by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost 56 cents to $41.04 on the New York Merc, while Brent for September lost 19 cents to $43.22 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.00 to WTI, down from a discount of $9.35. Natural gas for August added seven cents to $1.80. The TSX energy index lost 2.85 points to close at 76.63.
Oil sands producer Cenovus Energy Inc. (CVE) lost 40 cents to $6.35 on 11.3 million shares, after moving to shore up its balance sheet with a $750-million (U.S.) note offering. The company already provided an update on its finances last Thursday with its quarterly filings for June 30, though at the time, it kept its gaze largely focused on the future as it talked of strengthening oil markets and how Cenovus can help "lead Canada's economic recovery." It was particularly pleased to announce record monthly production in June from its core Christina Lake project. In fact, said management, Cenovus has been producing so much that it is exceeding its quota under Alberta's crude curtailment program. (This is permissible because Cenovus has been buying production credits from companies that are below their quotas. Such credits have plunged in value since the start of the downturn. Although prices are not public, sources recently told Bloomberg that the credits are currently selling at around $1.25 (U.S.) a barrel, compared with $7 (U.S.) a barrel or higher a few months ago.)
Despite its sunny optimism, there were some dark spots in Cenovus's financials, such as its rising debt. Cenovus has been relying heavily on credit to cope with the downturn. Since the start of the year, the amount drawn on its main credit facility has shot up to $1.47-billion (as of June 30) from $265-million (as of Dec. 31). This still leaves plenty of room -- the facility is good up to $4.5-billion, and Cenovus has a separate $1.1-billion facility that remains undrawn -- but the speed and size of the increase have raised eyebrows. Now Cenovus is planning to reduce the drawn amounts by issuing notes to replace them. It has filed a preliminary notice on EDGAR about a $750-million (U.S.) offering of five-year notes.
The preliminary filing does not set an interest rate, so it is too early to draw many conclusions about the state of the debt market. Energy investors are already well aware that borrowing costs spiked in the wake of the downturn, with many companies shut out entirely. Even the companies still able to access debt had to pay a hefty price. Within the oil sands, for example, Suncor Energy Inc. (SU: $21.57) -- the largest producer/refiner in Canada -- had to put a 5-per-cent coupon on the 10-year notes it sold in April (compared with 3.1 per cent for a different batch of 10-year notes last year). Suncor then sold five-year notes in May at 3.1 per cent. In June, as markets were getting up and dusting themselves off a bit, fellow oil sands giant Canadian Natural Resources Ltd. (CNQ: $24.26) sold five-year notes at 2.05 per cent and 10-year notes at 2.95 per cent. Cenovus is smaller and has a lower credit rating than either of those companies.
Elsewhere in the oil sands, MEG Energy Corp. (MEG) lost 28 cents to $3.73 on six million shares, after releasing its second quarter financials. Analysts were more impressed than investors. MEG produced 76,000 barrels a day during the quarter, exceeding analysts' predictions of 71,000 barrels a day, while cash flow of 29 cents a share was higher than analysts' predictions of 26 cents a share. This was done on capital spending of just $20-million, whereas analysts had expected MEG to spend $27-million. MEG emphasized that it was able to generate $69-million in free cash flow during the quarter. Free cash flow is crucial to MEG's plan to chip away at its debt, the main anchor that it has dragged its $3.73 stock down from a 2014 high of over $41. As of June 30, net debt was $2.97-billion, down from $3.15-billion as of March 31.
While MEG was not as explicitly optimistic as Cenovus about an oil market recovery, it did leave a clear sign that it is seeing greater stability: It reintroduced full-year production guidance. This was originally set at 94,000 to 97,000 barrels a day. In March, MEG nudged that down to a range of 93,000 to 95,000 barrels a day, and then in May, it suspended the guidance altogether. It implied that it would wait until August to revisit the guidance, once a planned turnaround at Christina Lake was finished. Now, even though the turnaround is not finished yet, MEG is feeling confident enough to revive the guidance, and is now aiming for a full-year average of 78,000 to 80,000 barrels a day.
Chief executive officer Derek Evans was feeling so confident that he even offered some early-stage predictions for 2021. "Our desire at a minimum would be to have a capital program that allowed us to sustain production at 85,000 barrels a day," he said during a conference call this morning. Such a program would need a budget of about $250-million. Eventually, added Mr. Evans, MEG wants to "start the journey back to 100,000 barrels [a day]," but that will require higher oil prices. For now MEG will continue to be "very cautious."
Further afield, Manolo Zuniga's Peruvian oil producer, Petrotal Corp. (TAL), lost one cent to 24 cents on 866,000 shares, on top of the two cents it lost yesterday. Yesterday brought the triumphant announcement of the restart of production at the company's core Bretana oil field. A drop in the share price was probably not the expected reaction, but seeing as the stock had already climbed from 18.5 cents since the start of the month, a bit of a pullback is not too surprising. Petrotal had already told investors that it was hoping to bring the field back on-line this month. The field was shut down in May because the pipeline that carries its oil, known as the ONP, was suspended by the Peruvian government as a COVID-19 protective measure. (The pipeline runs through remote, sparsely populated areas, and the government did not want workers spreading disease to these high-risk communities.) Peru ended its nationwide lockdown near the beginning of this month. Yesterday, Petrotal confirmed that its Bretana field restarted operations on July 15.
Although Bretana's production was quickly able to return to preshutdown levels of around 12,000 barrels a day, Petrotal has since reduced output to 8,000 barrels a day. This is mainly because the ONP is still not operating and Petrotal is having to send out its production by barge, limiting its capacity. The company is hopeful that the ONP will be up and running again in early August.
Another South American junior has been having an interesting few days. Colombia- and Argentina-focused Cruzsur Energy Corp. (CZR), a Serafino Iacono and Frank Giustra promotion, added four cents to 55 cents on 1.53 million shares. This is its heaviest volume since mid-2018. The past few days have seen increasingly heavy volume, as well as a sharp rise in the stock to 55 cents from 29 cents, in the wake of Friday's announcement of a somewhat inadvertent gas discovery in Colombia. Cruzsur was re-entering the Aruchara gas well on the Maria Conchita block, drilled by Texaco in 1980. One of the purposes of the re-entry was simply to carry out service repairs on the 40-year-old well. Yet Cruzsur also found what it described as "a large amount" of gas. It has some fiddling to do to determine the actual amount of gas, but this should not take too long, perhaps a couple of weeks. Investors seem intrigued. A sizable discovery would speed along Cruzsur's efforts to become a major Colombian gas producer. Maria Conchita is not even the company's most hyped block; that would be SN-9, which Cruzsur calls an "important" future source of gas for the country.
In any event, the Maria Conchita news is certainly pleasant for those who participated in Cruzsur's financing two months ago, when it raised $1.8-million by issuing shares (plus warrants) at 18 cents. The stock closed today at 55 cents. This is, alas, still a long way down from Cruzsur's very first financing, done in 2017 at an effective price of $8 (really 80 cents, but the stock rolled back 1 for 10 in 2018). This drop partly reflects disappointing results from a separate well at Maria Conchita. The new well should put a bit of life back in her hype machine. Mr. Iacono and Mr. Giustra are certainly adept on this machine, if an investor can get the timing right. Bad timing can be disastrous. As evidence, one need look no further than Mr. Iacono's most famous past promotion, Pacific Rubiales. Pacific Rubiales was a Colombian oil producer whose stock, from 2008 to 2016, soared from less than $2 to over $35 before it collapsed to 64 cents and declared bankruptcy. How warmly investors think of Mr. Iacono tends to depend on where they landed in that chain of events.