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Weekly Energy Market Review

Weekly Energy Market Review

Energy market summary for the week ending July 21, 2017:
  • US dollar continues to slide as CAD closes in on 80 cents
  • Rise in US rigs starts to ease
  • Oil prices dip on rumours of record OPEC output
  • Canadian energy stocks catch a nice bounce
  • US markets hit another record high despite weakness in energy sector
  • Hits and misses in this week's Q2 earnings, including Encana, Husky Energy and Kinder Morgan.
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MARKET OVERVIEW
CURRENCIES & BONDS

US treasuries rose this week as longer duration bond yields continue to fall, once again flattening the yield curve.

The Euro almost hit a 2-year high this week, as ECB President Mario Draghi says he sees "unquestionable improvement" and may consider scaling back asset purchases in the fall. The higher Euro sent the US dollar to a 13-month low.

This week's notable Statistics Canada data:

  • The Consumer Price Index rose 1% y/y, showing deceleration from May's numbers.
  • Retail sales increased for the third consecutive month, rising 0.6% to $48.9 billion in May.
  • Lower prices at the pump resulted in a 0.6% m/m decline at gas stations, the first decline in three months.

Continued strength in retail sales has increased the chances of another rate hike to 70% in October. The loonie gained another 1% this week, closing in on 80 cents. The dollar has now rallied almost 7% from the lows of last May, despite persistent weakness in energy prices.

OIL & GAS PRICES (USD)

Oil prices rose earlier in the week on a rather positive inventory report but later declined after Petro-Logistics reported that OPEC output this month is projected to be the highest since last December, likely topping 33 million bbl/day.

 

WEEKLY US INVENTORY REPORT

JULY 19, 2017

BIG DRAWDOWNS IN CRUDE AND PRODUCTS STOCKPILES HELP PROP UP OIL PRICES

 

Increases in rig counts appears to be slowing in the US, as Baker Hughes reported one less rig in service this week in the oil patch. In Canada, 12 new oil rigs were added, bringing the total to 118, while the number of gas rigs rose by 3 to 88.

EQUITY MARKETS

The TSX had an uneventful week and remains below its 200-day moving average. All US markets (except the Dow large caps) hit record highs again this week. The FTSE All World Index also reached another record high.

SECTORS

Industrial stocks were the worst performers this week, in part due to weakness in transport stocks, particularly the rails. Financial stocks also remain weak due to lower bond yields.

ENERGY SECTOR PERFORMANCE

Energy stocks staged a nice rally on the TSX, led higher by the pipeline players. Oil field service stocks remain the worst sub-sector. In contrast, US energy stocks declined this week despite another strong week for refiners.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Husky Energy (HSE) reported a net loss of $93 million in the second quarter, down from a $196 million loss for the same quarter last year. Funds from operations increased 40% y/y to $715 million on a 20% improvement in realized pricing for upstream production. Company executives hinted the dividend may be reinstated once commodity markets stabilize and the company returns to positive cash flow.

Higher output and lower costs helped Encana (ECA) report better than expected second quarter results this week, as earnings rose to $331 million, up from a $601 million loss in Q2/2016. Operating earnings doubled to $180 million. Total oil and gas production fell 14% to 316,000 boe/day, 246,500 boe/day coming from its core assets in the Montney, Duvernay, Eagle Ford and Permian basins. Production growth out of its core assets is now expected to increase by 25-30% by the end of this year. Encana also says it expects to make more divestitures this year, making its portfolio increasingly liquids-weighted and lowering operating costs.

Kinder Morgan Canada Limited (KML) reported their first quarterly results this week, after going public in late May. Revenues in the Canadian subsidiary declined 2% y/y to $168.7 million while profits were cut in half to just $25.1 million. The shortfall was blamed on currency fluctuations, higher operating costs on the Conchin pipeline and a 21% decline in volumes shipped to Washington State. KML's Board of Directors also approved a quarterly dividend of $0.1625 per share.

CP Rail (CP) reported a blow out quarter, helped by strong demand for all commodities, including grains, potash, metals, minerals and energy products. Revenues from crude, chemicals and plastics rose 16% on a 10% increase in transport volumes. Net income at CP rose 46% y/y to a record $480 million.

Pembina Pipeline (PPL) has filed for a mixed shelf offering of up to $3 billion, including common shares, preferred shares and warrants to be issued over the next 25 months. The company says it will use the proceeds to pay down debt and other general accounting purposes.

Canadian Natural Resources (CNQ) also filed for a mixed shelf offering of up to US$3 billion in debt securities and US$3.16 billion in common shares (or 97.56 million shares) to be issued over the next 25 months. The shares will be used to fund its recent acquisition of a 60% interest in the Athabasca Oil Sands Project from Royal Dutch Shell.

Analysts at BMO Capital think Cenovus Energy (CVE) is at risk of being taken over, likely by another Canadian energy giant, due to the company's strong asset base and low share prices.

Crescent Point (CPG), Precision Drilling (PD), Pengrowth Energy (PGF) and Western Energy Services (WRG) all reached 52-week lows on the TSX this week. MEG Energy (MEG) was this week's top performer, gaining over 11%. 

Next week's notable second quarter earnings include Suncor Energy (SU), Cenovus Energy (CVE), MEG Energy (MEG) and TransCanada (TRP), PrairieSky Royalties (PSK), Crescent Point (CPG), Calfrac Well Services (CFW), AltaGas (ALA), Bonavista Energy (BNP), Mullen Group (MTL) and Vermillion Energy (VET).


