by Stockwatch Business Reporter
West Texas Intermediate crude for April delivery lost $1.95 to $51.43 on the New York Merc, while Brent for April lost $2.20 to $56.30 (all figures in this para U.S.). Both benchmarks tumbled after Italy reported a sharp rise in coronavirus cases, marking the largest outbreak outside Asia and fuelling concerns that a protracted pandemic will hurt oil demand around the world. Western Canadian Select traded at a discount of $15.85 to WTI, up from a discount of $16.25. Natural gas for March lost eight cents to $1.83. The TSX energy index lost 5.42 points to close at 126.21.
As if tumbling oil prices and rising coronavirus fears were not enough, the oil patch can now add another project to its ever-lengthening list of shelved investments. Late Sunday, mere days before the federal government was expected to rule on the fate of Teck Resources' $20.6-billion Frontier oil sands mine, Teck withdrew its application, citing "no constructive path forward" for the nearly decade-old project. The withdrawal will mean a writedown for Teck of $1.13-billion.
Teck announced the killing of Frontier by way of a public letter from its president and chief executive officer, Don Lindsay, to federal Environment Minister Jonathan Wilkinson. Mr. Lindsay called himself "disappointed" by this turn of events. "Frontier has unprecedented support from indigenous communities and was deemed to be in the public interest by a joint federal-provincial review panel," he noted. He blamed the withdrawal not on economic infeasibility -- though there are plenty who would debate that, given today's low oil prices and tight export capacity -- but rather on Canada's lack of clear climate policies in the context of resource development. "Investors and customers are increasingly looking for jurisdictions to have a framework in place that reconciles resource development and climate change ... This does not yet exist here today," said Mr. Lindsay. He warned, "Without clarity on this critical question, the situation that has faced Frontier will be faced by future projects and it will be very difficult to attract future investment."
Shortly after Teck made the announcement, the federal government confirmed that it will no longer be making a decision on Frontier. It praised Teck for its "leading-class" consultation and its correct perception that "global investors and consumers are increasingly looking for the cleanest products available and sustainable resource development." The rest of Mr. Lindsay's point -- that investors are also looking for places where development can actually occur -- was swept aside, only to be picked up and brandished by Alberta Premier Jason Kenney. "This decision [by Teck] is clearly the result of federal regulatory uncertainty and the current lawless opposition to resource development," fumed Mr. Kenney on Twitter (referring to the illegal rail blockades that have persisted for weeks in protest of the Coastal GasLink pipeline). He added that the "devastating" withdrawal "deepens Alberta's resolve to use every tool available to fight for greater autonomy, including the right to develop our own resources."
Within the oil patch, one company was busy expanding its resources. Mike Rose's Tourmaline Oil Corp. (TOU) lost 50 cents to $11.99 on 4.93 million shares, after announcing not one, not two, but three acquisitions in the B.C. Montney. Two of them are takeovers. The larger of the two is the proposed $24.4-million purchase of Chinook Energy Inc. (CKE), up half a cent to 6.5 cents on 7.56 million shares. Tourmaline is offering a whole 6.75 pennies for each Chinook share. The deal will add about 3,500 barrels of oil equivalent a day to Tourmaline's production.
For context, when Chinook went public in 2010 through a complicated merger transaction, it started trading at $2.50 and was producing nearly 17,000 barrels a day. It billed itself as a promising international producer with assets in both Canada and Tunisia. The Tunisian contribution was initially small -- about 700 barrels a day -- but by 2014, it had reached nearly 3,000 barrels a day. By then, however, Chinook had soured on the politically unstable Tunisia, and its debt was piling up. It decided to focus on Canada alone and sold the Tunisian assets for $127-million in mid-2014. That was a high point for the company, with no debt, a more easily promotable asset base and a share price peaking at $2.85. The good times did not last. When commodity prices crashed later that year, Chinook tried to cope by drastically cutting its spending, which led to declining production. That took a fresh toll on the balance sheet, which prompted numerous asset sales, which further reduced production. Chinook ended up putting all of its remaining assets up for sale in 2016. It sold some, but mostly it soldiered on in the Montney, drilling a few wells each year and hoping for better times to return. Finally it gave up last November and put its entire self on the block. By then, its debt woes had returned, it was not in compliance with its credit covenants and its production was below 4,000 barrels a day.
Enter Tourmaline. It was always seen as a likely suitor, given the proximity of their assets and the state of Tourmaline's bursting treasury. The company "has access to over $800-million for select acquisition activity," as Tourmaline itself announced in December. One analyst, Scotia Capital's Jason Bouvier, came up with a list of no fewer than 16 companies that Tourmaline might consider buying. Chinook was near the top of the list. Other public companies on the list include Cequence Energy Ltd. (CQE: $0.28), Pieridae Energy Ltd. (PEAL $0.43), Delphi Energy Corp. (DEE: $0.69) and Perpetual Energy Inc. (PMT: $0.075) (the last of which, interestingly enough, is run by Mr. Rose's wife, Sue Riddell Rose). Those four were not among the companies that Tourmaline is now acquiring, but given that Mr. Bouvier expects Tourmaline to drop $600-million to $800-million on acquisitions over the next two years -- and today's transactions add up to just $84-million -- he presumably still sees plenty of time.
The second company that Tourmaline is acquiring (and one that was not on Mr. Bouvier's list at all) is the private Polar Star Canadian Oil and Gas. This takeover merited just two sentences in Tourmaline's press release, but the name still might ring a vague bell for energy investors. Polar Star is an indirect subsidiary of the U.S. pension fund TIAA (Teachers Insurance and Annuity Association of America). In 2009, Polar Star took over the Toronto-listed Tusk Energy through a cash-and-share deal worth $257-million. Now Polar Star itself has been taken over for just $9-million. It will boost Tourmaline's production by about 2,500 barrels a day.
As for the third acquisition, it adds no production but Tourmaline expects to change that shortly. Today, Tourmaline identified itself as the buyer of a 75-per-cent interest in a 13-section Montney land block sold by Painted Pony Energy Ltd. (PONY: $0.51) last November. Painted Pony did not identify the buyer at the time, nor did it specify the block's exact location, though Stockwatch speculated that the high price tag -- $45-million, or $7,100 per net acre -- suggested a location in the more liquids-rich portion of Painted Pony's 305-section land base. This turned out to be accurate: The block offsets Tourmaline's South Gundy area, one of the most liquids-rich parts of its portfolio. Tourmaline kept its role in the deal confidential as it figured out its plans for the block. These plans, as announced today, include bringing nine new wells on production in the third quarter of this year, with estimated initial production of 15,000 barrels a day (one-third liquids).
Painted Pony, for its part, saw its stock reach an intraday high today of 62 cents, even if it did then retreat and close unchanged at 51 cents. Investors were likely reacting to Tourmaline's production plans. As Painted Pony still has a 25-per-cent interest in the land block, it will benefit from Tourmaline's drilling keenness. Yet it did not release a press release this morning to give investors the happy news. In fact, it has not released any news since closing the deal in November, which likely goes some way toward explaining the stock's fall from as much as 85 cents in December. Investors are hoping for word soon on the company's 2020 guidance and perhaps even the long-term supply agreements that it has been trying to negotiate with gas customers (including would-be exporters of liquefied natural gas, or LNG). If nothing else, investors can expect an update on Wednesday, March 11, when Painted Pony is scheduled to release its year-end 2019 financials.