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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending October 27, 2017:
  • Markets rip to new highs
  • TSX finally joins the party
  • Loonie takes a dive
  • Brent touches US$60 and holds
  • Big Oil continues to lower 2017 capex budgets
  • Refiners hit Q3 earnings out of the park.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

The Bank of Canada (BoC) kept interest rates unchanged this week, and maintained its overnight rate at 1%. The BoC says inflation has picked up in recent months due to "stronger economic activity and higher gasoline prices" and is sticking to its forecast of 2% inflation for the second half of next year. The loonie had a ugly week, sinking to a 4 month low. Canada's 10-year bond yields fell below 2%.

Despite an active hurricane season, US GDP expanded by an estimated 3.0% in the third quarter, slightly lower than the second quarter growth rate of 3.1%. Economists estimate Q3 GDP would have been closer to 3.5% if not for Hurricanes Harvey and Irma. The US dollar gained 1.2% for the week, now back to the levels of last July. Long term yields moved higher this week, steepening the yield curve.

The Euro tumbled 1.5% for the week week after the ECB announced it will be reducing asset purchased from €60 billion/month to €30 billion, much more than economists were expecting.

OIL & GAS PRICES (USD)

Brent crude finally reached US$60 this week, breaking out of its recent trading range and now back to the highs of July 2015. The spread between Brent and WTI remains well above US$6/bbl, increasing demand for US crude and accelerating exports.

Henry Hub natural gas prices took a tumble this week, blamed on higher supply and lower demand.

Gasoline and distillate stockpiles saw huge drawdowns this week, falling 5.5 and 5.2 million barrels, respectively. Crude production has largely recovered from the effects of Hurricane Nate, returning to 9.5 million bbl/day last week.

Rig counts in the US increased by 1 this week, the first increase in four weeks. In Canada, the number of oil rigs declined by 11 to 96.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

OCT 25, 2017

US EXPORTS SURGE HIGHER WHILE PRODUCT INVENTORIES SEE MASSIVE DRAWDOWNS

 

Goldman Sachs says positive near-term fundamentals will be reflected in backwardation, and not the actual oil price. The company maintains its 2018 price targets of US$55 for WTI and US$58 for Brent. While the Brent futures curve remains firmly in backwardation, the WTI curve is still in contango.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▼ BEARISH
A ceasefire between Iraqi forces the country's autonomous Kurdish region have eased tensions and allowed production out of the Kirkuk oil field to resume this week. No new news on the Iran sanctions front.
USD INDEX
▼ BEARISH
The greenback rose to a 4-month high on a weakening Euro and better-than-expected Q3 GDP data.
SUPPLY
NEUTRAL
US production out of the Lower 48 returned to pre-Hurricane levels late last week. The Saudi kingdom says it supports extending OPEC's production caps for "as long as it takes."
DEMAND
NEUTRAL
No new news on the demand front this week.
SENTIMENT
▲ BULLISH
Brent has clearly broken out of a trading range, and managed to hold above US$60 by the end of the week. WTI is lagging due to a wide Brent/WTI discount but also posted a very strong showing.
EQUITY MARKETS

Markets ripped to new highs this week, led by mega-cap technology stocks. The TSX finally caught up with global markets, hitting a record high on Friday.

SECTORS

Offensive sectors took the lead this week, led by technology, financials and discretionaries on both the TSX and S&P 500.

ENERGY SECTOR PERFORMANCE

Canadian and US energy sectors diverged this week, with US energy declining an average of 0.6% while Canadian energy stocks gained 2.5%.

Canadian oil majors had a very good week. Refiners continue to outperform in US markets, while midstream and select services stocks continue to lag.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

TransCanada (TRP) announced the sale of its Ontario-based Axium Infinity Solar for $540 million. The package includes eight solar power plants with a generating capacity of 76 megawatts. The company says proceeds from the sale, estimated at $83 million, will go towards its $24 billion near-term capital spending program. The company has also asked US federal regulators for permission to raise tolls for light oil transport on its Marketlink pipeline that runs from Cushing, OK to Port Arthur and Houston, TX.

This week's notable Canadian energy earnings releases:

