by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery added 31 cents to $41.60 on the New York Merc, while Brent for September added seven cents to $43.41 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.35 to WTI, unchanged. Natural gas for August lost seven cents to $1.73. The TSX energy index added a fraction to close at 79.48.
The week began with a fresh setback for the oil patch, as Deutsche Bank proclaimed that it will no longer finance new energy projects in the oil sands, effective immediately. "The bank has tightened its fossil fuels policy ... for business activities involving oil, gas and coal worldwide," trumpeted the German giant this morning. On the oil and gas front, the bank is washing its hands of three particular types of projects: ones that involve fracking in countries with scarce water supplies; new projects in the Arctic region; and new projects in the oil sands, whether involving "exploration, production, transport or processing."
At this stage, the move seems more of a humiliation than a true hardship, as it simply cements what Deutsche Bank has already been doing with regard to oil sands projects. This writing has been on the wall long before it was written into policy. Back in 2015, Deutsche Bank was one of the signers of the "Paris Pledge for Action" in the wake of the jet-setting United Nations climate change convention. It hardly needs saying that few of the glitzy globe-trotters in attendance had fond feelings for the oil sands.
Following the signing, in support of its Paris commitments, Deutsche Bank in early 2017 said it would stop financing new coal projects. Alas, within the very circles it was hoping to impress, the bank drew criticism instead: Environmental activists pointed out that only coal projects were excluded, not coal companies themselves, which could still use general corporate loans or bonds to finance their projects. This won the bank a scolding in the "Banking on Climate Change -- 2018 Fossil Fuel Report Card" published by the Rainforest Action Network (RAN), which claimed that Deutsche Bank still invested in coal mining in 2017 despite its announcement. The RAN's report for 2018 was even harsher on Deutsche Bank, lambasting it as one of the world's largest backers of Arctic oil and oil sands development. As evidence, the report cited Deutsche Bank's business relationships with pipeline builders Enbridge Inc. (ENB: $41.85) and TC Energy Corp. (TRP: $59.94) (then TransCanada), as well as the coal miner and oil sands producer Teck Resource Ltd. (TECK: $14.81). (Incidentally, in 2017 the bank also helped with the initial public offering of pipeline company Kinder Morgan Canada.)
A stung Deutsche Bank actually published a response to the RAN's 2018 report. "The report explicitly criticizes Deutsche Bank for its involvement in the extraction of tar sands and Arctic oil and gas. In both areas, we did not provide any direct financing for such a project," wrote the bank. It added, "We cannot follow the conclusion that due to [our] business relationships, we are one of the largest supporters of these extraction technologies." Amazingly, the green group did not appreciate the rationale.
The above history, combined with today's announcement, makes two things clear: One, Deutsche Bank has been shunning direct financing for "tar sands" projects for quite a while now. Two -- perhaps more interestingly, as far as its existing relationships with pipeline companies are concerned -- the bank has not learned (or has chosen to forget) its coal-based lesson about promising to avoid investments in projects while omitting any mention of the companies themselves. Worth noting, however, is that the bank promised today to "review all of its existing business activities in the oil and gas sector" by the end of 2020. The oil patch will have to wait and see what to make of that.
Meanwhile, quarterly earnings season continued. Today brought the second quarter financials of international oil and gas producer Vermilion Energy Inc. (VET), unchanged at $6.31 on 2.8 million shares. It swung to a loss in the quarter, but a smaller one than analysts were expecting: Net loss came to $71-million or 45 cents a share, whereas analysts were expecting a loss of 72 cents a share (compared with earnings of one cent a share in the same period last year). Cash flow was also much better than analysts had predicted, at 52 cents a share rather than 30 cents a share. This largely reflects a one-time, 16-cent-a-share gain on an interest rate hedge. As for production, Vermilion unexpectedly got back above the 100,000 mark, producing 100,400 barrels of oil equivalent a day during the quarter, after spending the prior three quarters in the high 90,000s.
Investors were unimpressed. Many have been leery since Vermilion announced an abrupt management shake-up in May, when president and CEO Tony Marino stepped down and was replaced by former chief financial officer Curtis Hicks. The CEO role will remain unfilled; Vermilion is relying instead on an unusual management structure involving a committee of various senior executives. Investors were not given an opportunity to ask the new management about the financials, as Vermilion did not hold a quarterly conference call. Vermilion did, however, send Mr. Hicks to talk up the update on BNN.
The interview began in typically friendly BNN fashion, with the interviewer marvelling, "How did you manage to eke out positive cash flow in a horrible period like Q2?" Mr. Hicks was happy to sing the praises of Vermilion's "high-margin, high-netback asset base." Then came a less pleasant question about Vermilion's net debt, which was a lofty $2.16-billion as of June 30 (more than double its current market cap of $990-million). "We're not happy about that," sighed Mr. Hicks, saying debt reduction will be a near-term focus and "might be at the expense of top-line production growth." On the plus side, he hastened to add, once Vermilion has trimmed its debt to more comfortable (but unspecified) levels, it will "revisit a cash return to our shareholders and perhaps reimplement a dividend." (Its famously generous dividend was suspended in April.) The interviewer brought things to an uncharacteristically pointed close by asking Mr. Hicks if he has been buying stock in Vermilion lately as a sign of confidence in the company. Mr. Hicks acknowledged that he has not been buying stock lately, but will consider doing so after examining his portfolio. He maintained that "certainly we have lots of confidence in our company."
Meanwhile, a much smaller international player started the week off on a happier note. Jay Park and Craig Steinke's Reconnaissance Energy Africa Ltd. (RECO) shot up 16 cents to 83 cents on 303,100 shares, after releasing a resource update on its Kavango basin assets in Botswana and Namibia, as well as getting the governmental go-ahead for a planned drill program this fall. The three-well program is targeting the Namibian side of the basin. The Namibian government has now designated the program an "essential service," allowing Reconnaissance to import drilling equipment and foreign staff. Reconnaissance's CEO, Mr. Park, cheered the "full support" of the government as he reminded investors that Reconnaissance holds a commanding 8.75 million acres in this basin.
As massive as the acreage is, it is also massively underdeveloped, without a single well having been drilled. For that reason, Reconnaissance's newly updated resources are entirely in the undiscovered prospective category, a very low level of certainty. A closer look at the resources shows that, on the Namibian side, they are unchanged from the resources already noted in a report from 2018. The need for an update stems from the fact that Reconnaissance expanded to the Botswana side of the basin last month, picking up 2.45 million acres. These new acres contain best-estimate risked prospective resources of 37.4 million barrels of oil and 1.61 trillion cubic feet of gas. The updated report has "probabilistically aggregated" those numbers with the Namibian numbers, coming up with a total of 99.2 million barrels of oil and 4.29 trillion cubic feet of gas for Reconnaissance's entire holdings.
Reconnaissance's reserve evaluator, Sproule, assigned a geological chance of success -- the probability that exploration will confirm the existence of potentially recoverable oil and gas -- at just 8.8 per cent. Fortune favours the bold. Based on the stock's rapid rise to 83 cents from 31 cents over the last three months, there are plenty of investors eager to roll the dice, ahead of the spudding of the first well in October.