by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery had a grim start to the week, breaking below $20 in intraday trading before closing at $20.09 (down $1.42) on the New York Merc (all figures in this para U.S.). Brent for May lost $2.17 to $22.76. Western Canadian Select traded at a discount of $15.50 to WTI, up from a discount of $16.25. Natural gas for April added six cents to $1.69. The TSX energy index added 5.54 points to close at 52.06.
A refinery in Newfoundland has become the first major refinery in North America to shut down on COVID-19 fears. North Atlantic Refining announced late Sunday that it is temporarily halting operations at its 130,000-barrel-a-day Come by Chance plant, out of concern for worker safety. The shutdown is expected to last two to five months. It comes as refineries worldwide are curtailing operations in the face of plunging fuel demand, as the global pandemic forces planes to idle and motorists to stay home as much as possible. The Norwegian research centre Rystad Energy forecast last Thursday that global fuel demand will decrease by as much as 16 per cent in April, 2020, compared with a year earlier. That is actually one of the more optimistic forecasts; some have put the drop as high as 30 per cent. In virus-ravaged Italy, national fuel demand has collapsed 85 per cent, according to a statement from a local refinery that became the first to shut its doors last Friday.
The headlines are not any happier in Western Canada, where the price of heavy oil, after accounting for shipping costs, has reached negative territory. WCS prices got as low as $3.82 (U.S.) a barrel today. To move this barrel costs $7 (U.S.) to over $9 (U.S.) depending on the transportation method. While the intuitive reaction is to shut in production, that is not always feasible, particularly for companies with take-or-pay contracts or -- arguably more importantly -- with thermal operations. Unlike contracts, subterranean steam chambers never come with a force majeure clause. Thermal oil companies risk having their chambers collapse and damage the reservoir if they tap the brakes too fast or for too long (even standard maintenance-related shutdowns need careful handling). On top of that, the costs of restarting production -- circulating enough steam to reheat the reservoir, purging any built-up fluids that may have condensed on top of the bitumen, and so on -- are so punitive that most companies would rather produce at a loss and simply try to outlast the downturn.
All of this serves to highlight the role of hedging, which offers at least some insulation from rapid price fluctuations. Within the oil sands, the companies with the most extensive hedge positions for 2020 include MEG Energy Inc. (MEG: $1.49), which has hedged 55 per cent of this year's oil production (including 70 per cent for the first half of 2020), and Athabasca Oil Corp. (ATH: $0.13), which has hedged about 43 per cent of this year's oil production. Cenovus Energy Inc. (CVE: $2.41), by contrast, has not hedged any of its production for the year.
Elsewhere in Alberta, Stephen Loukas's Cardium-focused Obsidian Energy Ltd. (OBE) stayed unchanged at 24 cents on 219,400 shares, after successfully -- finally -- meeting the deadline to receive a bit of debt relief from its lenders. As discussed most recently in last Thursday's Energy Summary, Obsidian has been working on a partial debt restructuring to extend the term of its credit facility and delay its 2020 note maturities into 2021. It was originally hoping to meet its lenders' conditions by March 4. That got pushed back to March 13, followed by a further extension to March 31. Now the deed is finally done. Obsidian even got some covenant relief thrown into the bargain. It now has a few months to breathe in relative peace, ahead of its next scheduled facility review on Nov. 30, 2020. The facility currently has a borrowing base of $550-million (though only $450-million is actually available to Obsidian) and was $399-million drawn as of Dec. 31.
