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The Oil Sands Weekly

The Oil Sands Weekly

Water supply restored to parts of Prince Albert . . .

Rural residents around Prince Albert have had their water restored less than 2 weeks after supply was shutdown due to Husky Energy's oil spill into the North Saskatchewan River. Water restrictions are also slowly being lifted for city residents.

More than 900 water samples have been taken at 60 locations from the spill site up to Prince Albert (385 km downstream). Those samples still comply with Canadian drinking water standards. However, the Saskatchewan Water Security Agency wants to do more independent testing and do a risk analysis before it gives the go-ahead to draw water from the river again.

The Government of Saskatchewan is being criticized for not fully implementing pipeline safety recommendations outlined four years ago by Saskatchewan’s auditor general. The recommendations include hard guidelines on pipeline design, clean-up and monitoring.

Husky claims it has complied with all of Saskatchewan's regulation but has yet to confirm the cause of the pipeline failure. The company has promised to pay for clean-up and has already set up claims centres in Prince Albert and North Battleford for businesses affected by the water shortages.

CNRL begins winding down final phases of expansion at Horizon . . .

Canadian Natural Resources (CNRL) is getting ready to wrap-up its final phases of expansion at the Horizon Oil Sands Mine over the next 18 months. Phase 2B is currently being commissioned and remains on-track for an October start-up. Phase 3 (the final phase of expansion) is over 80% physically complete and will be operational by the end of next year. Phase 2B/3 will increase Horizon's capacity from about 150,000 bbl/day to 250,000 bbl/day of synthetic crude oil.

The company declared its second consecutive quarterly loss this week due to lower oil prices, lower production and high capex spend for Horizon.

CNRL also revealed that its Pine River Gas Plant was shutdown in mid-June due to flooding in northeastern BC that exposed a section of pipe and washed out access roads. The wells, which produced 176 million cubic ft/day of natural gas, have been capped and are not expected to return to normal operation until December.

Devon's Jackfish exceeds all expectations . . . 

Devon Energy reported a second quarter loss of US$1.57 billion on revenues of US$2.5 billion (-27% y/y). The better-than-expected results were attributed to aggressive cost-cutting, on track for $1 billion in savings by the end of this year.

Canadian heavy oil and bitumen production averaged 121,000 bbl/day (+24% y/y). Scheduled maintenance at Devon’s Jackfish 2 cut production by 11,000 bbl/day in Q2. Jackfish exceeded nameplate capacity by 9% in April, producing a record 114,000 bbl/day of bitumen. Devon's Canadian operations generated $113 million in free cash flow in Q2. In the third quarter, Devon expects net oil production from its heavy‐oil operations to range between 131,000 and 136,000 bbl/day. 

The company is also expected to close on its US$1.1 billion sale of the Access Pipeline within the next few weeks. The divestiture will increase the cost of heavy oil transportation by US$35 to $40 million in 2016.

Devon has divested US$3.2 billion worth of assets so far and will put most of those funds towards debt reduction. The company also plans to increase spending by US$200 million and deploy more rigs through the end of this year, boosting shale oil production into the early part of 2017.

When it rains, it pours - literally . . .

There was certainly no shortage of bad news for Alberta this week:

Heavy rainfall in Fort McMurray has caused flooding in several neighbourhoods, including Thickwood and the downtown core. The flooding prompted the Regional Municipality of Wood Buffalo to reopen its emergency operations centre for the first time since the May wildfires. The full extent of the damage has not yet been assessed.

Calgary home sales declined for the 20th consecutive month in July, with sales nearly 13% lower than the summer of 2015. The benchmark home price declined 4.2% y/y to $440,000. Part of the problem is fewer people moving to Alberta, which has declined from a high of about 10,000 people per month in 2013 to about 3,000 people/month in the past year. Despite heavy job losses in the energy patch and lower interprovincial migration, home prices in Calgary and Edmonton have held up surprisingly well thanks to low interest rates and record government spending.

Calgary received 206 mm of rain in July, blamed in part for a 22-year low in attendance for this year's Calgary Stampede. Alberta farmers have also made 5,500 claims for hail damage, and that number is expected to rise dramatically by the end of the season due to on-going dismal weather in the province.

HSBC Bank Canada reported a 29% decline in second quarter profits, blamed in part on continued write-downs of underperforming oil & gas loans. The company says to will continue to manage their exposure to the energy sector. 

Insurer Genworth reported a sharp increase in delinquencies and claims in Alberta, dragging its losses on claims 32% higher than last year. Personal bankruptcies in the province are up substantially from the lows of early May but still no where near the highs of 2009.

