The Oil Sands Weekly
In the Canadian energy patch this week . . .
Columbia Pipeline Group shareholders have approved TransCanada's US$13 billion takeover. The merger will make TransCanada one of North America's largest players in the natural gas storage and distribution market. The deal is expected to close in July.
TransCanada also gave notice that volumes on the Keystone pipeline will be significantly below normal for the rest of June. Flows are now expected to average 396,140 bbl/day, down 7% from an earlier estimate of 425,963 bbl/day. Keystone has the capacity to transport 590,000 bbl/day.
Suncor Energy is trucking an estimated 10,000 bbl/day of bitumen product from of its MacKay River SAGD facility due to a blocked Enbridge product pipeline. The pipeline became plugged after bitumen was allowed to cool after MacKay River was shutdown and evacuated due to encroaching forest fires. MacKay River has the capacity to produce 38,000 bbl/day and is in the process of returning to normal operation.
Athabasca Oil Sands has sold Contingent Bitumen Royalties to Burgess Energy Holdings for $129 million. The company also repaid its US$221 million first lien term loan, reducing corporate debt by 30% and reducing its exposure to the US dollar. The company has $85 million in cash and almost $500 million in debt due by the end of next year.
Penn West received clearance from the competition bureau to sell its Saskatchewan assets to Teine Energy for $975 million. The deal is expected to close by June 24th.
Encana has agreed to sell its Gordondale assets to Birchcliff Energy for $625 million, slightly less than analysts were expecting. The sale includes 54,200 acres of land located 100 km northwest of Grande Prairie, AB. The assets produce an average of 25,200 boe/day of natural gas and liquids. Over the past 3 years, Encana has sold about $10 billion worth of assets, reducing their portfolio from 27 plays to just 4. The deal is huge for Birchcliff, which has a market cap of only about $1 billion. The acquisition will be partially funded through bought deal financing, now increased to $634 million. Billionaire-investor Seymore Schulich owns about 28% of Birchcliff and is expected to load up on more shares.
Calgary-based Sunshine Oilsands announced the closing of almost 59 million shares to Bright Hope Global Investments. The deal nets Sunshine about $20 million. The company issued about $1.7 million worth of shares earlier this month. Sunshine owns one million acres of oil sands and natural gas leases in the Athabasca region. The company is currently raising cash to develop its 5,000 bbl/day West Ells thermal in-situ pilot. Sunshine stock trades on the Hong Kong stock exchange.
Bankers Petroleum has received clearance from the federal government to be taken over by Chinese firm Geo-Jade at a price of $2.20 a share. Bankers' operations are focused in Albania and Eastern Europe.
Beijing-based Sinoenergy also received approval from the federal government to takeover Calgary-based Long Run Exploration for $780 million. Long Run is an intermediate energy player focused on light oil development and exploration in western Canada. The company produces about 30,700 boe/day and defaulted on its debt payments earlier this year. Sinoenergy has agreed to retain Long Run's staff of about 200. The Chinese company has a history of buying distressed natural gas assets, including the purchase of New Star Energy last year for $215 million.
Heavy oil producer Baytex Energy will be appealing reassessments received from the Canada Revenue Agency (CRA) related to tax deductions made in 2010. The CRA contested those deductions in November of 2014, sending Baytex a tax bill for $120 million. Baytex is appealing the CRA's decision but the company warns the process could drag out for several more years.
Deeper pockets needed to purchase Alberta's oil wells . . .
The Alberta Energy Regulator (AER) has doubled the asset to liability ratio required for the purchase or transfer of existing oil wells licenses in the province.
In May, the Alberta Court of Queen's Bench ruled that creditors cannot be held financially responsible for clean-up of non-producing wells. Creditors argued that environmental liabilities associated with old wells rendered their assets worthless. The ruling makes the province responsible for remediation and abandonment costs.
The AER responded by doubling the liability management ratio (LMR) from 1.0 to 2.0 for any company looking to takeover existing licenses. The move will reduce M&A activity in the energy patch, possibly deterring those companies looking to buy distressed assets. It is unclear whether the new LMR threshold is temporary or permanent. The AER is currently appealing the court decision.
Vancouver mayor continues his crusade to stop Trans Mountain expansion and dismantle the NEB . . .
The City of Vancouver continues to wage war against the Trans Mountain expansion, launching a judicial review of the National Energy Board's (NEB) approval of the project. Mayor Gregor Robertson called the review "flawed and biased" claiming it ignores scientific evidence on the consequences of a major oil spill and the impact of greenhouse gas emissions. The NEB review spanned several years, hearing from 1,600 participants and ten thousand pages of evidence which culminated in a 553 page final report and recommendation to the federal government.
