by Stockwatch Business Reporter
West Texas Intermediate crude for January delivery added 89 cents to $60.07 on the New York Merc, topping $60 for the first time in three months, while Brent for February added $1.02 to $65.22 (all figures in this para U.S.). Western Canadian Select traded at a discount of $20.65 to WTI, down from a discount of $20.35. Natural gas for January lost three cents to $2.30. The TSX energy index lost a fraction to close at 138.84.
Turkish gas producer Valeura Energy Inc. (VLE) plunged 56 cents to 48 cents on 12.2 million shares, dismaying investors with the latest results from its BCGA (basin-centred gas accumulation) play in Turkey's Thrace basin. One hopes that only the bravest investors are still in this roller coaster of a stock, which in the last three months has taken jumps or dives of at least 10 per cent no fewer than 11 times. It is all thanks to Thrace. In the BCGA play, Valeura and its joint venturer, Norway's Equinor, have been testing deep gas wells. They started with their Inanli-1 well, which flowed gas but at underwhelming rates, and more recently they have been testing their Devepinar-1 well, which was responsible for one of the 10-per-cent jumps last month on encouraging preliminary rates.
Now Valeura and Equinor have conducted a more comprehensive test of Devepinar-1. Sadly, the new results have not lived up to the promise of the preliminary rates last month. Last month saw three zones tested at 1.6 million cubic feet a day, 1.3 million cubic feet a day and 1.3 million cubic feet a day, respectively, or 4.2 million cubic feet a day in total -- all without artificial lift (reflecting encouragingly high pressures). Each zone was tested individually and over a short period of just two to three days. To get a better sense of the well's capabilities, Valeura and Equinor moved on to testing the three zones together in a commingled test lasting 11 days. Individual zones do not necessarily predict performance in a commingled test, and investors would not have expected the commingled test to yield a whole 4.2 million cubic feet a day. That said, they also did not expect a final stabilized flow rate, over the last 24 hours of the test, of a mere 462,000 cubic feet a day. The average over the 11-day period was 908,000 cubic feet a day. Another way of putting it is that the three prior tests each averaged 1.4 million cubic feet a day, whereas the commingled test could not even crack one million.
Valeura's president and chief executive officer, Sean Guest, kept up a brave smile, calling himself "pleased" with the tests and the resulting "substantial data set." If one massages the numbers slightly (as Mr. Guest seemed inclined to do), one can agree with Valeura's conclusion that the commingled average was "similar" to the three prior individual tests, as they all hovered around the one-million mark. This has led Valeura to speculate that the prior tests hit on a common fracture network. Though more modelling work is required, the consensus in the market, at this point, is that the play is far more marginal than previously thought. Valeura seems undeterred and says it will continue to work with Equinor to "define the next steps for the play." It plans to release details of its work program in the first quarter of 2020.
Despite the carnage, there was still one very friendly face in the crowd. Canaccord Genuity analyst Charlie Sharp, over in the U.K. offices (Valeura has a London listing), found the update "encouraging." The commingled test rate was "lower than what might have been anticipated," but Devepinar-1 is unquestionably a better well than Inanli-1. Mr. Sharp looks forward to hearing about modelling and other analyses over the next couple of months. In the meantime, he is lowering his price target to 400 pence from 525 pence. That is a fairly deep cut, but considering that Valeura's stock closed in London today at just 33.5 pence, Mr. Sharp remains one of the stock's most optimistic supporters.
Here in Canada, the country's largest gas producer, Mike Rose's Tourmaline Oil Corp. (TOU), edged down four cents to $13.90 on 3.15 million shares. The slight dip came in spite of a lovely mention this morning from Scotia Capital analyst Jason Bouvier. In a 13-page research note, Mr. Bouvier said he recently met with Tourmaline's management and has been given to believe that the company, having just raised a fair amount of cash through its recent Topaz Energy spinout, is feeling acquisitive. "Conditional on market pricing, we expect about $300-million to $400-million per year of acquisition in each of the next two years," predicted Mr. Bouvier. He added that Tourmaline's balance sheet is in "great shape" to pursue acquisitions. Roughly $1.1-billion of its $2.85-billion credit facilities remains unused, and the company's forecast debt-to-cash-flow ratio in 2020 is just 1.5 times. Tourmaline could also sell some of its plentiful infrastructure assets if it wants to pay for acquisitions without relying on debt. The important thing, to Mr. Bouvier, is that all of the acquisition opportunities he has identified will be accretive to free cash flow either immediately or in the near term.
Mr. Bouvier's list of acquisition opportunities for Tourmaline includes no fewer than 16 companies. Most are private, but Mr. Bouvier did include the following public companies: Chinook Energy Inc. (CKE: $0.055), Cequence Energy Ltd. (CQE: $0.195), Pieridae Energy Ltd. (PEA: $0.77), Delphi Energy Corp. (DEE: $0.71) and Perpetual Energy Inc. (PMT: $0.065) (the last of which, interestingly enough, is run by Mr. Rose's wife, Sue Riddell Rose). Mr. Bouvier says all of the listed companies could be attractive to Tourmaline because they have overlapping or adjacent operations and are relatively small and easy to swallow. To sum up, Mr. Bouvier sees a "meaningful number of motivated sellers" that might happily put themselves under Tourmaline's care, leaving Tourmaline "well positioned to consolidate a beaten-down subsector." Mr. Bouvier has a "sector outperform" rating on Tourmaline and a price target of $23, well above today's close of $13.90.
Elsewhere in Western Canada, Paul Colborne's Alberta- and Saskatchewan-focused Surge Energy Inc. (SGY) added five cents to $1.06 on 2.58 million shares, after touting its "defensive and sustainable" guidance for 2020. It plans to produce 21,000 barrels of oil equivalent a day (down from this year's target of 22,000) on a budget of $98.5-million (nearly one-third lower than this year's budget of $135-million). Surge said this level of spending will allow it to maximize cash flow, pay down debt and even maintain the 0.8333-cent monthly dividend, with its generous yield of 9.4 per cent. The guidance also allows for "flexibility" to respond to changing commodity prices. In some investors' eyes, this could suggest that the guidance will be hiked at some point, particularly in light of the fact that analysts had been forecasting bolder numbers: namely, a budget of around $124-million and production of around 21,600 barrels a day. In a research note this morning, Scotia Capital analyst Cameron Bean said he sees Surge's guidance as "restrained" and more or less "neutral." He praised Surge's focus on dividend sustainability and pegged the company's all-in payout ratio for 2020 at just 85 per cent. Mr. Bean has a "sector perform" rating on Surge and a price target of $1.25.
Surge also announced that it has hired Derek Christie as senior vice-president of geosciences. It hailed his 28 years of experience in various energy roles across North America. Few specifics were provided, but some investors may have recognized the name anyway. Mr. Christie was most recently the senior vice-president of exploration and corporate development at Crescent Point Energy Corp. (CPG: $5.06), where he worked for about 12 years until his departure nine months ago (perhaps as part of the "streamlining [of the] team" that Crescent Point has been carrying out since September of last year). During Mr. Christie's time with Crescent Point, its production rose to over 175,000 barrels a day from 35,000. One of the co-founders of Crescent Point is the above-mentioned Mr. Colborne, Surge's president and CEO. He was a director of Crescent Point until 2013. The two men also have another connection: They worked together at StarPoint Energy, a private company that was founded in 2003 with an initial private placement of $6-million and merged with another company two years later in a deal worth $5-billion. Mr. Colborne appears to have fond memories of their time together, popping up in Surge's press release to welcome Mr. Christie aboard and praise him as a surefire "huge asset for the company."