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The Oil Sands Weekly

The Oil Sands Weekly

Hangingstone shuts down, at least for now . . .

Japan Canada Oil Sands (JACOS) has temporarily suspended bitumen production at their Hangingstone demo plant due to low oil prices.

Hangingstone is a thermal in-situ facility located 50 km southwest of Fort McMurray with a capacity to produce 6,000 bbl/day of bitumen. The facility has been in operation since 1999 but was shutdown in May due to encroaching forest fires. The plant did not sustain any damage.

The company says it is continuing construction of its Hangingstone Expansion project, which will add 20,000 bbl/day to the facility's nameplate capacity. Construction is nearing completion and first oil is expected sometime next year. JACOS' current operations staff of about 200 are being transferred to the expansion plant.

The original demo plant was not connected by pipeline, forcing the company to truck product out of the facility. In 2013, Enbridge agreed to build a 52 km 12-inch lateral pipeline, connecting Hangingstone to the Cheecham Terminal near Fort McMurray. Diluent return to the SAGD operation will be provided by Inter Pipeline, through a 2 km lateral connection to their existing Polaris Pipeline.

Although the company did not provide specific timing for restart of the demo plant, it is hoped production will be restored after the expansion and pipelines are up and running. Higher production rates and lower transportation costs should dramatically reduce operating costs, making the facility economically viable.

JACOS is the Canadian subsidiary of Japan Petroleum Exploration Company, which owns 75% of the Hangingstone facility. The remaining 25% is owned by Nexen Energy, the Canadian subsidiary of CNOOC.

Williams Cos gets out of Canada, completely . . . 

Oklahoma-based Williams Cos. has sold their entire Canadian business unit to Inter Pipeline for $1.35 billion. Williams Canada's assets include two liquids extraction plants located near Fort McMurray, the 420 km Boreal pipeline and an olefinic fractionator in Redwater, Alberta.

The two extraction plants are located at the CNRL and Suncor upgraders. Bitumen upgraders produce off-gases that are high in natural gas liquids (NGLs) and olefins. The liquids are removed from the off-gas and pipelined to the fractionator. The fractionator then separates the NGLs and olefin into value-added products such as polypropylene, butane and condensate, sold across North America.

Inter Pipeline said it would also assume responsibility for the potential construction of a $1.85 billion propane dehydrogenation (PDH) facility in Alberta. The new PDH facility has the potential to produce 525,000 tonnes/year of polymer grade propylene, a intermediate product used to create a variety of plastics, fibres and chemicals. 

Williams has already invested $250 million into the PDH project, having already completed design, procurement and site preparation. Inter Pipeline expects to make a final investment decision by the end of 2016. The facility is also eligible for $500 million in royalty credits under the Alberta Government's Petrochemical Diversification Program. If sanctioned on time, the new plant could be operational by 2020.

The deal is expected close by the end of 2016 subject to regulatory approval and clearance from the Competition Bureau. Inter Pipeline will be issuing $600 million in new shares through bought deal financing to help pay for the acquisition. The company also hinted it may reinstate it Dividend Reinvestment Plan (DRIP) after the deal closes.

Suncor hangs on to production out of the North Sea . . .

Suncor Energy has agreed to purchase a 30% stake in the Rosebank field from Austrian energy group OMV for US$215 million. Suncor will make an initial payment of US$50 million, and pay an addition US$165 million after regulatory approval and once the Rosebank joint venture approves a final investment decision.

Rosebank was discovered in 2004. The field is located 130 km northwest of the Shetland Isles in the North Sea. The field is operated by Chevron and is currently in the engineering and design phase. The Rosebank JV consists of Chevron, who holds a 40% share and Denmark's Dong Energy, with 10%. OMV retains 20% of the project. 

Once operational, Rosebank can potentially produce 100,000 barrels of oil and 80 million cubic feet of natural gas per day. Suncor already has operations in the North Sea which it acquired in its 2009 purchase of Petro-Canada. The acquisition will help offset natural declines in Suncor's current North Sea assets.

Gibson Energy not yet ready to sell entire company . . .

Midstream player Gibson Energy has rejected a $2.8 billion takeover offer from a Signapore-based private equity firm. The firm offered a 39% premium on Gibson's share price. Gibson called the offer "inadequate" and noted that “now is not an opportune time to pursue a sale of control of the corporation.” Gibson is looking for a buyer for its propane unit but indicated it is not interested in selling the entire company just yet.

