by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery added 93 cents to $40.55 on the New York Merc, while Brent for September added 89 cents to $43.24 (all figures in this para U.S.). Western Canadian Select traded at a discount of $7.99 to WTI, down from a discount of $7.93. Natural gas for August added three cents to $1.81. The TSX energy index added 2.37 points to close at 74.57.
Oil prices edged higher after the International Energy Agency (IEA) deemed the worst of the oil price turbulence to be over. Following the pain of what the IEA called "Black April" -- when oil prices turned negative for the first time in history -- markets are making headway as demand begins to recover, said the agency in its monthly report. It added, however, that the re-emergence of COVID-19 in Asia, the renewed lockdowns in Latin America and the spiralling case count in the United States are "casting a shadow" over its outlook. "The pandemic is not under control," warned the agency, "and the risk to our market outlook is almost certainly to the downside."
In other downcast news, a U.S. federal judge has rejected a request from the operator of the Dakota Access pipeline to freeze an order that would shut down the pipeline for a lengthy environmental review. The operator, Energy Transfer LP (U:ET: $6.44), was told on Monday by U.S. District Judge James Boasberg that it must close and empty the 570,000-barrel-a-day pipeline within 30 days for a review that could take 13 months. The judge blamed "serious" permitting errors made by the Army Corps of Engineers. In a court filing arguing against the closure, Energy Transfer said the judge's order was both "literally unprecedented" and "not physically possible." It is unprecedented because Dakota Access has already been pumping oil for over three years. It is impossible, in Energy Transfer's view, because a 30-day period is not long enough to purge the line (which holds five million barrels when full) and take steps to preserve the pipe and prevent corrosion. This would take about three months, estimated Energy Transfer. It also estimated the cost at about $24-million (U.S.), with a further $67.5-million (U.S.) for each year that the line remains inoperable.
The judge was unmoved. Although he expressed willingness to extend the 30-day deadline, he denied the request to suspend the order, effectively sending the matter to the U.S. Court of Appeals.
Energy Transfer seems to have expected this, having said earlier this week that it would seek an expedited appeal process. It is thought to have a fairly good case. Energy Transfer's position is that the judge lacks the authority to shut down the line, as the Army Corps has the ultimate jurisdiction "pursuant to its regulations governing Corps property." In addition, none of the cases that the judge used to justify his order involved active, operating pipelines. Over all, "case law appears weighted in favour of [Energy Transfer]," opined Height Securities analyst Josh Price in a new research note. Even if Energy Transfer fails in the Court of Appeals, it could ask the U.S. Supreme Court to step in. All of this makes it relatively unlikely that Dakota Access will be shut down by the judge-imposed deadline of Aug. 5. (Incidentally, in an environment where activists habitually rely on the courts to impede pipelines, there is something to be said for when it works the other way.)
The result for now is that Dakota Access has made absolutely no move to reduce service, and industry is responding accordingly. Bakken crude prices improved today, narrowing to a discount of $2.25 (U.S.) to WTI from a discount of $2.36 (U.S.). (The discount had jumped to $2.65 (U.S.) from $1.95 (U.S.) right after Monday's announcement.) Shareholders started to relax as well. For example, Enerplus Corp. (ERF), which uses Dakota Access and has watched its shares fall from $4 since Monday, today added 27 cents to $3.31.
Here in Canada, Brian Schmidt's Alberta- and Saskatchewan-focused Tamarack Valley Energy Ltd. (TVE) added 5.5 cents to 91.5 cents on 3.11 million shares, after trumpeting a "strategic asset acquisition." The $4.25-million deal will add about 2,500 barrels of oil equivalent a day within an existing core area of west-central Alberta. In normal circumstances, a deal with a price tag of $4.25-million is unlikely to have prompted Tamarack to haul out the trumpets; it usually relegates these sorts of tuck-in acquisitions to a brief mention in a quarterly financial update. Past deals that have merited their own press releases have had price tags ranging from $54-million (an Alberta asset acquisition in 2015) to $407-million (the takeover of Spur Resources in 2017). Amid a depressing downturn, however, even a $4.25-million deal seems to have warranted plentiful plucky paragraphs.
While it is a nice change these days to see an energy company so bursting with confidence, the main rationale for the press release was only indirectly related to the price tag, in that it was pleasingly low relative to the amount of production acquired. Adding 2,500 barrels a day for $4.25-million works out to just $1,700 per flowing barrel. By comparison, in 2019, Tamarack spent a total of $9.9-million on tuck-in acquisitions that added 800 barrels a day, for $12,375 per flowing barrel. Moreover, the addition of 2,500 barrels a day is enough to prompt a change in Tamarack's production guidance. The company now expects to produce 20,850 to 21,250 barrels a day, up from the old target of 19,000 to 20,000.
A different company is working on a much larger acquisition in Canada. That would be i3 Energy, a London AIM-listed company that is seeking a Toronto listing through the reverse takeover of Toscana Energy Income Corp. (TEI), unchanged at one cent on 146,700 shares. Toscana is not the "much larger acquisition" in question -- indeed, i3 is scooping it up for practically pennies. (As discussed in the Energy Summary for June 23, i3 is paying a grand total of $3.85-million for Toscana, including what it already paid in March to acquire Toscana's debt. Toscana had $28-million in debt facilities that were in default and were acquired by i3 for the bargain price of $3.4-million.) Toscana is merely the appetizer to a much larger deal that i3 announced on June 23, when it said it would pay $80-million for a package of Canadian assets producing over 10,000 barrels of oil equivalent a day. It did not disclose the seller or the specific terms of the deal. Now it has lifted the shroud of mystery, clarifying that it is conducting a reverse takeover of Gain Energy.
Gain is a private Calgary-based company that was formed in August, 2017, through the merger of OMERS Energy (owned by OMERS, the Ontario Municipal Employees Retirement System) and Superman Resources (owned by Manitoba's Civil Service Superannuation Board). Its assets in Alberta and Saskatchewan produced an average of 10,645 barrels a day (47 per cent liquids) in the fourth quarter of 2019. Based on the $80-million price tag, the cost per flowing barrel is about $7,500. An unspecified chunk of the production comes from Gain's minority interest in the 23,000-barrel-a-day Weyburn asset in Saskatchewan, one of the largest carbon-capture oil projects in the world. Weyburn has been operating since the 1950s and is sometimes described as a carbon dioxide oil field, because CO2 is pumped in to ease the flow of oil out. This can offset or even eliminate a corporation's CO2 emissions at other operations -- or so claims Weyburn's majority owner and operator, Whitecap Resources Inc. (WCP: $2.24), which boasts of being "carbon negative" thanks to Weyburn. Whitecap acquired a 62-per-cent interest in Weyburn from Cenovus Energy Inc. (CVE: $5.99) in 2017. There were three dozen other owners at the time. This suggests that Gain's interest, which i3 did not disclose, is most likely on the small side, though this did not stop i3 from highlighting it as a "major attraction" of the Gain takeover.
i3 added that Weyburn "will further offset additional production as it is added to i3's portfolio in the future." In other words, even with the Toscana and Gain deals, i3 is not done yet. Investors should get more details of its plans as it files them with various regulators. Its AIM-listed shares are currently halted pending the completion of a readmission document with further details of the Gain transaction. Here in Canada, the company's proposed listing on the TSX or the TSX-V is a condition of the Toscana arrangement, which Toscana says should close later this quarter.