An almost-new 1,200 person work camp in Peace River is up for sale by auctioneer Richie Brothers. The camp was built by ATCO for Shell's now shelved Carmon Creek in-situ project. The camp is one of Richie Bro's largest items ever auctioned in its 55 year history.

Statistics Canada reported this week that Alberta's unemployment rate rose 0.7% to 8.6%, the highest rate since September 1994. Full time job losses in the province over the past year now totals 104,000. The number of job losses has held steady for the past few months but the number of people looking for work continues to rise. 

Canada's trade deficit continues to widen to a record $3.6 billion in June as exports tumbled 4.7%, the largest drop in 7 years. Part of the drop was caused by lower oil exports blamed on the Alberta wildfires. Imports of refined products jumped sharply, up 31% y/y.

Turns out, Trudeau may not be much different than Harper . . .

The federal Liberals have quietly approved 2 permits for BC Hydro's controversial Site C mega dam project in northeastern BC. The permits allow BC Hydro to begin flooding about 5,340 hectares of the Peace River Valley. 

The initial construction permits were granted by Stephen Harper in December of 2014. The project has met with stiff opposition from local farmers, environmentalists and aboriginal groups. Two First Nations groups have taken the government to court over treaty rights. A court decision is not expected until September but BC Hydro had been pressing the Liberals for approval of construction permits, threatening layoffs and stiff penalties if there were any further delays. It is unclear what will happen if the courts overturn the federal permits, given that billions have already been spent by the BC government.

The Liberal government is now stuck between a rock and a hard place. PM Trudeau promised all stakeholders, especially First Nations groups, a voice and potentially even veto power over infrastructure projects. But a collapse in energy prices has sparked a downward spiral in the Canadian economy, shrinking government revenues much more than initially expected. 

The next big test of the federal government will be Petronas' Pacific NW LNG Project, Enbridge's Line 3 Replacement and Kinder Morgan's Trans Mountain Expansion, which are all due to be approved/rejected by year end. All three face vocal opposition by a wide variety of anti-fossil fuel activists, landowners and First Nations groups.

The $9 billion Site C project will generate 1,100 megawatts of power and can potentially supply (carbon-neutral) electricity to Alberta, who remains intent on shutting down all its coal-fired power plants by 2030.

Enbridge redirects Bakken oil from Canada to Texas . . . 

Enbridge has entered into a joint venture with Marathon Petroleum for a minority stake in the Bakken Pipeline Project, which includes the Dakota Access pipeline and the Energy Transfer Crude Oil pipeline. Both pipelines are co-owned by Phillips 66, who will retain their 25% stake. 

Enbridge's US subsidiary Enbridge Energy Partners paid US$1.5 billion for their 27.6% interest. Marathon Petroleum paid US$500 million for their 9.2% share.

The two pipelines transport over 470,000 bbl/day of Bakken oil from North Dakota to Texas, with potential for expansion to 570,000 bbl/day. 

Enbridge and Marathon also cancelled their joint venture agreement on the yet-to-be-built US$2.6 billion Sandpiper Project, which runs 991 km from the Bakken region into Canadian refineries. The project has met with much opposition in the state of Minnesota. Enbridge says it will need to "re-evaluate" the viability of the pipeline.

This week's random energy news . . . 

Husky Energy conceded on a discount for Chinese natural gas customers, offering an average price break of 11%. Husky and CNOOC were involved in a dispute over the Liwan Gas Project off the South China Seas, where CNOOC reneged on its original take-or-pay contract due to falling gas prices in Asia. Investors were happy with the resolution, noting it could have been much worse.

TransCanada announced plans to build a $800 million marine terminal, inland storage hub and 265 km refined product pipeline project in Mexico. The 100,000 bbl/day pipeline will run parallel to TransCanada's $500 million Tuxpan-Tula natural gas pipeline, which is currently under construction. The project is a joint venture with Mexican firms Sierra Oil & Gas and Grupo TMM.

Irving Oil announced the purchase of the Whitegate Refinery in Cork, Ireland from Houston-based Phillips 66. The value of the transaction was not disclosed. The Whitegate Refinery was built in 1959 and has crude processing capacity of 75,000 bbl/day.

The Wall Street Journal (WSJ) has hinted that Malaysia-based Petronas may hit the pause button on its $38 billion Pacific Northwest LNG project in Kitimat, BC. Sources cite a glut in the LNG market and low oil & gas prices, which have rendered the project uneconomical. The Canadian Environmental Assessment Agency has promised to rule on the project by early October.