This week's notable Canadian economic news . . . 

A Nomura economist is warning that the Bank of Canada (BoC) may need to lower rates again this year if exports continue to decline. The BoC has been banking on non-energy exports to lift Canada's economy, but that has yet to materialize. However, Nomura admits a rate cut and lower loonie will do very little to help Canada's non-energy exports, which remain globally uncompetitive.

TransUnion is reporting a sharp increase in Q2 delinquency rates across Alberta (+14.7%) and Saskatchewan (+11.6%). Delinquency is defined as debt payments that are overdue by more than 90 days. 

However, non-mortgage debt is rising the fastest in BC and Ontario, led by sharp increases in Toronto and Vancouver. The average non-mortgage debt across Canada rose 3% to $21,580. Albertans still carry the highest non-mortgage debt load in the country, reported at $27,583 per person in Q3, up 1.4% y/y.

Chevron wins big in US court, but Canadian assets still up for grabs . . .

The US Court of Appeals have overturned a $9.5 billion judgment made against Chevron for environmental violations made in the Ecuadorian rainforest during the 1970s and 80s. The court ruled that the NY-based legal team behind the lawsuit committed extortion, money laundering, wire fraud, witness tampering and obstruction of justice.

Chevron has never actually operated assets in Ecuador. The lawsuit stemmed from Texaco Petroleum, who was a minority partner in an Ecuadorian consortium that included state-owned Petroecuador. Texaco handed over its share of their Ecuadorian operations over to Petroecuador in 1992.

The company struck an agreement with the Ecuadorian government to remediate selected production sites, leaving Petroecuador responsible for the rest of the cleanup. The government of Ecuador oversaw and certified the remediation, releasing Texaco from further environmental liabilities. However, Petroecuador allegedly never held up their part of the bargain, failing to cleanup the production sites as promised.

In 1993, a US-based law team sued Texaco on behalf of 30,000 villagers and indigenous tribe members. The group claims that Chevron, through its acquisition of Texaco in 2001, inherited its environmental liabilities. An Ecuadorian court agreed, awarding the legal team $9.5 billion in damages. Chevron has denied any wrong-doing and refused to pay the fine.

Since Chevron has no assets in Ecuador, the plaintiffs moved their case to other jurisdictions, including Brazil, Gibraltar, Canada and the US. Chevron then filed their own lawsuit, under the federal Racketeer Influence and Corrupt Organizations Act (RICO), seeking to dismiss all claims against US assets. So far, Chevron has won each court case.

However, the group is still seeking justice in Canada and several other countries where Chevron runs their operations. A case is still pending in Canadian courts over the group's rights to seize Chevron's Canadian assets to pay the $9.5 billion in damages. For Chevron, the US court ruling is a huge step forward but this drama is far from over.

This week's other global energy news . . . 

Chesapeake Energy has agreed to give away its Barnett Shale holdings to a private-equity backed operator. The divestiture reduces the company's shipping and processing costs by US$715 million and eliminates US$1.9 billion in long term pipeline agreements. Chesapeake stock is down 77% from the highs of 2015 due in part to its enormous debt load and onerous pipeline contracts. The Barnett Shale in North Texas is considered the birthplace of the shale revolution. However, its importance has diminished considerably due to low gas prices and expanding production from the Marcellus and Utica shales along the eastern seaboard, which are much close to major urban markets.

BP is seeking buyers for its 50% stake in Chinese petrochemicals joint venture SECCO, estimated to be worth between US$2 billion and US$3 billion. The other half of SECCO is owned by state-owned China Petroleum & Chemical Corp (Sinopec), which has a right of first refusal. SECCO is China's largest petrochemicals refinery located near Shanghai.

OPEC announced plans to meet informally in Algeria in September. Venezuelan President Nicolas Maduro says he is in talks with other OPEC members and Russia on stabilizing oil prices. Russia quickly shot down the suggestion, noting that oil prices are already much improved. Representatives from Qatar have said a production freeze is "possible". Oman has already stated they won't participate due to disappointment over the cartel's failure to address low oil prices. Saudi Arabia's energy minister signalled they might be willing to participate in market stabilization.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • preliminary data by EIA
US OIL INVENTORIES
million bbls • data by EIA

US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes

2,857k
-10 ▼ 0.3%
BBL/D CDN IMPORTS TO US
8,445k
-15 ▼ 0.2%
BBL/D US PROD'N
523.6M
+1.1 ▲ 0.2%
BBL US INVENTORY
396
+15 ▲ 3.9%
US RIG COUNT
CHANGE WK/WK  

US crude oil inventories rose for the third week in a row last week, although gasoline inventories continue to decline. Refineries on the East Coast and US Midwest have backed off on gasoline production, increasing the volumes imported from overseas.