Federal Liberals launch additional public consultations . . .
The federal government launched yet another review of the country's environmental and regulatory processes in an effort to restore public trust. The government will be holding public consultations, asking Canadians for their input in modernizing the NEB and restoring protections and safeguards in coastal waters.
Canadian executives unhappy with federal government's money management skills . . .
The Gandalf Group's latest C-Suite Survey reveals that Canadian executives are worried about the federal government's handling of fiscal policies and pipeline approvals. However, the group concedes Trudeau has improved Canada's image on the world stage. Canadian executives would also rather see Hillary Clinton elected as the next US president due to concerns that Donald Trump may block trade with Canada.
Ontario continues quest to shrink take-home paycheques . . .
Following-through on an election promise made to Ontario Premier Kathleen Wynne, the federal government is boosting mandatory contributions made to the Canada Pension Plan (CPP). Contributions will increase 20% to almost 12% of gross pay (split 50/50 between employee and employer), now payable on incomes of up to $82,000, up from the current ceiling of $56,000. Business groups are worried about the numerous increases in taxes, levies and payroll deductions rolling out over the next few years, particularly in Ontario and Alberta. Former PM Stephen Harper had delayed CPP eligibility to age 67 but PM Trudeau rolled it back to 65 shortly after the Liberals were elected. The new CPP reforms begin to take effect in 2019.
This week's Canadian economic data . . .
Statistics Canada reported a puny 0.1% increase in April's wholesale trade, reversing 2 consecutive months of declines. The increase was much lower than expected. A 3.0% decline in construction, forestry, mining and industrial machinery accounted for much of the pullback. Surprisingly, Ontario and Quebec were the hardest hit provinces this month. Wholesale trade in Alberta appears to have flatlined in the past 3 month after declining through all of 2015. Wholesale trade represents business-to-business sales, which is an important indicator of the health of the Canadian economy. Despite the lower loonie, national wholesale trade figures are down 0.2% yr/yr and show no signs of recovery.
In contrast, Canadian retail sales continue to be strong, rising another 0.9% in April, reaching a record $44.3 billion. This marks the third increase in the past four months powered by a 6% increase in gasoline sales. April marks the first increase in gasoline sales since June of 2015, up 8.9% on an unadjusted basis for the month.
The number of people collecting Employment Insurance (EI) benefits in Alberta rose another 1.2% in April, bucking the national average which is seeing declines across most provinces. On a year-over-year basis, the number of beneficiaries in Alberta increased by 23,360 people or 52.2%. Alberta accounts for most of Canada's gains in EI beneficiaries in the past year. Next month's May data will provide insights into the impacts of the Fort McMurray wildfire evacuations.
One trillion in cash waiting to be invested . . .
Tax advisory firm Ernst & Young (EY) estimates that global private equity (PE) firms are sitting on close to US$1 trillion in cash just waiting to be invested. The firm's latest survey revealed that 43% of PE firms are ready to deploy some of that capital in the global oil and gas sector by mid-2017. Asia and midstream players in North America are expected to be the big beneficiaries. There have been surprisingly few acquisitions and mergers in the oil and gas sector with many bankrupt companies opting to refinance instead.
California's energy troubles . . .
Another incident at Exxon's Torrance refinery in California has caused a spike in West Coast wholesale gasoline prices. Three workers were injured when a 300-ton crane tipped over and crashed to the ground on Monday morning. The 149,500 bbl/day Torrance refinery was sold to PBF Energy in September of last year but has sine been plagued by a series of operational issues. A gasoline unit was shutdown for more than a year following a fire and explosion last year. Exxon must demonstrate 15 days of steady operation before it hands the plant over to PBF.
Colorado-based Crimson Pipeline has spilled 700 barrels of crude oil into the Pacific Ocean near Ventura County, CA. The spill volume was revised lower from initial estimates of 5,000 barrels. Crimson Pipeline operates over 1,500 km of pipeline in the state of California and has recorded 10 spills in the past 10 years.
Still in California, closure of the state's largest natural gas storage plant in Aliso Canyon has raised concerns of rolling blackouts in the southern parts of the state. There are 6 refineries in southern California producing about 1 million bbl/day of final products. Refineries are exempt from rotating power outages but could still face disruptions if natural gas shortages are severe. Aliso Canyon became the focus of national attention after one of its wells began to leak in October. It took the company four months to stop the leak and seal the well, forcing the relocation of thousands of residents in nearby Porter Ranch.
