Weekly Energy Market Review

Weekly Energy Market Review

This week's Energy Market Summary for the week ending May 4, 2018:
  • Feds intervene in BC's fight to block bitumen exports
  • Suncor CEO confident pipelines will get built
  • CNRL reports record production from the oil sands
  • US imports of Cdn crude hit record high
  • WCS discount falls below US$16
  • WTI inches closer to US$70
  • AECO natural gas prices go negative, again
  • Canadian oil rig counts finally turn a corner
  • Keystone pipeline return to normal ...
    ... while Keystone XL starts site prep work in Montana
  • Marathon and Andeavor join forces to top Valero
  • Exxon announces more petrochemical expansion in Texas.
WHAT'S MOVING OIL PRICES THIS WEEK
GEOPOLITICS
BULLISH
  • US President Donald Trump is seen as very likely to withdraw from the 2015 Iran nuclear accord next weeks, although exact specifics on the impact to Iran's oil exports are still unclear. The deadline for the White House to make an announcement is May 12.
  • Iranian crude production is up 1 million bbl/day since sanctions were lifted, rising to 4.5 million bbl/day.
USD INDEX
BEARISH
  • The US dollar rose 1.2% this week, its third consecutive weekly gain and breaking above the 200-day moving average for the first time since May of last year.
SUPPLY
BEARISH
  • US production hit another record high of 10.62 million bbl/day.
  • Baker Hughes reported a fifth consecutive weekly increase in oil rig counts, now back to the levels of March 2015.
DEMAND
BEARISH
  • US crude inventories unexpectedly jumped over 6 million barrels last week, blamed on refinery maintenance outages on the West Coast.
SENTIMENT
BULLISH
  • Oil prices continue to climb higher, with Brent ending the week just under US$75 and WTI just under US$70/bbl. Brent prices are near the highs of late April while WTI is approaching the levels of late 2014.
  • Net longs on both Brent and WTI futures started to retreat slightly last week, coming off record high levels.
CURRENCIES & BONDS

This week's Canadian economic data:

  • After declining 0.1% in January, real Canadian GDP expanded 0.4% in February, driven higher by a 3.0% rise in non-conventional oil and gas extraction and a 2.9% increase in conventional production.
  • Canada’s trade deficit widened to $2.9 billion in March as imports rose 6% to a record $51.7 billion, while exports rose 3.7% to $47.6 billion. Imports were driven by consumer goods and motor vehicles. Export gains were seen in aircraft parts, food and energy products.

This week's notable US economic data:

  • The US added 164,000 jobs in April, less than economists were expecting. March figures were revised upwards, although wage inflation still remains relatively tepid at 2.6% annually. The unemployment rate fell below 4% for the first time since December 2000.
  • The US trade deficit shrank 15% to $49 billion, the lowest level since September. Exports rose 2.0% while imports declined 1.8%.

The US Federal Reserve held interest rates unchanged this week but says it expects inflation to run near its 2% target "over the medium term." Analysts peg the chances of a rate hike in June at about 100%, with one more hike expected in the second half of the year. The US dollar had another good week gaining 1.2%, its third consecutive weekly increase.

Core inflation in the euro zone fell back below 1.0%, making it likely the European Central Bank will continue its monetary easing program. The euro fell below US$1.20 this week, for the first time since January. The British pound was one of this week's worst performers, falling 1.8%.

OIL MARKETS
USD/BBL
% CHG W/W
52-WK
BRENT
WTI
C5+
CDN LT
WCS
74.87
69.72
69.14
62.79
54.26
44.82
42.53
40.88
39.64
30.41
75.17
69.72
69.14
62.79
54.26

Oil prices all posted decent gains this week, with Western Canadian Select (WCS) surging over 7% on a narrower heavy oil discount. The differential between WTI and WCS has declined from a high of US$30 in February to below US$15.50 on Friday.