  • Imperial Oil (IMO) posted a smaller-than-expected net profit of $371 million for the third quarter of this year, down from $1 billion for the same time last year, which included proceeds from the sale of its gasoline stations. Operating expenses rose 6% y/y to $6.7 billion while revenues declined to $7.1 billion, down almost 5% y/y. Upstream production improved 18% from the previous quarter, rising to 390,000 boe/day in Q3, but remains 1% lower than the same time last year. Refining throughputs also declined 5% y/y to 385,000 bbl/day. The company says it plans to buy back $250 million in shares during the fourth quarter.
  • Suncor Energy (SU) reported third quarter operating earnings of $867 million, more than double the same time last year. Funds from operations grew 22% y/y to $2.5 billion while net earnings ballooned to $1.3 billion, including a $412 million forex gain. Upstream production hit a quarterly record of 739,900 boe/day, up 1.6% from the same quarter last year. Oil sands operating costs (ex-Syncrude) declined to $21.60/bbl, down from $22.15 in Q3/2016. Operating costs at Syncrude were reported at $27.65/bbl.
  • Husky Energy (HSE) reported a net profit of $136 million for the third quarter, versus an adjusted loss of $100 million for the same time last year. Production rose 5.6% to 318,000 boe/day, thanks to a strong performance from its thermal properties in Alberta and Saskatchewan. Funds from operations hit $891 million, resulting in $380 million in free cash flow. The company also lowered its 2017 capital spending plans from about $2.5 billion to a range of $2.2 to $2.3 billion. 2017 ‍annual production guidance was unchanged at 320,000 to 335,000 boe/day.
  • MEG Energy (MEG) reported a third quarter operating loss of $43 million on revenues of $546 million. A positive forex gain helped the company post a net profit of $84 million for the quarter. The company reduced its 2017 capital investment program by $80 million to $510 million. Full year production guidance was unchanged at 80,000-82,000 bbl/day.
  • Mullen Group (MTL) reported a 10% increase in third quarter revenues, rising to $284 million. Net income rose 48% y/y to $26 million, including an $11 million forex gain.
  • Higher oil prices boosted demand for Western Energy Services (WES) in the third quarter. Operating revenues rose 67% y/y to $51.1 million. Net losses for the quarter narrowed to $11.5 million, versus $17 million for the same time last year. The company says drilling activity has improved from the lows of 2016 but remains well below historical levels.
  • Calfrac Well Services (CFW) reported better-than-expected third quarter revenues of $448 million, up 156% from the same time last year. Net income rose to $7.8 million versus a $40.9 million loss in Q3/2016. The company also announced plans to increase its 2017 capital budget from $65 to $95 million due to higher demand for its equipment in North America. Calfrac warns the "pace of pricing gains is anticipated to slow" in Canada and the US.
  • Precision Drilling (PD) reported a smaller-than-expected loss in the third quarter as drilling activity improved in the US. Revenues rose 47% y/y $314.5 million while net losses narrowed to $26.3 million, down from $47.4 million for the same time last year.

New 52-week lows on the TSX include Advantage Oil Gas (AAV), ARC Resources (ARX), Birchcliff Energy (BIR), Enbridge Income Fund Holdings (ENF), Enbridge (ENB), Peyto Exploration & Development (PEY), Precision Drilling (PD), Tourmaline Oil (TOU) and Whitecap Resources (WCP). Fuel distributor Parkland Fuels (PKI) was the best performer in the Canadian energy patch this week, reversing losses from last week.


S&P 500 ENERGY STOCKS
S&P 500 ENERGY STOCKS

This week's notable energy news:

  • Hess (HES) announced the sale of its Norwegian oil and gas assets for US$2 billion to an undisclosed buyer. The company is also working on selling its properties in Denmark. Hess says the sale should save them US$190 million annually post-2019.
  • ExxonMobil (XOM) announced the addition of another 1.25 net acres in offshore deepwaters through the purchase of Statoil's (STO) interest in the Carcara field. The company has agreed to an upfront payment of US$800 million, with contingency payments of up to US$1.3 billion.
  • Royal Dutch Shell (RDS.A) and its partners have been awarded three, 35-year production sharing contracts for pre-salt blocks located in the Santos Basin, offshore Brazil.
  • Kosmos Energy (KOS) has signed three new offshore production-sharing contracts with Equatorial Guinea. Partners in the deal include Hess Corporation (HES) and private-equity backed Trident Energy.
  • ONEOK (OKE) and partner Martin Midstream Partners (MMLP) announced plans to expand its West Texas LPG Pipeline into the Delaware Basin. The US$200 million project includes 120 miles of new pipe and is expected to be completed by the third quarter of 2018.
  • Valero Energy Partners (VLP) has approved the purchase of the Parkway Pipeline and various Port Arthur terminal assets from parent company Valero Energy (VLO) for US$508 million.
  • BP-subsidiary BP Midstream Partners (BPMP) made its debut on the NYSE this week. The IPO was priced at US$18 per share for 42.5 million shares, valuing the company at about US$1.9 billion. BP will retain a 53.3% stake in the subsidiary.

