Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending January 26, 2018:
  • US markets headed to the moon
  • TSX lags despite higher commodity prices
  • US dollar sinks to 3-year low
  • Heavy oil discount widens to 4-year high
  • Canadian rig counts double in 2-weeks
  • Cold weather continues to boost natgas prices ...
  • ... but be sure to temper your enthusiasm.
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MARKET OVERVIEW
CURRENCIES & BONDS

This week's Canadian economic data:

  • Average weekly earnings rose 0.6% in November to $988. Over the past 12 months, earnings are up 2.8%. Gains were seen across most sectors and in all provinces.
  • Canada's Consumer Price Index (CPI) slowed to an annualized rate of 1.9% in December, down from 2.1% the previous month. Gasoline prices cooled, while natural gas, food and shelter got more expensive. Core inflation rose to 1.8%, a 14-month high.
  • Wholesale sales rose 0.7% in November to $63.6 billion, the second consecutive monthly increase. Gains were led by food, beverages, tobacco and auto parts.
  • Retail sales rose 0.2% in November to $50.1 billion, below what analysts were expecting. Higher sales at gasoline stations offset declines in sales of new vehicles. 

After expanding 3.2% in the third quarter, US economic growth unexpectedly slowed to 2.6% in Q4. According to the Bureau of Economic Analysis, growth was hampered by a slowdown in "private inventory investment" and higher imports, although exports, consumer spending and government expenditures remain strong. Full year 2017 GDP is now forecasted at 2.3%, up from 1.5% in 2016.

The US dollar tumbled again this week after US Treasury Secretary Steven Mnuchin said he welcomes a weaker dollar as a way of boosting exports. However, President Trump reiterated his preference for a strong dollar while speaking at this week's Economic Forum in Davos. The dollar has been sinking on a widening trade deficit as imports rise, and strengthening of foreign currencies as the world's top central bankers contemplate scaling back on stimulus programs.

In other currency news, the Euro surged to a 3-year high despite no change in interest rates from the European Central Bank (ECB) this week. ECB President Mario Draghi telegraphed plans to keep stimulus going as long as required and says an interest rate hike is highly unlikely this year despite improving economic data.

OIL & GAS PRICES (USD)

Brent crude managed to hold its head above US$70 this week, a first since December 2014. Backwardation on the WTI futures curve has steepened, bring the near-contract prices higher. The WTI discount to Brent narrowed to about US$4.40 per barrel this week, down from a high of almost US$7 late last year.

No such luck for Canadian energy prices, as the heavy oil discount topped US$28 a barrel for the first time since January 2014 when WTI was trading near US$100. The discount for Canadian Light also widened to US$7 a barrel.

Natural gas prices continue to rise, climbing another 10% as temperatures are forecasted to be below-normal across the central US going into February. However, the Energy Information Administration (EIA) is warning natural gas producers and investors not to get too excited, as it expects prices to remain relatively flat this year and next.

This week's revisions in oil price forecasts:

  • In a note to investors, French bank BNP Paribas said that "outlook for 2018 is roughly balanced for most of the year" but predicts a rise in inventories towards the fourth quarter. BNP raised its 2018 oil price forecasts by US$10 a barrel to US$60 for WTI and US$65 for Brent.
  • CIBC World Markets updated its 2018 average oil price forecasts this week, rising to US$62.50 per barrel for WTI, up from a previous forecast of US$55. Longer term, the bank says WTI and Brent should average closer to US$65 and US$68.50, respectively.

Imports of Canadian crude into the US took a large tumble last week, falling 580,000 bbl/day to just 3.0 million bbl/day. TransCanada's 590,000 bbl/day Keystone pipeline to Cushing, OK is still running at reduced pressure, with flows estimated at about 524,000 bbl/day last week.

US commercial crude stockpiles declined 1.1 million barrels last week. This is the tenth consecutive weekly decline, although the rate of drawdowns in slowing as US refineries begin to prepare for maintenance shutdowns. After declining through much of the winter, inventories in the Gulf Coast have now started to build.

US oil drillers added 12 rigs this week, bringing the total to 759. After a rough start to the winter, Canada also added 12 oil rigs this week, bringing the total to 220, double the number from just two weeks ago.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

JAN 24, 2018

Drawdowns in crude stockpiles start to slow as Gulf Coast reports inventory build

 

Saudi Arabia says it plans to hold production at about 9.8 million bbl/day from January through March. Crude oil exports are expected to remain at 7 million bbl/day for the first quarter despite planned refinery shutdowns.

Russia retained the top spot as China’s top crude oil supplier in December for the 10th month in a row, once again surpassing rival Saudi Arabia.