According to GMP FirstEnergy, Western Canada's natural gas prices could rebound by next winter due to higher demand and low inventory levels. GMP says prices are likely to remain depressed through the summer, with AECO prices potentially turning negative again as output outstrips pipeline capacity. The company is forecasting an AECO average of $1.97/MMcf this year, rising to $2.68 in 2019 and $3.25 in 2020. AECO spot prices went negative again this week.

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)

US oil rig counts increased by 9 this week to 834, the fifth consecutive weekly increase and the highest since March 2015. After 8 consecutive weekly declines, Canada gained 4 oil rigs to 37.

 
us-inventory-report.jpg

WEEKLY US INVENTORY REPORT

May 2, 2018

Refinery outages on the West Coast drive inventories higher by 6 million barrels

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

Equity markets posted mixed results this week, with the TSX gaining 0.4% but the broader NYSE index declining 0.8%. Technology, healthcare and materials stocks were the big gainers in Canada. Technology stocks were the big winners in US markets, helping the NASDAQ increase 1.3%.

Despite higher oil prices, energy stocks ended the week roughly unchanged on both the TSX and S&P 500.

ENERGY SECTOR PERFORMANCE
TSX ENERGY SUBSECTORS
SPX ENERGY SUBSECTORS

In Canada, E&Ps were the biggest losers, while large cap integrated names and service stocks led the declines in US markets.

CANADIAN ENERGY NEWS

This week's notable Canadian energy news:

  • The federal government has been granted intervenor status in BC's fight to stop the Trans Mountain Expansion Project (TMEP). BC Premier John Horgan is asking the province's Court of Appeal to determine if BC has the right to seek permits for shipments of bitumen out of the West Coast. Justice Minister Jody Wilson-Raybould says she is "confident in Parliament's jurisdiction" and stands ready to defend the federal government's "clear jurisdiction over interprovincial pipelines." Kinder Morgan Canada (KML) has put TMEP on hold until the end of May and has threatened to cancel the expansion unless all legal matters are promptly resolved.
  • Pembina Pipeline (PPL) announced the Phase VI expansion of its Peace Pipeline system in Alberta to accommodate for additional volumes out of the Montney and Deep Basin plays. Plans include upgrades at Gordondale, a 6-inch pipeline from LaGlace to Wapiti and associated pump station upgrades, and a 20-inch pipeline from Kakwa to Lator. The project is expected to cost $280 million and is anticipated to be placed in service in 2020, subject to all regulatory approvals. Pembina's Phase IV and V expansions are currently in progress, and are expected to be placed into service by the end of this year.
  • According to Bloomberg, TransCanada (TRP) has been warned it is at risk of a credit downgrade to "BBB+" by S&P Global Ratings. The company has allegedly hired JPMorgan Chase and Deutsche Bank to begin discussions with key bond holders. TRP's CFO says its debt rating would "still comfortably" remain as "investment grade" and the company has no plans to change course with its funding plans.
  • Obsidian Energy (OBE) has regained compliance with the New York Stock Exchange as its share price managed to climb above US$1 per share during the month of April. At the request of activist shareholder FrontFour Capital, the company has abandoned plans for a reverse share-split.

This week's notable Canadian first quarter earnings:

