by Stockwatch Business Reporter
West Texas Intermediate crude for November delivery added 55 cents to $53.36 on the New York Merc, while Brent for December added 68 cents to $59.42 (all figures in this para U.S.). Western Canadian Select traded at a discount of $17.00 to WTI, unchanged. Natural gas for November lost four cents to $2.30. The TSX energy index lost a fraction to close at 126.27.
"Fortune favours the bold," proclaimed Canaccord Genuity analyst Anthony Petrucci -- no doubt considering himself a member of that set -- as he wrote a combined 80 pages of research notes this morning on his latest stock recommendations, being ARC Resources Ltd. (ARX: $5.68), Tourmaline Oil Corp. (TOU: $11.97) and Seven Generations Energy Ltd. (VII: $7.81). These are his initial research notes on the companies. He acknowledged that the difficulties facing the Canadian energy sector have left many investors wondering, "Why would anyone invest in this market?" In his view, ARC, Tourmaline and Seven Generations are good bets for "riding out the uncertainty" because they have strong balance sheets, do not need to tap the capital markets for their near-term spending programs and can generate free cash flow even at current commodity prices. Two of them, ARC and Tourmaline, pay dividends (with respective yields of 10.6 per cent and 4.0 per cent). All three are also trading at or near all-time lows.
Mr. Petrucci's "top pick," with a $10 price target, is ARC. The Montney- and Cardium-focused producer has seen its $5.68 stock lose about half of its value over the last year, in part because its projected 2019 cash flow will not be enough to cover both its spending and its dividend, giving rise to fears that ARC will cut the dividend (again -- it previously halved the dividend to five cents a month from 10 cents a month in early 2016). Mr. Petrucci said these worries are "missing the point." He looked back at ARC's total spending since 2015 and calculated that ARC has taken in a total of $250-million more than it has spent, while paying for its dividend and boosting its production to 140,000 barrels of oil equivalent a day from 115,000. ARC is deliberately overspending in 2019 to set itself up for future production increases, said Mr. Petrucci, adding that this does not mean that it will have to cut its dividend. He sees inflow and outflow coming back in balance by 2021.
Mr. Petrucci also had plenty of lovely things to say about Tourmaline Oil (Canada's largest gas producer and a "best-in-class operator" with a price target of $17) and Seven Generations (the "condensate king" of the Alberta Montney, with a price target of $11). Despite his fine words, none of the three stocks showed much movement today. ARC edged up nine cents to $5.68, Tourmaline lost 12 cents to $11.97 and Seven Generations added seven cents to $7.81.
Down in South America, Frontera Energy Corp. (FEC) added three cents to $10.52 on 276,300 shares, after renewing its share buyback program. Investors have been expecting this ever since the previous buyback program expired three months ago. That program was valid for five million shares, and Frontera bought back 2.68 million, for a current share count of 97.9 million. The new program will allow Frontera to buy back up to 6.53 million shares over the next year. Both this time and last time, Frontera gave the usual justification for these sorts of programs: the belief that its share price "may not fully reflect the underlying value of its business and future prospects." If that was true when the previous program was announced in July, 2018, it must be even truer now; the stock has dropped to around $10.50 from over $18 in the last 15 months. The drop is in spite of the various "shareholder enhancement initiatives" that Frontera began talking about last December. Chief among these was the introduction of a quarterly dividend, currently set at 20.5 cents, for a yield of 7.8 per cent.
Meanwhile, Frontera's core country of operations, Colombia, continues to try to position itself as the destination of choice for energy investment in Latin America. "We must take advantage of the moment," said Luis Miguel Morelli, head of Colombia's National Energy Agency, in a recent interview with Reuters. The "moment" is the political turmoil engulfing neighbouring countries such as Venezuela. With rather un-neighbourly candour, Mr. Morelli explained that "if Venezuela changes politically, if there is a transformation in Venezuela, the opportunities for Colombia will be notably reduced." Colombia will soon test producers' appetite for its energy assets by holding another block auction. Fifty-nine blocks are available for bidding, with the final list of qualified bidders expected to be published next Monday, Oct. 21, and initial bids due Oct. 31. Mr. Morelli said he hopes to see 26 companies qualify as bidders, including a number from Canada. (Investors in Frontera, Parex Resources Inc. (PXT: $18.62) and Gran Tierra Energy Inc. (GTE: $1.45) will likely be watching, as all three companies have participated in previous auctions.) Of the 59 blocks up for auction, Mr. Morelli hopes to sign away 20, in line with the typical success rate in such auctions of 30 per cent. Five of the available blocks, interestingly, are offshore. Mr. Morelli sees future offshore exploration as "fundamental" to Colombia's efforts to boost production and reserves.
Back in North America, Bruce Chernoff's North Dakota Bakken producer, PetroShale Inc. (PSH), lost three cents to 57 cents on 56,000 shares. President and chief executive officer Mike Wood has resigned effective immediately to pursue other interests. He had been on the job for just over two years, having joined PetroShale in June, 2017. One of the first things he did was complete a $500,000 private placement through which he bought 384,615 shares at $1.30. He evidently had faith in PetroShale's newly announced plan to start drilling and operating its own wells, rather than sitting on non-operated interests and letting other companies do the heavy lifting. This new plan has had a marked effect on production. PetroShale was producing just 1,800 barrels of oil equivalent a day in late 2016, but has since drilled over 20 of its own wells, and was producing over 12,000 barrels a day as of August. Mr. Wood himself said in August that PetroShale "continues to be excited over the many projects we have ahead of us." Now, however, he seems to have found something more exciting to focus on. He is doubtless disappointed with the direction the stock has taken over the last year and a half. Although the stock reached a peak of $2.50 in early 2018 -- nearly twice the price at which Mr. Wood started investing in mid-2017 -- it has since slumped to its current level of 57 cents.
Director David Rain will serve as interim CEO while PetroShale looks for a permanent replacement. Mr. Rain served as the chief financial officer of PetroShale from 2013 to 2018 and, for many years longer than that, has been a colleague of PetroShale's executive chairman and main shareholder, Mr. Chernoff (who controls 64.4 million of its 192 million shares). Mr. Rain has been the CFO and then vice-president of Mr. Chernoff's private investment company, Caribou Capital, since its inception in 1999. (That was the year that Mr. Chernoff made his first big splash in Calgary by helping to sell Pacalta Resources to a predecessor of EnCana Corp. (ECA: $5.63) for about $1-billion. He was 34 years old.) In 2002, Mr. Chernoff and Mr. Rain co-founded Harvest Energy Trust, a public Canadian oil producer where Mr. Chernoff served as chairman and Mr. Rain as CFO. Harvest reaped the rewards of the energy trust model until 2006. Then the federal government abruptly pulled the plug on income trusts' tax breaks, just as Harvest was in the middle of financing a multibillion-dollar refinery expansion. The financing fell apart and Harvest was quickly up to its neck in debt. In 2009, a white knight rode to the rescue, and Harvest was sold to Korean National Oil Co. (KNOC) at a generous premium. KNOC paid $10 a unit for Harvest, or about $1.8-billion cash. With assumed debt factored in, the value of the deal rose to $4.1-billion.