This week's global energy news . . .
BP announced it will fast-track natural gas development in Egypt. The Atoll Phase One gas project will produce up to 300 million cubic ft/day by the first half of 2018. Egypt's Atoll field holds an estimated 1.5 trillion cubic feet of gas and 31 million barrels of condensate. BP has been operating in Egypt for over 50 years with investments totalling US$30 billion so far.
Russia is looking at selling about 20% of state-owned oil giant Rosneft to China and India. The 20% stake is estimated to be worth US$11 billion. Rosneft produces more oil than Exxon Mobil. The sale will help patch the country's giant budget shortfall.
After many years of debate, the German government has agreed to ban shale gas fracking indefinitely. NATO has accused Russia of funding the powerful anti-fracking lobby groups in Europe. Russia controls 30% of Europe's natural gas supply. France also has a similar fracking ban in place. Germany gets 60% of its power from coal and is vowing to shutdown all of its nuclear plants by 2022.
The Dutch government has further lowered production volumes from its Groningen gas field, which supplies up to 10% of Europe's natural gas. The move comes after a series of earthquakes that resulted in extensive property damage in the northern part of the country. The Groningen gas field is a joint venture between Shell and ExxonMobil.
Offshore oil drilling rig workers in Norway have reached a wage deal, narrowly avoiding a strike. As part of the wage deal, it was agreed that those being laid off will be rehired if the employer increases staffing within 2 years. Layoffs have topped 40,000 in Norway's energy patch since 2014 with another 15,000 workers expected to be hit over the next 2 years.
Moody's is warning that Venezuela's state-owned oil company PDVSA is likely to default sometime this year, which will lead the whole country into bankruptcy. Oil revenues account for 95% of the country's exports. The IMF expects Venezuela to contract another 8% this year with inflation increasing to 480% due to the worthless bolivar currency. Credit-default swaps are pricing in a 60% chance of default in the next 12 months. Venezuela’s bonds yield about 14%.
OPEC reported a steep US$438 billion decline in revenues last year, a 10 year low for the cartel. Exports increased 1.7% to 23.6 million bbl/day, rasiing its market share to 43%. OPEC earned US$518.2 billion in 2015 from the sale of crude and refined fuels, the lowest figure since 2005.
+342 ▲ 12.4%
BBL/D CDN IMPORTS TO US
-39 ▼ 0.4%
BBL/D US PROD'N
-0.9 ▼ 0.2%
BBL US INVENTORY
-7 ▼ 2.1%
US RIG COUNT
US oil inventories declined for the fifth straight week while US oil production continues to slide lower. Despite record high demand for gasoline, gasoline stockpiles keep rising as refineries switch from distillates production to gasoline and diesel.
Rig counts south of the border declined this week after 3 consecutive weekly gains. However, analysts are expecting rig counts to rise through the end of the year as producers lock in US$50 oil prices.
Natural gas stockpiles rose by 62 billion cubic feet last week, slightly more than expected. On the positive side, injections have been slowing as temperatures rise in the US and Eastern Canada. Henry Hub prices have rallied close to 30% since the start of the summer cooling season. Alberta's AECO gas prices have almost tripled since the extreme lows of May when forest fires took much of the oil sands offline.
The UK's decision to leave the EU sent currency markets in a tizzy on Friday. The pound sterling has its worst one day performance since 1985. The pound ended the week 4.8% lower, while the Euro declined 1.5%. Concerns of global financial instability sent traders fleeing into the Yen (+1.9%) and the US dollar (+1.3%).
The rising US dollar, potential collapse of the EU and threat of another UK recession moved the next US rate hike to the day after never, sending bond yields to yet another low and treasuries to yet another new high. German, Japanese and UK bond yields reached historic lows while US yields are approaching the lows of 2012.
Nigeria has de-pegged its currency from the US dollar, causing the naira to plummet. Many countries peg their currency to stabilize financial markets. The Central Bank of Nigeria imposed capital controls in March of 2015 as oil prices began plummeting. The capital controls have hurt local businesses, who are unable to buy foreign goods or move revenues out of the country. A lower currency will dramatically boost government revenues since oil trades in US dollars.
RBC president Dave McKay doesn't think US$50 oil will be enough to stimulate investment in the Canadian energy patch. McKay thinks the US is much better positioned to bounce back faster, pointing to the recent increases in oil rig counts south of the border.
