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The Oil Sands Weekly

The Oil Sands Weekly

Cenovus back in the black and shifts focus to SAGD expansion . . . 

Cenovus Energy unexpectedly reported a $91 million operating profit for the fourth quarter of last year, much better than analysts were expecting. This is the company's first operating profit since the second quarter of 2015. 

Q4 production at Christina Lake increased to 165,600 bbl/day thanks to the continued ramp up of the phase F expansion, which began producing oil late last year. Operating costs for the full year have declined 7% y/y to $7.48/bbl, or $5.40 ex-energy.

Construction of phase G, which was shelved in 2015, is expected to restart in the first half of this year. The company reports to have already resumed module assembly for the expansion, which will add another 50,000 bbl/day of gross capacity to the overall facility. Cenovus says it has managed to shave $500 million off the phase G budget, now estimated at $1.1 billion. First oil out of this latest expansion phase is expected by the second half of 2019.

Foster Creek averaged 163,200 bbl/day in Q4, bringing the full year average to 140,500 bbl/day. Operating costs have declined 16% to $10.55/bbl, or $8.09 ex-energy. Timing of the phase H expansion is still up in the air, although the company says it is continuing to advance engineering work.

Cenovus is also mulling the revival of its Narrows Lake project, also shelved in 2015 in order to preserve cash. An update is expected on both the Foster Creek and Narrows Lake expansions during the company's Investor Day event in June.

Cenovus says it now has "a clear line of sight to five years of growth" that would take oil sands gross production capacity to more than 500,000 bbl/day. The company also announced a 5% increase 2016 in proved oil reserves, now approximately 2.7 billion barrels of oil equivalent.

Christina Lake, Foster Creek and Narrows Lake are a 50/50 joint venture with ConocoPhillips.

A decent year at Albian Sands despite spring wildfires . . .

Marathon Oil provided a rare update on the Albian Sands mine this week. The company says fourth quarter production averaged 235,000 bbl/day, down from a record high of 290,000 bbl/day in Q3. The decline was blamed on planned maintenance activities during the quarter. 

Despite the spring wildfires which forced the evacuation of the mine site, the facility managed to average 240,000 bbl/day last year, up from 237,000 bbl/day in 2015. Albian Sands includes the Muskeg River Mine and adjacent Jackpine expansion, which have a combined nameplate capacity of 255,000 bbl/day. 

For the full year 2016, operating costs declined 20% to US$27.89 per barrel of SCO (synthetic crude oil) produced at Scotford (roughly $37/bbl). Fourth quarter operating expenses declined 5% to US$26.52 per barrel. 

The average selling price for the company's SCO in Q4 was US$43.35/bbl (about 10% below the WTI average of US$49/bbl in Q4). Scotford produces two streams of light/sweet crude (Shell Synthetic Light and Premium Albian Synthetic) as well as a partially upgraded heavy/sour blend (Albian Heavy Synthetic).

Marathon Oil owns a 20% stake in the Athabasca Oil Sands Project, which includes the Scotford Upgrader. The remainder is owned by Chevron (20%) and Shell (60%).

This week's Trans Mountain Expansion update . . .

Reuters is reporting that Kinder Morgan is advancing talks with Canadian pension funds and private equity firms to raise capital for its $6.8 billion Trans Mountain Expansion project (TMEP). 

Reuters lists the Canada Pension Plan Investment Board, Quebec's Caisse de Depot and the Ontario Teachers' Pension Plan as possible suitors. Middle Eastern sovereign wealth funds are also being considered.

Kinder Morgan has also hired TD Bank to investigate a potential IPO of a 50% stake in the project through the creation of a new joint venture. 

Kinder Morgan's 2017 capital spending plan only includes plans to pay for 50% of TMEP.

Kinder Morgan purchased the Trans Mountain line in 2005 through its acquisition of Vancouver-based Terasen Inc. The expansion would almost triple the pipeline's capacity to 890,000 bbl/day. The existing line has been in service since 1953.

This week's Keystone XL update . . .

