Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending April 27, 2018:
  • No end in sight for TMEP saga
  • Losses unexpectedly widen at Cenovus
  • Imperial swings back to black in Q1
  • Hope springs eternal for Kitimat's LNG Canada Project
  • The suffering continues for Cdn oilfield service providers
  • US dollar finally comes to life
  • Brent prices surge higher
  • Permian production outstripping Texas pipeline infrastructure ...
    ... driving WTI discount higher
  • US set to become top global oil exporter
  • Midstream stocks take a hit on higher interest rates
  • Threats of renewed Iranian sanctions weighs on oil markets.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • Despite strong opposition from EU members, President Trump is widely expected to reimpose sanctions on Iran, potentially reducing output from the OPEC member. A decision from the White House is expected by May 12.
  • North and South Korea have begun historic peace talks with plans to demilitarize the Korean peninsula.
USD INDEX
BEARISH
  • The US dollar index jumped 1.4%, breaking out of a 3-month trading range and returning to the 200-day moving average.
SUPPLY
BULLISH
  • US crude production hit yet another record high of 10.59 million bbl/day this week.
  • Venezuela's crude production has declined from about 2.5 million in early 2016 to 1.5 million bbl/day due to ongoing political turmoil.
DEMAND
BULLISH
  • US crude exports hit a record high of 2.33 million bbl/day last week as the price of WTI sits at a US$6.50 discount to international crude prices. The wide spread should pull US inventories lower.
  • Steep backwardation in the futures curve, particularly in Brent, should also encourage further drawdowns in global stockpiles.
SENTIMENT
BULLISH
  • Brent prices continue their upward climb, now reaching the highest level since late 2014.
  • Short positions for WTI ticked slightly higher last week, reducing net longs for money managers.
  • Net longs have pulled back slightly for Brent, but remain at historically high levels.
CURRENCIES & BONDS

This week's notable Canadian economic data:

  • Wholesale sales unexpectedly declined 0.8% in February, blamed on a 2.6% drop in auto sales. In real terms, sales were down 0.9%, while inventories were roughly unchanged.
  • Weekly earnings jumped from an annualized rate of 2.8% to 3.4%, reflecting a tight labour market and low unemployment rates.

The European Central Bank (ECB) kept rates unchanged this week, vowing to keep up its €30 billion/month bond purchases to the end of September or until the economy begins to show signs of inflation. The Bank of Japan also held rates unchanged this week.

This week's notable US economic data:

  • GDP expanded 2.3% y/y in the first quarter, down from a 2.9% annualized rate in Q4, but hotter than analysts were expecting.
  • Wages increased 0.8% in the first quarter, also slightly higher than expected.
  • Personal consumption grew only 1.1%, the weakest in 5 years and down sharply from the last quarter of 2017.
  • US initial jobless claims declined 24,000 to a seasonally adjusted 209,000 last week, the lowest level since December 1969.

US 10-year notes hit 3.0% on Tuesday, for the first time since January 2014, before pulling back to 2.96% by the end of the week. US dollar hit a 3-month high this week, pulling most other global currencies lower.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
74.64
68.10
67.65
61.40
50.55
44.82
42.53
40.88
39.64
30.41
74.74
68.64
68.24
61.59
51.82

The spread between Brent and WTI continues to widen, topping US$6.50 on Friday as growing production from the West Texas Permian basin is outpacing current infrastructure. Permian crude sells at a US$7 discount to WTI and approximately US$14 cheaper than Brent.

The spread on Canadian heavy oil narrowed by US$1.30 this week to about US$17.50/bbl. Backwardation in oil markets continues to steepen, particularly for Brent futures.

CRUDE OIL FUTURES CURVES
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ MONTH 3   █ MONTH 5 (VS NEAR MONTH)
MANAGED MONEY: FUTURES & OPTIONS
BRENT
WTI
█ OIL PRICE (USD/BBL)   █ LONG   █ SHORT █ NET LONG (1000 BBL CONTRACTS)

According to Citigroup, the US is on track to become the world's top crude oil and products exporter in 2019, surpassing Saudi Arabia. Total US exports of petroleum products reached 8.3 million bbl/day last week, surpassing Russia's average of 7.4 million bbl/day. Saudi Arabia retains the top spot, exporting an estimated 9.3 million bbl/day in January.