In a note to clients, Raymond James is predicting WTI will average US$80 by the end of next year, citing semi-permanent supply destruction in the US, Mexico, Columbia, Angola and China. The investment firm doesn't think US DUCs (drilled-but-uncompleted wells) will be able to come on-stream fast enough to meet rising demand.
CP Rail (TSX:CP -2.0%) warned that second quarter earnings will decline by 12% yr/yr, driven lower by an expected 18% drop in revenues. The company blamed lower crude-by-rail volumes (due to the Fort McMurray wildfires), as well as declines in grain and potash volumes.
Marathon Oil (NYSE:MRO +10.9%) has agreed to buy PayRock Energy Holdings for $888 million from venture capital firm EnCap Investments, boosting its presence in the Oklahoma basin. PayRock currently produces about 9,000 boe/day.
Whiting Petroleum (NYSE:WLL -17.8%) got hit hard this week on massive share dilution as the company moves to convert over US$1 billion in bonds to equity starting the end of June.
Big gainers on the TSX this week included Paramount Resources (TSX:POU +16.2%), Trican Well Service (TCW +11.5%) and Athabasca Oil Sands (ATH +10.9%). TransCanada (TRP +3.0%) hit another 52 week high on Thursday before retreating during Friday's sell-off.
On the US exchange, Exxon Mobil (XOM -1.5%), Chevron (CVX +0.3%) and Occidental Petroleum (OXY +0.4%) all hit 52 week highs this week.
- Suncor Energy (TSX:SU): Upgraded from Hold to Buy at TD Securities and from Neutral to Buy at Citigroup.
- Trican Well Service (TSX:TCW): Upgraded from Sector Perform to Outperform with price target increased from $2 to $5 at RBC Capital.
- Marathon Oil (NYSE:MRO): Upgraded from Equal Weight to Overweight at Capital One Financial and from Underweight to Equal Weight at Morgan Stanley.
- Tesoro (NYSE:TSO): Upgraded from Market Perform to Outperform at Wolfe Research.
- Encana (TSX:ECA): Downgraded from Neutral to Underperform at Macquarie.
- Pembina Pipeline (TSX:PPL): Downgraded from Outperform to Neutral at CSFB and Credit Suisse.
- Statoil (NYSE:STO): Downgraded from Hold to Sell at Deutsche Bank.
- Valero Energy (NYSE:VLO): Downgraded from Outperform to Market Perform at Wolfe Research.
PRICE TARGET CHANGES
- Athabasca Oil (TSX:ATH): Price target increased from $2 to $2.25 at Canaccord Genuity.
- Birchcliff Energy (TSX:BIR): Price target increased from $6 to $8 at RBC Capital.
- Enerplus (TSX:ERF): Price target increased from $8 to $10 at Barclays, from $9.50 to $10 at TD Securities and from $7.25 to $9.50 at Scotiabank.
- Paramount Resources (TSX:POU): Price target decreased from $15.50 to $13.50 at Raymond James.
- TransCanada Pipeline (TSX:TRP): Price target increased from $59 to $62 at BMO Capital.
- Trican Well Service (TSX:TCW): Price target increased from $2.25 to $2.75 at TD Securities.
- Marathon Oil (NYSE:MRO): Price target increased to US$16 at Citigroup.
- Halliburton (NYSE:HAL): Price target increased from US$48 to US$60 at Simmons.
NEXT WEEK'S EVENTS
- Mexican President Enrique Peña Nieto arrives in Quebec City
- US Q1 GDP @ 8:30am
- MEG Energy 2016 Annual General Meeting in Calgary, AB @ 3:00pm MT
- Pengrowth Energy 2016 Annual General Meeting in Calgary, AB @ 3:30pm MT
- API Weekly Statistics Bulletin released @ 4:30pm ET
- ECB Forum on Central Banking begins in Sintra, Portugal
- European Union begins 2-day summit to discuss Brexit
- US Fed Chair Janet Yellen speech @ 9:30am
- UK preliminary Q2 GDP figures
- EIA Petroleum Status Report released @ 10:30am ET
- North American Leader's Summit in Ottawa
- Canadian GDP and payroll data for April released by Statistics Canada @ 8:30am
- Canadian Producer Price Index (PPI) for May released by Statistics Canada @ 8:30am
- EIA Natural Gas Report released @ 10:30am ET
- Last trading day for Brent August contract
- Baker-Hughes Rig Count released @ 1:00pm ET
- TSX closed for Canada Day holiday