by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost 23 cents to $38.49 on the New York Merc, while Brent for August lost three cents to $41.02 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.50 to WTI, unchanged. Natural gas for July added two cents to $1.50. The TSX energy index lost 1.94 points to close at 74.47.
It was a "one step forward, two steps back" kind of day for pipelines. All the steps were taken by Enbridge, whose Line 5 pipeline has been brought to a standstill, but whose Line 3 is inching forward. A Michigan judge ordered Enbridge late yesterday to shut down Line 5 in the wake of an incident that occurred last week. Last Thursday, an anchor support on the east leg of Line 5, a dual-leg pipeline that crosses the Great Lakes, was found to have shifted deep beneath the surface in the Straits of Mackinac. Enbridge immediately closed both legs, but then reopened the west one after consultation with the Pipeline and Hazardous Materials Safety Administration. This was not good enough for the Michigan state attorney-general and other state officials who have long been trying to close Line 5 permanently. Using the east leg's problems as a pretext, they demanded a shutdown of the entire line, saying Enbridge has not provided enough proof that the west leg is still safe. A judge has now agreed and issued a preliminary injunction pending a hearing next Tuesday.
Enbridge called itself disappointed, but quickly complied by closing the west leg (the east leg is still closed for repairs). The company warned against an extended shutdown that could cause "critical gasoline supply shortages" for residents of Michigan and surrounding areas. Line 5 supplies just over half of the heating needs of Michigan, including about two-thirds of propane demand in Michigan's Upper Peninsula. In fact, analysts estimate that as many as seven refineries rely directly and primarily on Line 5 for oil deliveries, including four refineries here in Canada. Imperial Oil Ltd. (IMO: $21.03), which has refineries in Sarnia and Nanticoke, told the Financial Post that if Line 5 remains out of service into mid-July, both refineries will reduce output, which "will likely result in shortfalls of gasoline, diesel and jet fuel in our distribution points in Southern Ontario. That would happen within approximately a week." Shell Canada and Suncor Energy Inc. (SU: $22.28) also operate refineries in Ontario that rely on Line 5. There are other lines that can supply such refineries, such as Line 78 and Line 95, but if Line 5 is out of service for an extended period, there is a risk that the alternatives could be overwhelmed.
Some good news arrived to help offset the Line 5 disappointment. In Minnesota, the state's Public Utilities Commission (PUC) has once again come out in favour of Enbridge's Line 3 replacement project. Line 3, which runs from Alberta to Wisconsin (passing through Minnesota on the way), was built in the 1960s and is currently running at just half capacity due to age and corrosion. Enbridge wants to dig up the old 34-inch piping and replace it with new 36-inch piping, thereby upgrading the line while adding about 370,000 barrels a day of extra shipping capacity. The Minnesota PUC first approved this idea in 2018. Opponents kicked up a fuss and challenged the PUC's decision in court, so the PUC did another review and then issued another approval in February of this year. That kicked off another fuss from opponents. Now the PUC has rejected the opponents' arguments, saying the project's environmental impact statement, certificate of need and route permits are all in order. In theory, this moves Line 3 closer to completion. In reality, filing objections with the PUC was just a necessary precursor to filing even more time-wasting objections in court, which will almost certainly be the opponents' next move. It remains to be seen whether Enbridge will actually achieve its goal of starting construction by the end of this year.
Staying on the south side of the border, U.S.-focused shale producer Ovintiv Inc. (OVV) lost $1.60 to $11.93 on 4.64 million shares. The drop came in spite of its imminent addition to the Russell 3000 index, as well as lovely mention this morning from an analyst. The annual reconstitution of the FTSE Russell indexes is often one of the highest-trading-volume days of the year. This year's reconstitution is taking place today, with changes effective Monday. Ovintiv can now qualify for these and other U.S. indexes because it redomiciled from Calgary to Denver in January. It found out three weeks ago that it would be joining the Russell 3000. This means that, of the roughly 10,000 publicly traded companies in the U.S. market, Ovintiv is in the top 3,000 by market cap. Of those, the top 1,000 automatically become members of the large-cap Russell 1000, while the remainder form the Russell 2000. That is where Ovintiv should land, though the indexes will not explicitly disclose this until Monday.
The index additions were one of the highlights mentioned in a research note today by RBC Dominion Securities analyst Greg Pardy. "The company's initiative to redomicile to the United States and thrust to attract large pools of passive capital appear to have borne fruit," wrote Mr. Pardy approvingly (if not particularly eloquently). He added that by Ovintiv's own estimates, "index inclusions to date have more than doubled demand for passive investment levels prior to the domicile shift." (The stock is, alas, still trading at all-time lows if one excludes the last four or so months because of the industry-wide downturn. Investors who scooped up shares toward the beginning of the downturn, when Ovintiv traded at a low of just $2.95, have since seen their investment quadruple to $11.93. Most long-term investors, however, remain underwater.)
Mr. Pardy said he recently talked to Ovintiv's management and learned of the company's ambition of "re-engineering itself to generate free cash flow ... [even] at $35 (U.S.) WTI." That will not happen this year, or even next year, but Mr. Pardy is confident that Ovintiv will get there at some point. He kept his rating at "sector perform" and hiked his price target to $11 (U.S.) from $6.50 (U.S.). The stock closed today on the New York Stock Exchange at $8.85 (U.S.).
Another dual-listed producer (at least for now) is Baytex Energy Corp. (BTE), which added two cents to 66 cents on 12.5 million shares, after boosting its 2020 production guidance. It previously lowered this guidance twice, first in mid-March and then again in early May. The March reduction reflected Baytex's decision to halve its budget and suspend or curtail much of its drilling activity. It also shut in uneconomic production of 3,500 barrels of oil equivalent a day. As a result, the original production guidance of 93,000 to 97,000 barrels a day fell to a range of 85,000 to 89,000. By early May, the shut-ins had skyrocketed to 25,000 barrels a day, and Baytex found itself reducing its guidance again, this time to a range of 70,000 to 74,000 barrels a day. Early June brought a spark of hope as chief executive officer Ed LaFehr told an investment conference that Baytex was in "recovery mode" and was bringing shut-in volumes back on-line. Now Baytex has announced the successful resumption of about 20,000 barrels a day. Although the rest will probably stay shut in for the remainder of the year, Baytex feels confident enough to rejigger the guidance once again. It is now aiming for 72,000 to 73,000 barrels a day.
Baytex also said it expects to remain in compliance with its debt covenants through 2021. This will be a relief to chief financial officer Rod Gray, who at the above-mentioned conference said Baytex was in danger of breaching its covenants next year. He was already considering asking the company's bankers for covenant relief this fall. Now it appears that he will not have to.
This is not to say that debt is no longer a concern: With net debt exceeding $2-billion as of March 31, Baytex has one of the most burdened balance sheets in the oil patch. So pointed out Raymond James analyst Jeremy McCrea in a research note this morning. Although Mr. McCrea applauded Baytex for its new production guidance, he was forced to conclude, "With the company's high debt position, we maintain our underperform' rating." The most he was willing to do was hike his price target to 40 cents from 30 cents -- hardly a compliment, as the stock closed today at 66 cents. It has fallen from over $50 since 2014. As alluded to above, the stock is currently so low that it is at risk of being booted off the NYSE, which requires a minimum share price of $1 (U.S.). Baytex has until Dec. 3 to get back above the minimum or it will be delisted.