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Weekly Energy Market Review

Weekly Energy Market Review

Energy Market Summary for the week ending November 3, 2017:
  • Energy stocks power markets higher
  • Bond yields retreat
  • Oil prices breakout to 2-year highs
  • WCS discount widens
  • Midstream stocks get slaughtered, again
  • Global oil majors (ex-USA) post another record week
  • Q3 earnings parade continues.
QUICK LINKS
MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable Canadian economic news:

  • Canada's GDP unexpectedly slammed into reverse in August, contracting 0.1% on lower manufacturing, mining and the energy patch. Oil and gas extraction declined 1.4%, led lower by conventional oil production. This is the first negative GDP reading since October 2016.
  • Canada's international trade deficit totalled $3.2 billion in September, roughly unchanged from the previous month. Exports excluding energy declined 1.8%. Exports of bitumen and crude oil rose 9.5% on higher volumes.
  • Statistics Canada reported a stellar jobs report for the month of October, much better than analysts had expected. Employment increased by 35,000 for the month, driven by 89,000 full-time jobs, offsetting 53,000 part-time losses. Gains were led by Quebec and Alberta while Saskatchewan saw declines. The national unemployment rate was unchanged at 6.2%. Alberta's unemployment rate also held steady at 7.9%.

President Trump has nominated Jerome Powell as the new Chair of the Federal Reserve, replacing outgoing Chair Janet Yellen. Powell is a former lawyer and investment banker, and the first Fed chair in 40 years that isn't an economist. The new chair is viewed as being supportive of Yellen's policies, tempering expectations for aggressive rate hikes going forward. Short term yields moved higher while longer duration bond yields declined, once again flattening the yield curve to a 10-year low.

October was the best month for the greenback since February, gaining 1.7% from September. The dollar is now up over 3% from September lows but roughly unchanged this week.

The Bank of England reluctantly raised interest rates by 25 basis points this week (to 0.5%), the first increase in a decade. Governor Mark Carney says hot inflation data and a very tight labour market requires the removal of stimulus, despite the continued concerns over Brexit execution. Global bond yields and the British pound declined sharply on the rather sombre outlook and lower expectations for more rate hikes going forward.

OIL & GAS PRICES (USD)

Oil prices hit a 2-year high this week, including Brent, WTI and Canadian Light. Western Canadian Select (WCS) is lagging its peers due to a widening differential. Natural gas prices also staged a nice recovery this week on expectations of colder weather across North America.

The WTI futures curve has now moved into backwardation 6 months into the future.

For the month of October, oil prices continue to recover from the lows of July. Averaged over the entire month, October oil prices were as follows (USD/bbl):

  • Brent: US$57.65 +3.5% m/m
  • WTI: US$51.59 +3.4% m/m
  • Canadian Light: US$50.23 +5.8% m/m
  • WCS: US$38.78 +4.4% m/m

The heavy oil discount was roughly unchanged from September at about US$11.80 per barrel averaged over the entire month of October.

Alberta's natural gas prices staged a nice rally last month despite ongoing outages on TransCanada's NGTL network. Average gas prices for the month of October were as follows (USD/MMBtu):

  • AECO: US$1.70 +29%
  • Henry Hub: US$2.91 -3.1%

US crude oil exports hit another record high last week, topping 2.1 million bbl/day. The US$6 discount between the international Brent benchmark and WTI is driving more foreign buyers to source US oil supplies.

