by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery edged up two cents to $58.54 on the New York Merc, while Brent for March added 23 cents to $64.85 (all figures in this para U.S.). Western Canadian Select traded at a discount of $23.20 to WTI, unchanged. Natural gas for February lost eight cents to $2.00. The TSX energy index lost 1.29 points to close at 143.15.
Amid rising tensions in Northern British Columbia, where a handful of activists are protesting the Coastal GasLink pipeline -- and where the RCMP recently opened a criminal investigation after finding "traps" and "bags full of fuel-soaked rags" along the project's access road -- the fates have decided to insert a good chuckle. Recently the project's proponents were left scratching their heads after a United Nations committee called on Canada to suspend Coastal GasLink (among other projects) until it obtains indigenous backing. The project does, in fact, enjoy broad indigenous backing, with all 20 of the bands along the route having signed support agreements. This utterly escaped the attention of the UN Committee on the Elimination of Racial Discrimination. In the wake of the committee's report on how "disturbed" and "alarmed" it feels at Coastal GasLink's supposedly callous treatment of the locals, someone has finally decided to tell the poor committee what is going on. It came as a great surprise to committee chairman Nourredine Amir. "I did not know that most first nations agree on [Coastal GasLink]. That is something new that comes to my understanding," he told Reuters yesterday. Reuters took it from there: "Asked why the committee did not gather more information, [Mr.] Amir said its role does not include investigations." Indeed. In fairness, the committee's 18 members are described as "experts of high moral standing and acknowledged impartiality." Rudimentary research skills are not part of the job description.
U.S.-focused shale producer EnCana Corp. (ECA) lost 23 cents to $5.33 on 17.8 million shares. After receiving shareholder approval on Tuesday for its proposal to move its headquarters to Denver from Calgary (and to rebrand as Ovintiv Inc. and roll back its shares 1 for 5), the company is now facing the first repercussions of the move: It is being deleted from the S&P/TSX Composite Index and the S&P/TSX 60 Index. The deletion will take effect with the move-out date of Jan. 24. Under S&P/TSX index rules, member companies must, among other things, be established or incorporated in Canada and have a "substantial presence" in Canada. EnCana no longer fits the bill, with over 80 per cent of its spending, 75 per cent of its revenue, 70 per cent of its proven reserves and now its headquarters being located south of the border.
EnCana has known the deletion was coming ever since it pitched the relocation proposal in October. In response to criticisms that the deletion will force Canadian-index-linked investors to sell and crystallize steep losses, EnCana countered that greater exposure to larger pools of U.S. capital could only benefit the stock in the long run. Yet it will take time for the company to realize its goal of being added to a U.S. index. There is also the question of which index. The most likely candidate, as BMO analyst Randy Ollenberger mused earlier this week, is the S&P MidCap 400. Being added to this index would prompt many passive funds to buy EnCana and could create demand for about 90 million shares, fully replacing the 90 million that are in the S&P/TSX, said Mr. Ollenberger. (EnCana currently has 1.3 billion shares outstanding. That, of course, will change after the above-noted 1-for-5 rollback.)
For context, the minimum capitalization for inclusion in the MidCap 400 is $2.4-billion (U.S.). EnCana can easily clear that bar, with a market cap of $5.3-billion (U.S.) as of today's close. Alas, it is not big enough to even think about breathing the rarefied air of the S&P 500. That index has a minimum capitalization of $8.2-billion (U.S.). EnCana would need to bulk up by at least 55 per cent in value before it could join this exalted club.
Here in Canada, Alberta Cardium producer Obsidian Energy Ltd. (OBE) added 11 cents to $1.21 on 199,000 shares, pleasing investors with the initial results of the 13 light oil wells it started drilling last year. The wells produced an average of 520 barrels of oil equivalent a day (90 per cent oil) over their first 10 days. These 13 wells form part of Obsidian's phase 2 Cardium program, building on the phase 1 program, which involved 19 wells from mid-2018 to early 2019. Obsidian told investors in mid-2019 that this phase "outperformed all historical programs over the past five years." (More specifically, the production from the newer wells was roughly double that from the older ones.) The results from phase 2, so far, are consistent with phase 1, much to Obsidian's satisfaction. The company is now working on completing the remaining nine wells of the phase 2 program by mid-2020. It added that it is feeling "very encouraged with [its] capital cost performance," having reduced its per-well costs to $3.5-million from $4-million.
This optimism makes for a pleasant change at Obsidian. It was one of the worst performers of 2019, a year in which its stock was high as $4.55 and as low as 51 cents. There were far more valleys than peaks: It lost both its CEO and its CFO and had to replace them; it tried to arrange financings and asset sales that did not end up happening; it got a delisting warning from the New York Stock Exchange; and it even started a "strategic alternatives process" (code for going up for sale). Toward the end of the year, things finally started to perk up a bit. Obsidian hired a motivated new interim CEO, Stephen Loukas (a portfolio manager at FrontFour Capital, which owns a significant -- and significantly underwater -- interest in Obsidian). It also talked up "very promising" early-stage results from the phase 2 program.
Investors have responded well; Obsidian's $1.21 stock has more than doubled since late November. Yet the company will eventually have to do something about its burdened balance sheet. It had nearly $500-million in net debt as of Sept. 30, well above its current market cap of $88-million. The debt includes over $400-million drawn on Obsidian's credit facility, which is up for a reconfirmation review next week. (A reconfirmation review is not the same as a borrowing base review -- when facilities are raised or reduced or just left alone -- but it is still important, as failing a reconfirmation review can render a facility no longer usable.) Obsidian will then face a borrowing base review next month on Feb. 28. Meanwhile, one important debt date for Obsidian has already passed: On Jan. 1, 2020, a covenant-relaxation agreement from 2019 expired, and the formerly relaxed debt covenants began to tighten up again. Obsidian has not said whether it might ask for another round of relaxations. If requested, any new relaxations would likely be along similar lines as the 2019 ones, allowing Obsidian to keep its debt-to-EBITDA ratios at temporarily elevated levels.
In other debt news, Dale Shwed's B.C. Montney-focused Crew Energy Inc. (CR) added five cents to 53 cents on 5.15 million shares, after touting "strategic debt and cost-reduction transactions." The deals revolve around its operated, 28.7-per-cent-owned Septimus and West Septimus gas plants. Crew has agreed to sell a 22-per-cent interest in both plants to an unnamed mid-stream company for $70-million. At the same time, it has exercised a pre-existing option to buy a 16-per-cent interest in both plants for just $11.7-million. Once the dust settles, Crew will own a 22.7-per-cent interest in both plants, will remain operator and will have an extra $58.3-million in its pockets. There will be a slight increase in its operating costs as a result of its reduced ownership in the plants -- around $500,000 a year -- but Crew is still pleased with the deal it is getting, and has even entered a "strategic alliance to participate collaboratively in future value creation opportunities" with the mid-stream company.
Crew will use the proceeds to repay the $53-million it owes on its $235-million credit facility. This amount makes up just a fraction of its overall net debt, which was $356.1-million as of Sept. 30, compared with a current market cap of $82.8-million. The bulk of this debt consists of $300-million in senior notes that are covenant-free and do not mature until 2024. For that reason, Crew sees itself as having "ample liquidity" to carry out its 2020 plans. It expects to release those plans later this quarter.