by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added $1.21 to $39.70 on the New York Merc, while Brent for August added 69 cents to $41.71 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.50 to WTI, unchanged. Natural gas for August shot up 21 cents to $1.71. The TSX energy index added 2.49 points to close at 76.96.
Another of the former shale titans has fallen. On Sunday, the 27-year-old shale gas pioneer Chesapeake Energy Corp. (U:CHK) succumbed to its $9-billion (U.S.) debt and filed for Chapter 11 bankruptcy. It has also entered a restructuring arrangement to wipe out about $7-billion (U.S.) of its debt and rejigger its long-term contractual obligations.
President and chief executive officer Doug Lawler kept up a brave face as he vowed that Chesapeake would "emerge from the Chapter 11 process as a stronger and more competitive enterprise." Mr. Lawler took charge in 2013, after the former CEO, the late Aubrey McClendon, was pushed out by Carl Icahn and other activists. (Mr. McClendon died in a car crash in 2016.) Chesapeake at the time was saddled with about $13-billion (U.S.) in debt and $10-billion (U.S.) in other obligations. Mr. Lawler's efforts to right the ship were hindered by persistent commodity price weakness and, more recently, a return to the habit that put Chesapeake so deep in debt in the first place: acquisitions. A little over a year ago, Chesapeake dismayed investors with the unexpected acquisition of WildHorse Resource Development for $4-billion (U.S.). The addition of a "growth platform" was much heralded by Mr. Lawler. "We want this opportunity. We were made for this," he told the press. The deal, financed with a combination of debt and stock, closed in early 2019.
Investors were right to be leery. By late 2019, Chesapeake had planted a "going concern" red flag in its financials, and during early 2020, the situation grew increasingly dire, with the company openly speculating about a Chapter 11 reorganization. Its share price got so low that it conducted a 1-for-200 rollback in April to prevent the likely loss of its NYSE listing.
Despite the financial woes, Chesapeake still had its cheerleaders, creating some interesting trading days for the beleaguered stock. Three weeks ago, for example, the stock nearly tripled to around $70 (U.S.) from around $25 (U.S.) in one day, before giving it all back and then some the next day. Today it was suspended at $11.85 (U.S.). Adjusted for the above-noted rollback, the stock has fallen from about $430 (U.S.) in the last year and from $8,670 (U.S.) since 2008.
Chesapeake was not the only shale producer kicking off the week with a bankruptcy filing. The much smaller Lilis Energy Inc. (U:LLEX), which only narrowly avoided bankruptcy a few years ago, has lost its battle this time around, filing for Chapter 11 protection this morning. It owes about $115-million (U.S.). A mere three years ago, Lilis was considered to be on the comeback trail, along with several other U.S. shale drillers that had weathered OPEC's oil price storm better than anyone had expected -- particularly so in Lilis's case. It came precariously close to being flushed out. Instead it managed to raise cash, merge with another distressed oil company and fix both of their balance sheets. The result was that it went from being a nearly insolvent penny stock in 2016 to being listed on the NYSE MKT one year later. In 2018, the stock got as high as $6.30 (U.S.). Alas, it has not been able to sustain that success, and the stock has wilted to the current (suspended) level of 26 U.S. cents.
Both Lilis and Chesapeake follow in the destitute footsteps of former shale giant Whiting Petroleum, which filed for bankruptcy in April. These are just some of the bankruptcies currently sweeping the oil and gas industry. In the United States alone, roughly two dozen energy companies have gone bankrupt so far this year. The research firm Rystad Energy estimated last month that over the next two years, this figure could increase by 240.
Here in Canada, the mood was more upbeat, buoyed by rising oil prices and perhaps, in some cases, favourable analyst attention. For example, oil sands giant Canadian Natural Resources Ltd. (CNQ), up 45 cents to $23.83 on 15.2 million shares, got a lovely mention this morning from RBC analyst Greg Pardy. Mr. Pardy is a fan of the company's "good operating momentum" and "confidence in its outlook." Underscoring this confidence is Canadian Natural's decision to leave its quarterly dividend intact at 42.5 cents (for a yield of 7.1 per cent), in contrast to Suncor Energy Inc. (SU: $23.16), which recently slashed its quarterly dividend to 21 cents (for a yield of 3.6 per cent). "We believe that [Canadian Natural] will distinguish itself by emerging from the COVID-19 pandemic with its dividend policy intact," predicted Mr. Pardy. (That certainly seems to be Canadian Natural's plan. A new presentation on its website affirms that the dividend is "manageable" at current price forecasts.) Mr. Pardy concluded that Canadian Natural "remains our favourite producer for 2020." He kept his rating at "outperform" and hiked his price target to $30 from $27.
While Mr. Pardy zeroed in on the oil sands, another analyst was gripped by gas producers. In the wake of last week's brutal treatment of gas prices -- they may have risen sharply today, but last week they fell four days in a row and hit their lowest level since 1995 -- Scotia Capital analyst Cameron Bean said this is primarily affecting U.S. gas producers, while "the Canadian equities screen well." By way of explanation for the pricing turmoil, he pointed to a separate research note from his colleague Michael Loewen, who on Thursday noted that weekly U.S. storage data had shown an increase of 120 billion cubic feet -- not only unusually large at this stage in the summer cooling season, but also far surpassing the increase of just 12 billion cubic feet predicted by analysts. "[This] monster build highlights global oversupply," said Mr. Loewen. Yet when he looked north of the border, he had no concerns. The AECO gas benchmark in Alberta has been "relatively tight and stable in recent weeks," while storage levels remain safely "very far away from maximum capacity." Mr. Loewen briefly explained that this reflects an "AECO storage market [that] was previously broken, but [is] now working as intended."
(The "broken" comment deserves a closer look. If anything, local gas producers would have called it too kind a description for how AECO used to work, right up until a massive overhaul last fall. Before that it was notoriously volatile. For example, over a four-week period at roughly this time last year, AECO prices bounced wildly between negative 11 cents and positive $2.28. In the comparable four-week period this year, they have held gorgeously steady at around $1.80, give or take a few nickels. Such mild fluctuations are much easier for gas producers to manage. The calm descended after an overhaul last October enabled greater access to local storage systems, vastly improving pricing, which was further bolstered by the fact that storage levels entered the winter at their lowest in a decade. They are rising quickly -- in fact at a record weekly pace -- but they are still months away from reaching their maximum. As Mr. Loewen put it, "Ultimately, we believe that we'll end the summer injection season with just the right amount of molecules in the ground in Alberta.")
All of this raised the spirits of Scotia's Mr. Bean. He wrote this morning that in spite of the "severe near-term headwinds" facing the gas market, he "continue[s] to believe that our Canadian producer group is relatively well positioned." He is particularly keen on gas producers that own the majority of their processing infrastructure. "The most compelling investment opportunities in the sector," in his view, are Tourmaline Oil Corp. (TOU: $12.30), with a price target of $23; Advantage Oil & Gas Ltd. (AAV: $1.67), with a price target of $4; and Birchcliff Energy Ltd. (BIR: $1.16), with a price target of $3.25. All three of those companies have a rating of "sector outperform," as does Seven Generations Energy Ltd. (VII: $3.11), with a price target of $7. Mr. Bean is also "beginning to warm up" to ARC Resources Ltd. (ARX: $4.57), on which he has a price target of $7 but merely a "sector perform" rating. The least favoured stock on Mr. Bean's list is Paramount Resources Ltd. (POU: $1.53), with a "sector underperform" rating and a price target of just 80 cents, or about half of today's close.