  • Suncor Energy (SU) posted a 21% y/y increase in adjusted profits in the first quarter, rising to $985 million on higher oil prices and improved refining margins. Earnings declined 42% y/y to $789 million on lower production and a $329 million forex loss. Total upstream production averaged 689,400 boe/day in Q1, down 5% y/y, while output from the oil sands fell 10% to 404,800 bbl/day. CEO Steve Williams says he remains confident both the Trans Mountain Expansion and Line 3 Replacement will eventually get built.
  • Net profits at Canadian Natural Resources (CNQ) more than doubled in the first quarter, rising to $583 million. Total production rose almost 30% to 1.12 million boe/day, thanks to its acquisition of various heavy oil assets from Royal Dutch Shell last year. The company produced 456,076 bbl/day of upgraded synthetic crude from its oil sands operations and outlined plans to grow production through incremental "capacity creep" projects.
  • Net losses at the "new" Pengrowth Energy (PGF) narrowed to $27.2 million, down from a loss of $86 million for the same time last year. Funds from operations declined 83% y/y to $7.2 million due to property divestures and higher diluent blending costs. The company says it now remains focused on two 100% owned and operated assets - the Lindbergh SAGD facility and Groundbirch natural gas plant. Lindbergh averaged 15,118 bbl/day in Q1, rising to 16,500 bbl/day by the middle of April. Total Q1 production averaged 19,541 boe/day but the company says it expects output to reach 24,000 boe/day by the end of the year, on expectations of higher production out of Lindbergh.
  • Fuel distributor and refiner Parkland Fuel (PKI) reported an adjusted gross profit of $430 million in the first quarter, more than double the same quarter last year. The company delivered 4.21 billion litres of fuel in Q1, up from 2.76 billion in Q1/2017. Parkland also completed a major maintenance turnaround at its Burnaby refinery, purchased from Chevron last year.
  • Adjusted funds from operations increased 87% at Painted Pony Energy (PONY), rising to a record $46.4 million in the first quarter. Production rose 69% y/y to a record 60,703 boe/day, weighted 9% liquids. The company lowered its 2018 capital guidance from $185 million to between $145 and 165 million due to ongoing weakness of natural gas prices in Western Canada. Full year production guidance was also reduced by 3,000 boe/day to a range of 58,000 to 60,000 boe/day.
  • Crescent Point Energy (CPG) posted a first-quarter loss of $91 million, versus a profit of $119 million for the same time last year. Production averaged 178,418 boe/day during the quarter, up about 3%. The company cut its 2018 capital budget by $25 million to $1.78 billion.
  • Encana (ECA) reported a 50% increase in adjusted profits for Q1, rising to $156 million on higher production and higher oil prices. Cash flow from operations more than tripled to $381 million as total production increased over 30% to 145,200 boe/day in the first quarter. 
  • Whitecap Resources (WCP) reported a first quarter loss of $7.8 million, including $115 million charge on losses from its hedging program. Revenues rose about 50% to $361 million while funds from operations grew 34% to $167 million. Oil and gas production rose to a record 73,120 bbl/day, thanks to its recent acquisition of operating assets in Saskatchewan. The company also raised its dividend 5% to $0.0257 per share.
  • Baytex Energy (BTE) reported a net loss of $62.7 million in the first quarter, blamed on a wide heavy oil discount and derivative loss. Q1 production averaged 69,522 boe/day (weighted 79% liquids), roughly unchanged from the same time last year.
  • Bonavista Energy (BNP) reported a 3% decline in first quarter revenues, falling to $138.4 million. Production averaged 72,417 boe/day in Q1, up 3% from the same quarter last year.
  • Pembina Pipeline (PPL) reported a record first quarter thanks to the purchase of Veresen last year, as revenues rose 24% y/y to $1.837 billion and profits increased over 50% to $568 million. Volumes increased to a record 3.27 million boe/day, up 38%. The company also announced a 5.6% increase in its monthly dividend, rising to $0.19 per share, the company's seventh consecutive annual dividend increase.
  • Funds from operations at Seven Generations Energy (VII) rose 40% y/y in the first quarter, to $129 million. Production averaged 187,700 boe/day in Q1, up 23% while revenues rose 3% to $649 million.
  • Enerplus (ERF) reported a net income of $30 million in the first quarter, about double the same time last year. Production averaged 85,080 boe/day, weighted 90% liquids. Full year production is expected to average between 86,000 and 91,000 boe/day.
  • Energy services provider Enerflex (ERF) reported first quarter revenues of $386 million, up 9% y/y. Net earnings declined 14% to $10.9 million, dented by higher costs on an international project. The company says it saw strong bookings globally and in the US, offsetting "continued weakness" in Canada.
  • Revenues at Calfrac Well Services (CFW) more than doubled in the first quarter, rising to $583 million. The company posted a net profit of $3.23 million, up from a $19.5 million loss for the same time last year. Calfrac's 2018 capital budget has been increased by $23 million to $155 million to support the redeployment of idled equipment from Canada to the US.
  • Secure Energy Services (SES) posted a 57% increase in total revenues for the first quarter, rising to $705 million. Adjusted net earnings rose to $6.1 million, up from $3.4 million for the same time last year.
US ENERGY NEWS