Toronto-based GMP Capital announced the purchase of Calgary-based FirstEnergy Capital. FirstEnergy is active in mergers and acquisitions for small and medium sized firms in the energy patch. The friendly deal is worth $98.6 million. GMP Capital hopes this acquisition will help them build their market in the oil and gas sector, which they expect to improve over the next few years. The new company (GMP FirstEnergy) will still be based in Calgary and retain many of FirstEnergy's management team.

UK-based S&P Global Platts announced the purchase of Pira Energy, an energy market analytics firm. Platts remains focused on growing their analytics capabilities, having recently purchased RigData in June and Commodity Flow in March. 

Italian energy giant Eni has apparently agreed to sell its stake in a Mozambique LNG development to ExxonMobil. Last year, the government of Mozambique awarded Exxon three offshore exploration licence blocks just south of Eni's gas reserves. Exxon has yet to confirm the transaction. Terms of the deal were not disclosed.

Tropical Storm Earl is headed towards southeastern Mexico, threatening oil platforms in the Gulf of Mexico. Mexican national oil company Pemex said it is monitoring Earl but has not yet moved to evacuate workers.




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

2,867k
+142 ▲ 5.2%
BBL/D CDN IMPORTS TO US
8,460k
-55 ▼ 0.6%
BBL/D US PROD'N
522.5M
+1.4 ▲ 0.3%
BBL US INVENTORY
381
+7 ▲ 1.9%
US RIG COUNT
CHANGE WK/WK  

The number of oil rigs in service in the US rose by 7 this week, the 6th consecutive weekly increase. Despite the gains, US oil production declined 55,000 bbl/day last week. The declines all came from Alaska. Production from the lower 48 states was unchanged.

US imports of Canadian crude rose 5.2% last week to 2.87 million bbl/day. This is the first increase in over a month.

US imports of Venezuelan crude is now over 800,000 bbl/day, a 25% increase from last June. The US is buying more of the heavier blends from the Orinoco Belt, likely in response to reduced output from the Canadian oil sands.

Bloomberg estimates that OPEC production declined in July due to ongoing problems in Nigeria and Libya:

  • Libya's production declined by 20,000 bbl/day to 300,000 bbl/day
  • Nigeria's oil production fell 70,000 bbl/day to 1.52 million bbl/day due to outages of infrastructure damaged by militants
  • Saudi Arabia also reduced output by 40,000 bbl/day
  • Production from Iran grew another 20,000 bbl/day to 3.55 million bbl/day.

The African country of Gabon is OPEC's latest member, adding 210,000 bbl/day to the cartel's total oil volumes.




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

96.17
+0.68 ▲ 0.7%
USD INDEX
75.96
-0.63 ▼ 0.8%
CDN DOLLAR
1.59%
+0.13 ▲ 8.9%
US 10Y Bond
1.07%
+0.04 ▲ 4.1%
CDN 10Y Bond
CHANGE WK/WK  

The Bank of England (BoE) dropped its overnight lending rate from 0.5% to 0.25%, a 322-year low for the country. The BoE will also buy £60 billion of UK government bonds and £10 billion of corporate bonds. The pound declined over 1% on the news.

Another weak jobs report in Canada and weakness in energy prices dragged the loonie almost 1% lower. Canada lost another 71,000 full time jobs in July (m/m). Full time jobs continue to be shed across the country in favour of lower paying part time employment.

In contrast, the US added 255,000 jobs for the month of July, much higher than the 180,000 jobs that were expected. Wages are up 2.9% so far this year. The news revives the chances of a rate hike by year end, sending the US dollar and short term yields higher.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
44.27
+1.81 ▲ 4.3%
BRENT USD/BBL
41.80
+0.20 ▲ 0.5%
WTI USD/BBL
37.77
+0.42 ▲ 1.1%
CDN LT USD/BBL
26.90
+0.10 ▲ 0.4%
WCS USD/BBL
CHANGE WK/WK  

Oil prices bottomed on Tuesday, with WTI breaching the $40/bbl mark for the first time since April. However, prices recovered on Wednesday on news that gasoline stockpiles are finally retreating. Oil prices tend to peak in the summer, when demand for gasoline is high, and retreat into the fall when many refineries shutdown for maintenance.

The heavy oil discount widened slightly to $14.90/bbl. As a point of comparison, comparable heavy crude from Venezuela and Mexico is currently selling at a discount of just under US$6/bbl to WTI, reflecting much lower transportation costs to the US Gulf Coast.




