by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost $1.28 to $39.62 on the New York Merc, while Brent for September lost 94 cents to $42.35 (all figures in this para U.S.). Western Canadian Select traded at a discount of $7.93 to WTI, unchanged. Natural gas for August lost four cents to $1.78. The TSX energy index lost 1.50 points to close at 72.20.
The 2020 turnaround tour continued for Vermilion Energy Inc. (VET), down 11 cents to $5.48 on 3.05 million shares. About six weeks have passed since an unexpected management shake-up in which Anthony Marino abruptly stepped down as president and chief executive officer, giving way to Curtis Hicks, who emerged from retirement to become Vermilion's CEO. He had been its executive vice-president and chief financial officer until 2018. Since his surprise rejoining of the company, Mr. Hicks has been active on the conference circuit, and was one of the presenters yesterday afternoon at TD Securities' Virtual Energy Conference.
In terms of luring in investors, Mr. Hicks has a big job ahead of him. Over the last year, Vermilion's stock has cratered to around $5.50 from nearly $30, even touching a low of $2.19 in mid-March. The company also suspended its dividend in March, a rather embarrassing moment in that Mr. Marino had spent several months insisting that the dividend was quite safe. As for the management shake-up, investors initially seemed pleased -- the stock rose to as much as $10 from $7 in the two weeks after the announcement -- but now Vermilion has given back this ground and then some.
At the TD conference, Mr. Hicks explained the poor performance as a function of Vermilion having "diverged from [its] core business principles over the last couple of years" (aligning, incidentally, with his departure as CFO, though he did not spell that out). He said Vermilion let its debt climb above its internal targets and became arguably "too committed to paying our dividend." Now Mr. Hicks wants to haul the company back on track. His near-term goal is debt reduction. As of March 31, Vermilion's net debt was approaching $2.2-billion, for a debt-to-cash-flow ratio of around 2.6 times. Mr. Hicks said his preferred ratio would be 1.5 times or under. He did not set a timeline for achieving this goal, but dangled a couple of carrots for investors to keep watch on: Once the balance sheet is back in shape, Mr. Hicks wants to reinstate the dividend (though at a lower level) as well as buy back shares. "[This is] a healthy model for us to be in," opined Mr. Hicks, "but it's going to take us some time before we're able to reach that."
One aspect of the presentation that may have raised investors' eyebrows was Mr. Hicks's promise to undertake a "full review" of Vermilion's assets over the next 12 to 18 months. The company's assets are spread out both geographically (North America, Europe and Australia) and by resource type (oil, liquids and gas). Mr. Hicks sees the spread a good way to manage risk, but nonetheless wants to review the portfolio and "look for strategic opportunities across the platform." This could mean buying or selling. Investors do not seem keen on the idea of further uncertainty at Vermilion, but they will just have to wait and see.
Another presenter at the conference was Derek Evans, president and CEO of oil sands producer MEG Energy Corp. (MEG), down five cents to $3.63 on 4.53 million shares. He is also somewhat new to the top job at MEG, though not as new as Mr. Hicks at Vermilion; next month will mark two years since Mr. Evans's appointment. Mr. Evans impressed upon the conference that the "corporate philosophy at MEG has changed radically since I arrived." That appears to be a lofty way of saying that MEG has tightened its pursestrings. MEG entered 2018 with long-term debt exceeding $4.6-billion, having spent the previous years "focused on executing growth," as Mr. Evans put it mildly. (To its credit, MEG more than doubled its bitumen production to 93,200 barrels a day in early 2018 from 45,500 barrels a day in late 2014.) Mr. Evans's MEG is less interested in big production boosts and more so in paying down debt. Though it has made progress, its long-term debt as of March 31 was still lofty at $3.2-billion (compared with a market cap of $1-billion).