US drillers added 5 oil rigs last week, bringing the total to 825, the highest since March 2015. Canada lost another 5 oil rigs this week, ending the week at just 33.

The Petroleum Services Association of Canada (PSAC) lowered its forecast for the number of wells expected to be drilled this year from 7,900 to 7,400 wells, attributed to a "shameful" discount for Canadian crude. The company says its members are still making staff reductions, suggesting that Canada's oilfield services sector is "far from healthy" despite higher oil prices and higher demand. PSAC also says E&Ps are shifting from gas to oil due to depressed natural gas prices.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

APR 25, 2018

US crude oil exports surge to new record high

 
EQUITY MARKETS
    TSX SECTORS
52-WK
    SPX SECTORS
52-WK

US equity markets ended the week flat to lower, as investors digest the impact of higher borrowing costs. The TSX ceased trading early on Friday due to a computer glitch.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

Heavily indebted midstream stocks were once again the weakest subsector in the energy patch on both sides of the border. Most other subsectors posted gains on relatively decent first quarter earnings.

CANADIAN ENERGY NEWS

This week's notable Canadian energy news:

  • BC has sent draft legislation to the province's Court of Appeal to control the flow of heavy oil out of its ports due to environmental concerns. The courts are highly unlikely to render a decision by the end of May, which is Kinder Morgan Canada's (KML) deadline for continuing construction of its Trans Mountain Expansion pipeline. Win or lose, the court ruling will likely be appealed to the Supreme Court of Canada.
  • The Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) has granted approval for BP's (BP) Scotian Basin Exploration Project. The company says it plans to begin drilling one deepwater exploration in its Aspy D-1 exploration well, located about 300 kilometres offshore. BP submitted its application in September 2017 for up to seven exploration wells, several of which still require other levels of approval.
  • Keyera (KEY) announced the start of service on its Keylink NGL gathering pipeline. Keylink initially connects eight Keyera gas plants to the company's Rimbey gas plant for fractionation. The Rimbey gas plant is connected to Keyera's Edmonton Terminal and Fort Saskatchewan fractionation and storage complex via pipeline. The company says the $147 million project was completed on time and under budget.
  • Japan's JGC Corp and Texas-based Fluor (FLR) have been awarded the EPC contract for the US$14 billion LNG Canada Project in Kitimat, let by Royal Dutch Shell (RDS.A). The contract is conditional on a positive final investment decision, expected sometime this year. Korean media reports speculate that Shell and its partners, PetroChina (PTR), Korea's KOGAS and Mitsubishi Corp (MSBHY), will sanction the export terminal due to improved global LNG prices.
  • MEG Energy (MEG) announced the retirement of CEO Bill McCaffrey after the company's AGM at the end of May. Board member Harvey Doerr will act as interim CEO until a permanent replacement is found.
  • Encana's (ECA) debt rating was downgraded from "BBB" to "BBB-" with a stable outlook by S&P Global due to a weakened reserves profile.

This week's notable first quarter earnings:

