by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery lost $3.05 to $76.93 on the New York Merc, while Brent for February lost $2.89 to $82.68 (all figures in this para U.S.). Western Canadian Select traded at a discount of $28.50 to WTI, down from a discount of $27.50. Natural gas for January lost 70 cents to $5.58. The TSX energy index lost 7.40 points to close at 249.53.
Oil prices foundered in a sea of mixed headlines. Early in the session, prices headed sharply higher, supported by European sanctions on Russian crude (which took effect today) and the decision by OPEC+ to stick to its existing production curbs (as announced Sunday). Several Chinese cities also began easing COVID restrictions over the weekend, boosting hopes of higher fuel demand. Later in the session, however, oil prices abruptly reversed course, ending the day lower after U.S. employment data came in stronger than expected. This led to worries that the Federal Reserve will continue its aggressive interest rate hikes as it seeks to rein in inflation.
Within the sector, one of today's biggest -- and unhappiest -- movers was Jose Franciso Arata's New Stratus Energy Inc. (NSE), down 45.5 cents to 18.5 cents on 5.65 million shares. The company was "shocked" and "deeply saddened" to announce that its contract extensions at blocks 16 and 67 in Ecuador are being denied. The government of Ecuador, in what New Stratus sees as "politically motivated ... clear and blatant infringement of the rule of law," plans to allow the contracts to expire at the end of the month. New Stratus plans to fight the decision through international arbitration.
The announcement follows days of speculation in the local media about the souring relationship between the company and the government. By way of background, New Stratus acquired the blocks -- which are its only producing assets -- in January, 2022, from Spain's Repsol. This was two months after New Stratus said in November, 2021, that it had been "formally notified" of the government's approval of the deal, and had in turn agreed to spend $200-million (U.S.) in Ecuador over two years. The two-year commitment would start after the two sides completed negotiations to amend the contracts and extend the expiry past Dec. 31, 2022. So confident was New Stratus that it quickly signed a letter of intent with Baker Hughes for what it expected to be a massive future drill program. It told shareholders throughout 2022 that talks with the government were "in process."
Then the talks reportedly ground to a halt. As discussed in Stockwatch last Tuesday, following reports by local news outlets such as El Universo, the government has apparently taken the position that New Stratus did not secure proper approval for the deal after all, leading New Stratus to fume about potential arbitration. It was still attempting to keep up a smile for its shareholders when it released its financials last week (indeed sticking to its usual line that the talks were "continu[ing] to advance"). Today, however, all smiles vanished as the company said it had received clear confirmation that the government does not plan to extend the contracts. It dubbed itself "shocked by this sudden change of posture" and vowed to pursue legal remedies through arbitration.
New Stratus is not the only producer feeling bruised by an international government. The Lundin Group's Africa Oil Corp. (AOI), down 14 cents to $2.76 on 2.02 million shares, waited until after the close on Friday to tell investors about news it had received on Thursday about a long-running tax dispute in Kenya. A Kenyan court has determined that Africa Oil owes about $18.7-million (U.S.).
This is, at least, considerably less than the $51.1-million (U.S.) in taxes that the Kenya Revenue Authority (KRA) originally claimed to be owed by Africa Oil. The KRA hit the company with this assessment in 2018, saying it reflected a variety of taxes relating to activities from 2012 to 2017. Africa Oil objected to the assessment before a Kenyan tax tribunal. In 2020, the tribunal gave a mixed ruling, siding with Africa Oil on some issues but determining that it still owed $22-million (U.S.). The company objected to that too -- as did the KRA -- and the matter went to Kenya's High Court. Last week, the High Court tweaked the assessment even further, once again throwing partial victories at both sides. It ruled that Africa Oil owes $18.7-million (U.S.).
Africa Oil is considering a further challenge (presumably to the Kenyan Court of Appeal, the next step after the High Court), but said it will take legal advice before making a decision. The owed amount is, in any case, a fraction of the company's $207.2-million (U.S.) in cash and equivalents as of Sept. 30. This is a healthy increase from $58.8-million (U.S.) at the start of the year. Africa Oil's coffers have swelled thanks to dividends from its 50-per-cent-held Prime Oil, an oil producer in Nigeria. By contrast, Africa Oil's long history in Kenya has produced little more than frustration. The company discovered oil in Kenya a decade ago, but has been unable to develop its discovery because of regulatory and infrastructure delays, ultimately deciding to launch a farm-out process for the assets last year. Past SEDAR filings have expressed concern that a negative tax ruling from the High Court could have a "material negative impact" on the Kenyan assets (and thus presumably the farm-out process).
More broadly, this is the second blow to Africa Oil's non-Nigerian promotions in less than a month. In mid-November, two companies in which Africa Oil has sizable investments -- Africa Energy Corp. (AFE: $0.205) and Eco (Atlantic) Oil & Gas Ltd. (EOG: $0.29) -- reported that a much-hyped exploration well in South Africa came up dry. Their stocks have since lost up to half of their value. Africa Oil has not suffered as severely, but, at $2.76, is still down noticeably from last month's high of $3.44.