TransCanada has applied for routing approval in the state of Nebraska

The current proposed route was evaluated and approved by former Nebraska Governor Dave Heineman in 2013, after TransCanada rerouted the pipeline around an ecologically sensitive area. A Nebraska judge overturned the governor's approval in February of 2014, but that decision was later struck down by the Nebraska Supreme Court.

TransCanada is in the process of updating its shipping contracts but expects to have sufficient commitments to support construction of the project. At best, construction could start in the second half of 2018 and be ready for service in about 2 years.

ConocoPhillips looking to exit Canadian natgas operations . . . 

ConocoPhillips has reportedly put several natural gas assets in Western Canada for sale, including properties in the Deep Basin, Clearwater, Kaybob-Edson and Plains regions. The properties are estimated to be worth up to US$2 billion.

Sources say the company has no plans to divest its assets in the oil sands or the Montney region. ConocoPhillips is the largest independent oil producer in the US.

Pembina Pipeline and Chevron partnering up in Duvernay shale gas play. . . 

Pembina Pipeline entered into a 20 year service agreement with Chevron to construct and operate gas gathering and processing facilities, as well providing long-term service agreements on its pipelines and fractionation facilities in the Kaybob region of the Duvernay basin near Fox Creek, Alberta. 

Terms of the deal between the two companies were not disclosed.

Chevron has yet to make a final investment decision on its Kaybob Duvernay project, which is jointly owned with KUFPEC Canada, a wholly owned subsidiary of Kuwait Foreign Petroleum Exploration Company.

AER gets tough on Lexin Resources . . . 

The Alberta Energy Regulator (AER) has suspended the licenses of all wells, facilities, and pipelines belonging to Lexin Resources, forcing the company to shutdown all production at more than 1600 sites.

The AER accuses Lexin of insufficient staffing and failing to comply with multiple orders. The company now owes more than $1 million in orphan fund levies and $70 million in security deposits for its end of life obligations. The AER says it has little confidence in Lexin’s ability to conduct its operations safely.

Lexin says the AER's actions have prevented them from accessing enough capital to run their operations.

Almost 100,000 Albertans now collecting EI . . . 

The number of Employment Insurance (EI) recipients in Alberta ticked higher again in December, climbing to 97,900. The Calgary area saw a 4.1% jump in beneficiaries, while Edmonton increased by 1.5%. Both cities have seen an increase of almost 60% in the past 12 months.

Alberta's unemployment rate reached a record 8.8% in January.

Other notable Canadian energy news this week . . . 

Canadian Natural Resources (CNRL) announced a 4% increase in its proved reserves. Gross proved plus probable reserves now total about 9.18 billion barrels of oil equivalent, resulting in a production replacement ratio of 147% relative to 2016 production (or a recycle ratio of 3.8). Horizon's proved plus probable reserves accounts for 3.6 billion of those barrels.

Gibson Energy has agreed to sell its industrial propane business to Superior Plus for $412 million. Under terms of the deal, Superior has agreed to a 5 year wholesale supply and distribution agreement that allows Gibson to continue to procure propane volumes. Gibson says it will use proceeds of the sale to reduce its debt load. Superior says it is positioning itself for "oilfield activity recovery and improved demand" in Western Canada.

Norway's Statoil announced plans to drill two offshore exploratory wells this summer in the Flemish Pass Basin near the Bay du Nord discovery, located 500 kms offshore St. John's, NL. All of Newfoundland's current production is from the Jeanne d'Arc region, closer to shore and in significantly shallower water. Statoil produces about 20,000 bbl/day in Atlantic Canada and holds a stake in Newfoundland's Hebron, Hibernia and Terra Nova projects, all located in the Jeanne d'Arc region.

Vancouver-based auctioneer Ritchie Brothers has signed an agreement with Shell to sell surplus industrial assets. Terms of the deal were not disclosed. Last July, Shell contracted Ritchie Brothers to sell its 1,200 person camp in Peace River after it cancelled its Carmon Creek SAGD expansion project.