The US Energy Information Administration (EIA) is forecasting the country will produce an average of 8.7 million bbl/day this year, much lower than the 9.4 million bbl/day produced in 2015. The agency boosted its domestic production outlook for 2017 from 8.2 million bbl/day to 8.3 million bbl/day. US crude oil production for July 2016 averaged 8.6 million bbl/day, a 200,000 bbl/day decline from the previous month.

For the first time since the summer of 2014, output from North Dakota is set to fall below the 1 million bbl/day mark. The break-even price across the state is reportedly US$26/bbl but a WTI price closer to US$50 is needed to increase hydraulic fracturing activity. Energy regulators say it could take up to a year for production to recover.

The number of oil rigs in service in the US rose by 15 this week, the 7th consecutive weekly gain. The numbers of oil rigs in service in Canada rose by 5 to 65.

In their latest Oil Market Report, The Paris-based International Energy Agency (IEA) cut its world demand growth forecast by 100,000 bbl/day for 2017, falling to 1.2 million bbl/day. Among the key highlights:

  • The 2016 growth forecast remains unchanged at 1.4 million bbl/day. 
  • Global oil supply rose by 800,000 bbl/day in July driven by gains from both OPEC and non-OPEC members. 
  • Global refinery throughput in the third quarter is expected to rise to a record 80.6 million bbl/day, then taper off by the end of the year.
  • Next year's output is expected to rise by 300,000 bbl/day (revised higher from the previous estimate of a 200,000 bbl/day increase). The gains are due in part to the start-up of the Kazakh Kashagan field in the Caspian Sea, expected to add 370,000 bbl/day to the global oil supply by the end of 2017.
  • OECD inventories grew by another 5.7 million barrels in July to a record 3,093 million barrels. Declines in crude oil stockpiles were offset by a 15.9 million barrel build in refined products, particularly propane and NGLs.

The IEA sees a balanced oil market and is predicting stockpiles will begin to ease through the second half of the year. 

In their August Monthly Oil Market Report, OPEC upgraded its forecast for 2016 demand growth to 1.22 million bbl/day, bringing the 2016 total consumption estimate to 94.26 million bbl/day. OPEC's outlook for 2017 remains unchanged. The cartel warns that stockpiles remain high, especially for refined products, and doesn't foresee any meaningful curtailment in global production. OPEC warns of a "seasonal downward correction" after the summer driving season.

OPEC production rose 46,400 bbl/day in July to 33.1 million bbl/day. Saudi Arabia claimed it reached an all-time high of 10.67 million bbl/day in July, surpassing the June 2015 record of 10.56 million bbl/day. However, external sources put the country's July production closer to 10.477 million bbl/day. The Saudis claim the production boost was in response to high domestic demand during the month of July.

Iraq is also claiming to have boosted production by 57,000 bbl/day last month to 4.61 million bbl/day. Libya, Iran, and Iraq are all expected to boost production in the coming years. 

China's "tea pot refiners" have recently received government permission to export refined products, potentially adding to already glutted market.

Natural gas stockpiles rose 29 billion cubic feet last week, slightly more than expected. Inventories remain at historical levels due an unseasonably warm winter. Declining production and slowing injections have failed to halt the declines in prices. Despite the growing use of natural gas for power generation south of the border, the fuel is primarily consumed for winter heating. The EIA also warned this week that US natural gas inventories are expected to reach 4,042 billion cubic feet by October, which will be the highest on record.




CURRENCIES • WEEKLY CLOSE
Friday close • data by Bank of Canada & ICE

95.68
-0.49 ▼ 0.5%
USD INDEX
77.15
+1.18 ▲ 1.6%
CDN DOLLAR
1.51%
-0.08 ▼ 5.0%
US 10Y Bond
1.01%
-0.06 ▼ 5.6%
CDN 10Y Bond
CHANGE WK/WK  

Weaker than expected retail sales numbers in the US dragged the greenback lower this week. A 1% drop in energy costs helped lead the declines. 

The British pound failed to hold 1.30 USD/£ this week, nudging closer to its post-Brexit lows. China is showing further signs of slowing, after publishing a slew of weak manufacturing, retail and investment data was released earlier this week. Bond yields resumed their downward slide this week.

