The Oil Sands Weekly
IN THE NEWS THIS WEEK . . .
Suncor Energy reached a deal with Murphy Oil to purchase their 5% share of Syncrude for $937 million. Suncor's share of the Syncrude oil sands operation will increase to 53.74% once the deal closes. The company insists it has no plans to take control of the facility, currently operated by Imperial Oil. All in, Suncor paid $54,000/bbl of premium light synthetic crude produced at Syncrude, a much better deal than the $71,400/bbl price tag for the Fort Hills greenfield project which produces lower-value heavy bitumen.
The National Energy Board (NEB) recommended approval of Enbridge's Line 3 Pipeline Replacement Program. The NEB noted in its decision that the project will replace an aging pipeline with a new pipeline constructed to modern standards, therefore making the system safer. Line 3 is a 40 year old pipeline that carries a blend of crudes from Alberta to Wisconsin. The replacement will increase the line's capacity from 390,000 to 760,000 bbl/day. The federal government has committed to making the final decision this fall, which would allow for an in-service date sometime in 2019. The US section of the line will be executed by Enbridge Energy Partners, and still needs US approvals. However, since Line 3 is already in operation, a presidential permit is not required.
In this week's political news:
- Premier Notley met with Prime Minister Trudeau and his Liberal cabinet early in the week to discuss pipelines and th environment. Natural Resources Minister Jim Carr is now suggesting projects could be approved before the newly imposed deadlines, raising hopes a pipeline to tidewater might actually get built by the end of this decade.
- Trudeau reiterated this week that Northern Gateway will not get built under his watch, calling the Great Bear Rainforest "no place for a crude pipeline". Supporters of Northern Gateway (which now includes Premier Notley) point out that the Trans Mountain pipeline, which runs through Jasper National Park, has been carrying Alberta crude to Vancouver since 1953 without incident.
- Prime Minister Trudeau also visited Saskatchewan this week, meeting with Premier Brad Wall to discuss infrastructure and innovation. The premier voiced concerns over SE and SW corners of Saskatchewan that were excluded from the recent expansion of EI benefits. Trudeau responded that the government is monitoring the situation but makes no promises.
- Premier Notley headed to Washington DC this week to explain the concept of a "social licence" to the Americans. The premier met with Canadian ambassadors, several elected officials and energy think-tanks to spread the message that Alberta is committed to leading the fight against climate change and is far more socially responsible than the previous government. The PR tour is unlikely to change anything for TransCanada's Keystone XL. Presidential frontrunner Hillary Clinton wants nothing to do with Alberta's "dirty oil" while both Republican candidates support the Keystone project. Premier Notley is convinced Alberta's carbon tax is bringing Canada closer to getting at least one new pipeline built.
- The Federal government appears to have ended the 2015/16 fiscal year with a whopping $7.5 billion surplus, slightly different than the $5.5 billion deficit the Liberals claim to have inherited from the previous government. Government data seems to indicate the Canadian economy is doing quite well outside the energy patch. Many are questioning the need for $113 billion in deficit spending over the next 5 years and huge expansion of government, none of which will patch the hole left by low oil prices.
- Moody's Investors Service downgraded Alberta's long-term debt rating from AAA to AA1 citing "deep deficits and long return to balanced budgets forecasted by the province, and the resulting rapid and substantial rise of provincial debt levels". Moody's recent downgrade followed DBRS who downgraded the province in April and Standard & Poor's downgrade last December. Provincial Finance Minister Joe Ceci met with investors and credit rating agencies in Toronto and New York to defend the NDP government's fiscal policies.
Canada's energy players began rolling out first quarter earnings this week. In general, all producers reported an operating loss on upstream operations with many reversing foreign exchange charges booked last year on US denominated debt. Key highlights:
- Suncor Energy reported a steeper than expected operating loss of $500 million in the first quarter but managed to salvage earnings by booking a $800 million forex gain. Including its recent acquisition of Canadian Oil Sands, the company expects production to reach 650,000 bbl/day by year end and is looking to hit 800,000 bbl/day by 2019 when Fort Hills comes online.
- Imperial Oil reported a first quarter loss of $101 million, an exceptionally rare event for the company. Weak refining margins dragged earnings lower while the company's upstream operations lost $448 million for the quarter.