Shell also closed on a deal to sell its partially-built Carmon Creek cogeneration plant to Kineticor Resource. The 690 MW facility will be named Three Creeks Power Plant. The acquisition also includes an agreement between Kineticor and Shell for the future development.

The National Energy Board (NEB) has issued a hearing order for the Wyndwood Pipeline Expansion Project. The natural gas project would expand the existing Fort St. John Mainline by 27 kms near the town of Chetwynd, BC. A project of this magnitude that does not cross provincial borders typically doesn't require a public hearing but the NEB says it has made an exception due to an "elevated level of public interest." The pipeline is owned by Spectra Energy.

Paramount Resources provided an operational update and 2017 outlook this week. The company expects to spend $325 million this year (excluding land acquisitions), mostly on the expansion of its Karr-Gold Creek facility. Sales volumes are expected to average 20,000 boe/day for the full year, ramping up towards the latter half of the year as production out of Karr-Gold Creek should double post-expansion.

Alberta Premier Rachel Notley heads to Washington on February 26 to discuss jobs and bilateral trade. The US is Alberta's largest trading partner. Diluted bitumen is by far the province's largest export. The premier has not yet released a specific itinerary for the trip.

DAPL saga hopefully coming to an end . . .

A US federal judge has denied a request from the Cheyenne River and Standing Rock Sioux Native American tribes to halt construction of the Dakota Access Pipeline (DAPL). 

The tribes say the pipeline would endanger their cultural sites and infringes on their religious freedom. The judge ruled that no harm can come from construction, at least not until "the spigots are turned on and the oil flows through the pipeline." Another hearing has been scheduled for February 27.

Pipeline operator Energy Transfer Partners (ETP) received its final easement from the US government last week, allowing it to complete a last section of pipe that runs under the Missouri River. A spokesperson for DAPL says construction is progressing faster than anticipated and the line could be in service in less than a month. 

ETP executive VP Joey Mahmoud has denounced protests against the project, noting that the pipeline has been "subjected to a series of politically motivated actions by the previous administration, accompanied by a host of half-truths and misrepresentations in both social and mainstream media." Mahmoud described how ETP employees and their children have faced death threats, calling the "well-funded" protestors basically domestic terrorists.

Less than 6% of almost 700 protestors arrested are from North Dakota. Local officials claim the out-of-state protestors have been recruited by national activist groups and many appear to have been professionally trained.

The Army Corps of Engineers has ordered DAPL protestors to leave by February 22. It is unclear who will pay for the debris, trash, untreated waste and abandoned vehicles left behind by the protestors, which now risks contaminating the Missouri River. The state of North Dakota says the protests have costs taxpayers US$33 million to date.

Trump's love of coal put to the test . . .

A Navajo Nation tribe has asked President Trump to save a coal plant located on their lands in northern Arizona.

The 40 year old Navajo Generating Station is the largest in the Western US employing 400 full-time staff, 90% of whom are Navajo. The facility and neighbouring coal mine pays out over US$150 million annually in salaries and royalty payments to the Navajo and nearby Hopi tribes.

The plant is the country's third largest emitter of greenhouse gases and was slated to close this year. Aside from environmental challenges, the plant's owners maintain a natural gas fired power plant would be far less costly to operate and reduce power costs by hundreds of millions. The tribe is asking the White House explore all options to keep the plant running while it works towards transitioning its economy away from coal. 

In the interim, operator SPR (Salt River Project) has agreed to keep the plant open until the end of 2019. At this point, the only salvation for the coal plant would likely be in the form of a government bailout.

EPA about to undergo extreme makeover . . . 

Scott Pruitt has been cleared by the US Senate to lead the Environmental Protection Agency (EPA). The vote was split 52-46, mostly along party lines. 

During his time as Oklahoma’s attorney general, Pruitt participated in dozens of lawsuits challenging a variety of EPA regulations, including Obama's Clean Power Act. 

