by Stockwatch Business Reporter
West Texas Intermediate crude for October delivery shot up $8.05 to $62.90 on the New York Merc, while Brent for November added $8.80 to $69.02 (all figures in this para U.S.). Both benchmarks reached their highest levels in four months, fuelled by fear over global supplies after two massive attacks on Saudi oil facilities on Saturday (discussed further below). In terms of intraday trading, Brent at one point posted its biggest percentage gain since the 1990-1991 Gulf War. Here in Canada, Western Canadian Select traded at a discount of $13.75 to WTI, down from a discount of $13.15. Natural gas for October added seven cents to $2.68. The TSX energy index added 12.52 points to close at 147.81.
Energy headlines continued to be dominated by the weekend's brazen drone attacks on two key oil sites at the heart of Saudi Arabia's oil industry. The attacks shut down about 5.7 million barrels a day of crude, representing roughly half of the country's oil production or around 5 per cent of the world's total supply. Iranian-allied Houthi rebels in Yemen have claimed responsibility for the attack, but U.S. Secretary of State Mike Pompeo ruled out Yemeni involvement and blamed the attacks on Iran. Tehran is denying any responsibility. U.S. President Donald Trump said the United States (which is already at odds with Iran over its nuclear program) is "locked and loaded" to retaliate. Mr. Trump added that he has authorized the release of oil from the strategic petroleum reserve, if necessary.
It is not yet clear how long Saudi Arabia will need to resume normal production from the damaged facilities. The Wall Street Journal reports that Saudi officials expect to restore around one-third of production by the end of today, while Reuters adds that a full return to normal operations could take months. Christyan Malek, a JPMorgan analyst, told Reuters that he sees oil prices reaching $80 (U.S.) to $90 (U.S.) over the next three to six months as the market turns its focus to geopolitics. Greg Newman, co-chief executive officer of Onyx Commodities, speculated that prices could even reach $100 (U.S.) if production cannot be restored quickly.
The attacks, and the associated jump in oil prices, made for an interesting day for Canadian oil stocks. Some of the biggest gainers of the day were EnCana Corp. (ECA), up $1.03 to $7.35, Enerplus Corp. (ERF), up $1.27 to $10.98, and Cenovus Energy Inc. (CVE), up $1.50 to $13.93. Before the attacks, a major news items heading into the weekend was Friday afternoon's rebalancing of the S&P/TSX Composite Index, and as expected, oil and gas stocks did not fare well: Five of the 10 stocks deleted from the index were producers. Those five were Birchcliff Energy Ltd. (BIR: $2.41), Kelt Exploration Ltd. (KEL: $3.60), NuVista Energy Ltd. (NVA: $2.52), Peyto Exploration & Development Corp. (PEY: $4.10) and TORC Oil & Gas Ltd. (TOG: $4.16). Deletion from the index typically leads to selling pressure. Today, however, each of the five companies had an up day, buoyed by higher oil prices. The changes to the index will take effect on Sept. 23. Today's price optimism aside, the deletion of five producers from the index represents the largest wave of deletions that the sector has seen in the current business cycle (as measured from mid-2015, when the index began to react to the 2014 oil price crash). There have now been 20 producers deleted from the S&P/TSX Composite Index since mid-2015. A mere 17 remain, out of the total index population of 233.
One of the remaining producers is Grant Fagerheim's Alberta- and Saskatchewan-focused Whitecap Resources Inc. (WCP), up 51 cents to $4.96 on 13.6 million shares. Whitecap got a boosterish mention this morning from Raymond James analyst Jeremy McCrea. In the wake of Saturday's jarring attacks in Saudi Arabia, Whitecap provides investors with "torque without undue risk," opined Mr. McCrea. He likes its strong balance sheet. Although companies with weaker balance sheets tend to show disproportionately good reactions to rising in oil prices (a knife that cuts both ways; they also drop harder when prices fall), Mr. McCrea cautioned investors against the "knee-jerk" temptation to buy highly leveraged companies in response to the Saudi situation. "Leveraged names [are] not necessarily the best outperforming stocks," he warned, saying his research shows that "in periods where WTI prices increased, underleveraged names perform as well [as] if not greater than overleveraged names." For that reason he likes lower-risk Whitecap. Adding to his enthusiasm is Whitecap's history of "consistently show[ing] some of the best well economics among its neighbouring peers." Mr. McCrea maintained his "strong buy" rating on the stock and his price target of $6.50.
Between the surge in oil prices and the moral support of Mr. McCrea, Whitecap's stock reached an intraday high of $5.10 today, its first time above $5 in four months. That compares with an all-time low of $3.41 on Aug. 27. On Aug. 26 after the close, Whitecap cut its 2019 budget to $400-million from $450-million and lowered its production target for the fourth quarter to a range of 74,000 to 76,000 barrels of oil equivalent a day (from 77,000). It described the budget as "prudent given the continuing U.S./China trade wars and recessionary concerns in 2020." Notably, Whitecap maintained its confidence in the safety of its 2.85-cent monthly dividend, which on Aug. 26 represented a generous yield of 9.6 per cent. With the stock having gained nearly 40 per cent in value since then, the yield is now 6.9 per cent.
Heading abroad, Guyana- and Namibia-focused Eco (Atlantic) Oil & Gas Ltd. (EOG) did not participate in today's big gains, instead edging down eight cents to $2.70 on 1.19 million shares. The drop came in spite of the news of a second oil discovery that Eco and its joint venturers have made off the coast of Guyana. This largely seems to reflect a "sell the news" attitude in the market; Eco's stock had already risen from about $2 over the last three weeks. Before that, in the week of Aug. 12, it shot up toward $2 from about $1.15, after Eco and its joint venturers made their first Guyanese discovery. That a second discovery has now been made did not strike the market as surprising, given that both wells had the same predrill odds of success.
The two discoveries have been named Jethro and Joe. Both are located on the offshore Orinduik block, owned 15 per cent by Eco, 25 per cent by France's Total and 60 per cent by Tullow Oil (the operator). Jethro came first, with Eco and its joint venturers announcing on Aug. 12 that their Jethro well had hit 55 metres of oil pay in "excellent" Lower Tertiary sandstone reservoirs. Today's result from the Joe well is somewhat less impressive, encountering just 16 metres of sandstone, but it also opens up a new play. The well targeted the Upper Tertiary, and this is the first time in the region that oil has been found in these shallower rocks. Past wells (mostly drilled by the neighbouring Exxon) have targeted the Lower Tertiary or the Upper Cretaceous.
Eco and its fellow joint venturers have now wrapped up their Guyanese wildcatting for the year. All in all, the two-well program was a great success for Eco, which has watched its stock more than double in about a month. This in turn is good news for major shareholder Africa Oil Corp. (AOI: $1.30), which owns 33.95 million or 18.8 per cent of Eco's shares, with a cost base of just 61 cents. Africa Oil rarely misses an opportunity to remind investors of its position in Eco. It issued its own press release this morning to tout the new discovery, with president and CEO Keith Hill popping in to exclaim, "We're two for two." Of course, the main player in that "we" is not Africa Oil but Tullow, the operator of the joint venture. Tullow got a pat on the back this morning from Canaccord Genuity analyst Charlie Sharp. Although Mr. Sharp acknowledged that "an early review suggests that Joe is a little smaller than predrill estimates," he nonetheless deemed the result both "excellent" and "of great significance." He expects Tullow to make the Orinduik block "a primary focus of operational activity in 2020 and beyond." No official drilling plans for 2020 have been released yet, but Mr. Sharp expects Orinduik to see four wells, perhaps five.