Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending January 19, 2018:
  • Interest rates continue to move higher
  • US dollar sags to a new low ...
  • ... as equity markets hit fresh record highs
  • Oil prices take a breather
  • Canadian heavy oil discount widens, again
  • Energy stocks mostly end the week lower ...
  • ... except for refiners, which continue to hit new highs.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's notable economic data from Statistics Canada:

  • After a 0.6% decline in October, manufacturing sales rebounded 3.4% in November. Sales of energy products rose for the fifth consecutive month, gaining 6.1% in November to $6 billion, primarily due to higher prices. Sales volumes dipped 0.3%.
  • The number of Canadians collecting Employment Insurance dipped slightly in November, falling 0.7% to 506,700. Ontario and Quebec saw the biggest decreases, while gains were seen in most other provinces. The number of EI recipients in Alberta rose 1.7%, the first increase in the past 12 months. Most of those gains were focused in Edmonton (+5.9%), while Calgary reported a 1.7% decline.
  • Canada's GDP attributed to natural resources expanded 0.1% in Q3/2017, following a 2.4% growth rate in the second quarter. The energy sector contracted 0.2%, despite a 4% gain in the electricity sector.

The Bank of Canada raised its overnight lending rate from 1.00% to 1.25% this week. The bank says any further rate hikes would be data dependant, but uncertainty around NAFTA is "clouding the economic outlook." Canadian bond yields continue to move higher, with 10-year yields back to the highs of September 2014.

US bond yields continue to power higher, with 10-year yields now back to the levels of mid-2014. The US dollar dipped slightly again this week, remaining below key support levels.

OIL & GAS PRICES (USD)

Western Canadian Select (WCS) declined over 7% this week as the heavy oil discount widened again to US$26.75 a barrel. Both WTI and Brent posted their first weekly decline since mid-December, falling 1.5% and 1.8%, respectively. Note that the WCS February contract expired this past week, while WTI flips to the March contract on Monday.

The WTI futures curve remains firmly in backwardation while the spread between WTI and Brent continues to narrow, falling from a high of over US$6.50 in December to about US$5.40 a barrel on Friday. Backwardation on the Brent futures curve has also begun to ease slightly.

This week's notable oil price forecasts:

  • Bank of America Merrill Lynch raised its 2018 Brent price forecast from US$56 to an average of US$64 a barrel. The bank says world oil markets are undersupplied by about 430,000 bbl/day this year.
  • Analysts at Desjardins Group say they expect WTI to average under US$60 this year. The bank says the recent run-up in oil prices have left little room for future price increases.
  • Deutsche Bank says it expects oil prices to start the year close to US$60 a barrel but decline closer to the US$50 range in the latter half of the year.

US commercial crude oil stockpiles continue to fall, declining another 7 million barrels last week, now down 123 million barrels from the highs of last spring. Crude production rebounded from weather-related outages of the previous week, returning to about 9.75 million bbl/day.

Natural gas inventories fell by 183 Bcf last week, the ninth consecutive weekly drawdown. In this month's Short-Term Energy Outlook, the Energy Information Administration (EIA) says US natural gas production averaged 78.1 Bcf/day in December, a new record high.

According to Baker Hughes, US oil rig counts dipped by 5 to 747 this week. In Canada, the number of oil rigs in service rose by another 23 to 208.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

JAN 18, 2018

Crude stockpiles continue to fall, now down 123 million barrels from the highs of last spring

 
What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
▲ BULLISH
The Niger Delta Avengers returned to the spotlight this week, threatening to attack key infrastructure in Nigeria. The rebel group took over 1 million bbl/day of Nigerian production offline in 2016/17 before calling a ceasefire in the summer of 2017.
USD INDEX
▲ BULLISH
The US dollar dipped slightly again this week, now back to the lows of late 2014.
SUPPLY
NEUTRAL
Both the IEA and OPEC reiterated expectations for higher crude output this year, driven by the US, Canada, Brazil and Kazakhstan. Traders await news from OPEC's compliance meeting with Russia in Oman this weekend.
DEMAND
NEUTRAL
Expectations for oil demand in 2018 were left roughly unchanged by both the IEA and OPEC this week.
SENTIMENT
NEUTRAL
Brent is struggling to clear the US$70 overhead resistance level, indicating some "toppyness" in oil prices. However, money managers remain overwhelmingly long for both WTI and Brent, with net long position remaining at record levels.
EQUITY MARKETS

US markets gained on average another 1% this week, hitting yet another fresh batch of record highs. The US government officially shutdown on midnight Friday, on the one year anniversary of President Trump's inauguration. Although this was somewhat expected, reaction from equity markets was muted at best.

The Dow Jones cleared the 26,000 mark this week, now up over 40% since Trump's election last November.

SECTORS

A continued surge in the Canadian healthcare stocks helped offset losses in materials and energy stocks on the TSX. Energy was also the biggest drag on the S&P 500, posting its first weekly decline since mid-December.