Earlier this week, an Oklahoma judge ordered Pruitt to hand over hundreds of emails with fossil fuel companies during his time as attorney general. Democrats failed in their attempt to stall Pruitt’s confirmation vote until those documents could be reviewed. 

Pruitt says he remains open to "meaningful collaboration between the EPA and the states to achieve important environmental objectives."

This week's other notable US energy news . . . 

The US Federal Trade Commission has approved the merger between Spectra Energy and Enbridge, subject to a number of conditions. The US$28 billion merger will create North America's largest energy infrastructure company. Both parties expect the deal to close sometime in the first quarter of this year.

Enbridge has sold its Ozark Pipeline to Marathon Petroleum's MLPX for US$220 million. The 433 mile (700 km) line transports 230,000 bbl/day of crude oil from Cushing, Oklahoma to a terminal in Wood River, Illinois. The line's capacity will be expanded to 345,000 bbl/day by the middle of 2018.

Plains All America and Noble Midstream Partners have formed a joint venture to acquire Advantage Pipeline for US$133 million. Assets include a 150,000 bbl/day crude oil pipeline and 490,000 barrels of storage capacity, all located in the Texas Delaware Basin.

Around the world this week . . . 

Workers have ended strike action at CNRL’s Baobab and Espoir oil and gas fields in Ivory Coast after the two sides signed a memorandum of understanding. Production has restarted on all platforms. CNRL produces about 70 million cubic feet/day of natural gas and up to 45,000 bbl/day of oil in the Ivory Coast.

The government of India continues to work towards reducing energy imports by approving rights to 31 small oil and gas fields in its first auction in six years. The International Energy Agency expects India to become the fastest growing crude consumer, surpassing China. Prime Minister Modi wants to reduce crude imports by 10% by 2022. The country currently imports about 80% of their oil requirements.

The government of Iran claims to have discovered dozens of new oil fields said to contain 30 billion barrels of crude and 128 trillion cubic feet of natural gas. Officials for the National Iranian Oil Company warn the country must "say goodbye to such big fields as Yadavaran and Azadegan and get used to discovering smaller fields" noting that while new gas discoveries are still possible, new oil findings are unlikely to be large. Iran has 157 billion barrels of proven oil reserves and currently produces about 4 million bbl/day.

OPEC sources have hinted the cartel may extend or deepen production cuts through the second half of this year. OPEC would like to see global oil inventories decline from their record highs closer to their 5 year average. A group of OPEC and non-OPEC members have agreed to cut production by 1.8 million bbl/day from last October's level, but those quotas are set to expire in July. OPEC's cuts so far have mostly focused on medium and heavy grades of crude.



WEEKLY ENERGY STATISTICS

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

3,138k
-442k ▼ 12.3%
BBL/D CDN EXPORTS TO US
8,977k
-1k ▼ 0.0%
BBL/D US PROD'N
518.12M
+9.53M ▲ 1.9%
BBL US INVENTORIES
597
+6 ▲ 1.0%
US RIG COUNT
CHANGE WK/WK  

WEEKLY MARKET SUMMARY

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

100.95
+0.16 ▲ 0.2%
USD INDEX
76.34
-0.08 ▼ 0.1%
CDN DOLLAR
2.42%
+0.01 ▲ 0.4%
US 10Y Bond
1.70%
+0.01 ▲ 0.6%
CDN 10Y Bond
CHANGE WK/WK  

OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group

55.81
-0.89 ▼ 1.6%
BRENT USD/BBL
53.40
-0.46 ▼ 0.9%
WTI USD/BBL
50.70
+0.07 ▲ 0.1%
CDN LT USD/BBL
39.77
+0.74 ▲ 1.9%
WCS USD/BBL
CHANGE WK/WK  


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

TransCanada (TRP) reported a fourth quarter loss of $358 million, including an $870 million impairment charge related to the sale of power assets in the northeastern US. Much of the company's growth is now coming from its recent acquisition of Columbia Pipeline and natural gas distribution in Mexico. For the full year, TransCanada turned a profit of $485 million and cash flow from operations exceeded $5 billion for the first time in its history. TransCanada now operates over 90,000 km of natural infrastructure versus only 4,300 km of crude oil pipelines. The company has $22 billion in near-term projects (mostly natural gas) and $45 billion in of longer term projects on the books, including Keystone XL and Energy East. Canada's #2 pipeline operator also boosted its dividend by 10% to $2.50 per share annually.

