by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery added 48 cents to $60.18 on the New York Merc, while Brent for June added 39 cents to $63.67 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.11 to WTI, down from a discount of $10.08. Natural gas for May added six cents to $2.62. The TSX energy index lost 1.22 points to close at 115.00.
Oil prices edged higher as OPEC boosted its forecast for near-term oil demand recovery. In a report released today, OPEC predicted that global oil demand would rise by 5.95 million barrels a day in 2021 (relative to 2020). This is noticeably more optimistic than the forecast provided on March 30, when OPEC put the figure at just 5.6 million barrels a day.
OPEC has gone back and forth all year on how to feel about this year's oil market. In January, the group was relatively optimistic, predicting that 2021 oil demand would rise by 5.90 million barrels a day. Its mood darkened in February as it cut the forecast to 5.79 million. Then the figure took a jump to 5.89 million in mid-March, and then, as noted above, slid all the way to 5.6 million in late March. Two weeks later and OPEC is back to feeling bullish with a forecast of 5.95 million, its highest number yet. Further mood swings, of course, are all but certain.
Here in Canada, one company claims to be feeling nothing but excitement for the future. Alberta Montney producer ARC Resources Ltd. (ARX), down eight cents to $7.34 on 9.62 million shares, closed its merger with fellow Montney player Seven Generations Energy last week and subsequently began hyping its postmerger plans to analysts. Scotia Capital analyst Cameron Bean has published a research note about his discussion with ARC's management. "The future looks bright," he opined, in typically obliging fashion. Although he expects ARC to go through "a period of recalibration" -- apparently his term for a drop in the share price, which has fallen to $7.34 from over $8 since the start of the month -- Mr. Bean said this is perfectly normal for a company digesting a large acquisition. Ultimately he expects ARC to "work through this process over the next several months ... [and] move forward as a stronger company."
In terms of actual future plans, Mr. Bean reported that ARC's management is planning to hold Seven Generations' production flat over the next year or so, keeping it at 180,000 to 185,000 barrels of oil equivalent a day. (ARC's premerger production was about 170,000 barrels a day.). In the past, Seven Generations' assets have produced as much as 220,000 barrels a day, but ARC is not in a hurry to bring them back to that level. Mr. Bean concluded that ARC will use these assets as a "free cash flow engine." It will use the cash in part to develop a higher-priority asset, its Attachie Montney project, where it wants to set development in motion by the end of this year. ARC is also open to increasing its dividend, said Mr. Bean, although he does not see this happening until 2022 or 2023. (The current six-cent quarterly dividend represents a yield of 3.3 per cent.)
Unlike some other acquisitive companies lately -- such as Whitecap Resources Inc. (WCP: $5.42) and Tamarack Valley Energy Ltd. (TVE: $2.30), both of which have been announcing one deal after another since last summer -- ARC is not particularly interested in further acquisitions, according to Mr. Bean. He noted that ARC may in fact look to sell some assets. It has a position in the Alberta Cardium that is producing 6,500 barrels a day and is now considered non-core in light of the expanded Montney assets. Mr. Bean did not speculate on any buyers. (One of the likeliest potential buyers happened to be the above-noted Whitecap, but its CEO pooh-poohed this rumour on BNN last month, saying Whitecap looked at these assets but decided not to buy them because of their high cleanup costs.)
Mr. Bean concluded that ARC's outlook is "positive" in the wake of its "transformational" merger. He reiterated his "sector outperform" rating on the stock and kept his price target at $11, compared with today's close of $7.34. A disclaimer at the bottom of his research note indicated that his employer, Scotia Capital, expects to receive or seek compensation from ARC within the next three months for unspecified investment banking services.
South of the border, U.S. shale producer Ovintiv Inc. (OVV) lost 33 cents to $29.16 on 550,800 shares. It too saw a smattering of analyst applause recently, not from Scotia but from Moody's Investors Service. Moody's upgraded its outlook on Ovintiv to "positive" from "stable." It left its credit rating intact at Ba1 -- still junk, unfortunately. Ba1 is one step into junk territory. Ovintiv undoubtedly would have preferred a promotion to investment-grade status, but it had to make do with the upgrade to its outlook instead. Paresh Chari, an analyst at Moody's, said the revised outlook reflects Ovintiv's progress on asset sales, which will "improve leverage in 2021 and 2022." (Once again in contrast to highly acquisitive companies such as Whitecap and Tamarack, Ovintiv has been an active seller lately. It agreed in February to sell its Alberta Duvernay assets for $263-million and then announced in March that it would sell its Texas Eagle Ford assets for $880-million.)
Even further south, Gary Guidry's Colombia-focused Gran Tierra Energy Inc. (GTE) added one cent to 83 cents on 879,000 shares. It also added one cent yesterday after providing an operational update for the first quarter. By its estimate, quarterly production averaged 24,463 barrels of oil equivalent a day. This was slightly below analysts' predictions of 25,400 barrels a day -- not a good start to 2021, especially considering Gran Tierra's history of operational mishaps in 2019 and 2020, which forced it to slash its production guidance several times. The company set relatively cautious production guidance of 28,000 to 30,000 barrels a day for 2021. While the first quarter's output came up short, Gran Tierra hastened to add that its current production is safely in the full-year range, averaging 28,930 barrels a day for March 28 to April 10. Investors seemed reassured.
Some of them will be downright thrilled these days, with Gran Tierra's 83-cent stock having more than tripled since November from a low of 24.5 cents. The rise partly reflects the rally in Brent oil prices. These are currently approaching $64 (U.S.) a barrel, which is around $20 (U.S.) higher than they were just six months ago, and well above the $49 (U.S.) a barrel on which Gran Tierra was basing its budget. Mr. Guidry, Gran Tierra's president and CEO, cheered the strength in Brent prices during yesterday's update. He vowed to use the windfall responsibly by reducing Gran Tierra's debt. Rather understandably, he did not remind investors of the level of the debt, which as of Dec. 31 was a lofty $770-million (U.S.). The company's current market cap is $304-million.