by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery edged down seven cents to $37.26 on the New York Merc, while Brent for November lost 22 cents to $39.61 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.46 to WTI, up from a discount of $8.66. Natural gas for October added four cents to $2.31. The TSX energy index lost a fraction to close at 70.50.
Oil prices wobbled on a bearish new monthly report from OPEC, which is now predicting a global oil demand drop of 9.46 million barrels a day in 2020, worse than the 9.06 million barrels a day that it was forecasting last month. It cited the COVID-19 pandemic and its associated curtailments on travel and economic activity. This also means that the rebound in demand will be slower than previously hoped. OPEC now expects consumption in 2021 to rise by just 6.62 million barrels a day, down from its previous forecast of 6.99 million.
Here in Canada, oil sands giant Imperial Oil Ltd. (IMO) lost 28 cents to $19.00 on 3.11 million shares. It has fallen from $21.60 since announcing on Sept. 2 that it would have to suspend production from its Kearl oil sands project, which contributes around 40 per cent of its total output, as a result of a spill along the western leg of the Polaris diluent pipeline. (Diluent is necessary for mixing with the sticky oil sands bitumen to facilitate transportation.) Neither Imperial nor the operator of Polaris, Inter Pipeline, has been able to estimate when the pipeline and therefore Kearl will be back in service. Today, however, BNN reported that Inter Pipeline has filed an application with the Alberta Energy Regulator (AER) to install a temporary pipeline bypass along Polaris. The AER typically takes about three days to review this sort of application.
A quick solution would be good news for Imperial, lest it follow in the unfortunate footsteps of Suncor Energy Inc. (SU: $17.82), which in the last two weeks has tumbled to $18 from over $21 after reducing its production guidance (in its case because of a fire-related outage, not a pipeline-related one). Inter Pipeline will certainly want to keep Imperial in as high spirits as possible: Imperial is the largest customer along the western leg of Polaris, with four times as much capacity as the second-largest customer, Husky Energy Inc. (HSE: $3.66). Fortunately for Inter Pipeline, the eastern leg of Polaris, which is even larger and mostly serves Cenovus Energy Inc. (CVE: $5.40), is still fully operational.
Update: Imperial got its good news after all. After the close, it announced that the pipeline is back in service. Inter Pipeline confirmed on its website that the AER has approved an approximately 400-metre bypass pipeline that will allow the western leg of Polaris to reopen. There is no word yet on Imperial's production guidance.
Outside the oil sands, international oil and gas producer Vermilion Energy Ltd. (VET) (with operations in Canada, the United States, Europe and Australia) edged up four cents to $3.89 on 2.39 million shares. Even a minor rise is a nice change for a stock that has fallen from over $7.50 in the last three months -- hardly an auspicious start for new president Curtis Hicks. He took over four months ago after the abrupt departure of president and CEO Tony Marino, initially sparking a wave of excitement that sent the stock up to $7.50 from around $7. The stock has since resumed its slide. Investors do not seem persuaded that Vermilion's new management model (which involved eliminating the CEO role in favour of an executive committee) or its new priorities (which Mr. Hicks summed up as a vow to "redouble its focus on its core business principles") will be nearly enough to get the sub-$4 stock back up toward its 2014 heyday of over $78.
Today, a rare shower of compliments came Vermilion's way, courtesy of a 20-page research note from the London-based Edison Investment Research. (A disclaimer at the top of the note discloses that Vermilion is a "research client" of Edison. Investors have to go all the way to the bottom of the 20-page note to find out exactly what that means: Vermilion commissioned the report from Edison, which charges a standard annual fee of 49,500 British pounds, or about $84,000 -- working out to over $4,000 per page, in this case (though more reports could be on the way before the year is out).) The Edison analysts wrote that Vermilion is on a "mission [to] reinstate [its] core business principles and restore investor confidence in this diverse, flexible operating company." Its top priority is debt repayment. With $2-billion in net debt as of June 30, Vermilion has a net-debt-to-cash-flow ratio of around 3.2 times, well above its goal of 1.5 times. The analysts applauded the company's "conservative, long-term focus on balance sheet strength and capital discipline," though they acknowledged that some of its actions may come "at the expense of production growth," at least in the short term. They set a "blended valuation" -- the closest they seem to get to a price target -- of $9.60 a share. The stock closed today at $3.89.
A much smaller international producer, the Asia-Pacific-focused Pan Orient Energy Corp. (POE), added six cents to 64 cents on 85,100 shares. The company patted itself on the back this morning for achieving production from three new wells in Thailand. Two of the wells are development wells within the main DD oil field at Pan Orient's 50-per-cent-owned L53 block. Each of those is producing at satisfyingly high rates of over 800 barrels of oil a day. (One of them was originally drilled as a water disposal well, so the oil-bearing capacity is an especially pleasant development.) The third new well, an exploration well in the AA area of the block, is producing only 80 to 100 barrels a day, but it still counts as a new pool discovery. Alas, a second exploration well, in the BB area, was a disappointment and will be abandoned, but investors were willing to overlook that as Pan Orient trumpeted its latest sales numbers. Total sales from the L53 block reached 3,532 gross barrels of oil a day (1,766 net to Pan Orient) in August, up sharply from 1,761 gross barrels a day (881 net) in July.
Investors seemed pleased with the update. Over all, however, the last year has not been kind to Pan Orient, which saw its stock drop all the way to $1 from around $2.50 in December, after a much-hyped well in Indonesia came up dry. This was not Pan Orient's first Indonesian failure, but it was the last straw, prompting the company to leave the country for good. Then in March, Pan Orient all but swore off Canada, where it owns part of the Sawn Lake oil sands project in Alberta. It took an $80-million impairment charge as of March 31 and said it would "put all plans [for Sawn Lake] on hold for the foreseeable future." That leaves Thailand as the sole input for the hype machine. It has creaked along as best it can, getting the stock up to the current level of 64 cents from its March low of 41 cents. Part of that likely also has something to do with Pan Orient's healthy pile of cash, which as of June 30 amounted to $26.4-million, or about 51 cents a share. Pan Orient is content to mostly sit on this cash while the global oil outlook is so unpredictable. Eventually, however, its investors would probably like to see it do something a bit more ambitious.