by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery lost 75 cents to $37.30 on the New York Merc, while Brent for November lost 73 cents to $40.06 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.82 to WTI, up from a discount of $8.96. Natural gas for October lost eight cents to $2.32. The TSX energy index lost 1.60 points to close at 71.10.
Li Ka-shing's Husky Energy Inc. (HSE) lost 18 cents to $3.68 on 4.83 million shares, amid further chatter about yesterday's announcement that it is putting its West White Rose project in Newfoundland up for review and, "by extension, [reviewing] future operations in Atlantic Canada." The grim implication was that Husky might end its nearly 40 years of operations in the region. President and chief executive officer Rob Peabody lamented the "very difficult decision" in the press release yesterday morning. Fortunately for Newfoundland's beleaguered energy industry, Mr. Peabody was in a more optimistic mood by yesterday afternoon, when he made an appearance on BNN.
Mr. Peabody told BNN that the decision to review West White Rose is not reflective of poor expected returns. Even at today's low oil prices, the project has "reasonable economics," he claimed. The issue is affordability. With revenue stuck in a pronounced slump, Husky would have a difficult time forking out the roughly $2-billion required to complete West White Rose while still "preserving balance sheet strength." There is a feasible solution: Bring in the government -- federal or provincial or both -- as a partner. Mr. Peabody pointed out that there is precedent for this, even in Newfoundland itself, where Ottawa bought an 8.5-per-cent interest in the Hibernia oil field in 1993. This investment rescued Hibernia from certain collapse and is still raking in "tremendous" returns. (According to its most recent financial statements, as of March 31, 2019, the government has earned a total of $3.2-billion from its net profit interest in Hibernia.)
Mr. Peabody concluded that a government investment would be an "elegant solution" that would preserve jobs, ease Husky's financial burdens, and (crucially) provide "very, very solid" returns in the form of equity, royalties and taxes. A stumbling block may be timing. Offshore Newfoundland has a tight weather window for construction, so in order to prepare for construction next year, Husky would need the government to offer a commitment as quickly as November of this year. Mr. Peabody said he thinks the government will be "open to discussions."
Further afield, Charle Gamba's Colombian gas producer, Canacol Energy Ltd. (CNE), lost six cents to $3.54 on 238,100 shares. Yesterday it added eight cents after hyping its most recent gas sales and trumpeting a "new play type" discovered on one of its blocks. Contractual gas sales in July and August averaged 162 million cubic feet a day (about 28,400 barrels of oil equivalent a day), with a further eight million cubic feet a day of nominations. (Nominations are a new program that Canacol is trying this year, to try to maintain good relationships with its off-takers amid the economic challenges of COVID-19. Off-takers can "nominate" volumes of gas, but not actually pay for or receive the gas until later in 2020. This contrasts with contractual sales, which are essentially gas that has been produced, delivered and paid for.) For context, Canacol's contractual sales were just 130 million cubic feet a day from April through mid-May. The numbers are clearly improving, though they are still short of the 211-million-cubic-foot-a-day average for January and February.
As for the new play type, this was discovered on Canacol's VIM-5 block, via the new Porro Norte-1 exploration well. This was a step-out well drilled nearly 30 kilometres from the large Pandereta gas field on the same block. The primary reservoir at Pandereta is the CDO sandstone. The Porro Norte well hit a 24-foot interval of potential gas pay in the Cicuco limestone, something new for the block. While 24 feet is disappointingly small -- wells at Pandereta typically hit pay intervals of over 100 feet -- the limestone is intriguing. Scotia Capital analyst Gavin Wylie certainly thinks so, writing this morning that Porro Norte helps "derisk" the wider petroleum system while setting up new targets for 2021. Moreover, the mere fact that Canacol remains an active explorer in spite of the downturn impresses Mr. Wylie, who sees it as a unique advantage (or, in analyst gibberish, "an important point of differentiation providing some catalyst potential that is currently lacking in the sector"). Mr. Wylie has a "sector outperform" rating on Canacol and a price target of $6. The stock closed today at $3.54.
Another international producer, the Lundin family's Africa Oil Corp. (AOI), lost three cents to 99 cents on 140,500 shares, going below $1 for the first time since April. Investors were unimpressed by yesterday's announcement that Africa Oil has obtained an extension on its block 10BB and 13T exploration assets in Kenya. (The company's production comes from Nigeria.) The blocks, held in a joint venture with Tullow Oil and France's Total, were set to have their licences expire this month. The Kenyan government has agreed to extend them until the end of the year, with a possible further extension to Dec. 31, 2021, pending an agreed work program and budgets.
Some semblance of harmony between the joint venturers and the government is seen as important, especially because the joint venturers had declared force majeure on the assets from May to August, partially blaming new tax rules (as well as COVID-19). This was just the latest delay in the efforts to develop these assets and thereby turn Kenya into an official oil producer. The original goal was to reach a final investment decision (FID) in 2019 and achieve production in 2022. There is still no FID, and, based on comments from both Africa Oil and Tullow Oil -- which yesterday released its half-year financials up to June 30 -- Kenya will likely have to wait until at least 2025 to join the ranks of global oil producers.
Speaking of Tullow, its financials yesterday included the news that it is no longer trying to farm down its interest in the Kenyan joint venture. Tullow, which operates the assets, announced over a year ago that it wanted to sell at least part of its 50-per-cent interest in order to shore up its weak balance sheet. Now it has had a change of heart -- maybe. It said yesterday that it has "suspended" the farm-down process but will still consider "strategic alternatives" for the assets (usually code for having them up for sale). This uncertainty may have played a role in Africa Oil's wobbly share price. Had the project been taken over by a deep-pocketed new operator, such as China's CNOOC (seen as the front-runner), this might have ended the stalemate between the project's owners and the government. As it is, the project remains operated by a company with both financial and relationship strains. The coming months will be important as all sides try to hammer out a work program, in order to secure the extension to the end of 2021.