by Stockwatch Business Reporter
West Texas Intermediate crude for September delivery lost 33 cents to $41.61 on the New York Merc, while Brent for October lost 49 cents to $44.50 (all figures in this para U.S.). Western Canadian Select traded at a discount of $11.79 to WTI, unchanged. Natural gas for September added two cents to $2.17. The TSX energy index lost a fraction to close at 84.11.
The big news in the Canadian energy sector continued to be yesterday's announcement that Painted Pony Energy Ltd. (PONY: $0.68) is being put out to pasture, having accepted a 69-cent-a-share cash takeover offer from Canadian Natural Resources Ltd. (CNQ: $27.29). The total price tag is $460-million and largely reflects $350-million in assumed debt. As Painted Pony told the story yesterday, the burdened balance sheet, combined with wider market weakness, "deprived [its] asset base of the capital necessary to fund meaningful development," leading it to embark on a confidential review of "opportunities to enhance shareholder value." The board reviewed multiple proposals and deemed Canadian Natural's to be "the best alternative for Painted Pony's shareholders."
A number of shareholders could be forgiven their skepticism. Not only does 69 cents mark a sad end for a stock that traded at nearly $15 in 2014, but lately gas prices have strengthened to their highest levels of 2020, which should lead to rising cash flow for Painted Pony and other gas producers that can just stay afloat a bit longer. Painted Pony implied that it cannot afford this due to "near-term liquidity considerations." Even if a takeover was the only option, any investor in Painted Pony would be a gas bull by nature, and any gas bull would doubtless prefer a deal that retained some exposure to the assets in a strengthening market, say through a cash-and-share offer rather than an all-cash one.
Instead, shareholders are being "cashed out at the bottom," as one portfolio manager put it. Senior portfolio manager Rafi Tahmazian of Canoe Financial talked to BNN yesterday after the close and speculated that Painted Pony's bankers played a large role in the terms of the deal. "Ultimately, the banks probably wanted their money back," he said. These days he is increasingly seeing banks "controlling the course of some of these companies to the path of sale, forcing them to take the cash transactions, versus, wouldn't it be nice to do a deal where you could merge ... and ride that rally up." The Canadian Natural deal does not provide that option.
As Painted Pony is considered unlikely to terminate the deal or attract a competing bid (the $20-million break fee, as well as the fact that it already went through a proposal solicitation process, should see to those possibilities), the question is whether shareholders will approve the current deal at a special meeting to be held in September. The deal will require two-thirds approval. Painted Pony's largest shareholders, ARC Financial and EnCap Energy, which together hold 23.3 per cent of the outstanding shares, have already agreed to vote in favour.
Meanwhile, quarterly reporting season continued. Today brought the second quarter financials of Egypt- and Alberta-focused TransGlobe Energy Corp. (TGL), unchanged at 81 cents on 38,500 shares. It had already released an extensive operational update in late June that pegged its second quarter production at around 14,400 barrels of oil equivalent a day. As a result, the financials held relatively few surprises, and TransGlobe spent much of them talking up its "crisis mitigation measures." The company had one of the fastest responses to the crisis that began in March, almost immediately announcing that it would halt all drilling and chop its budget to $7.1-million (U.S.) from $37.1-million (U.S.). The revised budget was intended to support production of 13,300 to 14,300 barrels of oil equivalent a day.
TransGlobe repeated that guidance as recently as six weeks ago. Today, however, it lowered the guidance to a range of 13,300 to 13,800 barrels a day, while noting a sizable drop in its monthly production for July. In Egypt (where TransGlobe gets the bulk of its output), July's production dropped to 9,956 barrels a day, which is: (a) down from about 12,500 barrels a day in June; (b) down from 14,600 barrels a day in July, 2019; and (c) the first time below the 10,000-barrel-a-day mark in about a decade. Natural declines and the lack of fresh drilling activity explained part of the drop. It also reflects the decision that TransGlobe announced in May to postpone Egyptian interventions until oil prices improve (interventions being activities to sustain or boost production from an existing well, such as repairs, workovers, pump settings and more). TransGlobe said in May that the postponements were having no effect on its 2020 guidance. Clearly that is not the case anymore.
Another international junior facing production woes -- not to mention a PR disaster -- is Manolo Zuniga's Peru-focused Petrotal Corp. (TAL), down half a cent to 20.5 cents on 2.13 million shares. It lost an additional three cents yesterday on the shutdown of its core Bretana field, following a violent confrontation with locals. This marks the field's second shutdown this year. The first took place from May to mid-July in response to the government of Peru's COVID-19-mandated lockdowns. Now, mere weeks after that shutdown was lifted, a second one has been caused by the government, though not as directly: A group of anti-government protesters got into a deadly scuffle with police outside the Bretana field camp, forcing the closure of the camp (and thus the field) pending an investigation. The protesters were reportedly demanding more government assistance to cope with COVID-19. According to ORPIO, a local indigenous rights organization, indigenous communities are suffering viral outbreaks and want compensation from oil companies and the government. Describing the incident leading to the Bretana shutdown, Peruvian Interior Minister Jorge Montoya told a local television channel that 70 protesters armed with spears came to the camp early Sunday morning, where they fought with police. The clash left three dead and 17 injured.
Petrotal did its best to distance itself from the carnage. "It is important to highlight that the protests were against the government of Peru, as Petrotal is known as a Peruvian-led and -operated oil company whose mission and vision are in tune with the local communities," the company stated. (Its Peruvian connection is on display in its very name: The "tal" in Petrotal comes from Talara, a northeastern Peruvian city that is the birthplace of the company's president and chief executive officer, Mr. Zuniga.) Petrotal added that it has "consistently promoted that government and community revenue sharing should happen under full transparency." Despite the company's efforts, it is never a good day in PR when international headlines are screaming about "protester deaths and injuries."
Elsewhere in South America, a handful of juniors were in a much more optimistic mood, as they watched the progress of ExxonMobil's planned Tanager-1 exploration well off the coast of Guyana. The London-listed Westmount Energy stirred up some excitement by announcing that the drilling vessel has arrived at the Tanager-1 well site, where it will begin a "potential multiwell drilling campaign ... [that] could result in transformational value changes." Westmount owns a small indirect interest in the Kaieteur block, where the Tanager well will be drilled. As a result, Westmount's stock, which has hovered around 16 pence all month, shot up to 22 pence on the mere announcement of the rig's arrival. A different stock that should benefit from the drill program, according to analyst Sam Wahab of the London brokerage SP Angel, is Eco (Atlantic) Oil & Gas Ltd. (EOG) (listed in both London and Toronto). Mr. Wahab opined that the Tanager-1 well will "provide important read-across factors" to Eco because it too has an offshore Guyanese block, Orinduik. Alas, Eco's investors did not appear to pay Mr. Wahab any mind; the stock closed unchanged today at 39.5 cents. Far more active was yet another offshore Guyanese explorer, CGX Energy Inc. (OYL), which has interests in the Corentyne and Demerara blocks. It added four cents to 50 cents today and has shot up from 33.5 cents over the last week. Its investors likely have their eyes tightly trained on Tanager.