  • TransCanada (TRP) reported a 14% increase in quarterly profits, helped by a good performance from its US natural gas distribution business. Net income rose to $734 million, up from $643 million for the same time last year. Revenues were roughly unchanged at $3.4 billion. The company says it is awaiting on a decision on two lawsuits challenging the Presidential Permit for Keystone XL, with a decision expected by the end of September. A third ruling from the Nebraska Supreme Court on the validity of KXL's approved route is due by the first quarter of next year. TransCanada says it has $21 billion of near-term capital projects on the books, with $11 billion due to come online by the end of this year.
  • Imperial Oil (IMO) reported a 55% increase in quarterly profits, rising to $516 million on a strong showing from its refining and chemicals businesses. Cash flow from operations more than doubled to $985 million and revenues rose 11% to $7.9 billion. Q1 production averaged 370,000 boe/day, down 2% y/y due to lower output from its Cold Lake operations. The company says it plans to raise its existing share buyback program from 3% to 5%, now targeting to repurchase 42.3 million IMO shares, and also raised its quarterly dividend 20% to $0.19 per share.
  • Net losses at Cenovus Energy (CVE) unexpectedly widened to $914 million in the first quarter, as operating losses increased to $752 million, up from a loss of $39 million for the same time last year. The company says results were negatively impacted by a wide heavy oil discount, maintenance shutdowns at its two refineries, lack of pipeline export capacity and losses on its hedging program.
  • First quarter funds from operations at Husky Energy (HSE) increased 35% y/y to $895 million. The company lowered its 2018 production guidance by 10,000 bbl/day due to a wide Canadian heavy oil discount, now expected to average between 310,000 and 320,000 boe/day. Net earnings more than tripled to $248 million. Q1 production averaged just over 300,000 boe/day, down 10% y/y due to asset divestitures.
  • First quarter net earnings at Vermilion Energy (VET) declined 43% to $25 million. Funds from operations fell 13% y/y to $157 million while Q1 production dipped 4% y/y to 70,167 boe/day. Production guidance was boosted to between 86,000 and 90,000 boe/day once the company closes on its recent $1.4 billion acquisition of Spartan Energy (SPE).
  • PrairieSky Royalty (PSK) reported a 15% decline in Q1 revenues, falling to $67.9 million, bringing net profits to 19.8 million, down 5% y/y. Royalty production averaged 23,536 boe/day during the first quarter, down 12% y/y, weighted 47% liquids. The company also says it plans to buy back $50 million of its shares over the next 12 months.
  • First quarter revenues at Altagas (ALA) rose 14% y/y to $878 million while funds from operations were roughly unchanged at $169 million. The company expects its acquisition of WGL to close in the middle of this year.
  • Western Energy Services (WRG) reported a 4% decline in first quarter revenues, falling to $81.3 million on a slow winter drilling season. Net losses widened to $5.9 million, up from a $4.4 million loss for the same time last year.
  • Net losses at Precision Drilling (PD) declined to $18.1 million in the first quarter, down from a loss of $22.6 million for the same quarter last year. Revenues rose 9% y/y to $401 million. The company says its focus for this year is debt reduction, improving the balance sheet and wide scale technology deployment.
US ENERGY NEWS

This week's notable US energy news:

  • Husky Energy (TSX:HSE) reported an explosion and fire at its Superior Refinery in Wisconsin. According to media reports, a tank explosion left 15 people injured, forcing the evacuation of everyone located within a 1-mile radius. The incident happened when crews were working on shutting the plant down for repairs. The 50,000 bbl/day refinery dates back to the1950s and has a storage capacity of 3.6 million barrels of crude and products.
  • Royal Dutch Shell (RDS.A) announced a final investment decision in the development of Vito, a deepwater offshore project in the US Gulf of Mexico. Vito is expected to reach peak production of approximately 100,000 boe/day at a breakeven cost of US$35 per barrel. The development has an estimated recoverable resource of 300 million boe and is expected to begin producing oil in 2021.
  • Andeavor (ANDV) announced two joint ventures this week to support more crude transport from the Permian Basin to Corpus Christi, Texas, connecting to a new marine terminal. The 700,000 bbl/day Gray Oak Pipeline, jointly-owned with Phillips 66 (PSX), received enough binding commitments for a second open season, and could eventually be expanded to 1 million bbl/day. 
  • The Gray Oak Pipeline will connect to the new South Texas Gateway Terminal, currently under development by Buckeye Partners (BPL). The terminal will have 3.4 million barrels of storage capacity and is expected to be put into service by the end of 2019.

This week's notable US first quarter earnings:

  • First quarter revenues at Chevron (CVX) rose 13% y/y to US$37.76 billion bringing total earnings to US$3.64 billion, up 36% y/y. Upstream production averaged 2.85 million boe/day, up from 2.68 million for the first quarter of last year.
  • ExxonMobil (XOM) reported a 17% increase in first quarter profits, rising to US$4.7 billion on higher oil prices. Revenue grew 16% y/y to US$68 billion while upstream production declined 6% to 3.9 million boe/day. The company boosted their dividend by 7% to US$0.82 cents, the 36th consecutive annual increase.
  • ConocoPhillips (COP) reported first quarter revenues of US$8.96 billion, up from US$7.77 billion for the same time last year. Profit rose over 50% y/y to US$888 million. Full year production is expected to average between 1.20 and 1.24 million boe/day. The company has set a 2018 capital budget of about US$5.5 billion and says it remains on track to repurchase US$2 billion COP shares this year.
  • Hess (HESS) posted its 14th consecutive quarterly loss in the first quarter, despite aggressive cost cutting and debt reduction. Net losses narrowed to US$106 million, about one-third the losses from the same time last year. Net production declined to 255,000 boe/day, down from 311,000 boe/day last year. For the full year 2018, the company expects production to average 245,000 to 255,000 boe/day.
  • Phillips 66 (PSX) reported a 2% decline in first quarter profits, falling to US$524 million due to higher operating costs.
  • Valero Energy (VLO) reported an 21% increase in revenues, rising to US$26.8 billion  in the first quarter. Net income rose 54% y/y to US$469 million on much improved refining margins.

