by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost $2.36 to $38.01 on the New York Merc, retreating decisively below $40 on bearish U.S. storage data, while Brent for August lost $2.32 to $40.31 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.95 to WTI, up from a discount of $9.05. Natural gas for July lost four cents to $1.60. The TSX energy index lost 3.03 points to close at 76.01.
Amid "signs of stabilization," one analyst is making the case for large-cap Canadian oil and gas stocks. Citi analyst Prashant Rao said the oil patch reacted quickly to the downturn, slashing spending, shutting in production, and suspending dividends and buybacks. Now a recovery appears to be in progress. "While we maintain a modest preference for more integrated operators [with both production and refining operations], oil price is recovering, potentially tipping us towards more upstream exposure ahead," mused Mr. Rao. Based on his updated oil and gas price forecasts, he is boosting his estimates of companies' cash flow per share in 2020 and 2021.
Mr. Rao gave readers a list of four "preferred" picks to peruse. At the top were oil sands producers Suncor Energy Inc. (SU: $22.75) and Cenovus Energy Inc. (CVE: $6.22), which Mr. Rao praised for their "strong" finances and "superior" assets, respectively. He ranked them both "buy" and hiked his price target on Suncor to $31 from $28 and his price target on Cenovus to $9 from $7. Mr. Rao also had kind words for Imperial Oil Ltd. (IMO: $21.49), which can generate "meaningful cash flows and maintain dividends during this downturn." He left his rating at "neutral" but hiked his price target to $23 from $21. Rounding out the list was Husky Energy Inc. (HSE: $4.44), which "offers long-term growth," though Mr. Rao acknowledged that "historical operational issues have raised some concerns." He maintained his "neutral" rating and his price target of $4. Considering that Husky's stock is already above this target and closed today at $4.44, it is a rather curious addition to the "preferred" list, one which Mr. Rao did not explain.
Despite Mr. Rao's efforts, all four of the above stocks were down today, falling alongside oil prices. Yet even this was unlikely to sour a celebration at one of the four, Imperial Oil Ltd. (IMO), down 78 cents to $21.49 on 2.11 million shares. Its Kearl oil sands project has officially been taken off Alberta Health Services' list of outbreak locations for COVID-19. The outbreak at Kearl began in mid-April after three workers tested positive for the virus. Two days later, the number of cases was 12; one month later, it was over 100. This outbreak was one of the reasons -- with low oil prices being another -- for Imperial's decision to tweak the schedule for Kearl's maintenance-related shutdown. This began in early May, earlier than forecast, and will last until late June or early July, about a month longer than forecast. The earlier start time means Imperial can get most of the work done while oil prices are weak and there is no incentive to boost production (a good thing, as production will slump sharply while maintenance is in progress. Imperial reckons that Kearl will produce about 150,000 barrels a day in the second quarter, down from 226,000 in the first). The longer duration reflects the limited number of workers on site, to enable COVID-19-related distancing.
These efforts seem to be paying off. This week, Imperial trumpeted on Twitter that Kearl has had no new cases of COVID-19 since mid-May and will no longer be on Alberta Health's outbreak location list. "Congratulations to the entire Kearl family," cheered Imperial. It added that it "will not be letting [its] guard down" and will continue to enforce strict safety and health procedures.
Imperial also announced yesterday that it is renewing its annual share buyback program, if at a far more restricted level than usual. Under the previous program, and the one before that, Imperial was allowed to buy back up to 5 per cent of its shares. Buybacks were suspended in April to save cash. The current program expires this week, so Imperial is renewing it, but -- in stark contrast to the 38.2 million shares and the 42.3 million shares allowable under the two prior programs -- this one goes up to just 50,000 shares, an imperceptible dent in its share count of 734 million. Imperial says it is merely looking to offset the dilution from its restricted share unit plan. Imperial can always can change its mind, of course, and amend the program to allow for higher purchases. It previously did that in 2018, hiking the maximum to 5 per cent of its shares from 3 per cent.
Outside the oil sands, Canada's largest gas producer, Tourmaline Oil Corp. (TOU) -- be not fooled by its Oil-y name -- edged down four cents to $12.03 on 1.92 million shares. Its management recently spoke with Scotia Capital analyst Cameron Bean, who has now provided his thoughts in an obligingly boosterish research note. Tourmaline is nothing less than "the must-own Canadian natural gas equity," declared Mr. Bean. He cited the company's ambitious expansion plans, both at its existing assets -- particularly the Gundy Montney, which Mr. Bean views as "one of if not the most economic assets in North America" -- and via acquisitions. Tourmaline has been an active acquiror over the last several months. For example, it bought the public Chinook Energy and the private Polar Star earlier this year, adding about 6,000 barrels a day in the Conroy Montney. That is relatively minor next to Tourmaline's current production of around 300,000 barrels a day, but Mr. Bean said Tourmaline sees "meaningful" potential at Conroy and, over the long term, might build "a Gundy-sized facility."
Meanwhile, in the nearer term, Mr. Bean said Tourmaline is aiming to complete an initial public offering for its dividend-paying royalty/infrastructure subsidiary, Topaz Energy, in the third or fourth quarter of this year. Tourmaline currently owns about 70 per cent of Topaz. By Mr. Bean's calculations, Topaz is worth about $1.2-billion to $1.5-billion, suggesting that Tourmaline's interest is worth $800-million to $1.1-billion, or $3 to $4 a share. The proceeds from selling shares of Topaz will help support Tourmaline's acquisition goals.
Given all this planned activity, Mr. Bean said he is more confident than ever that Tourmaline can achieve its five-year plan. This includes generating $1.5-billion in free cash flow, boosting production by 15 per cent, and maintaining or even increasing its 12-cent quarterly dividend (for a yield of 4 per cent). The analyst reiterated his "sector outperform" rating and kept his price target at $24, nearly double today's close of $12.03.
While Mr. Bean's song of praise appears to have gone unheard by investors, it was presumably appreciated by Tourmaline -- and perhaps also by a much smaller gas producer, Pat Ward's B.C. Montney-focused Painted Pony Energy Ltd. (PONY), down two cents to 45 cents on 284,800 shares. Painted Pony helped kick off the shopping spree that Tourmaline started late last year. The smaller company sold the larger one a partial interest in assets just offsetting Gundy, in an area called South Townsend. They became joint venturers and Tourmaline took over operatorship. According to Mr. Bean's new research note, Tourmaline recently finished its first eight-well pad at South Townsend and is planning to frack the wells next quarter.
Good results at South Townsend could give Painted Pony a much-needed shake of the reins. Even among gas producers, its stock has had a turbulent few months: After getting as low as 19.5 cents in March, the stock hit 82 cents in early May, buoyed by gas markets that were looking much healthier than oil markets. The enthusiasm for gas has dimmed in recent weeks -- even Tourmaline has come down by about 15 per cent since the start of June -- but Painted Pony's pullback started a month earlier and has been steeper relative to competitors. At 45 cents, the stock has lost 45 per cent of its value since early May, on very limited news (the last press release was about the annual shareholder meeting on May 8).
Investors should be getting an update somewhat soon. Painted Pony previously promised to review its budget for the second half of 2020 in late June -- so, any time now. As well, the company's credit facility is up for review on June 30. It was previously up for review on April 30, but the lenders agreed to extend this deadline, as long as Painted Pony agreed to an interim facility reduction to $350-million from $375-million (which does not mean the facility cannot be reduced again on June 30). The facility was about $121-million drawn as of March 31.