by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery lost $2.18 to $37.39 on the New York Merc, while Brent for December lost $2.08 to $39.12, going below $40 for the first time in about four weeks (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.25 to WTI, up from a discount of $10.85. Natural gas for November lost two cents to $3.00. The TSX energy index lost 2.59 points to close at 63.50.
Oil prices tumbled as supply and demand balances came under assault on nearly every front. COVID-19 cases are rocketing higher, especially in Europe, prompting France and Germany to announce new lockdown measures. The previously hamstrung Libyan oil industry is back to churning out production. Closer to home, U.S. data showed crude stockpiles increasing by 4.3 million barrels last week, nearly four times the amount that analysts were expecting. Even the powerful Hurricane Zeta, speeding toward a storm-weary U.S. coast and raising fears of fresh supply disruptions, could not sweep aside the bears.
Canadian oil producers fell alongside prices. Oil sands giant Suncor Energy Inc. (SU) lost 83 cents to $15.00 on 13.3 million shares. It got an unpleasant mention this morning from Citi analyst Prashant Rao, who downgraded the stock to "neutral" from "buy" and slashed his price target all the way to $16 from $31. The downgrade came even as Mr. Rao claimed to be feeling generally bullish on the WCS heavy oil benchmark. Low-cost Canadian heavy oil assets should "see demand growth into 2022, driven by share gains in U.S. refining and higher oil price," predicted Mr. Rao. He still saw fit to roughly halve his price target on Suncor. Although he continues to like its "strong management team" and "highly integrated model," he fears that its balance sheet is "relatively more stressed in this downturn" while its "integration value is limited in a world of rising oil price and lagging refining margins." His new price target of $16 is only a dollar above today's close of $15.
Separately, Suncor made headlines after The Canadian Press reported that the company is moving its PetroCanada head office to Calgary from two offices in Ontario, in a bid to increase efficiencies. The move will take place in 2021 and affect roughly 700 workers. This announcement comes about three weeks after Suncor said it would cut 10 to 15 per cent of its work force, or as many as 2,000 jobs, over the next 18 months.
Another oil sands giant, Canadian Natural Resources Ltd. (CNQ), lost 59 cents to $20.98 on 5.16 million shares. In its case, the news it released today had nothing to do with Canadian oil production, but rather an African exploration campaign. The company owns an interest in block 11B/12B off the coast of South Africa. Other owners include France's Total, Qatar Petroleum and the Lundin promotion Africa Energy Corp. (AFE), the last of which slumped 14 cents to 35 cents on 1.27 million shares. The drop came in spite of Africa Energy's management's declaration that it was "thrilled" to announce the second consecutive discovery at the block. Specifically, the Luiperd-1 well, drilled in the same fairway as last year's Brulpadda discovery, has hit 73 metres of net gas and condensate pay. Logging and coring are in progress with testing to follow.
The joint venturers seemed far more pleased about the find than the markets did. Total (the operator) described the discovery as "very encouraging," while Qatar Petroleum deemed it "better than anticipated" and both Canadian Natural and Africa Energy hailed it as "significant." It is true that at 73 metres of net pay, this find is considerably larger than the 57 metres of net gas and condensate pay found by the Brulpadda well. Investors nonetheless seemed disappointed. Some may have hoped for an oil find (which would be higher margin than gas), while for others, the general "sell the news" phenomenon was likely in play. Africa Energy had gone on a particularly excitable run leading up to the news, with its stock soaring to as much as 61 cents from 30 cents in the last four months.
Now comes the heavy thud as the joint venturers, having found gas and condensate, must figure out if they can develop and sell it. Located in choppy waters 175 kilometres away from the coastline, block 11B/12B will come with plenty of challenges. There is, however, some infrastructure already in the area, such as a pipeline that connects to a gas-to-liquids refinery in Mossel Bay; this pipeline is about 70 kilometres from the Brulpadda prospect. Total seems hopeful that the details can eventually be ironed out. The French giant declared today that the new Luiperd results provide "important data ... which will help progress development studies and engage with South African authorities regarding the possible conditions of the gas commercialization."
Back in Canada, Don Gray's Alberta- and Saskatchewan-focused Gear Energy Ltd. (GXE) edged down one cent to 16 cents on 106,900 shares. It has solved a sticky debt problem, or has at least kicked it down the road. The problem was the $13.18-million in convertible debentures that were due to mature in less than five weeks, on Nov. 30. This put Gear in a tough spot given that it had a working capital deficit of $66-million as of June 30. Now the company has proposed, and a majority of debentureholders have agreed, to extend the maturity date by three years. The catch (which Gear did not spell out as clearly as it could have) is the interest rate will go up to 7 per cent from 4 per cent, while the conversion price will go down to 32 cents from 87 cents.
Buying time can be expensive. Gear clearly views the trade-off as worthwhile, perhaps even unavoidable. The company already needs to come up with $5-million by Dec. 31, 2020, to make a scheduled repayment under its credit facility. This facility used to be good for up to $90-million, of which Gear had drawn $66.3-million as of June 30. Then in July, the bankers cut the facility to $75-million and told Gear to repay $5-million on each of Sept. 30, 2020, Dec. 31, 2020, and March 31, 2020. (The trade-off in that case was covenant relief.) Gear would also have needed the bankers' permission to repay its debentures with cash. The recent experience of Cardinal Energy Inc. (CJ: $0.395), which was explicitly informed in May that it would not be allowed to use its credit facility to repay its convertible debentures, suggests that Gear's bankers would not have been amenable. Cardinal responded by extending the debentures while hiking the interest and lowering the strike price. Now Gear is following suit. Despite their efforts, both Gear and Cardinal have potentially unpleasant meetings with the banks ahead of them. Cardinal's next borrowing base review is scheduled for Oct. 30 (this Friday), while Gear's is scheduled for Nov. 30.