by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added 95 cents to $57.72 on the New York Merc, while Brent for January added $1.02 to $63.30 (all figures in this para U.S.). Western Canadian Select traded at a discount of $18.60 to WTI, up from a discount of $18.85. Natural gas for December added four cents to $2.69. The TSX energy index added 1.81 points to close at 135.34.
Distressed Alberta and B.C. producer Pengrowth Energy Corp. (PGF) hovered unchanged at 5.5 cents on 3.83 million shares, as its proposed five-cent-a-share takeover by Adam Waterous's private Cona Resources took a step forward. The bid price of five cents -- well below the 20 cents that Pengrowth was trading at before the offer was announced two weeks ago, let alone its 2006 peak of over $26 -- reflects the risk that Cona is taking on in assuming Pengrowth's $700-million debt. As discussed in Monday's Energy Summary, Pengrowth had to prove to Cona by today, Nov. 15, that at least two-thirds of its secured debtholders supported the deal. It has now delivered that assurance. Holders of 93 per cent of the outstanding secured debt have signed support agreements, while also agreeing to extend the maturity of the debt until the completion of the takeover.
Now the deal must head to shareholders for their approval. Pengrowth has called a special meeting for Dec. 18, which means it has nearly five weeks to try to persuade shareholders to cast a yes vote. Its efforts at persuasion so far have been limited to dire warnings that any alternative to the takeover will likely leave shareholders with nothing, so they might as well take the five cents. It remains to be seen just how convincing this argument will be. Pengrowth's largest shareholder, the billionaire Seymour Schulich, has been tight-lipped about his feelings on the deal, which if carried out will crystallize a steep loss for him. He owns roughly 170 million of Pengrowth's 560 million shares and has pegged his cost base at about $1.10.
Over in Saskatchewan, Crescent Point Energy Corp. (CPG) added five cents to $5.29 on 9.02 million shares, after arranging its second major asset sale in about two months. It has agreed to sell some of its mid-stream gas assets in Saskatchewan to the private Steel Reef Infrastructure for $500-million cash. Steel Point will also pay for an expansion at one of the assets that Crescent Point would otherwise have had to cover itself, a perk worth an additional $30-million. Crescent Point will be able to keep using the assets under long-term take-or-pay agreements with Steel Point. The take-or-pay commitments will add about $47-million annually to Crescent Point's operating expenses, but this will be partially offset by interest savings once Crescent Point applies some of the sale proceeds to its debt. Scotia Capital analyst Patrick Bryden, in a research note this morning, estimated the annual interest savings at $23-million. He wholeheartedly approved of the "positive" deal and praised Crescent Point's management for being able to "achieve value recognition for the assets." Mr. Bryden has a "sector outperform" on Crescent Point and a price target of $7.75.
Crescent Point expects its net debt to be around $2.3-billion once the above sale closes. While still a high percentage of the current market cap of about $2.9-billion, net debt has fallen sharply from $4-billion as of Sept. 30, 2018, with much of the decrease taking place in the last couple of months. In September, Crescent Point announced that it was selling its assets in Utah and some of its non-core assets in Saskatchewan for a total of $921-million. These sales have helped the stock rally to $5.29 from around $3.75 in August, though it is still a long way from its 2014 peak of over $48. It is currently attempting to woo investors back by going on a shopping spree for its own shares. In September, it vowed to buy back $100-million worth of shares before year-end. SEDI shows that it is almost halfway to that goal, with about $47-million spent from Sept. 20 to Oct. 31.
Alberta Montney producer Birchcliff Energy Ltd. (BIR) edged down five cents to $2.18 on 4.8 million shares, despite trying to impress investors with its third quarter financials and preliminary 2020 guidance. The financials were slightly better than analysts had predicted. Production averaged 80,548 barrels of oil equivalent a day, compared with analysts' predictions of around 80,000, while cash flow of 24 cents a share exceeded analysts' predictions of 23 cents a share. Birchcliff also emphasized its self-calculated free cash flow of $22.8-million. The free cash flow issue is something of a sore spot with investors. They were greatly displeased with Birchcliff in August, when it hiked its 2019 budget by $38-million while maintaining that the revised version would still be "significantly" below cash flow. That is true, if one uses Birchcliff's method of calculating its spending, which looks at the F&D (finding and development) budget only and does not take into account dividend payments or acquisitions. That method allows Birchcliff to claim that it generated $54-million in free cash flow in the first nine months of 2019. Yet if one tots up the total capital expenditures and dividends over the period, they actually exceeded cash flow by over $15-million.
Now Birchcliff is forecasting an even higher F&D budget in 2020. It wants to spend $250-million to $350-million on F&D in 2020, up from $242-million in 2019. While investors were leery, analysts were cheery. "We like the contrarian growth plan," declared Scotia Capital analyst Cameron Bean. He noted that Birchcliff's 2020 plans "feature a return to growth (minus the outspending) with higher capex and production that we had previously expected." (The 2020 production target is 78,000 to 82,000 barrels a day, up from about 78,000 this year.) Mr. Bean acknowledged that the market is not particularly enamoured of rising budgets these days, and Birchcliff's "return to growth could cause a near-term negative reaction." He still likes the stock and maintained his "sector outperform" rating and his price target of $6. Meanwhile, Canaccord Genuity analyst Dennis Fong -- whose price target is somewhat less optimistic at $4.50, but still more than double today's close of $2.18 -- said the 2020 guidance "keeps flexibility in focus" while implying "exit-to-exit growth [in production] of 14 per cent." He sees the stock as "an attractive investment for those with interest in a low-cost natural gas producer." Alas, given the stock's fall to $2.18 from over $10 in the last three years, "those with interest" appear few and far between.
Further afield, Turkey-focused Valeura Energy Inc. (VLE) stayed unchanged at 83 cents on 527,900 shares. It has been one of the worst-performing international energy juniors lately, plunging from as much as $3.60 in the last two months (although the title of "today's most out-of-favour international energy junior" was snatched away this week by Eco (Atlantic) Oil & Gas Ltd. (EOG), the Guyanese explorer whose stock has tumbled to $1.05 from $2.16 in the last three days). Valeura's drop reflects lower-than-hoped-for test results from its Turkish gas play and worrisome Turkish news headlines. None of that fazes Canaccord Genuity analyst Charlie Sharp, who released an extraordinary research note on Valeura this morning to "review the progress so far." He noted that Valeura's tests so far may have shown "variable" gas flows, but the gas did flow. This is key, especially in a country like Turkey, where gas sells for about four times as much as it does in North America. Valeura is now testing another well and should have results in the next few weeks. All of these results should "feed into a wider play assessment ... [ahead] of the next operational stage of evaluation in 2020," said Mr. Sharp. Until Valeura is closer to that stage, Mr. Sharp sees no reason to change his price target on the stock. That target is nothing less than 525 pence. Valeura, which is dual listed, closed today in London at just 49.75 pence, and closed in Toronto at 83 cents. Mr. Sharp's target is more than 10 times those figures.