by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery added 40 cents to $54.87 on the New York Merc, while Brent for October added 41 cents to $58.64 (all figures in this para U.S.). Western Canadian Select traded at a discount of $13.30 to WTI, up from a discount of $13.35. Natural gas for September lost three cents to $2.20. The TSX energy index added 1.26 points to close at 122.26.
The oil patch will enter the weekend in a downbeat mood, following the bearish global market outlook delivered by OPEC in its latest monthly report. OPEC cut its 2019 forecast for rising oil demand to 1.10 million barrels a day from 1.14 million, citing "softening economic growth, ongoing global trade issues and slowing oil demand growth." It also warned that the oil market will be in slight surplus in 2020. The report will inevitably raise the question of whether OPEC and its non-OPEC allies (such as Russia) will continue to extend the supply-cutting pact that has been in place since the beginning of 2017. The pact is currently set to expire in March, 2020.
Here in Canada, the Riddell family's Alberta gas junior, Perpetual Energy Inc. (PMT), stayed unchanged at 23 cents on 3,700 shares. It has declared near-total victory in its courtroom battle against the bankrupt Sequoia Resources. Sequoia had been trying to sue Perpetual and its president and chief executive officer, Sue Riddell Rose, in relation to an asset sale done in 2016. The deal involved the transfer of a subsidiary of Perpetual that carried thousands of aging shallow gas wells and about $134-million in environmental liabilities. (Importantly, the fact that it was a transfer of a subsidiary rather than a straightforward asset sale allowed the deal to bypass some of the usual regulatory scrutiny of Sequoia's finances.) Sequoia scooped up the assets for a nominal $1 in hopes that it could better manage the production from the wells. Its plans did not work out, and in 2018, Sequoia filed for bankruptcy.
Sequoia also filed its lawsuit in 2018. It claimed that Perpetual and Ms. Riddell Rose knew full well that the liabilities would sink Sequoia. Either the deal should be annulled, or Sequoia should receive $217-million in damages, argued Sequoia (or rather its bankruptcy trustee, PricewaterhouseCoopers). Perpetual, for its part, argued that it had taken pains to position Sequoia for success -- including providing office space and a risk management contract on gas prices -- and that the "opportunistic" lawsuit should be dismissed.
This morning, Perpetual announced that the Alberta Court of Queen's Bench has dismissed and struck all but one of the claims under the lawsuit. These include the oppression claim and claim for relief. As well, the judge ruled that no claim can be made personally against Ms. Riddell Rose. The one claim still standing relates to whether the transfer was an arm's-length transaction (as Perpetual argues but Sequoia denies) under the specific terms of the Bankruptcy and Insolvency Act. The judge found that there was not enough evidence for a summary dismissal of this claim. Technically, this means that Sequoia may proceed with its lawsuit alleging that Perpetual contributed to its bankruptcy. Perpetual is unconcerned. In its press release, Perpetual noted that the judge's overall decision referred "several times" to an arm's-length transaction, and in an interview today with The Globe and Mail, Ms. Riddell Rose described it as "very clear in [the judge's] later arguments that the aggregate transaction occurred at arm's length." She said Perpetual may appeal this part of the decision. For its part, Sequoia's trustee said it is considering its next steps.
All in all, the decision makes for an interesting addition to the increasingly heated conversations around Alberta's gas producers. It is safe to say that not everyone approves of the fact that Sequoia was able to avoid the more rigorous solvency tests usually associated with asset sales. Sequoia is also not the only headline-grabbing bankruptcy of late. More recently, there was Trident Resources, which went bankrupt earlier this year and dumped thousands of wells (and their $329-million cleanup bill) into the lap of the Alberta Energy Regulator. Several gas producers have argued that more bankruptcies are inevitable unless the provincial government takes action to stabilize gas prices and improve investor confidence. Last month, a letter saying as much was sent to Premier Jason Kenney, signed by the CEOs of (among others), Paramount Resources Ltd. (POU: $5.73), Peyto Exploration & Development Corp. (PEY: $3.18), Advantage Oil & Gas Ltd. (AAV: $1.60), Bonavista Energy Corp. (BNE: $0.51), Pine Cliff Energy Ltd. (PNE: $0.095) and Bellatrix Exploration Ltd. (BXE: $0.50).
The last on that list, Bellatrix Exploration Ltd. (BXE) -- down three cents to 50 cents on 115,300 shares -- put aside its complaints and tried to stay upbeat this week while presenting at EnerCom's 2019 Oil and Gas Conference in Denver. Steve Toth, vice-president of investor relations and corporate development, talked up the "three pillars" around which Bellatrix is built. The first is "high-quality assets and acreage." Bellatrix focuses on the Alberta Spirit River play, which is one of the two main gas plays in Canada, said Mr. Toth (the other being the Montney). He acknowledged that gas prices in Canada, and especially the Alberta benchmark, AECO, have been persistently weak, but he sees "light at the end of the tunnel" as soon as next year. Bellatrix's second pillar is ownership of its infrastructure. Mr. Toth said Bellatrix has spent heavily on infrastructure over the last five years, but with this essentially done, the company has been able to focus on a simpler, lower-cost "drill-to-fill exercise." The third pillar is market access. Bellatrix has transportation service in place for its current and future production, including a good chunk moving through non-AECO-exposed markets, emphasized Mr. Toth.
One pillar that is decidedly not on Bellatrix's list is an impeccable balance sheet. The company was so indebted, in fact, that it completed a dilutive recapitalization in June, wiping out $110-million of debt and converting many of its debtholders into shareholders. Mr. Toth mentioned the recapitalization briefly during his presentation, explaining that it had saved the company about $12-million in interest costs that could be spent on the business instead. He invited his listeners to look at Bellatrix's SEDAR filings for further details. If they did, they may not have liked what they saw. Bellatrix's most recent financials show total net debt of $357-million as of June 30, compared with a current market cap of just $20-million. The financials also flag the risk that Bellatrix will breach its debt covenants within 12 months, and disclose "substantial doubt" as to whether the company can continue as a going concern. A new presentation on Bellatrix's website says the company is "actively exploring refinancing opportunities and additional sources of liquidity."
Another Alberta producer, the Montney-focused Pipestone Energy Corp. (PIPE), edged down one cent to $1.00 on 48,000 shares. It has closed its previously announced "strategic mid-stream transaction" with Tidewater Midstream (as discussed in the July 24 Energy Summary) and has also appointed a new chief operating officer, Dustin Hoffman (not, obviously, the Hollywood actor of the same name). Mr. Hoffman has spent the last 26 years of his career at EnCana Corp. (ECA: $5.57). He began as an operations engineer in 1993 and moved up the ranks to become, as of last year, a senior manager within the D&C (drilling and completions) group. Along the way, he served as group lead within several divisions, including the Duvernay, the Peace River Arch and the Bighorn South gas development in Alberta (Bighorn was later sold to the private Jupiter Resources for $1.8-billion). Pipestone, as a Montney player, is primarily interested in Mr. Hoffman's work in unconventional plays such as the Montney and the Duvernay. Paul Wanklyn, Pipestone's president and CEO, declared himself "extremely pleased" with Mr. Hoffman's appointment as COO. The appointment will take effect Sept. 9.