Enbridge (ENB) reported a fourth quarter net profit of $365 million, bringing full year profits to $1.78 billion. Cash from from operations increased 18% last year to $3.7 billion. Canada's largest pipeline operator transported an average of 2.4 million bbl/day of liquids and 1.5 billion cubic feet/day of natural gas through its Canadian network. Enbridge has $27 billion worth of projects currently in the works, including the recently approved $7.5 billion Line 3 Replacement project.

Inter Pipeline (IPL) reported a record 2016, as funds from operations increased 10% y/y to $849 million on record throughput volumes of 1.3 million bbl/day. The midstream player benefited greatly from higher volumes out of Foster Creek and the Cold Lake areas, as well increased production from Albian Sands transported on the Corridor pipeline system. Bulk liquid storage capacity utilization also hit a record 98% in 2016, up from 94% the previous year. Inter Pipeline operates 3,900 km of pipelines in Western Canada.

Midstream player Keyera Corp (KEY) reported a full year profit of $217 million last year, up 7% from 2015. The company has a number of joint ventures on the go, including the Norlite diluent pipeline (on track to be operational this summer), the South Grand Rapids diluent pipeline (expected to come online by the end of this year) and the Base Line Terminal crude oil storage project, which should begin filling early next year. 

Keyera also announced plans to construct a new NGL gathering pipeline systems dubbed "Keylink" which will connect several Keyera gas plants to the Rimby Gas Plant, expanding access to nearby fractionators, the Edmonton rail terminal and various NGL storage facilities. Keylink has a price tag of $147 million and should be operational by the middle of 2018.

Fourth quarter losses at Encana (ECA) narrowed to $281 million, much better than analysts were expecting. Liquids production fell 25% in Q4 to an average of 108,900 bbl/day while natural gas output declined 19% to 1.28 Bcf/day. The company also announced plans to boost capital spending by 50% this year, to a range of $1.6 to $1.8 billion. Encana has divested a slew of North American assets in the past few years and is now focused on just four core properties in the Montney, Duvernay, Eagle Ford and Permian basins.

Encana also says it remains hopeful Western Canadian gas producers will reach an agreement with TransCanada on pipeline tolls for its Mainline natural gas shipments to Ontario.

North American Energy Partners (NOA) reported a fourth quarter loss of $497,000 on revenues of $62.2 million (-4% y/y). The company was recently awarded a sole-sourced 5-year services agreement with a major oil sands operator for reclamation, overburden removal, mine support services and civil construction activities. CEO Martin Ferron says "the worst seems to be in the past" and remains optimistic for the future, expecting to beat growth targets over the next 2 years. NOA handles earthworks for the Syncrude, Suncor, CNRL and the Imperial Oil oil sands mining operations north of Fort McMurray.

Calgary-based Boardwalk REIT (BEI.UN) reported another quarterly decline in revenues from its Alberta rental properties as vacancy rates rise and rental prices fall across the province. The company blames the decline on a "softer economic environment in Western Canada" due to lower oil prices, negative GDP growth and a significant volume of new apartments built over the past few years. However, Boardwalk is hopeful a turn-around in the labour market, higher oil prices and new pipeline approvals will turn its fortunes around this year. Boardwalk owns and operated almost 20,000 rental units in Alberta, most located in the city of Edmonton.

Altagas (ALA) has agreed to issue $300 million in preferred shares (12 million shares at a price of $25 a share). Net proceeds will be used to reduce debt.

This week's 52-week highs on the TSX includes Paramount Resources (POU), Pembina Pipeline (PPL), ShawCor (SCL) and Veresen (VSN).