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

Kinder Morgan (KMI) told investors it expects to boost its dividend by 60% by 2018, then 25% annually through 2020. The company also announced plans to buy back US$2 billion in shares, representing 5% of its market cap. Second quarter profits came in at US$337 million on revenues of US$3.37 billion. Earnings from its product pipelines rose 11% despite higher operating costs, partially offsetting a 6% drop in the natural gas distribution business. KMI's current project backlog has increased to US$12.2 billion, up from US$11.7 billion in the previous quarter.

Schlumberger (SLB) reported a second quarter net loss of US$74 million, down from US$2.2 billion for the same quarter last year. Revenues rose 4.2% y/y to US$7.46 billion. The world's largest oil field services provider has also agreed to buy a 51% stake in Russia's biggest oil field services firm, Eurasia Drilling.

GE (GE) took a tumble this week after the company reported sluggish second quarter earnings, blamed squarely on its power and oil & gas services business. CEO Jeffrey Immelt will be retiring this year after 16 years at the helm. Baker Hughes stock (BHGE), now a partner in GE's oil & gas business, also suffered a meltdown, falling almost 9%.

Tesoro Corp (TSO) reached an agreement with Petróleos Mexicanos (Pemex) to supply fuels in the Mexican states of Sonora and Baja California. Tesoro says it plans integrate its Mexican operations under its existing ARCO brand.

Energy Transfer Partners (ETP) has pushed back the start date for its Rover natural gas pipeline to the end of this summer. The entire network now expected to be ready by November.

A subsidiary of Williams Partners (WMB) has filed an application with FERC for approval of its North Seattle Lateral Upgrade project in the state of Washington. The company says it already has firm agreements in place with Puget Sound Energy to expand its natural gas distribution network.

Plains All America (PAA) says it has wrapped up a successful open season for expansion of its Sunrise Pipeline system, which will add another 120,000 bbl/day of capacity from the Delaware Basin and Midland to the Cushing storage hub in Oklahoma.

Sempra Energy's (SRE) Aliso Canyon natural gas storage field in southern California has been cleared to resume injections this week after a gas leak shut-in operations almost two years ago.

LyondellBasell (LYB) announced plans to build the world's largest propylene oxide (PO) and tertiary butyl alcohol (TBA) plant in the Houston area, at an estimated capital cost of US$2.4 billion. This is the largest single capital investment in the company's history. 

UK-major BP (BP) is reportedly considering spinning off its Midwest and Gulf Coast pipeline assets into a new MLP (master-limited partnership), to be named BP Midstream Partners. If executed, the MLP should be one of the largest IPOs this year. The Wall Street Journal is also reporting that BP has found a buyer for its operating assets in the North Sea.

This week's notable dividend increases in the MLP space include:

Marathon Petroleum (MPC) and Tesoro Petroleum (TSO) reached 52-week highs on the S&P 500 this week while Range Resources (RRC) reached a 52-week low.

Next week's notable earnings in the US energy sector include ExxonMobil (XOM), Valero Energy (VLO), Chevron (CVX), ConocoPhillips (COP), Marathon Oil (MRO), Anadarko Petroleum (APC), Halliburton (HAL) and Whiting Petroleum (WLL). International oil majors Royal Dutch Shell (RDS.A) and Total (TOT) also report next week.


UPGRADES & DOWNGRADES

UPGRADES

  • Halliburton (NYSE:HAL): Upgraded from Neutral to Buy at Seaport Global Securities.
  • Plains American Pipeline (NYSE:PAA): Upgraded from Equal Weight to Overweight at Barclays.
  • Phillips 66 Partners LP (NYSE:PSXP): Upgraded from Equal Weight to Overweight at Barclays.
  • Total (NYSE:TOT): Upgraded from Hold to Buy at Canaccord Genuity.
  • Williams Companies (NYSE:WMB): Upgraded from Equal Weight to Overweight at Barclays.

DOWNGRADES

  • Advantage Oil & Gas (TSX:AAV): Downgraded from Outperform to Sector Perform at RBC.
  • Canadian Natural Resources (TSX:CNQ): Downgraded from Buy to Neutral at Citigroup.
  • Chevron (NYSE:CVX): Downgraded from Outperform to Market Perform at Wolfe Research.
  • ConocoPhillips (NYSE:COP): Downgraded from Outperform to Market Perform at Wolfe Research.
  • EOG Resources (NYSE:EOG): Downgraded from Buy to Neutral at Citigroup.
  • EP Energy (NYSE:EPE): Downgraded from Outperform to Sector Perform at RBC and from Neutral to Sell at Citigroup. 
  • Exxon Mobil (NYSE:XOM): Downgraded from Market Perform to Underperform at Wolfe Research.
  • Hess (NYSE:HES): Downgraded from Outperform to Market Perform at Wolfe Research.
  • Magellan Midstream Partners (NYSE:MMP): Downgraded from Overweight to Equal Weight at Barclays.
  • Occidental Petroleum (NYSE:OXY): Downgraded from Neutral to Sell at Citigroup.
  • Painted Pony Energy (TSX:PONY): Downgraded from Outperform to Sector Perform at RBC.
  • Sonoco (NYSE:SON): Downgraded from Hold to Sell at Vertical Research.
UPDATED: EVERY WEEKEND
NOTES:
  • COMMODITY PRICES REFLECT NEAR MONTH CONTRACT FROM THE NYMEX/CME GROUP
  • FTSE ALL WORLD INDEX = MARKET CAP WEIGHTED INDEX OF 47 COUNTRIES
  • SHARE PRICE CHANGES EXCLUDE DIVIDENDS
  • SOURCES:
  • EQUITY PRICES & SECTOR PERFORMANCE PROVIDED BY NYSE & TMX GROUP
  • CANADIAN EXCHANGE RATES PROVIDED BY THE BANK OF CANADA
  • Weekly Energy Market Review

    Weekly Energy Market Review

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