Mr. Evans acknowledged that the global downturn has derailed some of MEG's plans. Prior to suspending its guidance in May, MEG was aiming for production in the mid-90,000-barrel-a-day range. Mr. Evans told the conference that MEG's current production is only 60,000 barrels a day, but that partly reflects a turnaround in progress at the company's main asset, Christina Lake. The turnaround will wrap up in mid-August and then MEG expects to get back into the 80,000s for the rest of the year. Ultimately, Mr. Evans sees the potential to reach 100,000 to 115,000 barrels a day over the next few years, but only if oil prices rally enough that MEG can achieve this increase using free cash flow. Lest investors fear a return to MEG's old spend-happy ways, Mr. Evans clarified that there would be "no expectations of growth beyond that, in the short term, really." The overarching priority is and will remain debt reduction.
Yet another producer at the TD conference was president and CEO Ed LaFehr of Baytex Energy Corp. (BTE), down three cents to 67 cents on 8.37 million shares. Investors will recall that at a different conference on June 2, Mr. LaFehr triumphantly announced that Baytex was "in recovery mode" and was starting to bring back the 25,000 barrels of oil equivalent a day (nearly one-quarter of total production) that it previously shut in to cope with the downturn. Baytex then announced on June 25 that it had restored 20,000 barrels a day but would leave the remaining 5,000 shut in for the rest of the year. During his presentation yesterday at the TD conference, Mr. LaFehr said Baytex is actually looking at restoring it already. The company just wants to see WTI oil prices stabilize above $45 (U.S.), about $5 (U.S.) higher than now.
The shut-in production is in the Peace River area of Alberta. Mr. LaFehr focused much of his presentation on Baytex's "first call on capital," or its favourite place to spend money, being the Texas Eagle Ford. The company has a joint venture there with Marathon. They have been working together since Baytex entered the Eagle Ford in 2014, and Mr. LaFehr said there is a perception in the market that the assets are aging out of relevance, but he insisted this is not the case. "We like what's going in there," he said, adding that the joint venturers still have over a decade's worth of wells they can drill. Shifting to Baytex's next most important plays, the Viking and the Duvernay here in Canada, Mr. LaFehr dubbed them "excellent" and "outstanding," respectively.
Despite Mr. LaFehr's best efforts, investors showed little love for the stock. Like MEG, Baytex often finds its operational updates overshadowed by the mountain of debt on its balance sheet. Net debt was a little over $2-billion as of March 31. That compares with a current market cap of $375-million.
While North American energy markets have been at the forefront of many investors' attention these days -- with headlines overflowing with unprecedented pipeline setbacks, the lifting of shut-ins across Western Canada, and spiralling COVID-19 cases and their effect on fuel demand in the United States -- one analyst says not to forget our farther-flung juniors. Yesterday, Canaccord Genuity U.K. analyst Charlie Sharp hiked his two-year price forecasts for Brent, citing "signs of recovery" in the international energy sector. He highlighted "very good value combined with event-specific news flow" for several London-listed and dual-listed stocks.
Notably, Mr. Sharp said he sees "near-term high-impact exploration" potential at both Touchstone Exploration Inc. (TXP: $1.01) and Africa Energy Ltd. (AFE: $0.31). Touchstone has been exploring its Ortoire gas block in Trinidad since last year, with two discoveries so far, and is planning to spud its next exploration well this month. Africa Energy is currently sailing a drill rig to start a multiwell exploration program off the coast of South Africa in September. Mr. Sharp also has his eye on "event-driven potential" at Valeura Energy Inc. (VLE: $0.30) as it resumes a gas resource appraisal program in Turkey. Finally, he is hoping for "significant licence news" in the near term from TransGlobe Energy Ltd. (TGL: $0.80), which is trying to amend some of its licences in Egypt to secure better terms. Of those four, Valeura appears to offer the most potential in Mr. Sharp's view, based on his price target. Valeura closed today in London at 18 pence. It will need to more than triple to reach Mr. Sharp's target of 65 pence.