This week's international first quarter earnings:

  • Royal Dutch Shell (RDS.A) reported a 42% rise in first quarter profits on higher oil prices and higher production. Adjusted net income rose to US$5.3 billion, up from US$3.7 billion for the same time last year, while revenues rose 24% y/y of $89 billion. The company says it plans to buy back US$25 billion in shares through 2020.
  • First quarter revenues at Total (TOT) rose to US$43.3 billion, up from US$36.1 billion for the same time last year. The company says it plans to lower breakeven costs to US$25 a barrel this year, but notes the global market remains volatile despite the recent run up in oil prices. 2018 capital expenditures are forecasted to average between US$15 and US$17 billion.
  • Statoil (STO) reported a 28% increase in first quarter revenues, rising to US$19.9 billion, bringing total profits to US$1.28 billion, up 21% y/y. The company has set a 2018 organic capital budget of US$11 billion, with US$1.5 billion spent on exploration. The company expects full year production to grow about 1% to 2% from last year.

Around the world this week:

  • An international arbitration court has ordered Venezuela's state-owned PDVSA to pay ConocoPhillips (COP) US$2.04 billion for the early dissolution of two joint ventures in the country. COP's assets in Venezuela were expropriated in 2007 after former President Hugo Chavez nationalized the country's oil industry. The company had sought up to $22 billion from PDVSA for the broken contracts and loss of future profits. ConocoPhillips says it will pursue enforcement and "seek financial recovery of its award to the full extent of the law" and has already filed suit in a US federal court to enforce the ruling. The arbitration award is final and binding. 
  • Still in Venezuela, Chevron (CVX) has evacuated its executives from the country after two of its workers were imprisoned over a contract dispute with PDVSA last week. The workers were allegedly arrested for refusing to sign a supply contract due to high costs and lack of competitive bids. Chevron has asked all its employees to avoid any jointly-owned PDVSA facilities.
  • Royal Dutch Shell (RDS.A) announced the divestiture of its downstream operations in Argentina to Raízen for US950 million in cash. The sale includes a refinery in Buenos Aires, 645 gas retail stations, as well as supply and distribution activities in the country. Raízen is a 50/50 joint venture between Shell and Brazil's Cosan (CZZ).
  • BP (BP) announced a new 25-year production sharing agreement with Azerbaijan's SOCAR for joint exploration and development of Block D230, located 135 km off the coast of Baku in the Caspian Sea.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Baytex Energy (BTE)
• Birchcliff Energy (BIR)
• Peyto Exploration (PEY)
• Precision Drilling (PD)
• Raging River (RRX)
• Andeavor (ANDV)
• Baker Hughes (BHGE)
• Chevron (CVX)
• EQT Corp (EQT)
• Newfield Exploration (NFX)
12-MO
HIGHS
• Baytex Energy (BTE)
• Enerplus (ERF)
• Gran Tierra (GTE)
• Parex Resources (PXT)
• Suncor Energy (SU)
• Anadarko Petroleum (APC)
• Andeavor (ANDV)
• Hess Corp (HES)
• Marathon Petroleum (MPC)
• Phillips 66 (PSX)
• Pioneer Natural Res (PXD)
• Valero Energy (VLO)
10-YR
HIGHS
• None • Andeavor (ANDV)
• Valero Energy (VLO)
GOLDEN
CROSSES
• Crescent Point (CPG) • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Husky Energy (HSE)
• Mullen Group (MTL)
• PrairieSky Royalty (PSK)
• Shawcor (SCL)
• Vermilion Energy (VET)
• Apache (APA)
• Chesapeake Energy (CHK)
• Helmerich & Payne (HP)
• Hess Corp (HES)
• Kinder Morgan (KMI)
12-MO
LOWS
• Enbridge (ENB) • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • BP (NYSE:BP): Upgraded from Neutral to Buy at Goldman Sachs and Underperform to Neutral at Macquarie.
  • Cenovus Energy (TSX:CVE): Upgraded from Underperform to Market Perform at Raymond James.
  • ExxonMobil (NYSE:XOM): Upgraded from Underperform to Market Perform at Raymond James.
  • Gulfport Energy (NASDAQ:GPOR): Upgraded from Neutral to Buy at UBS and Eurobank EFG.
  • Helix Energy Solutions Group (NYSE:HLX): Upgraded from Neutral to Overweight at Piper Jaffray and Market Perform to Outperform at Raymond James.
  • MEG Energy (TSX:MEG): Upgraded from Market Perform to Outperform at Raymond James.
  • Noble Energy (TSX:NBL): Upgraded from Accumulate to Buy at Johnson Rice.
  • Trican Well Service (TSX:TCW): Upgraded from Hold to Buy at TD Securities.
  • Whiting Petroleum (NYSE:WLL): Upgraded from Underperform to Market Perform at Wolfe Research.

