by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery lost 45 cents to $40.10 on the New York Merc, while Brent for September lost 52 cents to $42.72 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.01 to WTI, down from a discount of $7.99. Natural gas for August lost seven cents to $1.74. The TSX energy index lost a fraction to close at 73.91.
Oil prices wobbled as traders waded through a flood of headlines. The weekend saw continued spikes of COVID-19 cases in the United States, raising concerns of renewed lockdowns and an accompanying drop in fuel demand. On the supply side, an OPEC technical committee is scheduled to meet tomorrow and Wednesday, and is widely expected to recommend easing the current OPEC+ production cuts. The group cut a record 9.7 million barrels a day in May, June and July. In August, the cuts are set to drop to 7.7 million, meaning that -- despite the still raging pandemic -- the market will soon have to contend with an effective increase of two million barrels a day.
There is, at least, one potential supply-side headache that seems to have resolved itself quickly. In Libya (currently exempt from the OPEC+ cuts because of internal strife), a force majeure has been reimposed on oil exports. This came all of one day after the resumption of exports following a six-month blockade. This blockade began in January and saw Libya's production plummet to around 100,000 barrels a day from 1.2 million. When the force majeure was lifted last Friday, Libya vowed to "take steps to ensure [its] oil production is never again held to ransom" -- well, so much for that.
Here in Canada, the mood was more upbeat. "We believe the worst is now behind and that energy prices can slowly recover in the quarters ahead," wrote Scotia Capital analysts Jason Bouvier, Cameron Bean, Gavin Wylie and Michael Loewen in their quarterly commodity price update. They gave a 10-per-cent boost to their 2020 forecasts for WTI and Brent, to $43.50 (U.S.) and $46 (U.S.), respectively. They also hiked their price targets on various oil and gas stocks. On average, their targets rose by 11 per cent, but notable outliers included Ovintiv Inc. (OVV: $12.80) (target boosted to $10 (U.S.) from $4 (U.S.)) and Crew Energy Inc. (CR: $0.285) (target boosted to 50 cents from 30 cents). The analysts also included a list of "top picks" that included Canadian Natural Resources Ltd. (CNQ: $23.05), Suncor Energy Inc. (SU: $22.10), Advantage Oil & Gas Ltd. (AAV: $1.64), Tourmaline Oil Corp. (TOU: $12.55) and Parex Resources Inc. (PXT: $16.35).
Not everyone shared in the good mood. Alfred Sorensen's would-be LNG (liquefied natural gas) developer, Pieridae Energy Ltd. (PEA), lost one cent to 33.5 cents on 31,800 shares, after a key engineering company beat a retreat. Kellogg Brown & Root (KBR), with a 40-year history in the LNG industry, agreed last year to help Pieridae built its $10-billion (U.S.) proposed Goldboro LNG project in Nova Scotia. According to press releases about the deal in April, 2019, KBR was to conduct an open-book estimate necessary for entering a lump-sum EPCC (engineering, procurement, construction and commissioning) contract. Now KBR is no longer willing to negotiate this contract. Pieridae criticized the move as an "apparent contravention" of the 2019 agreement.
The relationship between Pieridae and KBR started out on far more promising terms. Announcing the deal in April, 2019, Pieridae's chief executive officer, Mr. Sorensen, declared himself "extremely pleased" and lauded KBR's history of involvement with virtually every LNG project in Canada. As for KBR, it dubbed itself "excited" and said it was "looking forward to a close and collaborative relationship with Pieridae Energy to successfully deliver their LNG facility." Since then, however, the relationship appears to have soured significantly. Pieridae now says it is weighing its legal options in light of KBR's perceived abandonment. KBR has said nothing specifically about Pieridae, but it left some writing on the wall a few weeks ago: "KBR to focus on government contracts, quit natural gas [and] energy business," blared a Reuters headline on June 22. Reuters quoted a memo from KBR's CEO, in which he explained that COVID-19 had accelerated the company's decision to leave fixed-contract energy projects (with Pieridae's Goldboro fitting the bill).
Whether this represents a breach of contract is not entirely clear. For one thing, the contract is (customarily) private. For another, though KBR talked of wanting to "successfully deliver" Goldboro, elsewhere in its press release it said its job was to "conduct an open-book estimate ... with the intention of entering into an EPC contract at FID [final investment decision]. This work is expected to be performed within 11 months." KBR would presumably argue that intention to enter an EPC contract is not a firm commitment. Pieridae would presumably fire back that it is difficult to make progress on the FID in the absence of an open-book estimate that was supposed to be done months ago. The delay would, one assumes, be blamed as above on COVID-19.
In any case, Pieridae strove to reassure investors that it remains committed to building Goldboro, with or without KBR. The project is "solid," declared Pieridae. It added that it is already in talks with other "reputable and experienced" firms to replace KBR. For now, the proposed FID deadline of June 30, 2021, remains intact.
Further afield, the Guyana- and Namibia-focused Eco (Atlantic) Oil & Gas Ltd. (EOG) lost 4.5 cents to 30.5 cents on 380,100 shares, after releasing its financial results for the fiscal year ended March 31, 2020. As the company has no production or revenue, the financials are primarily useful for the accompanying operational update. Eco reminded investors of the two oil discoveries that it helped to make last year at its 15-per-cent-owned Orinduik joint venture block off the coast of Guyana. There are plenty of investors, unfortunately, who will not want reminding. The discoveries had the stock as high as $2.95 in September, but now it is all the way down at 30.5 cents. The drop largely reflects a follow-up analysis showing that the oil was of far lower quality than expected.
Broader market uncertainty has also taken a toll, even before the COVID-19 outbreak and associated demand downturn in March. Eco warned in February that, contrary to earlier forecasts of a three- to five-well Guyanese drill program in 2020, the joint venturers might not drill any wells until 2021. President and CEO Gil Holzman said at the time that he was still pushing for at least one well to be drilled in 2020. Today, however, he said the joint venturers are still working to "incorporate learnings ... to determine our next drilling targets planned for 2021." He tried to stay upbeat as he took note of Eco's $20-million (U.S.) cash position and its low burn rate. By his estimates, Eco should end 2020 with cash of $17-million (U.S.), setting up the company to "ramp up activity" when the time is right and "create significant value for shareholders."
Another international junior, Turkish gas producer Valeura Energy Inc. (VLE), added 1.5 cents to 32 cents on 368,400 shares, after releasing a second quarter operational update. Unlike Eco, Valeura has a bit of production, averaging about 521 barrels of oil equivalent a day (mostly shallow gas) in the quarter. That represented a 27-per-cent drop from the prior quarter amid a reduction in Turkish economic activity during COVID-19. Valeura noted that economic activity is starting to recover, which could help in its efforts to attract a new joint venturer to its much-hyped BCGA deep gas play. (The previous joint venturer, Equinor, made an abrupt exit in February, about four years after the companies started working together. They did not accomplish commercial production during this time. To ask Valeura, of course, they made incredible progress in identifying "sweet spots" and demonstrating "long-term potential.")
Other plans could be even more ambitious. Valeura disclosed that it has hired RBC Capital Markets to aid in "evaluating several potential inorganic growth transactions, including mergers and acquisitions." It emphasized its debt-free status and its $30.7-million (U.S.) in cash (about 48 cents a share, compared with today's close of 32 cents). This not only represents "compelling value," in Valeura's view, but it could also allow the company to benefit from a "flow of new deal opportunities" to boost its own scale and production. Investors seemed mildly intrigued. With one quiet little gas business and another asset that may never become commercial, Valeura is in need of something to attract new investors. Ideally, RBC will help it think of something quickly.