What's moving energy markets this week:

FACTOR
IMPACT
SUMMARY
GEOPOLITICS
NEUTRAL
The kidnapping of several oil workers and foreign nationals in Nigeria has largely gone unnoticed by energy markets this week. So far, production out of Nigeria has not been affected. Exports out of Libya returned to normal earlier this week.
USD INDEX
▲ BULLISH
The greenback took another big tumble, sending all commodities higher. Despite higher interest rates, the dollar is being dragged lower by a surge in imports into the US, which is widening the national trade deficit.
SUPPLY
NEUTRAL
At last weekend's OPEC meeting, Saudi Arabia indicated a "readiness" to extend production cuts into 2019. US crude production hit another record of 9.88 million bbl/day last week.
DEMAND
▲ BULLISH
The IMF revised its expectations for global growth to 3.9% for 2018 and 2019, up 0.2% from its previous forecast.
SENTIMENT
▲ BULLISH
Despite the recent run-up in oil prices, traders remain decidedly bullish. Net long non-commercial contracts grew by 50,000 last week to a record high of 708,000. Both Brent and WTI have comfortably cleared all technical resistance levels and remain in a solid uptrend.
EQUITY MARKETS

US markets continued to rip to new highs, driven by large-cap stocks and technology heavy-weights. 

Chinese markets also continue their upward trajectory. The Hang Seng Index is now up 17% from the beginning of the year, while the Shanghai stock exchange is up almost 10%. The All World Index, which includes emerging markets, gained another 2% to a new all-time high.

Despite the recent run-up in commodity prices, the TSX continues to lag US markets. European markets were also flat to lower this week, held back by continued strength in the Euro.

SECTORS

All sectors on the S&P 500 posted gains this week, including utilities stocks. However, utilities remain the worst performers on the prospects of higher interest rates. Energy stocks are closing in a new 12-month high, while all other sectors are trading at new record highs.

Despite all the enthusiasm in US equities, Canadian stocks posted mixed results this week, with only technology and discretionary stocks trading near 1-year highs. The more heavily-weighted financials and industrials have paused their respectively uptrends, both pulling back another 1% this week.

ENERGY SECTOR PERFORMANCE

The TSX energy sector has yet to post any gains for the year, ending the week roughly unchanged. Weakness in heavily-indebted midstream stocks continues to drag the overall sector lower. Most producers and services stocks posted gains for the week. Birchcliff Energy (BIR) was this week's stand-out performer, gaining almost 14%.

In contrast, US energy stocks added another 1.5% this week, coming very close to breaking the highs of January 2017. Most stocks ended the week higher. Andeavor (ANDV), Cimarex (XEC), Range Resources (RRC), Baker Hughes (BHGE) and TransOcean (RIG) posted the largest losses.


TSX ENERGY STOCKS
TSX 300 ENERGY STOCKS

Investment news from the Canadian energy patch this week:

  • Kinder Morgan Canada (KML) CEO Steve Kean reiterated that his company is in no hurry to ramp up construction on the Trans Mountain Expansion, instead focusing on getting all permits and approvals in place. The company also amended the terms of its $5.5 billion credit facilities, now split $4.0 billion for construction, $1.0 billion for contingency and $500 million in working capital.
  • The National Energy Board has approved Enbridge's (ENB) plans to repair a section of damaged pipe along the Norman Wells Pipeline. The line serves Imperial Oil's Norman Wells production facility in the Northwest Territories, which has since been shutdown. Repairs are estimated at $53 million and should be completed by year end. 
  • Husky Energy (HSE) filed for a mixed shelf offering of up to US$3 billion, including shares, debt and warrants. Net proceeds from the sale will be used to reduce indebtedness. CEO Rob Peabody hinted the company might be ready to reinstate its dividend, although the board has yet to make a final decision.
  • Husky's was also cleared to restart production at this SeaRose platform off the coast of Newfoundland. The province's offshore regulator has withdrawn their suspension, allowing production to restart. Husky also announced the appointment of a new Senior VP - Atlantic Region, reporting directly to the COO.
  • Journey Energy (JOY) announced plans to purchase 12.7 million shares from its largest shareholder, MIE Maple Investments, at a purchase price of $1.68 per share. The shares will be cancelled, reducing the company's float to 38.5 million. MEI will retain 3.7 million shares and reduce its presence on the board from two members to one. AIMCo has agreed to provide $22 million in financing for the share buyback.
  • InPlay Oil Corp (IPO) announced a 2018 capital budget of $38 million, which should translate into a 23% increase in light oil production. The company is forecasting 2018 production to average 4,400 to 4,500 boe/day weighted 72% liquids and says it plans to exit the year over 4,800 boe/day.
  • Razor Energy (RZE) announced a 2018 capital budget of $38.4 million. The company says it exited 2017 at 4,700 boe/day and plans to grow production over 15% this year.
  • Pengrowth Energy (PGF) announced a "realignment of its executive team" promoting Randy Steele from Senior VP Conventional Operations to Chief Operating Officer. The company also announced the departure of Senior VP Thermal Operations, Steve De Maio.