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

Birchcliff Energy (BIR), Seven Generations (VII), Advantage Oil & Gas (AAV) and Teck Resources (TCK/B) all hit 52-week highs on the TSX this week. Bellatrix Exploration (BXE) hit a new 52-week low.

This week's notable earnings from the energy patch . . . 

Veresen (TSX:VSN +9.2%) reported an adjusted profit of $13 million for the second quarter, driven by good performance in its pipelines and midstream business units. The company has suspended its Dividend Reinvestment Program and put its power generation business up for sale in order to raise cash for its core natural gas and NGL infrastructure business. Veresen also has big plans to build an LNG export terminal in Oregon. That project is stuck in regulatory limbo as the US Federal Energy Regulatory Commission has not yet granted a permit to begin construction.

Inter Pipeline (TSX:IPL -0.2%) reported a second quarter net income of $123 million, a 67% increase from Q2/2015. Pipeline volumes rose 14% to 1,213,900 bbl/day. Funds from operations rose 9% to $197 million. Oil sands volumes rose 19% y/y, now over 1 million bbl/day. Conventional oil volumes declined slightly. The Alberta wildfires forced the shutdown of its Corridor and Polaris pipelines in and out of the Albian Sands facility. The stoppage had no material impact on second quarter results.

Pengrowth Energy (TSX:PGF n/c) reported a Q2 net loss of $173.4 million, 30% wider than the $134.4 million loss reported in Q2/2015. Total production declined 23% y/y to 56,735 boe/day due to several assets sales, maintenance shutdowns and natural declines. Operating expenses for the quarter also declined 18% to $12.92/boe. Pengrowth's Lingbergh SAGD pilot in the Cold Lake area continues to perform better than expected, averaging about 15,700 bbl/day, much higher than its nameplate capacity of 12,500 bbl/day. The company hopes to expand the facility by another 17,500 bbl/day when oil prices recover. Pengrowth has spent $2.7 million on design and engineering for Phase 2 and has managed to bring capital costs down to $750 million, 12% lower than original estimates.

Pembina Pipeline (TSX:PPL +3.1%) reported a second quarter profit of $248 million (+24% y/y) despite a 15% drop in revenues, falling to $1.03 billion. Cash flow from operations rose to $273 million (+30%). Pipeline volumes increased about 6% to 1.79 million boe/day, led by strong growth in its conventional oil, NGL and natural gas distribution businesses. Pembina received approval from the Alberta Energy Regulator in April 2016 and began construction on two 270 km pipelines between Fox Creek and Namao, Alberta. Over $1 billion in new assets were put into service for the first 6 months of this year.

Enerplus (TSX:ERF +9.9%) reported a net loss of $168.5 million for the second quarter, about half the losses of Q2/2015. Oil & gas production declined to an average of 93,659 boe/day due to the recent sale of several assets. Production guidance for the full year was updated to 92,000 to 94,000 boe/day. Capital spending was revised up 7.5% to $215 million this year. About two-thirds of Enerplus' production comes from deposits in North Dakota; the remaining one-third from BC, Alberta and Saskatchewan.

Gibson Energy (TSX:GEI +4.0%) reported a net loss of $134 million in the second quarter, which included an impairment charge of $101.4 million. Q2 revenues declined 29% y/y to $1.12 billion, due to lower service and commodity sales. Capital expenditures for the quarter were $63 million which mostly went towards on-going terminal infrastructure expansions at Hardisty and Edmonton. Gibson successfully commissioned the Edmonton East Terminal Expansion in March, increasing its storage, blending, and handling capabilities.

Seven Generations (TSX:VII +8.7%) produced 117,353 boe/day in the second quarter, more than double the same time last year. Funds from operations rose 56% to $197 million. Net loss for the quarter widened to $57.5 million. The company's crown jewel is the Kakwa River Project in northwest Alberta. The asset produces liquids-rich natural gas sold primarily to the US Midwest. Production should increase through the second half of the year thanks to its recent $1.9 billion acquisition of neighbouring Montney Nest assets from Paramount Resources. The lands will add another 30,000 boe/day to 7Gen's total production. Capital spending for 2016 will increase to just over $1 billion. 7G stock is one of the best performers in the TSX energy sector, gaining 150% from its January low.

Paramount Resources (TSX:POU +7.2%) reported a second quarter loss of $30.6 million, much less than analysts were expecting. The company produced an average of 40,890 boe/day in Q2 down 4% from the same time last year.

