by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery edged down nine cents to $40.37 on the New York Merc, while Brent for August lost 45 cents to $42.63 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.05 to WTI, down from a discount of $9.00. Natural gas for July lost two cents to $1.64. The TSX energy index added 1.69 points to close at 79.04.
It was another day, another pipeline panic. The attorney-general of Michigan is seeking a court injunction to shut down Enbridge's dual-leg Line 5 pipeline. This pipeline traverses the Great Lakes and made headlines last week with the discovery that an anchor support had shifted deep beneath the surface. Enbridge closed both underwater sections as an immediate precaution. It reopened the west leg over the weekend, but the east leg, whether the shift occurred, remains closed in the Straits of Mackinac. State attorney-general Dana Nessel has seized on this as a chance to ramp up her battle to have Line 5 permanently shut down. She is asking the court to turn both legs off, pending the results of an independent investigation.
Ms. Nessel has already had a lawsuit in the works since mid-2019, seeking a decommissioning order for Line 5 and arguing that the agreements reached by Enbridge and Michigan in 2017 and 2018 (before she came to office) are invalid. Among other things, the agreements gave Enbridge permission to build a tunnel for the underwater pipelines, which in its view would "reduce the [spill] risk ... to virtually zero." Ms. Nessel would rather see the risk go to zero by having the pipeline shut down. She has labelled it a public nuisance (a nuisance that has operated safely in the straits for 67 years and provides more than half of the propane needs of the state, but apparently that is neither here nor there).
Enbridge, for its part, is fighting the lawsuit, and described Ms. Nessel's new injunction request as "legally unsupportable." It said it would continue to "vigorously" defend its legal position.
Here in Canada, oil sands giant Canadian Natural Resources Ltd. (CNQ) added 65 cents to $24.14 on 13.3 million shares, after announcing a $1.1-billion (U.S.) financing of five- and 10-year notes. It will use the proceeds primarily to refinance short-term debt. This is the third major debt financing in the oil sands in two months. Two previous ones were done by Suncor Energy Inc. (SU: $23.84), which sold $1-billion (U.S.) worth of notes last month and $1.25-billion worth of notes in April. Neither of those offerings came cheap: Borrowing costs spiked as oil prices collapsed, such that Suncor, the country's largest producer/refiner and one of the highest-credit-rated companies in the industry, had to sell its 10-year notes in April with a coupon of 5 per cent (compared with 3.1 per cent for a separate batch of 10-year notes that it issued last year). Debt markets were still leery last month, when Suncor sold five-year notes at 3.1 per cent. Happily, the outlook for oil prices has improved considerably over the last few weeks, and Canadian Natural is issuing its five-year notes at just 2.05 per cent and its 10-year notes at 2.95 per cent.
Moody's Investors Service rated the new notes Baa2 and left its overall credit rating of Canadian Natural intact. The ratings agency noted that the company has about $1.9-billion of debt maturing this year and another $500-million (U.S.) in late 2021. Those figures do not faze Moody's. After taking into account the new note offering, Canadian Natural has $2.5-billion cash, $3.9-billion of available credit and $500-million in forecast free cash flow through the first quarter of 2021. "Liquidity management has at times been weak, but is now good, where we expect it to remain," concluded Moody's. It kept its outlook at "stable."
Another credit ratings agency took aim at a different company, with, alas, unhappier results. DBRS Morningstar, which is currently in the process of revising all of its oil and gas issuer ratings -- it previously put each and every one of them "under review with negative implications" in March -- has now downgraded Dale Shwed's B.C. Montney-focused Crew Energy Inc. (CR), unchanged at 31.5 cents on 356,300 shares. "All trends are negative," intoned DBRS. It tried to give Crew its due: The company acted quickly to slash its budget (now set at $35-million to $40-million for 2020, down from $95-million in 2019), and it also arranged an infrastructure sale agreement that has already brought in $35-million (with a further $23-million expected later this year). As well, as a gas-weighted producer, Crew is naturally somewhat protected from weakness in oil prices.
DBRS nonetheless flagged some areas of concern for Crew. "The company's credit metrics [are expected] to remain weak through 2021," said the agency; this is in contrast to other producers that are expected to see their metrics already in recovery next year. Crew also has $300-million worth of notes which, though they do not mature until early 2024, are already weighing on some investors' minds. DBRS downgraded Crew's credit rating by one notch to B (low) from B. This is deep in junk territory.
In happier news, Grant Fagerheim's Alberta- and Saskatchewan-focused Whitecap Resources Inc. (WCP) added 15 cents to $2.43 on 6.61 million shares, after hearing some far more uplifting words. Raymond James analyst Jeremy McCrea praised Whitecap's "strong balance sheet, historical execution, and encouraging new plays and well results" as he upgraded the stock's rating to "outperform" from "market perform." He also hiked his price target to $3 from $1.75. Given that the stock has been trading above $1.75 for over a month, this part of the research note was arguably overdue; Mr. McCrea made up for that by laying on the compliments. Whitecap "consistently shows some of the best well economics among its neighbouring peers," he marvelled. The company would no doubt agree. A recent presentation on its website made much of its "premium assets [that] allow for positive funds flow even in a relatively low crude pricing environment." It added that oil prices just need to hit $45 (U.S.) -- about $5 (U.S.) higher than now -- and Whitecap will "resume production growth (3 to 8 per cent per year)."
A much tinier company also sees expansion opportunity in Western Canada. The AIM-listed i3 Energy, with assets in the U.K. North Sea, is exercising its option to acquire Alberta/Saskatchewan junior Toscana Energy Income Corp. (TEI), up half a cent to 1.5 cents on six million shares. The deal will serve as i3's springboard to a listing on the TSX (or possibly the TSX-V).
Toscana and i3 arranged this option in late March, with i3 crowing about its ability to seize a "unique, time-limited opportunity" in Western Canada, where assets can currently be had for "superior metrics not achievable elsewhere." Certainly Toscana is being bought at a bargain, Its stock, which is being valued at about one-third of a cent under the i3 deal, was worth as much as $18 in 2012. It collapsed under a heavy pile of debt. This debt went into default and i3 was able to scoop it up for pennies in March, paying $3.4-million for a debt load totalling $28-million. Now i3 will scoop up Toscana's equity. For every share of Toscana, shareholders will receive 0.03 of a share of i3, which closed today in London at 6.1 pence (about 10 cents). The total value of the deal, including the purchased debt, works out to $3.85-million -- equal to a piddling $3,615 per barrel of Toscana's production, based on the 2019 average of 1,065 barrels a day.
i3 is of course thrilled with the deal, and even more thrilled with a separate deal that will accompany it: the "transformational" acquisition of separate Canadian assets producing around 10,000 barrels a day. The seller is undisclosed, as are most details about the assets, other than the price tag of $60-million. i3 did provide a potential clue by revealing that heavy oil/thermal specialist John Festival is joining its board of directors. Mr. Festival is currently in charge of the private Saskatchewan thermal producer Broadview Energy, and previously sold the similar but public BlackPearl Resources to International Petroleum Corp. (IPCO: $2.65) in 2018. If nothing else, he can jog the memories of i3's executives when it comes to Canadian reporting obligations. These are not entirely new to i3; its founder, Neill Carson, previously had two Toronto-listed promotions, Iona Energy and Ithaca Energy (hence why i3 is "i3"). Iona went bust in 2016. Ithaca Energy accepted a takeover offer in 2017 at $1.95 a share, which was better than its 2016 low of 30 cents, but less than half its 2007 high of $4.20.