This week's analyst action:

  • Analysts at Canaccord Genuity released their "best of breed" top picks in the TSX energy space this week, including Suncor Energy (SU), Husky Energy (HSE), Enerplus (ERF), NuVista (NVA) and Parex Resources (PXT).
  • Analysts at BMO Capital have added Suncor Energy (SU), Imperial Oil (IMO), Husky Energy (HSE) and Canadian Natural Resources (CNQ) to the list of companies most likely to raise dividends during Q4 earnings releases. Both BMO and AltaCorp are also predicting dividend increases at Freehold Royalties (FRU) and PrairieSky Royalty (PSK). 
  • BMO Capital markets also advises natural gas investors to stick with producers that sell into the US, and avoid those stuck in Alberta.

New 52-week highs on the TSX include Enerplus (ERF), Kelt Exploration (KEL), NuVista Energy (NVA) and Parex Resources (PXT). TransCanada (TRP) hit a new 52-week low.


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

This week's fourth quarter earnings:

  • Halliburton (HAL) reported a Q4 net loss of US$805 million, including impairment charges for changes to US tax rates and unpaid bills in Venezuela. Excluding one-time items, the company posted a US$462 million net profit on revenues of US$5.9 billion, up from US$4.0 billion for the same time last year. The company says it has seen strong demand for its services in North America, while its outlook for international markets is "improving."
  • The new Baker Hughes (BHGE) posted a fourth-quarter loss of US$82 million blamed on an 81% increase in expenses. Revenues rose 64% to US$5.76 billion. The oil field services firm says it saw growth in North America, while international activity "remains muted" with pockets of growth seen in Asia Pacific, Latin America, Iraq and the UAE.
  • Drilling firm Helmerich & Payne (HP) reported net income of US$500 million for the first quarter of this year on operating revenues of US$564 million. The company took an after-tax gain of US$501 million on changes to the corporate tax rate.
  • Services firm RPC (RES) announced a doubling of revenues in the fourth quarter, rising to US$427 million. The increase was attributed to higher activity levels, improved pricing and re-activation of previously idled equipment. Operating profits for the quarter was reported at US$60 million, much improved over a US$32 million loss for the same time last year.

This week's US investing news:

  • At this week's 2018 Analyst Day meeting in Houston, Kinder Morgan (KMI) says it expects US$3.2 billion worth of projects to be placed into service this year, all funded through internal cash flow. The company warns it will take a one-time impairment charge of US$1.4 billion in the Q4 due to recent changes in the US tax code, but says it expects to benefit from the new regulations overall. The company has begun repurchasing US$2 billion of its shares in December, one month ahead of schedule. KMI's sustaining 2018 capital budget has been set at US$664 million.
  • KMI also announced the start of operations of its US$500 million 270-mile Utopia Pipeline, transporting 50,000 bbl/day of ethane from Ohio's Utica shale into Windsor, Ontario. The pipeline has room for expansion beyond 75,000 bbl/day.
  • Matador Resources (MTDR) announced a strategic alliance with a subsidiary of Plains All American Pipeline (PAA) to gather and transport crude oil from New Mexico. Under terms of the deal, PAA has agreed to purchase some of Matador's production in the region and expand part of its pipeline network.
  • PAA also says it has received sufficient binding commitments to proceed with its Cactus II Pipeline, running from the Permian Basin to Corpus Christi/Ingleside. The line should be operational by Q3/2019. The company has also launched a second open season for additional contracts.
  • US regulators have ordered Energy Transfer Partners (ETP) to stop construction of its US$4.2 billion Rover natural gas pipeline under Ohio's Tuscarawas River after state regulators expressed concerns over the release of drilling fluids. ETP says construction is more than 99% complete and the stop-work order will not delay the in-service date, currently forecasted by the end of the first quarter. 
  • Gastar Exploration (GST) announced the sale of various non-core assets in Oklahoma for US$107.5 million. The divested assets produced 2,836 boe/day in the third quarter of last year.
  • Shale oil producer SandRidge Energy (SD) has rejected a demand from activist investor Carl Icahn to replace two of its board members and amend its bylaws. In a letter to its shareholders, the company says any changes to its board or bylaws should be approved by shareholders.
  • Chapter IV has sent a letter to Antero Resources' (AR) Board of Directors asking it to simplify its organizational structure in order to boost its share price. The investment firm has sold its entire stake in Antero and its subsidiaries, and no longer holds a position in the company.
  • Environmental services firm Clean Harbors (CLH) has agreed to acquire Veolia North America’s US Industrial Cleaning Services Division for US$120 million in cash. The company says this will expand their reach, particularly in the Midwest.
  • In this week's 2018 financial guidance, midstream service provider ONEOK (OKE) says it expects full-year net income to be between US$955 million and US$1.155 billion, while earnings expectations were increased 20% over 2017 guidance. The company says it expects to grow it dividend 9-11% annually through 2021.
  • Rex Energy (REXX) announced the promotion of Curt Walker from Chief Accounting Officer to Chief Financial Officer. Walker replaces Thomas Rajan, who resigned from the company.
  • Marathon Petroleum (MPC) announced the promotion of Brian K. Partee from Director to VP of Business Development, and Rick Linhardt from Director to VP of Tax.
  • Teekay Corp (TK) announced an offering of 10 million common shares and US$100 million in convertible senior notes due 2023.

