by Stockwatch Business Reporter
West Texas Intermediate crude for November delivery lost five cents to $40.83 on the New York Merc, while Brent for December lost 31 cents to $42.62 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.80 to WTI, up from a discount of $11.00. Natural gas for November added three cents to $2.80. The TSX energy index lost a fraction to close at 66.25.
The U.S. shale industry saw another shake-up as ConocoPhillips (U:COP: $32.70) agreed to buy the Permian-focused Concho Resources Inc. (U:CXO: $47.26) in an all-share deal worth $9.7-billion (U.S.). This is the third, and the largest, shale deal since the start of the downturn in March, following Chevron's agreement to buy Noble Energy for $5-billion (U.S.) in May and Devon Energy's bid to buy WPX Energy for $2.56-billion (U.S.) last month. The ConocoPhillips-Concho merger will be bigger than both of those deals combined. Intriguingly, while the premiums offered by Chevron and Devon were just 5 per cent and 2 per cent, respectively, relative to their target's share price, ConocoPhillips has reversed this downward trend and is offering a 15-per-cent premium to shareholders of Concho.
The relatively generous premium reflects Concho's sizable production and asset base, as well as the fact that (unlike Noble and WPX) it has relatively little debt. Indeed, for some observers, a 15-per-cent premium is surprisingly low. Scotia Capital analyst Paul Cheng wrote in a research note last Wednesday -- one day after Bloomberg reported that ConocoPhillips and Concho were in talks about a merger -- that a premium of anywhere from 10 to 50 per cent was plausible but 20 per cent would make sense. He noted, however, that ConocoPhillips must factor in the wishes of its own shareholders, who might be upset if ConocoPhillips made a splashy offer while Chevron and Devon got away with more frugal ones. (Investors may recall the red faces last year after Callon Petroleum agreed to buy Carrizo Oil at a 25-per-cent premium, only to have to slash the premium to 7 per cent because its own shareholders revolted and threatened to vote against the deal.)
As for Concho's shareholders, even if they dislike the premium, they may have appreciate the fact that they are receiving stock and thus dividends. Just 10 days ago, ConocoPhillips made the unusual choice to raise its dividend. It now has a quarterly payout of 43 U.S. cents rather than 42 U.S. cents. The implied yield is 5.3 per cent.
Here in Canada, while there were no headline-grabbing takeovers to excite the industry, there was a call for a modest rebound in oil and gas drilling activity. Industrial Alliance Securities analyst Elias Foscolos took note of the "gradual incline" in the number of active rigs across Canada. The current rig count is 78, up from a record low of 16 in June. "We are expecting that weekly rig additions will continue at a slow pace into the early part of 2021 before accelerating through the remainder of the year," wrote Mr. Foscolos. He predicted an average active rig count of 98 across Canada in 2021. By comparison, according to Statista, there were an average of 146 rigs running across Canada in 2019. That is still sharply down from the 2005 record of 534.
It was otherwise a quiet news day in the Canadian oil patch. Toward the very bottom, Garth Johnson and Drew Cadenhead's Pulse Oil Corp. (PUL) stayed unchanged at 1.5 cents on 1.37 million shares, its heaviest volume in two years. It has cancelled what would have been a creative way to raise money for its Bigoray EOR (enhanced oil recovery) project in Alberta. Five months ago, Pulse proposed a $30.9-million financing of units priced at no less than $25.75 each. The breakdown was as follows: Each unit would comprise 25 shares of Pulse (valued at three cents per share, or 75 cents in total) plus one preferred share of a new operating subsidiary (with each such share valued at $25, a valuation that was never truly explained but had something to do with the idea that the subsidiary would one day pay a dividend). Pulse would have restructured itself so that the subsidiary would have held nothing but the Bigoray project. Since 2018, Pulse has been working on an EOR project at Bigoray that would theoretically boost production to as much as 5,000 barrels a day, compared with around 140 barrels a day at the start of the year. Pulse was hoping to start working on the infrastructure for this project by the end of this year. It just needed some money, hence the financing.
Alas, the financing has now been cancelled, with Pulse blaming that ever-popular scapegoat, "unfavourable market conditions." Its chief executive officer, Mr. Johnson, recovered his smile quickly and announced that Pulse "will now have the flexibility to consider all alternative financing being considered." He added that Bigoray is "worth persevering through tough times." As cheery as his words were, Pulse has limited time to avoid flatlining, with a working capital deficit of $1.67-million as of June 30. It did, at least, receive a zero-interest $40-million loan through the Canada Emergency Business Loan Program in April, currently due in 2022 but potentially extendible through 2025.
Another Alberta junior is looking to emerge from a restructuring process and get back to trading. Delphi Energy Corp., a Montney producer that traded under the symbol DEE until entering creditor protection in April, 2020, announced on Friday afternoon that it has finished its restructuring and will now use "reasonable commercial efforts to complete the listing and posting of the new shares on a recognized exchange." It has to specify that the shares are new, because under the restructuring agreement, all of the old shares -- shares that were worth as much as $69 in 2014 -- were cancelled for no consideration. Delphi issued a chunk of new shares to creditors while paying out other creditors at 25 cents on the dollar. Other chunks of shares went to investment funds, and one particularly interesting chunk went to a private company called Kiwetinohk Resources Corp. (KRC -- but if you want to use the whole name, the first word is pronounced "key-wheat-in-no"). KRC is a Pat Carlson promotion, Mr. Carlson being the founder and former CEO of Seven Generations Energy Inc. (VII: $4.09) in the Alberta Montney. Delphi issued KRC 1.5 million shares, for a 25-per-cent equity interest, in exchange for an investment of $22.9-million. Mr. Carlson has also joined Delphi's board.
In other board and management news, Delphi's long-time CEO and founder, David Reid, "has elected to retire," and will be replaced by Timothy Schneider. Mr. Schneider was most recently the head of upstream oil and gas investing at Luminus Energy, a New York hedge fund that has been a sizable shareholder of Delphi since mid-2017. It is hard to see how this investment could have been a lucrative one. Even so, Luminus still seems to believe in the potential of Delphi's Montney assets, and is hoping for better luck with Mr. Schneider at the helm.