ENERGY SECTOR PERFORMANCE

Canadian and US energy stocks ended the week mostly lower. Independent refiners were the only notable exception, with most hitting new highs again this week.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

This week's notable Canadian energy news:

  • Kinder Morgan Canada (KML) reported a net income of $46.4 million for the fourth quarter and $160.7 million for the full year. The company warned its Trans Mountain Expansion project will likely be delayed to the end of 2020, one year later than planned. KML also received some clarity from the National Energy Board on a process to resolve conflicts with the province of BC within 5 weeks of filing notice.
  • KML also announced the start of operations for the first 4 of 12 crude oil storage tanks at its Base Line Terminal in Sherwood Park, Alberta. The remaining 8 tanks are expected to be phased into service during 2018. The project is a 50/50 JV with Keyera Corp (KEY).
  • Obsidian Energy (OBE) says it produced 31,700 boe/day in 2017, on the high end of its production guidance. Q4 production averaged 31,400 boe/day, weighted 62% liquids. Obsidian says the extreme cold in the latter half of December resulted in unplanned downtime, but January production is averaging closer to 32,000 bbl/day. The company also moved to dismiss complaints from activist shareholder FrontFour Capital Group that it isn't developing its assets fast enough. FrontFour owns a 5.7% stake in Obsidian.
  • Vermilion Energy (VET) announced the purchase of privately-held assets in southeast Saskatchewan and southwest Manitoba for $90.8 million. The acquisition will be funded from Vermilion's existing credit facilities. The company has raised its 2018 production guidance to between 75,000 and 77,500 boe/day while its capital budget was increased to $325 million.
  • NuVista Energy (NVA) says fourth quarter production averaged about 37,400 boe/day, with full year production estimated at 29,700 boe/day, both near the top end of previous guidance. 2018 guidance remains unchanged with capital spending expected at $270 to $310 million while production is expected to average 35,000 to 40,000 boe/day. The company also announced an increase in its borrowing facility to $310 million.
  • Pengrowth Energy (PGF) announced a 2018 capital spending program of $65 million and says it plans to exit 2018 at 24,000 bbl/day, representing a growth rate of about 25%. 
  • Tamarack Valley Energy (TVE) estimates its Q4 production averaged over 22,600 boe/day, weighting 62% lights, slightly better than forecasted. The company has set a 2018 capital spending program of about $200 million.
  • Heavy oil producer Cona Resources (CONA) says it plans to deleverage its balance sheet this year, directing cash flow towards debt repayment and potentially selling some of its non-core assets.
  • Enerplus (ERF) says production averaged 88,600 boe/day in the fourth quarter, slightly above previous guidance and up 12% from Q3/2017. Liquids production averaged 46,750 bbl/day in Q4, an increase of 20% from the previous quarter.

UK-based Barclays has chosen Enerplus (ERF) as their top pick in an otherwise "dull" Canadian energy market. The bank says it expects the price differentials for Canadian crude to remain wide, and possibly widen further, this year. 

ERF touched a 52-week high earlier this week, as did Husky Energy (HSE), Kelt Exploration (KEL) and Parex Resources (PXT). This week's new 52-week lows include Advantage Oil & Gas (AAV), ARC Resources (ARX), Birchcliff Energy (BIR), Crew Energy (CR), Peyto Exploration (PEY) and Tourmaline Oil (TOU).


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

This week's US energy news:

  • USA Compression Partners (USAC) has agreed to purchase Energy Transfer Partners' (ETP) gas compression business for US$1.8 billion and 12.5 million USAC shares. ETP says it will use proceeds from the sale to pay down debt.
  • Hess (HES) began laying off hundreds of employees this week, as part of its efforts to improve profitability. A spokesperson for the company says about 300 workers will be affected, or 13% of its workforce.
  • Cheniere Energy (LNG) secured a 15-year supply contract with commodities trader Trafigura for 1 million metric tons/year of LNG beginning in 2019. This is Cheniere's first deal with an independent commodities trader.
  • Phillips 66 Partners (PSXP) announced a 5% increase to its quarterly dividend, rising to US$0.646 per share. This is the 17th consecutive quarterly dividend increase since the company's IPO in 2013.
  • Andeavor Logistics (ANDX) announced a 1.5% increase in their quarterly dividend, rising to US$1 per share. This is the 27th consecutive quarterly dividend increase for ANDX.
  • Extraction Oil & Gas (XOG) announced the private placement of US$600 million in senior, unsecured notes due 2026. Net proceeds will be used to retire shorter duration notes due in 2021.

This week's fourth quarter earnings releases:

  • Kinder Morgan (KMI) reported a fourth quarter net loss of US$1.045 billion despite a 4% increase in cash flow, rising to US$1.19 billion. The company says net income was negatively impacted by a US$1.28 billion impairment charge and it fully expects to be able to raise its quarterly dividend from US$0.125 to US$0.20 per share in the first quarter of 2018.
  • Oil field services provider Schlumberger (SLB) posted a bigger-than-expected quarterly loss in Q4, including a US$3 billion impairment charge on corporate restructuring and write-downs in Venezuela. Net loss widened to US$2.26 billion while revenues rose 15% y/y to US$8.18 billion.