- Cenovus Energy reported a $118 million loss on a 95% plunge in cash flow. Cenovus also booked a $413 million foreign exchange gain that made first quarter results look a lot less bad. CEO Brian Ferguson floated the idea of building a diluent recovery unit in Edmonton to avoid $2-4/bbl in diluent transportation costs.
- MEG Energy also reported an operating loss of $197 million in the first quarter. Net earnings came in at $131 million thanks to a $320 million accounting forex gain on assumptions for a stronger Canadian dollar.
- Husky Energy reported a net loss of $458 million in Q1, much worse than analysts were expecting. The company also divested 65% of select Canadian midstream assets to two Chinese firms for $1.7 billion in cash. Husky is currently involved in a spat with partner CNOOC over missed payments for gas delivery from their Liwan JV gas plant located in the South China Sea. CNOOC (which is owned by the Chinese government) wants to renegotiate the contract given recent declines in Asian natural gas prices. Husky is threatening legal action but remains confident the disagreement will be resolved. Investors don't appear to be as confident, as Husky stock declined 10% on the news.
- TransCanada reported a profit of $252 million thanks to strong performance from its Bruce Power division. The company also took a $176 million impairment charge on its decision to terminate contracts to buy coal-fired power in Alberta. The company is still looking to sell some assets to finance $13 billion worth of near-term projects, $45 billion in long-term projects and the recent $13 billion purchase of Columbia Pipelines. CEO Russ Girling has committed to boosting the dividend at least 8-10% per year through 2020.
Weak refining margins took a toll on earnings for global energy players as well:
- ExxonMobil reported a better than expected profit this week, albeit the smallest profit since 1999. Net income declined to US$1.8 billion (-64% y/y) on revenues of US$48.7 billion, while production rose 2% to 4.3 million boe/day. Investment firm Raymond James pointed out that 75% of earnings came from their chemicals division, while the upstream production operated at a loss. Exxon was downgraded by from AAA to AA+ by ratings agency Standard and Poor's this week, who cited the company's high capital spending budget, lofty dividend payouts and share buybacks that greatly exceed their internal cash flow. Exxon responded that they remain committed to long-term shareholder value and then proceeded to raise their dividend by another 3%.
- Chevron posted a wider than expected loss and pledged to cut another 1,000 jobs worldwide. The company reported a net loss of US$725 million on revenues of US$23.6 billion. Including this latest round of cuts, Chevron has eliminated 8,000 positions, or 12% of its workforce.
- ConocoPhillips reported a huge US$1.18 billion loss this week and vowed to further cut its capital spending plans. Conoco's Canadian division lost US$294 million as the company's newly completed Surmont 2 SAGD facility ramps up to full capacity later this year. Standard and Poor's also downgraded ConocoPhillipss credit rating from A- to A w/negative outlook due to expectations of negative cash flow through the end of this year and into 2017.
- UK energy giant BP bucked the trend and reported much better than expected Q1 results this week. The company made US$532 million in the first quarter thanks to aggressive cost cutting, strong refining margins and profits from their energy trading business unit. CEO Bob Dudley sees global oil markets coming into balance by the end of the year but left the door open for further cost cutting, noting it stands ready to chop another US$2 billion off of its 2016 operating budget if low oil prices persist.
- French energy giant Total also reported a better than expected net profit in the first quarter on higher output, good refining margins and strong performance in their chemicals business. Total produced 2.48 million boe/day in the first quarter, up 4% for the year. The company said it aims to spend less than the $19 billion it had planned for 2016. Total reported an upstream operating cost of $23 per barrel of oil equivalent (boe), making it one of the lowest cost operators among its peers.
- Baker Hughes had a dismal first quarter, reporting a net loss of US$701 million and negative free cash flow of US$103 million. The company expects North American rig counts to fall another 30% in the second quarter and sees no meaningful recovery for the remainder of the year.
In this week's random energy news:
- Several US refiners, including Exxon and Valero, are voluntarily reducing production through their refineries. Crack spreads have been exceptionally good for the past few years, encouraging refiners to maximize the production of gasoline and distillates. But refining margins have weakened considerably in the past few months due to high inventories and weak global demand. Lower crude runs should reduce the glut in gasoline and distillates but is obviously not good for US oil stockpiles, that are already at record highs.
- Reuters is reporting that OPEC production hit a new high this month, now estimated at 32.64 million bbl/day, up from 32.47 million in March. Production rose in Iran, Iraq and the UAE while output declined in Kuwait, Nigeria and Venezuela.
