by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery added $3.01 to $28.33 on the New York Merc, while Brent for June added $4.17 to $34.11 (all figures in this para U.S.). Western Canadian Select traded at a discount of $16.23 to WTI, up from a discount of $16.25. Natural gas for May added seven cents to $1.62. The TSX energy index lost 1.24 points to close at 63.15.
Oil prices bounded up for the second day in a row, on reports that OPEC+ is considering large-scale production cuts -- though only if some of the cuts are made by countries outside the alliance. In a series of tweets yesterday, U.S. President Donald Trump claimed to have brokered a deal between Saudi Arabia and Russia to deliver cuts of 10 million to 15 million barrels a day, or an unprecedented 10 to 15 per cent of global supply. Saudi state media then reported that the kingdom has called an emergency OPEC+ meeting to discuss the cuts. The meeting will be held by videoconference on Monday, April 6, according to Russia's RIA news agency.
The difficulty is that Saudi Arabia is apparently unwilling to have OPEC+ shoulder the entire burden alone, and wants non-OPEC+ countries, which include the United States, Canada and Norway, to participate in the cuts. It is not clear how such a deal would work. In the U.S., state-ordered production cuts are prohibited by antitrust legislation. Realistically, however, some level of U.S. participation would be essential, and that is presumably a topic of discussion at today's meetings between Mr. Trump and various energy executives. The outcome of these meetings will be closely watched by OPEC+ ahead of Monday's videoconference. Here in Canada, the largest producing province of Alberta already instituted production cuts at the start of 2019, and does not seem to relish the idea of further sacrifice. "We would certainly look at it, but really it's the Saudis and the Russians here who are the problem, not Canada. ... [The Saudis] are the ones who started the fire in global oil markets and they've got to put it out," Alberta Premier Jason Kenney told Reuters. As for Norway, its government has declined to say whether it is open to participating in production cuts.
Even if all these obstacles are overcome and the energy world comes together in a co-ordinated attack on global output, this will still not be enough to stabilize near-term supply and demand, according to the International Energy Agency (IEA). The head of the IEA, Fatih Birol -- whose job description does not include being cheerful -- told Reuters that a 10-million-barrel-a-day production cut would still lead to a 15-million-barrel-a-day buildup in global inventories during the second quarter. He blamed the "unprecedented" demand loss associated with the COVID-19 pandemic.
Within the energy sector, the budget cuts kept rolling in. U.S.-focused shale producer Ovintiv Inc. (OVV), up 33 cents to $4.83 on 6.99 million shares, is trimming a further $200-million (U.S.) from its planned second quarter spending. It already announced a $300-million (U.S.) cut three weeks ago. These cuts are just for the second quarter, so if Ovintiv is otherwise keeping to the full-year budget of $2.7-billion (U.S.) that it laid out in February, then it would now be at $2.2-billion (U.S.) for the year, a drop of 18 per cent. That is on the small side next to the rest of the sector's budget cuts. Quite possibly, seeing as Ovintiv has not actually specified $2.2-billion (U.S.) as its new full-year budget, the company has simply dropped the full-year budget and shifted to a quarter-by-quarter approach. Canaccord Genuity analyst Dennis Fong speculated in a new research note that Ovintiv will actually spend just $1.6-billion (U.S.) in 2020. That should be relatively in line with cash flow, which is relatively well protected by extensive hedges. (More than 70 per cent of this year's production is hedged.) Yet Mr. Fong does not seem overly enthused about Ovintiv. He has a "hold" rating on the stock and a price target of $3.50 (U.S.), barely above today's close of $3.43 (U.S.).
Here in Canada, Athabasca Oil Corp. (ATH) edged up half a cent to 15 cents on 3.79 million shares. It has shaved a further $10-million off its budget, on top of the $30-million cut announced two weeks ago. This brings the total budget to $85-million. Athabasca has also made the difficult decision to suspend its Hangingstone thermal project. Hangingstone was the company's very first operated oil sands project, and contributed 9,000 of the 36,400 barrels of oil equivalent a day that the company produced in the fourth quarter of 2019. Athabasca mourned the "unfortunate" confluence of events that gave it no choice but to suspend production.
There are other reasons why the suspension is unfortunate. While it is already doing short-term damage in the form of Athabasca's reduced 2020 production guidance (now 30,000 to 31,000 barrels a day), the real question has to do with the long-term effects. Shutting in a thermal operation is a delicate business, as halting the steam injections puts the steam chamber at risk of collapsing and damaging the reservoir. Then there are the punishing costs of restarting production, including recirculating enough steam to reheat the reservoir, removing fluids that may have condensed and settled on top of the bitumen, and so on. For some context, when Athabasca said earlier this year that it would need to take Hangingstone off-line for two weeks in the spring for a facility turnaround, it cautioned that the production recovery would take months. Investors with even longer memories may recall a now-defunct oil sands company called Connacher Oil, which shut in some of its thermal production for two months in 2008 and was never able to get production back to normal.
For those reasons, most companies tend to keep operating their thermal assets even if they are gushing more red ink than oil, in hopes of simply waiting out the downturn. Athabasca cannot afford to wait. Its balance sheet, though it shows about $340-million in liquidity, is highly strained by $560-million in debt, including $450-million (U.S.) in notes due February, 2022. The company is trying to refinance these notes. In the meantime, it says its decision to shut in Hangingstone, which needed WCS prices of $37.50 (U.S.) just to break even -- more than triple current prices -- will "significantly improve corporate resiliency."
Further afield, Colombian oil producer Parex Resources Inc. (PXT) stayed unchanged at $13.26 on 2.16 million shares, after highlighting its own "significant resiliency." It emphasized its lack of debt and its working capital of $340-million (U.S.). To preserve this pristine balance sheet, the company is halting the rest of its 2020 drill program, suspending its share buyback program and cutting its 2020 budget all the way down to $105-million (U.S.) from $225-million (U.S.). It already spent about $80-million (U.S.) in the first quarter, so the rest of the year will see minimal activity, unless prices improve quickly and Parex decides to nudge the budget higher. The company is withdrawing its previous 2020 production guidance of 54,000 to 56,250 barrels of oil equivalent a day. It produced 54,300 barrels a day in the first quarter, but expects to drop down into the high 40,000s starting this month, as a result of the lack of drilling and some shut-ins of older, less economic output.
Separately, Parex is making some changes to its board of directors. Stepping down from the board are Curtis Bartlett and Ron Miller, who have been with Parex since its inception in 2009 (and were also at its predecessor, Petro Andina, which was sold in 2009 for $7.65 a share. The related spinout of some of Petro Andina's assets is what created Parex). To help fill the vacancies, Parex's board is welcoming Sigmund Cornelius, the luxuriously named president and chief operating officer of Freeport LNG. Mr. Cornelius joined Freeport in 2014, a few years after retiring as CFO of ConocoPhillips. He had worked at Conoco in various positions since 1980.
Parex's update caught the approving eye of Scotia Capital analyst Gavin Wylie, who applauded it for maintaining "one of the most enviable balance sheets" in the sector. He speculated that Parex might use the downturn as an opportunity to "establish its next step change in growth." The company has previously signalled some interest in acquisitions, and given the abundance of distressed assets now on the market, Parex's cashed-up treasure chest is "strategically positive," mused Mr. Wylie. He kept his rating on the stock at "sector outperform" and his price target at $29, more than double today's close of $13.26.