have granted a brief extension that Surge did not feel the need to announce. Surge also did not feel the need to mention in today's announcement that the facility used to be set at $350-million. It merely disclosed that the facility is now $335-million -- so, a 4-per-cent cut. This is still a pleasing outcome for Surge, which had been worried that the facility could be chopped below the drawn amount of $305-million, forcing the company to cough up the shortfall. That is less of a concern now that the bankers have left a full $30-million of availability. Considering that Surge's entire 2020 budget is $45-million and it spent $32.5-million of that during the first quarter, it expects "sufficient liquidity to execute on its business plan."
Interestingly, Surge made no mention of any covenant relief, despite having disclosed in its first quarter financials that it foresaw a potential covenant breach in the next 12 months and would bring this up with its bankers. Its new announcement showed much less concern; Surge even said it "anticipates reducing net debt meaningfully over the rest of the year." Investors seemed skeptical.
In other debt news, Scott Ratushny's Alberta oil producer, Cardinal Energy Ltd. (CJ), lost two cents to 54 cents on 1.57 million shares, after receiving debentureholder approval to replace and extend its $45-million convertible debentures. These had an expiry date of Dec. 31, 2020, an interest rate of 5.5 per cent and a conversion price of $10.50 a share. Now their holders can exchange them for new debentures with an expiry date of Dec. 31, 2022, an interest rate of 8 per cent and a conversion price of $1.25 a share. Cardinal proposed the exchange after learning last month that it would not be allowed to use its credit facility to repay the debentures. The $325-million facility was just $193-million drawn as of March 31, which in theory left plenty of room, but the bankers were antsy. Ahead of the scheduled facility review on May 23, the bankers told Cardinal that they would delay the review until June 30, but Cardinal would have to abide by conditions, including that no drawings could be used to redeem or repay the debentures. Cardinal thus opted for the above debenture exchange. It now has another week to wait before learning the fate of its credit facility.
Both Cardinal and Surge are mulling participation in the liquidity support programs announced by the government of Canada. The problem for these and other embattled energy producers is the long, long road from announcement to approvals. Last week, the Canadian Association of Petroleum Producers (CAPP) told The Canadian Press that not a single energy company has been approved for financing under these programs. "Companies are increasingly concerned that liquidity won't come in time," said Ben Brunnen, CAPP's vice-president of fiscal and economic policy. He noted that the two main agencies that are finalizing the details -- those would be Export Development Canada and the Business Development Bank of Canada -- would prefer to backstop loans from companies' normal banks and lenders, which is: (a) why banks have been readily willing to postpone facility reviews; and (b) why implementation is proving more complicated and time-consuming than expected. There may be a glimmer of hope on the horizon: Alberta Premier Jason Kenney, talking to reporters last Friday, said he expects that Ottawa will soon make changes to the programs, in order to make them more easily accessible to struggling energy companies. He is hopeful that the changes could be announced as soon as this week.