by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 83 cents to $40.65 on the New York Merc, while Brent for August added $1.11 to $43.14 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.35 to WTI, unchanged. Natural gas for August added six cents to $1.73. The TSX energy index added 1.16 points to close at 77.61.
Yesterday's Canada Day celebrations did not mark the end of festivities within the oil patch. Today, the Supreme Court of Canada effectively ended the years-long battle over the Trans Mountain pipeline expansion project, dismissing an appeal from four indigenous groups that had sought to block it. As is customary, the court did not give reasons for its decision. This is the latest legal victory notched by Trans Mountain this year. In January, it fended off an assassination attempt by the B.C. government; in February, it won a unanimous ruling in its favour from the Federal Court of Appeal (which in its decision pointed out that 120 out of the 129 potentially affected indigenous groups either actively support the pipeline or do not oppose it); and in March, it saw the Supreme Court dismiss no fewer than five challenges from indigenous and environmental groups. Today's court decision is thought to (finally) mark the end of the legal wrangling.
Trans Mountain's president and chief executive officer, Ian Anderson, declared himself "pleased" with the ruling and eager to "continue building this nationally important project." The "continue building" part is telling -- Trans Mountain has long been confident in its legal position, especially after it won Ottawa's approval for the second time in June, 2019. It started construction later that summer. At the current rate, it expects oil to start flowing in late 2022.
This was not the only good news for pipelines. Yesterday, Enbridge Inc. (ENB: $41.58) had more reasons besides Canada Day to celebrate, as a Michigan judge allowed the company to reopen part of its Line 5 pipeline crossing the Great Lakes. As discussed in the Energy Summary last Friday, the judge had issued a temporary injunction ordering the shutdown of this dual-leg pipeline because of an incident that occurred on the eastern leg. An anchor support shifted deep beneath the surface but caused no reports of damage. Enbridge still closed both legs as a precaution, then reopened the western one after consultation with the safety regulator, the Pipeline and Hazardous Materials Safety Administration (PHMSA), while the eastern leg stays closed for further inspection. Opponents of Line 5 used the eastern leg's problems as a pretext to demand a shutdown of the entire line. This led to the temporary injunction, but the judge has now amended the order to enable the reopening of the western leg.
This will be a relief to the refineries that could have faced critical shortages if the line had remained shut down for an extended time. The people of Michigan would have been the most affected -- Line 5 supplies over half of the propane demand across the state -- but an extended shutdown could also have hurt consumers as far north as Ontario and Quebec. Enbridge said it is confident that it can meet demand even while running only the western leg. As for the eastern leg, it will remain down until the PHMSA has completed its investigation.
Another company had a noteworthy Canada Day. Oil sands producer Cenovus Energy Inc. (CVE), up nine cents to $6.44 on 8.73 million shares, announced on Twitter yesterday that it sold its first crude oil shipment to Irving Oil, the country's largest refiner, which is now taking the oil on a cross-country journey from Burnaby, B.C., to Saint John, N.B. Barrels of oil sands crude are making their way to the East Coast. No, the long-dead Energy East pipeline did not spring back to life and get built while no one was looking. Rather, Irving will take the long way around, sailing a tanker down the North American coast, through the Panama Canal and back up again. "O Canada!" declared Irving on Twitter as it showed off a picture of the tanker on Burnaby's shores. It added, "We can't think of a better way to celebrate the country we call home."
The patriotism is fitting, but this circuitous coast-to-coast journey was decidedly not Irving's preference for sourcing Alberta oil. Irving was one of the first backers of the Energy East pipeline proposed by TC Energy (then TransCanada) in 2014, and was disappointed when provincial and environmental opposition killed the proposal in 2017. Taking the roundabout route through the Panama Canal bypasses this opposition. It also, however, more than doubles the length of the journey to about 11,900 kilometres, compared with the 4,600-kilometre pipeline route.
Irving seems willing to accept the trade-off. It first applied to the Canadian Transportation Industry on April 16 to use the tanker route, claiming to need permission "urgently." The reason for the urgency was not specified, although there are a few possibilities. This was around the time that oil was selling at historic lows -- even going negative on April 20 -- so if there was ever a time to try to maximize profits at a refinery, that was it. In addition, as CEO Tim McMillan of the Canadian Association of Petroleum Producers (CAPP) pointed out to CBC News at the time, Irving's application arrived not long after Canada's rail system was paralyzed for weeks by indigenous-sparked protests. "We have seen there are limits to the reliability of rail transport ... and the cancellation of the Energy East pipeline leaves our country with few options to move our resources to the East Coast," said Mr. McMillan. He added, "In the short term, the Irving refinery proposal offers a desperately needed expansion of our domestic market, even if it takes an unconventional route."
Irving's April application had made no mention of whose oil sands crude it was planning to buy. Now, however, it is chummily linking on-line arms with its "partners" at Cenovus, applauding the producer for helping to "champion our country's rich natural resources." Cenovus returned the favour as it declared itself "pleased to be working with another strong Canadian energy company to help drive the nation's economy!" Happy hashtags and pictures of the flag were in abundance. Numbers -- prices, quantities of barrels and so on -- were not.
Another oil sands producer won applause from a different corner. Management of MEG Energy Corp. (MEG), up 11 cents to $3.88 on 4.49 million shares, recently talked to Scotia Capital analyst Jason Bouvier, who was all too happy to provide his thoughts in a research note this morning. "Our take: positive," he declared. He predicted that MEG will bring back its shut-in production faster than expected. At this time MEG does not have any official production expectations; it suspended its production guidance in May, while adding that it would accelerate and expand its maintenance-related turnarounds at its main assets. Maintenance always involves a level of shut-ins. According to MEG, it might produce anywhere from 30,000 to 60,000 barrels a day during the turnaround period, and up to 80,000 afterward, all depending on oil prices. Those figures compare with MEG's first quarter output of about 92,000 barrels a day. Given all that, Mr. Bouvier was previously forecasting that MEG would produce an average of 69,100 barrels a day in 2020. Now he is hiking that all the way to 79,100 barrels a day.
Production increases aside, the "balance sheet remains the priority" at MEG, continued Mr. Bouvier. He noted approvingly that MEG's $1.3-billion credit facilities are only $450-million drawn and its first long-term note maturity is not until 2024. (The company's overall long-term debt still exceeds $3.2-billion -- compared with a market cap of about $1.1-billion -- but Mr. Bouvier obligingly left that number out of the main body of his report. He included it in a lengthy small-print chart later on.) MEG's goal this year is to not add any further to its debt. The company may consider budget boosts, but only if it can afford them through cash flow, which, as Mr. Bouvier emphasized, will be bolstered in the second half of the year by the hedges covering over half of MEG's forecast production. Mr. Bouvier reiterated his "sector perform" rating on MEG and kept his price target at $4. That is scarcely above today's close of $3.88, but the analyst implied that anyone who feels good about oil prices should feel good about MEG, as MEG "has the highest torque to oil prices" of any stock on his list.