This week's notable third quarter earnings:

  • ExxonMobil (XOM) reported a net income of US$3.97 billion in the third quarter, up 50% from the same time last year. Revenues rose 12% to US$66 billion. Production increased 2% y/y to 3.9 million boe/day. The company has spent over US$14 billion in capital so far this year, down 3% from the same period in 2016. Exxon also says it plans to boost output from the Permian by 45% per year through 2020.
  • Chevron (CVX) also reported a 50% increase in third quarter earnings, rising to US$2 billion. The figures includes a US$675 million forex gain and US$220 million write-down on assets in Bangladesh. Revenues rose 17% y/y to US$34 billion. Upstream production rose 8% to 2.72 million boe/day.
  • ConocoPhillips (COP) swung to a profit in the third quarter helped by higher oil prices and lower operating costs. Q3 earnings were reported at US$420 million, much improved from a loss of over US$1 billion for the same time last year. Production declined over 20% to 1.2 million boe/day (excluding Libya) due to outages caused by Hurricane Harvey. The company lowered its 2017 capital budget by 10% to US$4.5 billion. ConocoPhillips is the largest independent oil producer in the US.
  • Net income at Marathon Petroleum (MPC) rose to US$903 million in the third quarter, up from US$145 million in Q3/2016. Revenues rose to US$19.4 billion, up 17% y/y on much improved refining margins.
  • Valero Energy (VLO) reported a 37% increase in quarterly profits, also helped by strong refining margins. Net income rose to US$841 million, up from US$613 million for the same time last year. Operating revenues rose 20% y/y to US$23.56 billion. Refinery utilization averaged 92% for the quarter. Valero is the world's largest independent petroleum refiner.
  • Phillips 66 (PSX) reported a 61% increase in Q3 earnings, rising to US$823 million versus US$511 million for the same time last year. Capital expenditure plans for the full year have been reduced from US$2.7 billion to US$2.0 billion on a deferral of additional fractionation capacity work.
  • Halliburton (HAL) reported a third quarter net profit of US$365 million, up from US$6 million for the same quarter last year. Revenues increased over 40% y/y to US$5.44 billion. The company says it has benefited from strong drilling activity in North America, its largest region by sales. Halliburton is the world's third largest oil field services company.
  • Hess (HES) reported a smaller-than-expected third quarter loss and warned that this fall's active hurricane season will weigh on production through the end of this year. Q3 losses almost doubled to US$624 million on an average quarterly production of 299,000 boe/day, excluding Libya.
  • Nabors Industries (NBR) posted a wider-than-expected third quarter loss of US$121 million, led by weakness in its Canadian operations. Q3 revenues were reported at US$662 million, up from US$520 million for the same time last year.
  • Whiting Petroleum (WLL) reported a US$286 million net loss for the third quarter, narrower than a US$693 million loss posted for the same time last year. The company also announced the appointment of Bradley Holly as CEO effective November 1. Holly is a former Executive VP with Anadarko Petroleum and will replace James Volker, who is retiring after 15 years in the CEO's chair.

Across the pond this week:

  • Total (TOT) reported a 29% increase in third-quarter profits, rising to US$2.7 billion on higher crude prices, higher production and strong refining margins. Operating cash flow rose 14% y/y to US$5.2 billion. Oil production rose 6% y/y to 2.58 million boe/day.
  • Statoil (STO) reported adjusted earnings of US$2.3 billion in Q3, down from US$3 billion in the previous quarter. Production topped 2 million boe/day in the third quarter, up 13% from the same time last year. Operating costs are down 11% from the previous quarter. Overall for the quarter, the company reported a loss of US$478 million.

This week's 52-week highs include Marathon Petroleum (MPC) and ADRs Royal Dutch Shell (RDS.A), Statoil (STO) and Total (TOT). New 52-week lows on the S&P 500 include Baker Hughes (BHGE), Chesapeake Energy (CHK) and Kinder Morgan (KMI).


UPGRADES & DOWNGRADES

UPGRADES

  • Calfrac Well Services (TSX:CFW): Upgraded from Hold to Speculative Buy at Canaccord Genuity.
  • EnLink Midstream (NYSE:ENLC): Upgraded from Neutral to Buy at UBS.
  • Kosmos Energy (NYSE:KOS): Upgraded from Sector Perform to Buy at Scotiabank and from Sector Perform to Sector Outperform at Howard Weil.
  • PraireSky Royalty (TSX:PSK): Upgraded from Market Perform to Outperform at BMO.
  • SM Energy (NYSE:SM): Upgraded from Neutral to Overweight at JP Morgan Chase.

DOWNGRADES

  • Pine Cliff Energy (TSX:PNE): Downgraded from Buy to Hold at Industrial Alliance Securities.
  • PBF Energy (NYSE:PBF): Downgraded from Outperform to Neutral at Macquarie.
  • Range Resources (NYSE:RRC): Downgraded from Overweight to Neutral at JP Morgan Chase.
  • Surge Energy (TSX:SGY): Downgraded from Buy to Neutral at Eight Capital.
  • Valero Energy (NYSE:VLO): Downgraded from Outperform to Neutral at Macquarie.
UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • FTSE ALL WORLD INDEX = MARKET CAP WEIGHTED INDEX OF 47 COUNTRIES
  • TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SHARE PRICE CHANGES EXCLUDE DIVIDENDS
  • CANADIAN EXCHANGE RATES REPRESENT END-OF-DAY CLOSE
  • SOURCES:
  • COMMODITY PRICES REFLECT NEAR MONTH CONTRACT FROM THE NYMEX/CME GROUP
  • EQUITY PRICES & SECTOR PERFORMANCE PROVIDED BY NYSE & TMX GROUP
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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