Across the pond this week:

  • BP (BP) is reportedly preparing to return to northern Iraq for the first time in three years, partnering up with the government to double production out of the Kirkuk oil field to about 750,000 bbl/day. BP also warned it will take another US$1.7 billion non-operating charge in the fourth quarter for "significantly higher claims" for ongoing settlements in its Deepwater Horizon spill in the Gulf of Mexico. Total costs for the 2010 disaster have now risen to about US$65 billion. 
  • Chevron (CVX) also says it plans to resume drilling in the Iraqi Kurdistan region "in the near future" as tensions between Baghdad and the Kurdistan regional government begin to ease. The company is in the process of remobilizing its people and equipment back to the region.
  • ExxonMobil (XOM) says it has struck oil in the Western Province of Papua New Guinea. The onshore P’nyang South-2 well is said to contain "high-quality, hydrocarbon-bearing reservoirs." The size of field has yet to be quantified. Exxon also signed a deal with the government of Ghana to explore for oil in the Deepwater Cape Three Point oilfield. 
  • KBR (KBR) and JV partner SOCAR were awarded two FEED contracts for the Azeri Central East platform on the Azerbaijan side of the Caspian Sea.
  • Royal Dutch Shell (RDS.A) has sanctioned an expansion of the Penguins oil and gas field in the UK North Sea. The project is a 50/50 JV with ExxonMobil (XOM), expected to produce up to 45,000 boe/day at a breakeven of less than US$40 a barrel. Capital costs are rumoured at about US$2.5 billion. Texas-based Fluor (FLR) was awarded the EPC contract for the FPSO vessel. 

Deutsche Bank says it expects "largely positive" fourth quarter earnings for big name energy companies this year. The bank has raised its price targets for 16 names, including ExxonMobil (XOM), Chevron (CVX), Apache Corp (APA) and Hess (HES). The bank's other top picks include Pioneer Natural Resources (PXD), Marathon Oil (MRO) for the fourth quarter, while EOG Resources (EOG), Devon Energy (DVN) and Noble Energy (NBL) were recommended for 2018.

New 52-week highs on the S&P 500 include Andeaver (ANDV), Chevron (CVX), Concho Resources (CXO), ExxonMobil (XOM), Marathon Petroleum (MPC), Marathon Oil (MRO), Occidental Petroleum (OXY), ONEOK (OKE), Phillips 66 (PSX), Valero Energy (VLO) and Williams Companies (WMB). Statoil's (STO) ADR on the NYSE also hit a new high.


UPGRADES & DOWNGRADES

UPGRADES

  • Baytex Energy (TSX:BTE): Upgraded from Sector Perform to Outperform at Alta Corp.
  • California Resources (NYSE:CRC): Upgraded from Neutral to Buy at Bank of America.
  • CNOOC (NYSE:CEO): Upgraded from Neutral to Buy at Bank of Maerica.
  • Denbury Resources (NYSE:DNR): Upgraded from Neutral to Buy at Mizuho.
  • Imperial Oil (TSX:IMO): Upgraded from Underperform to Sector Perform at Alta Corp.
  • Oneok (NYSE:OKE): Upgraded from Sector Perform to Outperform at RBC and from Equal Weight to Overweight at Barclays.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Equal Weight to Overweight at Capital One Financial.

DOWNGRADES

  • Antero Midstream (NYSE:AMGP): Downgraded from Overweight to Equal Weight at Barclays.
  • Cabot Oil & Gas (NYSE:COG): Downgraded from Positive to Neutral at Susquehanna.
  • Chesapeake Energy (NYSE:CHK): Downgraded from Neutral to Underperform at Mizuho.
  • Chevron (NYSE:CVX): Downgraded from Buy to Hold at HSBC.
  • Encana (TSX:ECA): Downgraded from Outperform to sector Perform at Alta Corp.
  • Essential Energy Services (TSX:ESN): Downgraded from Strong Buy to Outperform at Raymond James.
  • Helix Energy Solutions Group (NYSE:HLX): Downgraded from Neutral to Underperform at Bank of America
  • Husky Energy (TSX:HSE): Downgraded from Outperform to Market Perform at Raymond James and from Neutral to Sell at Eight Capital.
  • Phillips 66 Partners (NYSE:PSXP): Downgraded from Overweight to Equal Weight at Barclays.
  • Pioneer Natural Resources (NYSE:PXD): Downgraded from Positive to Neutral at Susquehanna.
  • Plains All America Pipeline (NYSE:PAA): Downgraded from Overweight to Equal Weight at Barclays.
  • Shell Midstream Partners (NYSE:SHLX): Downgraded from Buy to Hold at Stifel Nicolaus.
  • Valero Energy Partners (NYSE:VLP): Downgraded from Overweight to Equal Weight at Barclays.
  • Williams Companies (NYSE:WMB): Downgraded from Overweight to Equal Weight at Barclays.
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
  • Weekly Energy Market Review

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