DOWNGRADES

  • AltaGas (TSX:ALA): Downgraded from Market Perform to Underperform at Raymond James.
  • ConocoPhillips (NYSE:COP): Downgraded from Outperform to Neutral at Macquarie.
  • Gibosn Energy (TSX:GEI): Downgraded from Outperform to Market Perform at Raymond James.
  • Hess (NYSE:HES): Downgraded from Outperform to Neutral at Macquarie and from Buy to Hold at KLR Group.
  • Husky Energy (TSX:HSE): Downgraded from Buy to Hold at GMP Securities.
  • Imperial Oil (TSX:IMO): Downgraded from Market Perform to Underperform at Raymond James.
  • Inter Pipeline (TSX:IPL): Downgraded from Market Perform to Underperform at Raymond James.
  • Mullen Group (TSX:MTL): Downgraded from Outperform to Sector Perform at National Bank.
  • Petrobas (NYSE:PBR): Downgraded from Market Perform to Underperform at Raymond James.
  • Plains All American Pipeline (NYSE:PAA): Downgraded from Market Perform to Underperform at Wolfe Research from Outperform to Neutral at Macquarie.
  • PraireSky Royalty (TSX:PSK): Downgraded from Buy to Hold at TD Securities.
  • RPC (NYSE:RES): Downgraded from Buy to Neutral at Guggenheim and Janney Montgomery Scott.
  • SRC Energy (NYSE:SRCI): Downgraded from Overweight to Equal Weight at Capital One.
NEXT WEEK'S EVENTS

Monday:

  • March industrial and raw materials product indices released by Statistics Canada
  • Q1/2018 earnings: Secure Energy Services
  • Last trading day for Brent (June contract) and gasoline (May contract)

Tuesday:

Wednesday:

  • EIA Weekly Petroleum Status Report released @ 10:30am ET
  • Suncor Energy 2018 AGM in Calgary, AB
  • US FOMC interest rate decision released @ 2:00pm ET
  • Q1/18 earnings: TC Pipelines, Anadarko Petroleum, Marathon Oil, Williams Co

Thursday:

  • CNRL 2018 AGM in Calgary, AB
  • EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
  • Q1/18 earnings: CNRL, Crescent Point Energy, Pembina Pipeline, Seven Generations Energy

Friday:

  • PC Leader Andrew Scheer speaks at the Calgary Chamber of Commerce
  • Baker Hughes Rig Count released @ 1:00pm ET
UPDATED: EVERY WEEKEND
NOTES:
  • CRB = THOMSON REUTERS/CORECOMMODITY CRB INDEX
  • TLT = iSHARES 20+ YEAR TREASURY BOND ETF
  • XBB = iSHARES CANADIAN UNIVERSE BOND INDEX ETF
  • SHARE PRICE CHANGES (INCL. NEW HIGHS & LOWS) EXCLUDE DIVIDENDS
  • SECTOR & SUBSECTOR PERFORMANCES WEIGHTED BY MARKET CAP
  • GOLDEN CROSS: 10-WK SMA CROSSES ABOVE 40-WK SMA
  • DEATH CROSS: 10-WK SMA CROSSES BELOW 40-WK SMA
  • 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
  • FUTURES & OPTIONS CONTRACTS FROM ICE/CFTC (WEEKLY DATA FOR PREVIOUS TUESDAY)
  • CHARTPACKS COURTESY STOCKCHARTS.COM
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