by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added 91 cents to $43.06 on the New York Merc, while Brent for January added $1.10 to $46.06, closing above $45 for the first time in nearly three months (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.70 to WTI, unchanged. Natural gas for December added six cents to $2.71. The TSX energy index added 5.89 points to close at 87.97.
For the third Monday in a row, markets enjoyed positive news on potential COVID-19 vaccines. AstraZeneca says its vaccine is 70 to 90 per cent effective. (The range reflects a happy accident during late-stage trials. A group of participants mistakenly received a half dose of the vaccine followed by a full dose, which resulted in 90-per-cent efficacy. The efficacy was just 62 per cent when the full dose was given twice, as it was for most of the participants. The overall average came to 70 per cent.) An effective vaccine is seen as crucial to a recovery in fuel demand and thus oil markets. Today's news sent several Toronto-listed oil producers higher, including Vermilion Energy Inc. (VET), up 64 cents to $5.33, Cenovus Energy Inc. (CVE), up 70 cents to $6.86, and Suncor Energy Inc. (SU), up $1.75 to $21.92.
Some companies have additional reasons to welcome a vaccine. As of the most recent update provided by Alberta Health Services on Friday, there are six active COVID-19 outbreaks at oil sands sites in the Fort McMurray area. These are the base plant and Firebag operations of Suncor, the Albian and Horizon operations of Canadian Natural Resources Ltd. (CNQ: $29.79), Syncrude's Mildred Lake project, and -- for the second time -- Imperial Oil Ltd.'s (IMO: $24.01) Kearl project. Kearl was previously on the outbreak list after three workers tested positive for the virus in mid-April. Two days later, the number of cases was 12; one month later, it was over 100. Imperial responded with strict safety measures such as drastically reducing the number of workers on site. When Kearl was removed from Alberta Health's outbreak list in mid-June, Imperial gave itself a hearty pat on the back while vowing that it would "not be letting [its] guard down."
Alas, Kearl now finds itself on the list once again, with one employee testing positive and two others being quarantined off site. Another Imperial operation, Cold Lake, is also reportedly an outbreak location. Although Cold Lake is not yet showing up on Alberta Health's website, the local Lakeland Today (a Great West Newspapers publication) reports that there are 13 active cases at Cold Lake. A spokesman for Imperial told Lakeland Today that the company will "continue to take actions to prevent the spread of COVID-19."
Imperial can take some comfort from the fact that, in the wake of its 2020 investor day last Thursday, it continues to bask in analyst adulation. It had used its investor day as an opportunity to outline plans for higher spending and production in 2021. This morning, CIBC analyst Dennis Fong applauded Imperial for providing "positive operational updates and increased clarity," which in his view "could further increase investor confidence over time with execution of the company's operational and financial goals." He hiked his price target to $26 from $25. This is on top of other upgrades in the wake of Imperial's investor day, including from Raymond James analyst Chris Cox (who hiked his price target to $22 from $17), TD's Menno Hulshof (who hiked his price target to $23 from $19) and BMO's Randy Ollenberger (who hiked his price target to $25 from $23). The stock closed today up $1.44 to $24.01.
Further afield, Colombian oil producer Frontera Energy Corp. (FEC) shot up 41 cents to $2.90 on 465,600 shares. It had no news today, but it received a lovely mention after the close on Friday from Fitch Ratings, which was reacting to news that Frontera had released last Tuesday. Frontera announced on Tuesday that it has reached an agreement to resolve disputes related to two pipelines that are partly owned by Frontera but are controlled by subsidiaries of state-owned Ecopetrol. The disputes date back to the summer of 2018, when Frontera terminated six transportation agreements with the Ecopetrol subsidiaries. The subsidiaries disputed the terminations as invalid. As of Dec. 31, 2019, the subsidiaries claimed to be owed a total of $153.3-million (U.S.) plus interest, with a further $148-million (U.S.) demanded annually for the next four to eight years. Frontera, for its part, said it was the other way around: the subsidiaries actually owed it $519.1-million (U.S.) for service prepayments, "improperly drawn" credit and more.
The whole thing went into lengthy arbitration. Now, 2-1/2 years later, the parties are good chums once more. Each side will release the other from all claims, and no cash payments are involved, although Frontera will transfer its equity interest in one of the pipelines. The parties have also "create[d] new business opportunities" by entering new transportation contracts.
The news did little to move the market last Tuesday. On Friday after the close, however, Fitch Ratings popped up to call the settlement "credit positive." Fitch estimated that the new arrangement will reduce Frontera's fixed transportation costs by 12 per cent (to about $10 (U.S.) a barrel from $11.40 (U.S.) a barrel), which in turn will increase its EBITDA by 11 per cent (to $237-million (U.S.) from $213-million (U.S.), based on Fitch's forecast commodity prices for 2021). Fitch director Saverio Minervini wrote, "In addition to the expected increase in cash flow generation aforementioned, this settlement also removes the uncertainty of unfavourable resolution of the dispute for the company, which could have resulted in payments to compensate for the suspended contract[s]."
This is the third time Fitch has given Frontera a boost in as many months. Two weeks ago, it wrote that all Latin American energy producers (including Frontera as well as Canacol Energy Ltd. (CNE: $3.80), Gran Tierra Energy Inc. (GTE: $0.40) and more) were looking at "an improving trend in 2021, recovering from a very difficult 2020." Prior to that, in August, Fitch upgraded Frontera's credit rating to B from B- (still junk, but slightly shinier junk). Its rating outlook on Frontera is "stable."