US oil rig counts declined by 8 this week to 729. In Canada, 4 additional oil rigs were put into service, bring the total to 100.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

NOV 1, 2017

US crude exports surge to record highs as WTI discount to Brent remains stubbornly wide

 

This week's update from OPEC and friends:

  • OPEC’s October output fell 80,000 bbl/day to 32.78 million bbl/day. Compliance with OPEC's production quotas rose to 92% in October from an estimated 86% in September. 
  • Russian output edged up to 10.93 million bbl/day in October, up from 10.91 million the previous month.
  • Venezuela’s oil production continues to decline due to the country's economic turmoil, worsened by financial sanctions imposed by the US. OPEC expects the country's output to drop by anywhere from 300,000 to 600,000 bbl/day in 2018.
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
Exports out of Iraq appear to be returning to normal. Venezuela's debt crisis continues to unfold, expected to further dampen oil output well into next year.
USD INDEX
NEUTRAL
The US dollar ended the week unchanged on a mixed bag of economic data and nomination of slightly dovish Fed Chair.
SUPPLY
NEUTRAL
OPEC production dipped 80,000 bbl/day in October, partially offset by recovering production out of the US.
DEMAND
NEUTRAL
No new news on the demand front. OPEC will release its 2017 global forecast next week.
SENTIMENT
▲ BULLISH
Traders have become increasingly bullish as both Brent and WTI are holding above key support levels.
EQUITY MARKETS

Most US markets powered to new highs except for small caps. The TSX also broke a new high, cracking 16,000 for the first time in its history.

Most European markets also hit new record highs this week. Japan's Nikkei remains the best performer, gaining another 2.4% for the week and now up 35% from the lows of June 2016.

SECTORS

A mixed bag in sector performance with gains largely led by energy stocks and high-flying technology mega-caps south of the border.

ENERGY SECTOR PERFORMANCE

Gains in the TSX energy patch were led by producers this week. Select integrated and midstream players, including Enbridge and Imperial Oil, dragged the index lower.

The US energy sector also had a good week, except for midstream stocks that continue to underperform.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable third quarter earnings:

  • Cenovus Energy (CVE) reported a smaller than expected third quarter loss of $69 million, narrower than a $251 million loss for the same quarter last year. Q3 production ballooned to just under 590,851 boe/day thanks to its recent acquisition of oil sands assets from ConocoPhillips. The company also took a $440 million write-down on the sale of its Pelican Lake assets. Cenovus also announced the appointment of Alex Pourbaix as its new President & CEO effective November 6, 2017. Pourbaix is TransCanada's former COO and replaces outgoing CEO Brian Ferguson.
  • Canadian Natural Resources (CNQ) reported a third quarter net income of $684 million, versus a loss of $326 million reported the same time last year. Cash flow rose 68% to $1.68 billion while total production averaged 1.04 million boe/day, reflecting higher output from Horizon and integration of Shell's Albian Sands operations.
  • Enbridge (ENB) reported a Q3 profit of $765 million, much improved from a loss of $103 million reported the same time last year. Earnings rose to almost $2 billion in the third quarter. The company says it continues to make good progress executing on its $31 billion growth capital program. Enbridge expects its Line 3 Replacement project to get approved by the middle of next year and be in service by the second half of 2019.
  • Pembina Pipeline (PPL) reported a 7% increase in third quarter revenues, rising to $1.04 billion. Profits rose almost 10% y/y to $270 million. Transport volumes rose in both its conventional and oil sands pipeline networks. Total volumes rose to a 2.1 million boe/day in the third quarter.
  • Third quarter revenues at NuVista Energy (NVA) rose 28% y/y to $83.1 million as funds from operations increased by one-third to $41.5 million. Q3 production rose 15% y/y to 29,405 boe/day, weighted 32% liquids. For the quarter, NuVista reported a net loss of $4.4 million.
  • Third quarter funds from operations grew 8% y/y at Crew Energy (CR) despite a steep decline in natural gas prices. The company reported a Q3 profit of $2.13 million versus a $1.3 million loss in Q3/2016. Production averaged 23,251 boe/day, roughly unchanged from the same quarter last year. The company says production out of BC was curtailed due to weak spot pricing. Crew hopes to exit the year at 31,000 boe/day.
  • Revenues increased 13% y/y at Bonavista Energy (BNP), helping the company swing to a $16.5 million profit in the third quarter. Total production increased 11% to 71,191 boe/day.
  • Advantage Oil & Gas (AAV) reported an 18% drop in funds from operations in Q3, as total sales declined 9% to $51.7 million. Production increased 6% y/y to 38,030 boe/day despite outages on TransCanada's gas distribution network. Netbacks declined 24% to $1.74/boe on lower natural gas prices.
  • Fuel distributor Parkland Fuel (PKI) reported record earnings in the third quarter, rising to $96.4 million (EBITDA) on a gross profit of $266 million. Operating sales rose almost 60% y/y to $2.6 billion. Delivery volumes rose 34% to 3.6 billion litres of fuel and petroleum products. This past quarter saw the integration of both Chevron's refinery in Burnaby, BC and Quebec's Ultramar gas stations.
  • Third quarter production at Athabasca Oil Corp (ATH) averaged 36,133 boe/day, weighted 90% liquids. Net income rose to $5.1 million, up from a $33 million loss for the same quarter last year. Full year production guidance was left unchanged at 35,000 boe/day at a capital spend of about $210 million. The company says it expects to be over 40,000 boe/day next year.
  • Revenues at North American Energy Partners (NAGP) rose 45% y/y to $70 million in the third quarter, while operating income rose to $1 billion, up from a loss of $342 million for the third quarter of last year. Net losses narrowed to $585 million, down from $1.4 billion in Q3/2016. The company says revenues were driven by material handling work at the Millennium, Kearl, Mildred Lake and the Aurora oil sands mining operations. 
  • Third quarter revenues at Horizon North Logistics (HNL) rose 32% to $79.3 million, while operating losses widened 59% to $7.5 million. The company says it has seen higher activity levels across all its operations but business remains soft in Alberta.
  • Third quarter revenues more than tripled at Trican Well Service (TCW), soaring to $363 million. Adjusted net income rose to $98 million, up from $3.2 million for the same time last year. The company swung to a profit of 46.9% in Q3.
  • Seven Generations (VII) reported a net income of $85.7 million in Q3, up from a net loss of $2.2 million for the same time last year. Funds from operations rose 22% to $284.3 million. Production increased 39% to 183,920 boe/day.
  • Third quarter losses at Baytex Energy (BTE) narrowed to $9.2 million in Q3, versus a loss of $39.4 million for the same time last year. Production averaged 69,310 boe/day, up 3% y/y despite a disruptions caused by Hurricane Harvey. 2017 production guidance was reduced slightly to 69,500-70,000 boe/day while capital expenditure plans were left unchanged at $310-330 million.
  • Third quarter profits at Whitecap Resources (WCP) declined 42% y/y to $3.7 million blamed on higher expenses. Cash flow rose 12% to $119 million while sales revenues rose 30% to $240 million. The company's board of directors has approved a 5% increase in its monthly dividend.
  • Third quarter revenues at PrairieSky Royalty (PSK) rose 21% y/y to $72 million while funds from operations rose 23% to $67 million. Royalty production averaged 24,183 boe/day, weighted 48% liquids.
  • Vermilion Energy (VET) posted a wider-than-expected loss for the third quarter, blamed in part on unplanned downtime at its Corrib project in Ireland. Production averaged 67,403 boe/day in Q3, up slightly from the previous quarter. Full year production guidance has been lowered by 1,000 boe/day to a range of 68,000 to 69,000 boe/day.

Other notable energy news this week:

  • TransCanada (TRP) has launched Binding Open Season for its Marketlink crude oil pipeline that runs from Cushing, OK to markets in the Gulf Coast. Open Season runs to the end of November,
  • Pengrowth Energy (PGF) says it has regained compliance with NYSE now that its share price has been above US$1 for 30 consecutive trading days. The company also announced it has closed on the sale of its Swan Hills assets and reached an agreement to sell its Quirk Creek Sour Gas assets in southern Alberta for $6.5 million. The divestiture represents about 1,900 boe/day, weighted about 70% liquids.