The Canadian dollar gained 1.7% on higher oil prices.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
46.97
+2.70 ▲ 6.1%
BRENT USD/BBL
44.49
+2.69 ▲ 6.4%
WTI USD/BBL
40.73
+2.96 ▲ 7.8%
CDN LT USD/BBL
29.94
+3.04 ▲ 11.3%
WCS USD/BBL
CHANGE WK/WK  

Morgan Stanley is warning US$35 oil is possible by the end of this year. Energy strategist Adam Longson noted "physical oil markets likely need to get worse before they get better." Longson is predicting a bottom at around US$35 and a Q4 average price of US$40/bbl, but also thinks oil markets will rebalance by next year.

Goldman Sachs put out a note to clients earlier this week suggesting investors stock up on energy stocks when oil prices retreat. The firm recommends "shale-productivity winners" and thinks the bottom is in for drillers such as Schumberger (SLB) and Halliburton (HAL). Goldman also recommends "next-rung-down stocks" such as Cenovus (CVE), Encana (ECA) and Anadarko Petroleum (APC), as well "under-appreciated" stocks with lots of cash flow like ExxonMobil (XOM). Paradoxically, Goldman is also bullish on the US dollar, telling its clients that a rate hike by the Federal Reserve might happen before year end.

OPEC's Reference Basket price declined to US$42.69/bbl in July, down from US$45.84 in June. This marks the first decline in 5 months. In contrast WTI averaged US$44.80 for the month of July while Brent averaged US$46.40/bbl.

The EIA revised their average WTI forecast to US$42/bbl in 2016, increasing to US$52 in 2017. The agency sees WTI trading at a slight discount to Brent this year but returning to parity in 2017. The EIA also sees US gas prices falling to US$1.94/gallon in the fourth quarter.

Henry Hub natural gas prices declined another 7% this week, now down almost 20% from the highs of late June. Alberta's AECO gas prices are down almost 30% from the highs of late July.




ENERGY SECTOR PERFORMANCE
Friday close • data by TSX & NYSE

CANADIAN & US EQUITIES
Friday close • data by TSX & NYSE

SECTOR SUMMARY
Friday close • data by TSX & NYSE
TSX ENERGY STOCKS • WEEKLY CHANGE
NYSE ENERGY STOCKS • WEEKLY CHANGE

Midstream player Keyera Corp (TSX:KEY -0.2%) reported second quarter net earnings of $60 million, up substantially from last year's earnings of $16 million but much lower than analysts were expecting. Among the key highlights:

  • A 35,000 bbl/day fractionation expansion at Keyera's Fort Saskatchewan complex was completed in late May.
  • Construction is progressing on additional cavern storage, the Norlite and South Grand Rapids diluent pipelines and the Base Line Terminal above ground storage projects.
  • Gross throughput volumes fell 10% to 1,425 million cubic feet per day due to curtailed volumes imposed by TransCanada, natural declines from existing wells and shut-in production.
  • Fractionation throughput rose 8% to 137,000 bbl/day. Sales volumes also rose 16% to 117,900 bbl/day.

Despite the earnings miss, the company boosted its dividend by 6% to $1.59/share per year.

Bellatrix Exploration (TSX:BXE -12.4%) reported a second quarter net loss of $55.2 million, twice the losses from the same time last year. Revenues were almost cut in half to $48.3 million, much lower than analysts were expecting. Production volumes in the first 6 months of the year averaged 38,234 boe/day (72% gas weighted), which were in line with guidance volumes despite not drilling a single new well in the second quarter. Total net debt at the end of Q2 narrowed slightly to $638 million thanks to recent asset sales. The company expects natural gas prices to improve considerably next year. Bellatrix stock hit a fresh 52 week low on the TSX this week.

Seymour Schulich has sold 10 million shares of Birchcliff Energy (TSX:BIR -4.5%), reportedly for estate planning purposes. The Canadian billionaire still owns 35 million Birchcliff shares, making him the largest shareholder. Schulich contributes millions to Canadian universities (most notably the University of Calgary's Schulich School of Engineering), making him one of Canada's most generous philanthropists.

Earlier this week, Birchcliff reported a second quarter net loss of $23.3 million on revenues of $47.3 million (down 77% from Q2/2015). Q2 production averaged 39,513 boe/day, a 3% increase from the same time last year. Operating costs declined 24% to $3.45/boe. Q4 production is expected to increase to 62,000 to 63,000 boe/day thanks to the recent purchase of various Gordondale assets in Alberta.