South of the border, Bruce Chernoff's North Dakota Bakken-focused PetroShale Inc. (PSH) edged up half a cent to 11 cents on 189,100 shares, on top of the half-cent it added on Friday after releasing its 2019 financials and revised 2020 guidance. The financials were better than analysts had expected. Production for the fourth quarter of 2019 came to 12,200 barrels of oil equivalent a day, exceeding analysts' predictions of 11,400 barrels a day. This partly reflected higher-than-forecast spending: PetroShale spent a total of $236-million in 2019, going over its budget of $220-million. The company explained that it had to shift some 2020 spending on non-operated projects into late 2019. Despite this, fourth quarter cash flow of 18 cents a share was nicely above analysts' predictions of 14 cents a share. All of this was overshadowed somewhat by the greatly reduced 2020 budget. Partly as a result of the above-noted acceleration, but mostly because of the recent oil price collapse, PetroShale has slashed its 2020 budget to just $26-million from $70-million. It now expects to produce 11,000 to 12,000 barrels a day instead of 12,000 to 13,000.
The financials and the revised guidance caught the approving eye of Canaccord Genuity analyst Dennis Fong, who took heart from PetroShale's prediction that it will still manage to generate free cash flow this year. (For that it can partially thank its hedges, covering 71 per cent of forecast oil production in the second quarter. The company does not, however, appear to have any hedges in place past June 30.) Mr. Fong kept his "speculative buy" rating on PetroShale and left his price target at 40 cents. That is nearly four times today's close of 11 cents.
Back in the Canadian oil patch, amid the usual flurry of panicked spending cuts -- with today bringing both Parkland Fuel Corp. (PKI: $25.05) and Inter Pipeline Corp. (IPL: $7.84) into the fold -- one tiny company's announcement spoke to the opportunity that some still see in the sector. Toscana Energy Income Corp. (TEI), unchanged at half a cent on 39,000 shares, has agreed to a takeover by a U.K. North Sea junior called i3 Energy, which sees Western Canada as particularly attractive during this time of crisis. "We have concluded," declared i3 in its press release, "that the WCSB [Western Canadian sedimentary basin] provides a unique, time-limited opportunity to build a portfolio of production assets on superior metrics not achievable elsewhere."
The U.K. suitor highlighted Toscana's low-cost, low-decline production of 1,065 barrels of oil equivalent a day, along with its "prolific growth potential." The fact that Toscana is trading at less than a penny reflects its debt woes. Both its senior and junior debt facilities, representing a total of $28-million, were in default. Now i3 has bought them for just $3.4-million. Based on that, plus the share exchange ratio, the total amount that i3 will pay to acquire Toscana is just $3.95-million, equal to a mere $3,710 per barrel of Toscana's production. (For some context, when International Petroleum Corp. (IPCO: $1.50) bought the Alberta-focused Granite Oil in January of this year, the value of the deal was around $51,500 per barrel of production. Of course, Granite did not have the debt problems that Toscana does. A more comparable deal might be Tourmaline Oil Corp.'s (TOU: $8.36) deal in progress to buy Chinook Energy Inc. (CKE: $0.065), and even that deal is worth close to $7,000 per barrel of production.)
The deal still needs the approval of Toscana's shareholders, some of whom will be less than thrilled with the proposed price tag. Given that i3 is offering 0.0281 of a share for every Toscana share, and that i3's shares closed today in London at 7.25 pence (or 13 cents), the implied value of Toscana's shares is about one-third of a cent. That is down from a 2012 high of $18. Toscana went public in 2012 and was able to keep its share price mostly around the $15 mark until 2014, when it was crushed under the oil price collapse, never to recover. It is so behind in its various obligations that the TSX has been threatening to delist it for over six months.
A delisting would not go over well with i3, which is planning to use the takeover as its springboard to listing on the TSX (in addition to its existing London AIM listing). The TSX is familiar stomping ground for i3's people. Its founder, Neill Carson, had two previous promotions, Iona Energy and Ithaca Energy -- hence why i3 is "i3" -- that were also listed in Toronto. Their record is best described as mixed. Iona became a victim of the oil price crash of 2014, attempted but failed to restructure in 2015, and entered administration (insolvency) in early 2016. Ithaca Energy fared better: It accepted a takeover offer in 2017 at $1.95 a share, which was considerably better than its early 2016 level of about 30 cents, but still well off its 2007 high of $4.20.