This week's 52-week highs on the TSX include Calfrac Well Services (CFW), Suncor Energy (SU). This week's 52-week lows include Enbridge (ENB).


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

This week's notable news from the US and around the world:

  • Chevron (CVX) has abandoned plans to sell its three gas production subsidiaries in Bangladesh to China’s Himalaya Energy. The company did not give a reason for its decision but previous reports cited difficulties in getting government approvals and lengthy negotiations with state-owned Petrobangla, who has first right of refusal over asset sales.
  • French energy major Total (TOT) has reached an agreement with Italy's Group API to sell their fuel marketing and refining assets, held within the TotalErg joint venture. Total will purchase Erg's lubricants business in Italy and will subsequently dissolve the JV. Total proceeds are estimated at €750 million.
  • American Midstream Partners (AMID) has purchased a 17% interest in the Destin Pipeline from an affiliate of ArcLight Capital Partners for US$30 million. Upon closing, AMID will own a 66.67% stake in Destin. The company also announced a merger with Southcross Energy Partners (SXE) and the acquisition of various assets from Southcross Holdings. The two transactions are valued at about US$815 million, including debt.
  • Andeavor Logistics (ANDX) has closed on its US$1.7 billion acquisition of Western Refining Logistics (WNRL). WNRL was delisted from the NYSE this week. ANDX's debt rating was upgraded from BB+ to BBB- at S&P Global.

This week's notable third quarter earnings in the US:

  • Devon Energy (DVE) reported a 77% decline in quarterly profits, falling to US$228 million on lower production. Revenues declined 25% y/y to US$3.16 billion while total production fell almost 9% to 527,000 boe/day. Hurricane Harvey took 15,000 boe/day offline in the company's Eagle Ford production facilities.
  • Third quarter revenues at Noble Energy (NBL) rose 20% y/y to US$553 million on average sale volumes of 355,000 boe/day. Net losses in Q3 narrowed to US$115 million, down from a loss of US$143 million for the same quarter last year.
  • Diamond Offshore Drilling (DO) reported a 22% decline in quarterly profits on higher drilling expenses and hefty debt repayments. Net income fell to US$10.8 million down from US$13.9 million for the previous year. The company booked a US$34.4 million charge related to debt repayment.
  • Third quarter revenues at Anadarko Petroleum (APC) rose to US$2.5 billion in Q3, up from US$1.9 billion for the same quarter last year. Net losses attributable to shareholders totalled almost US$700 million, including several one-time items, down from a net loss of US$800 million for the same time last year. Total production declined 20% y/y to an average of 626,000 boe/day in Q3, blamed in part on Hurricanes Harvey and Irma.
  • Third quarter profits more than tripled at HollyFrontier (HFC) thanks to higher refining margins. Net profits rose to US$272 million, up from US$74.5 million for the same quarter last year. Revenues rose 30% to US$3.72 billion in Q3.
  • Magellan Midstream Partners (MMP) reported a net income of US$198.5 million in the third quarter, up slightly from a profit of US$194.6 million for the same time last year.
  • Enbridge Energy Partners (EEP) swung to a US$93.1 million profit in the third quarter, up from a US$406 million loss in Q3/2016.
  • Shale oil producer EOG Resources (EOG) posted a Q3 net income of US$100.5 million versus a net loss of US$190 million for the same quarter last year. Third quarter volumes averaged 598,000 boe/day, up about 8% y/y.
  • Williams Companies (WMB) reported third quarter revenues of US$1.89 billion, down from US$1.91 billion for the same quarter last year. Net income was roughly cut in half to US$33 million.
  • Murphy Oil (MUR) reported a net loss of US$66 million in the third quarter. Production averaged 154,000 boe/day while total revenues rose 2.6% y/y to US$498 million.
  • ONEOK (OKE) reported na 80% increase in net income for the third quarter, rising to US$165.7 million. Q3 operating income declined 7% to US$352 million while operating costs rose 12% to US$207 million.
  • Marathon Oil (MRO) reported a third quarter net loss of US$599 million including various one time items, down from a US$192 million loss reported the same time last year. Revenues rose 26% to US$1.25 billion. Q3 production averaged 371,000 boe/day, up 6% excluding Libya.
  • Chesapeake Energy (CHK) posted a Q3 net loss of US$41 million, including a paper loss on commodity derivatives. Total production averaged 541,600 boe/day in Q3. Revenues fell 15% y/y to US$1.94 billion.
  • Occidental Petroleum (OXY) reported a net income of US$190 million in the third quarter, versus a loss of US$241 million for the same period last year. Total production volumes averaged 600,000 boe/day in Q3, roughly unchanged from the previous quarter.
  • Pioneer Natural Resources (PXD) posted a Q3 net loss of US$23 million, down from a profit of US$22 million for the same quarter last year. Excluding derivative losses, the company turned a profit of US$80 million. Q3 production rose 6% to 276,000 boe/day, including unplanned outages due to Hurricane Harvey.