NYSE ENERGY STOCKS • WEEKLY CHANGE

Oklahoma-based Devon Energy (DVN) reported a fourth quarter profit of US$331 million, much improved from a US$4.5 billion loss in Q4/2016. For the full year, losses narrowed to US$3.3 billion, down from a US$14.5 billion loss in 2015. Q4 production at the Jackfish SAGD facility reached a record 139,000 bbl/day, bringing the full year average to 134,000 bbl/day. Total production at Devon averaged 611,000 boe/d in 2016, down from 680,000 boe/day the previous year. Expenditures are expected to be in the range of US$2.3 to US$2.7 billion, down from US$3.11 billion in 2016.

Marathon Oil (MRO) reported a net loss of US$1.37 billion in the fourth quarter on revenues of US$1.39 billion, down 5.8% from the previous year. For the full year 2016, the company produced an averaged of 396,000 boe/day reflecting better than expected output from Libya and its Alberta oil sands operations. Marathon announced plans to double its capital spending to US$2.2 billion this year, about 90% focused on "high return" US resource plays in Oklahoma and the Bakken shale formation. The remaining 10% will be spent on international projects, including Albian Sands.

Spectra Energy (SE) reported fourth quarter revenues of $663 million, up 5% y/y despite a 2% decline in revenues. The company brought eight projects into service this year, valued at US$2 billion. Another US$2.3 billion worth of projects are slated to be completed this year. For the full year 2016, Spectra turned a profit of US$693 million, up from US$196 million in 2015.

Independent E&P played Noble Energy (NBL) reported a narrower-than-expected Q4 loss of US$252 million on revenues of US$1.0 billion. Full year 2016 losses came in at US$998 million. CEO David Stover says his company is well "positioned for a tremendous year" in 2017.

Williams Companies (WMB) reported a fourth quarter loss of US$15 million, bring 2016 total losses to US$424 million. The company boosted its quarterly dividend 50% to US$0.30 per share and hopes to grow its dividend by 10% to 15% annually over the next few years. Subsidiary Williams Partners (WPZ) reported a fourth quarter profit of US$145 million and a full year profit of US$431 million.

Enbridge subsidiary Midcoast Energy Partners (MEP) posted a fourth quarter loss of US$32.6 million on operating revenues of US$620.5 million. Last month, Enbridge Energy Partners (EEP) agreed to purchase all outstanding shares of MEP, after which MEP shares will cease to trade. 

Warren Buffet's Berkshire Hathaway dumped its entire stake in Kinder Morgan (KMI) by the end of last year. The conglomerate owned 26.5 million shares at the end of 2015.


UPGRADES & DOWNGRADES
  • Cenovus Energy (TSX:CVE): Upgraded from Hold to Buy at Societe Generale.
  • Devon Energy (NYSE:DVN): Upgraded from Hold to Buy at Societe Generale.
  • Gran Tierra Energy (TSX:GTE): Upgraded from Neutral to Outperform at CIBC.

NEXT WEEK'S EVENTS

Monday:

  • December wholesale trade data released by StatsCan
  • Canadian/US markets closed for Family Day/Presidents' Day

Tuesday:

  • API Weekly Statistics Bulletin released @ 4:30pm ET
  • March contract expiry for West Texas Intermediate (WTI)

Wednesday:

  • December retail sales released by StatsCan
  • US Federal Reserve releases minutes from February meeting
  • Q4/2016 earnings releases: Trican Well Service and Western Energy Services

Thursday:

  • December average weekly earnings released by StatsCan
  • EIA Weekly Petroleum Status Report (delayed due to Monday holiday)
  • EIA Weekly Natural Gas Storage Report
  • Q4/2016 earnings releases: Pembina Pipelines, Calfrac Well Services, Blackpearl Resources, Crescent Point Energy

Friday:

  • January Consumer Price Index and Core Inflation released by StatsCan
  • Baker-Hughes Rig Count
  • Q4/2016 earnings releases: Husky Energy and EnerPlus

Next edition of the Oil Sands Weekly: Friday February 24, 2017 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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