Penn West Petroleum (TSX:PWT +9.7%) declared a second quarter loss of $132 million, bringing its total losses for the first half of 2016 to $232 million. Revenues declined 45% to $209 million, thanks in part to a 41% decline in total production, averaging 63,568 boe/day. Operating expenses declined 30% to $12.70/boe due to the deferral of maintenance activities. The company has sold a number of non-core assets this year, reducing its focus on operations in Cardium, Alberta Viking and the Peace River area. Proceeds from divestitures have gone towards reducing its debt from over $2 billion late last year to just $490 million. The company plans to almost double its capital spending through the second half of the year and begin growing production again.

Whitecap Resources (TSX:WCP +6.4%) reported a second quarter loss of $28.3 million due to lower oil & gas sales and several recent acquisitions. Q2/2016 production averaged 40,388 boe/day, 5% higher than their forecast of 38,500 boe/day. The company has closed on its recent acquisition of several assets in southwestern Saskatchewan, which will add 11,600 boe/day of low decline production to the bottom line. TWhitecap is on track to produce in excess of 50,000 boe/day by the end of this year.

Marathon Oil (NYSE:MRO +1.7%) reported a second quarter net loss of US$170 million. Total production averaged 384,000 boe/day in Q2, down 5.7% from the same time last year. Marathon Oil owns 20% of Albian Sands Energy, which includes the Muskeg River and Jackpine oil sands mines as well as the Scotford Upgrader. Production at Albian was curtailed by about 20,000 bbl/day over the second quarter due to the May wildfires which forced the shutdown and evacuation of both Muskeg River and Jackpine. The wildfires increased operating costs to US$39/bbl, including upgrading. Q3 guidance for the oil sands is expected to rebound to 225,000 to 250,000 bbl/day. CEO Lee Tillman says his company can return to growth as soon as WTI returns to the low to mid-$50s.

Chesapeake Energy (NYSE:CHK -9.8%) reported a quarterly net loss of US$1.79 billion. Chesapeake is the second largest natural gas producer in the US.

UPGRADES

  • Canadian Natural Resources (TSX:CNQ): Upgraded from Neutral to Outperform at Macquarie.
  • Enbridge Energy Partners (NYSE:EEP): Upgraded from Neutral to Outperform at Credit Suisse Group. 
  • Teck Resources (TSX:TCK/B): Upgraded from Underperform to Market Perform at Raymond James Financial.
  • Veresen (TSX:VSN): Upgraded from Underperform Market to Market Perform at BMO Capital Markets.

DOWNGRADES

  • Royal Dutch Shell (NYSE:RDS/A): Downgraded from Buy to Hold at Liberum Capital and from Outperform to Sector Perform at RBC.
  • Teck Resources (TSE:TCK/B): Downgraded from Buy to Hold at Goldman Sachs.

PRICE TARGET CHANGES

  • Devon Energy (NYSE:DVN): Price target increased from US$43 to US$45 at Barclays.
  • Enbridge (TSX:ENB): Price target increased from $58 to $59 at TD Securities.
  • Exxon Mobil (NYSE:XOM): Price target increased from US$100 to US$102 at Barclays.
  • Gibson Energy (TSX:GEI): Price target decreased from $17.50 to $17 at BMO and from $22 to $21 at Desjardins.
  • Husky Energy (TSX:HSE): Price target increased from $16 to $17 at Goldman Sachs and from $22 to $23 at Barclays.
  • Imperial Oil (TSX:IMO): Price target decreased from $49 to $48 at TD Securities.
  • Veresen (TSX:VSN): Price target increased from $13.50 to $14 at CIBC.

NEXT WEEK'S EVENTS

Monday:

  • NEB kicks Energy East hearings in New Brunswick
  • Presidential candidate Donald Trump unveils economic platform in Detroit, Michigan
  • Chinese trade balance and CPI data

Tuesday:

  • API Weekly Statistics Bulletin released @ 4:30pm ET
  • Finance Minister Bill Morneau holds press conference on economic growth in Sudbury, ON
  • Keyera Q2 earnings release
  • Ensign Energy Services Q2 earnings release
  • Transalta Q2 earnings release

Wednesday

  • EIA Petroleum Status Report released @ 8:30am ET
  • OPEC Monthly Market Report
  • Painted Pony Petroleum Q2 earnings release
  • Peyto Exploration Q2 earnings release
  • Bonterra Energy Q2 earnings release

Thursday:

  • EIA Natural Gas Report released @ 10:30am ET
  • IEA Monthly Oil Market Report
  • Crescent Point Energy Q2 earnings release
  • Trican Well Service Q2 earnings release
  • Black Diamond Group Q2 earnings release
  • Horizon North Logistics Q2 earnings release

Friday:

  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday August 12, 2016 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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