- Sticking with Venezuela, the country seems to be going from bad to worse as the Venezuelan bolivar is now virtually worthless. Venezuela's inflation rate is expected to reach 500% by the end of the year. Oil and gas represents 95% of the country's exports and accounts for 45% of government revenues.
- Statoil confirmed 13 people have died when one of its choppers crashed near the city of Bergen in Norway. The victims were from a variety of companies working on Statoil's Gullfaks B platform in the North Sea. The H225 Super Puma helicopter was operated by CHC Helicopter based in Richmond, BC.
Energy traders should thanks Janet Yellen this week for talking down the US dollar once again. The federal reserve chair is backtracking on plans to raise US interest rates on news that US GDP rose only 0.5% in the first quarter, much softer than expected. A sharp decline in corporate spending (brought on by billions in capex cuts from the energy sector) is dragging the US economy back into slow-growth territory. The greenback broke a 1 year low this week, powering all commodity prices higher. The Wall Street Journal surveyed 13 investment banks who are all concerned by the recent rally in oil prices and are calling for a sharp correction through the second half of the year.
West Texas Intermediate hit a 5-month high of US$46/bbl on Thursday, taking the Canadian dollar to a 5-month high of 80¢ in the week.
- Teck Resources (TSX:TCK/B): Upgraded from Underperform to Sector Perform at National Bank Financial. The company raised its price target from $8 to $13.50 a share.
- Toromont Industries (TSX:TIH): Upgraded from Hold to Buy at Desjardins. The company raised its price target from $34 to C$38 a share.
- Caterpillar (NYSE:CAT): Upgraded from Sell to Neutral at Goldman Sachs and from Hold to Buy at Argus. Goldman raised its price target from US$62 to US$78 a share. Argus has a price target of US$92 a share.
- Joy Global (NYSE:JOY): Upgraded from Sell to Neutral at Goldman Sachs. The company raised its price target from US$13 to US$24 a share.
- Canadian National Railway (TSX:CNR): Downgraded from Buy to Underperform at Bank of America/Merrill Lynch, from Outperform to Sector Perform at CIBC and from Buy to Hold at TD Securities. TD lowered its price target from $89 to $86 while BofA/Merrill lowered their price target from $87 to $86.
- Baker Hughes (NYSE:BHI): Downgraded from Outperform to Sector Perform at Iberia Capital Partners. The company lowered its price target to US$50.
- Schlumberger (NYSE:SLB): Downgraded from Neutral to Sell at Griffin Securities and from Buy to Hold at Societe Generale.
- Total S.A. (NYSE:TOT): Downgraded from Buy to Hold at Jefferies Group.
PRICE TARGET CHANGES
- Suncor Energy Inc. (TSX:SU): Price target increased from $38 to $39 at TD Securities.
- Cenovus Energy Inc. (TSX:CVE): Price target increased from $21 to $22 at TD Securities and from $22 to $23 at RBC Capital.
- Husky Energy (TSX:HSE): Price target decreased from $22 to $21 at Barclays, from $16 to $15 at Raymond James and from C$22 to C$21 at Barclays.
- ConocoPhillips (NYSE:COP): Price target increased from US$50 to US$65 at Citigroup.
- Marathon Petroleum Corp (NYSE:MPC): Price target increased from US$56 to US$56 at RBC Capital.
- SECURE Energy Services Q1/2016 earnings release
- Bank of Canada Governer Poloz Speech @ 9:30pm ET
- API Weekly Statistics Bulletin released @ 4:30pm ET
- Baytex Energy Q1/2016 earnings release
- Encana Q1/2016 earnings release
- Black Diamond Group Q1/2016 earnings release
- Gibson Energy Q1/2016 earnings release
- Pengrowth Energy Q1/2016 earnings release
- Devon Energy Q1/2016 earnings release
- Statistics Canada Balance of Trade data (imports/exports)
- EIA Petroleum Status Report released @ 10:30am ET
- Athabasca Oil Corp Q1/2016 earnings release
- Horizon North Logisitics Q1/2016 earnings release
- Enerflex Energy Q1/2016 earnings release
- Trican Well Services Q1/2016 earnings release
- Veresen Q1/2016 earnings release
- EIA Natural Gas Report released @ 10:30am ET
- Canadian Natural Resources Q1/2016 earnings release
- Statistics Canada Unemployment Data
- Baker-Hughes Rig Count released @ 1:00pm ET
- Enerplus Corp Q1/2016 earnings release