by Stockwatch Business Reporter
West Texas Intermediate crude for July delivery added 43 cents to $33.92 on the New York Merc, while Brent for July added 31 cents to $36.06 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.60 to WTI, down from a discount of $8.85. Natural gas for June lost six cents to $1.71. The TSX energy index lost 1.64 points to close at 80.28.
As if weak oil prices and a global pandemic were not enough, now Canadian energy producers can add a protracted regulatory fight to their list of worries. Suncor Energy Inc. (SU: $24.44), Canadian Natural Resources Ltd. (CNQ: $25.67) and 14 other parties were left disappointed this week, after the Canada Energy Regulator (CER) said it would proceed with Enbridge's request for a hearing on its proposal to revamp its Mainline pipeline network. The Mainline is the largest oil export system in Canada. Now it is at the heart of a battle over the future of how it operates.
The fight goes back to August of last year. That was when Enbridge first proposed a sweeping change to the commercial terms of the Mainline. Historically, ever since the Mainline started up about 70 years ago, it has operated under common-carrier principles with 100 per cent of its capacity available for uncontracted/spot transportation, open to any shipper regardless of size. Enbridge wanted to switch 90 per cent of the capacity over to long-term contracts and keep just 10 per cent for spot usage. This rankled several producers, such as MEG Energy Inc. (MEG: $3.24), which complained to the CER that Enbridge's proposal was too risky -- it would force producers to either gamble on getting enough spot capacity, or enter lengthy contracts at a time when there are almost no other options to ship product. This would leave the door open to unfavourable terms. MEG's comments were echoed by several other producers, including Shell Canada, which memorably railed against the "abuse of market power."
Worth noting is that at this point, Enbridge was merely holding an "open season" on the proposal, a way of gauging interest before making an actual regulatory application. This is the usual process. Unusually, in the face of so many complaints, the CER halted the open season in September and told Enbridge to seek regulatory approval first. A miffed Enbridge criticized the CER for reversing "decades of precedent and commercial practice," but ultimately acceded and filed its application in December. This set the stage for a hearing.
Given the scope of the proposed change, several oil producers requested that the hearing take place in two stages: the first on whether the change should be allowable at all, and the second on potential costs and tolling. The outbreak of COVID-19 then prompted the producers to request that the hearing be postponed until markets became more stable.
This week, the producers got their answer: no on both counts. Postponing the hearing would cause "unjustified delay," said the CER. It is also "not persuaded that a two-phase process is likely to achieve greater efficiency." The regulator will move ahead with a single-stage hearing. It has not released details, but promised to issue a list of participants and a hearing order "within the coming days."
This time the CER's decision was well received by Enbridge, which applauded the regulator for moving forward "in an appropriately expeditious manner." Enbridge also repeated its claim that its proposal has received support from producers and refiners representing more than 70 per cent of the Mainline's current throughput. Previous documents have listed Cenovus Energy Inc. (CVE: $5.96), Imperial Oil Ltd. (IMO: $21.57) and BP among the companies that support the switch. Many others, however, remain staunchly against it. "The vast majority of producers oppose this change," Tristan Goodman, president of the Explorers and Producers Association of Canada (EPAC), told the Financial Post this week. "... [This] line has been running fairly effectively for 70 years, and so I don't know why there needs to be this change." He said the producers will continue to fight the proposal at the hearing.
Meanwhile, several of the above producers won favourable mentions this morning from Scotia Capital analyst Jason Bouvier, who has been on a hunt for companies with "juicy" cash flow. He has revised some of his company-specific estimates amid a range of oil price scenarios. In his view, the companies with the "most torque to oil prices" are MEG Energy Inc. (MEG: $3.24) and Cenovus Energy Inc. (CVE: $5.96), whose cash flow will rise by 70 per cent and 54 per cent, respectively, with every $10 (U.S.) rise in WTI oil prices. Mr. Bouvier noted, however, that at $30 (U.S.) WTI (near current levels), neither MEG nor Cenovus can generate positive cash flow. Companies in good shape at $30 (U.S.) WTI include Suncor Energy Inc. (SU: $24.44) and Tourmaline Oil Corp. (TOU: $13.85), thanks in part to having "the most robust balance sheets," said Mr. Bouvier. He then mused that if WTI climbs all the way to $50 (U.S.), many producers would show "compelling" cash flow. His preferred pick in that case would be Canadian Natural Resources Ltd. (CNQ: $25.67).
Heading down (a long, long way down), George Armoyan's Bonavista Energy Corp. (BNP) lost half a cent to 16 cents on 231,300 shares. It has filed on SEDAR the circular for its annual meeting on June 25, disclosing the imminent departure of one-third of its board of directors. Three of the board's nine current members are not standing for re-election. One of those three, Mary Hemmingsen, has not even been on the board a full year; she joined Aug. 1, 2019. She is an accountant by background and is a current director of Stuart Olson and InstarAGF Asset Management. The other two leaving are Theresa Jang and Chris Slubicki, who have been on Bonavista's board since 2017 and 2007, respectively. Ms. Jang is the executive vice-president and CFO of Stantec, and Mr. Slubicki is the president and chief executive officer of the private Modern Resources.
If nothing else, the departures will cut down on Bonavista's director fees, at a time when it needs to trim as much spending as possible. The company is not exactly on the best of terms with its creditors. Bonavista first announced a year ago that it would be seeking covenant relief, but it had no success and officially breached its covenants as of March 31, 2020. Its net debt on that date was $880-million (compared with a current market cap of $41.6-million). Because of the breach, all of the outstanding debt became current, and the creditors could demand what they were owed at any time. Bonavista entered a forbearance agreement a few weeks ago as it continued to cast about for a solution. The forbearance agreement expires in less than a week, on Wednesday, May 27.
Even lower down, Garth Johnson and Drew Cadenhead's Pulse Oil Corp. (PUL) stayed unchanged at three cents on 256,400 shares. It has come up with a creative way to raise money for its Bigoray EOR (enhanced oil recovery) project in Alberta. Under the terms of a new $30.9-million financing, Pulse is proposing to issue units priced at $25.75, with each unit comprising 25 shares of Pulse (valued at three cents a share, or 75 cents total) and one preferred share of a wholly owned operating subsidiary (valued at $25). Eventually, holders of the preferred shares will receive dividends out of the operating subsidiary's free cash flow.
The operating subsidiary will be restructured so as to own nothing but the Bigoray assets. These assets were producing just 140 barrels of oil equivalent a day at the end of 2019, but Pulse has been working since 2018 on an EOR project that it says can significantly expand production: Its models show peak production of 2,000 barrels a day from one of the two oil reefs at Bigoray, rising to as much as 5,000 barrels a day with the second reef. When this might happen is not entirely clear. Pulse is still evaluating the required infrastructure work, which it hopes to begin in late 2020. EOR solvent injections will follow later and peak production is expected 12 to 18 months after that.
Although Pulse had been counting on its other core asset, Queenstown, to provide enough cash flow to develop Bigoray, that idea has been scuppered by low oil prices (which prompted the recent suspension of all of Queenstown's production). The silver lining, according to Pulse, is that prices are also historically low for EOR solvents, which represent Bigoray's largest expense. That is why Pulse says now is the perfect time to accelerate Bigoray with the help of a $30.9-million financing. If it can get enough investors to agree, it hopes to close the financing next month.