This week's dividend and reserves increases:

Across the pond this week:

  • French energy major Total (TOT) has agreed to buy Samson Offshore Anchor, which holds a 12.5% interest in four blocks covering the Anchor discovery in the Gulf of Mexico. The deal also includes a 12.5% interest in the nearby Green Canyon 761 exploration block, where Total already has a 25% interest. Anchor is located 225 km off the coast of Louisiana and is operated by Chevron (CVX). Financial terms were not disclosed.
  • According to Reuters, Total also purchased shares in three Kenyan oil blocks from A.P. Moeller-Maersk (AMKBY). The fields are expected to begin producing oil in 2021 after a pipeline to tidewater is completed. Financial terms of the deal were also not disclosed.
  • Kosmos Energy (KOS) and BP (BP) have reportedly won exploration rights for two offshore oil blocks in Central Africa. The blocks are located in Sao Tome and Principe Exclusive Economic Zone off the coast of Nigeria.
  • Texas-based Noble Energy (NBL) announced plans to expand gas production out of Israel's Mediterranean coast this week. The company owns 40% of the Leviathan gas field, which is expected to begin production by the end of 2019, and a 32.5% interest in the operating Tamar field.

Morgan Stanley says it expects oil producers to step up spending and earnings estimated in 2018, given the recent run-up in oil prices. The bank has raised its price target for 22 large-cap names, including ExxonMobil (XOM), Chevron (CVX), Anadarko Petroleum (APC) and Apache Corp (APA). Price targets for Range Resources (RRC) and Oasis Petroleum (OAS) were revised lower.

New 52-week highs on the S&P 500 include Concho Resources (CXO), ConocoPhillips (COP), EOG Resources (EOG), ExxonMobil (XOM), Marathon Oil (MRO), Marathon Petroleum (MPC), Occidental Petroleum (OXY), ONEOK (OKE), Phillips 66 (PSX), Valero Energy (VLO) and Williams Companies (WMB). Several global oil majors also hit new highs in the NYSE this week, including ADRs for BP (BP), PetroChina (PTR), Royal Dutch Shell (RDS/A), Statoil (STO) and Total (TOT). Range Resources (RRC) was the only 52-week low on the S&P 500 this week.


UPGRADES & DOWNGRADES

UPGRADES

  • Calfrac Well Services (TSX:CFW): Upgraded from Neutral to Sector Outperform at CIBC.
  • Encana (TSX:ECA): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Energen (NYSE:EGN): Upgraded from Equal Weight to Overweight at Morgan Stanley and from Neutral to Buy at Seaport Global Securities.
  • Halliburton (NYSE:HAL): Upgraded from Neutral to Buy at Guggenheim.
  • Kosmos Energy (NYSE:KOS): Upgraded from Neutral to Buy at Bank of America.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Sell to Neutral at Citigroup.
  • Schlumberger (NYSE:SLB): Upgraded from Neutral to Overweight at Atlantic Securities.
  • Statoil (NYSE:STO): Upgraded from Underperform to Outperform at Credit Sussie.

DOWNGRADES

  • Cimarex Energy (NYSE:XEC): Downgraded from Buy to Hold at KLR Group.
  • Devon Energy (NYSE:DVN): Downgraded from Buy to Hold at KLR Group.
  • Husky Energy (TSX:HSE): Downgraded from Equal Weight to Underweight at Morgan Stanley.
  • Jagged Peak Energy (NYSE:JAG): Downgraded from Outperform to Sector Perform at RBC.
  • Newfield Exploration (NYSE:NFX): Downgraded from Buy to Hold at KLR Group.
  • Petrobras (NYSE:PBR): Downgraded from Buy to Hold at HSBC.
  • Range Resources (NYSE:RRC): Downgraded from Equal Weight to Underweight at Morgan Stanley and from Overweight to Equal Weight at Capital One Financial.
  • Torc Oil & Gas (TSX:TOG): Downgraded from Outperform to Sector Perform at National Bank.
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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