Across the pond this week:

  • Royal Dutch Shell (RDS.A) reported a 47% increase in quarterly profits, driven by strong refining margins and higher energy prices. Adjusted net earnings rose to US$4.1 billion, up from US$2.8 billion for the same quarter last year. Total production rose 2% to 3.657 million boe/day. The company also closed on the sale of its onshore properties in Gabon and UK North Sea assets this week.
  • BP (BP) reported blow-out third quarter results, and says it plans to resume its share buyback program for the first time since oil prices crashed in 2014. Revenues rose to US$60.8 billion, up from US$48 billion for the same quarter last year. Oil and gas production averaged 3.6 million boe/day, up 14% y/y. The company says its organic capital program and dividend is fully funded at US$49 Brent.

Kinder Morgan (KMI) hit another 52-week low this week. New highs on the NYSE this week include Andeavor (ANDV), ConocoPhillips (COP), Marathon Petroleum (MPC) and Valero Energy (VLO). ADRs BP (BP), Royal Dutch Shell (RDS.A) and Total (TOT) also hit new 12-month highs.


UPGRADES & DOWNGRADES

UPGRADES

  • Andeavor (NYSE:ANDV): Upgraded from In Line to Outperform at Evercore ISI.
  • Cabot Oil & Gas (NYSE:COG): Upgraded from Hold to Buy at Johnson Rice.
  • Clean Harbors (NYSE:CLH): Upgraded from Underperform to Market Perform at Raymond James.
  • Devon Energy (NYSE:DVN): Upgraded from Equal Weight to Overweight at Stephens.
  • Marathon Oil (NYSE:MRO): Upgraded from Hold to Buy at Societe Generale.
  • NuVista Energy (TSX:NVA): Upgraded from Strong Buy to Outperform at Raymond James and from Neutral to Buy at Eight Capital.
  • Oasis Petroleum (NYSE:OAS): Upgraded from In Line to Outperform at Evercore ISI.
  • Valero Energy (NYSE:VLO): Upgraded from In Line to Outperform at Evercore ISI.

DOWNGRADES

  • Baytex Energy (TSX:BTE): Downgraded from Equal Weight to Underweight at Barclays.
  • EP Energy (NYSE:EPE): Downgraded from Neutral to Underweight at J P Morgan Chase.
  • Imperial Oil (NYSE:IMO): Downgraded from Sector Perform to Underperform at RBC Securities and from Overweight to Underweight at Barclays.
  • PrairieSky Royalty (TSX:PSK): Downgraded from Outperform to Market Perform at Raymond James.
  • Royal Dutch Shell (NYSE:RDS/A): Downgraded from Buy to Hold at Societe Generale.
  • Statoil (NYSE:STO): Downgraded from Buy to Neutral at Citigroup.
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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