Crescent Point Energy (TSX:CPG +5.8%) reported a net second quarter loss of $226 million, slightly less than losses reported the same time last year. Funds from operations declined 23% to $404 million. The company produced 167,218 boe/day in Q2, up 10% y/y. Operating expenses averaged $10.53/boe for the first half of the year, almost 10% lower than its 2016 guidance. Almost 90% of the company's production is now weighted towards crude oil and NGLs from in Alberta, Saskatchewan, Manitoba and the US.

Calgary-based Trican Well Service (TSX:TCW -0.9%) reported a $40.2 million loss in the second quarter on $32.5 million in revenues, down 59% y/y. Low operating margins have forced the company to idle 50% of its equipment and cut 75% of its staff in the past 2 years. However, the company thinks the worst is over and things can only get better from here. Trican is Canada's largest well services provider.

Canadian Natural Resources (TSX:CNQ +2.5%) has issued $1 billion in medium-term notes (5.5 years), as part of a $3 billion shelf prospectus filed in October of last year. The company says it will use the proceeds for debt repayment and day-to-day operations. 

Big winners on the TSX this week included Gibson Energy (GEI +10.8%), EnCana (ECA +10.6%), Baytex Energy (+7.8%), SECURE Energy Services (SES +7.7%).

TransCanada (TRP +1.8%), Encana (ECA +10.6%), Peyto Exploration (PEY -1.4%), Birchcliff Energy (BIR -4.5%), Teck Resources (TCK.B -2.3%), Vermilion Energy (VET +6.0%), Enerplus (ERF +4.4%), Parkland Fuel (PKI +4.2%) and Seven Generations (VII 1.7%) all hit 52-week highs on the TSX this week. Schlumberger (NYSE:SLB n/c) hit a 52 week high on the NYSE this week.

US markets, specifically the S&P500 and the Dow hit an all-time high on Thursday before retreating slightly on Friday. The TSX reached the highs of June 2015 as well high this week. Energy was the best performing sector across all North Amercican markets.

UPGRADES

  • Chevron (NYSE:CVX): Upgraded from Neutral to Buy at Simmons and from Neutral to Overweight at Piper Jaffray.

DOWNGRADES

  • Bellatrix Exploration (TSX:BXE): Downgraded from Buy to Hold at TD Securities. 
  • Cenovus Energy (TSX:CVE): Downgraded from Buy to Hold at TD Securities. 
  • Crescent Point Energy (TSX:CPG): Downgraded to Buy at TD Securities.
  • Teck Resources (NYSE:TCK): Downgraded from Outperform to Sector Perform at RBC.

PRICE TARGET CHANGES

  • Birchcliff Energy (TSX:BIR): Price target increased from $12 to $12.50 at TD Securities. Price target decreased from $11 to $9 at RBC.
  • Enerplus (TSX:ERF): Price target increased from $11.50 to $12.50 at TD Securities.
  • Ensign Energy Services (TSX:ESI): Price target increased from $8 to $8.50 at BMO Capital Markets. Price target decreased from $10 to $9.50 at FirstEnergy Capital and from $8.25 to $8 at Canaccord Genuity.
  • Gran Tierra Energy (TSX:GTE): Price target increased from $4.75 to $5 at Paradigm Capital.
  • Inter Pipeline (TSX:IPL): Price target increased from $28 to $30 at RBC.
  • Pembina Pipeline (TSX:PPL): Price target increased from $41 to $44 at TD Securities and from $42 to $45 at Royal Bank of Canada.
  • Veresen (TSX:VSN): Price target increased from $13 to $15 at Citigroup.

NEXT WEEK'S EVENTS

Monday:

  • National Energy Board moves Energy East hearings to Fredricton, NB
  • Finance Minister Bill Morneau press conference in Winnipeg @ 2:00 pm ET

Tuesday:

  • Canadian Manufacturing Sales data for June released by Statistics Canada @ 8:30pm
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday

  • EIA Petroleum Status Report released @ 8:30am ET
  • FOMC minutes released @ 2:00pm ET
  • Expiry of Western Canadian Select September contract
  • Expiry of Canadian Light Sweet Oil September contract

Thursday:

  • June Employment Insurance data released by Statistics Canada @ 8:30am
  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • July CPI data and June Retail Trade data released by Statistics Canada @ 8:30am
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday August 19, 2016 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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