This week's notable US energy news:

  • Marathon Petroleum (MPC) has agreed to acquire Andeavor (ANDV) for US$23.3 billion in cash and stock, including the companies refining and midstream assets. Under terms of the deal, ANDV shareholders will receive either 1.87 MPC shares or US$152.27 in cash. Marathon says it expects to realize US$1 billion in synergies annually within the first three years. The combined company will become the largest independent refiner in the US, with a refining capacity of 3.1 million bbl/day, overtaking Valero Energy (VLO). Marathon's board also approved another US$5 billion in share buybacks.
  • According to the US Chemical Safety Board (CSB), last week's explosion at Husky Energy's (TSX:HSE) refinery in Superior, Wisconsin was sparked by an explosion of its 13,000 bbl/day fluidic catalytic cracking unit (FCCU), sending shrapnel to a nearby asphalt tank, which then leaked and caught fire. The incident occurred just as workers were preparing to shutdown the refinery for a maintenance turnaround. The cause of the FCCU explosion is still unknown. The refinery remains offline pending further investigation.
  • ExxonMobil (XOM) and SABIC announced the creation of a new joint venture to advance their Gulf Coast Growth Ventures project, a 1.8 million tonne ethane cracker in San Patricio County, Texas. The facility will also include a monoethylene glycol unit and two polyethylene units. XOM and SABIC are already partnered up on two other JVs in Saudi Arabia.

This week's US midstream news:

  • The US Pipeline and Hazardous Materials Safety Administration (PHMSA) has cleared all pressure restrictions on TransCanada's (TRP) Keystone pipeline. The 590,000 bbl/day line was shutdown last November after a leak was discovered in South Dakota. The line has since been operating at reduced pressures, affecting transport volumes. The company says flow restrictions on the line have been minimal, so shippers should not expect to see a big increase in volumes. According to most recent data from the National Energy Board, volumes on Keystone averaged 583,000 bbl/day in December.
  • TransCanada has also been cleared to start site preparation work for its Keystone XL project in the state of Montana. The work includes "clearing vegetation to build the construction camps and pipe yards this fall." TransCanada has yet to make a final investment decision on the US$8 billion project but say they expect to start construction on the 1,900 km pipeline sometime in 2019.
  • Enterprise Products Partners (EPD), Western Gas Partners (WES), DCP Midstream (DCP) and a subsidiary of Enbridge (ENB) announced a binding open season for additional capacity on their jointly-owned Texas Express Pipeline, which transports NGLs from Carson County, Texas to a fractionation and storage complex in Mont Belvieu, Texas. Subject to sufficient demand, the partners expect to expand the line by 90,000 bbl/day, which is expected to be in service in Q2/2019.
  • Enterprise also announced a binding open season for an additional 100,000 bbl/day of capacity on its Front Range Pipeline, which transports NGLs from Colorado to Carson County, Texas. Subject to sufficient commitments, total capacity on the line will rise to 250,000 bbl/day by Q2/2019. The Front Range Pipeline is also jointly owned with Western Gas Partners and DCP Midstream.

This week's notable first quarter earnings:

  • Devon Energy (DVN) posted a US$197 million loss in the first quarter, including a US$312 million charge on early retirement of debt. Operating cash flow rose 11% y/y to $804 million while revenues rose 7% to US$3.81 billion. Total production averaged 544,000 boe/day in Q1, weighted 46% liquids. Output from the Jackfish SAGD facility declined 6% to 129,000 bbl/day.
  • Anadarko Petroleum (APC) reached record production in the first quarter (adjusted for divestitures), averaging 367,000 bbl/day. Operating costs declined 35% y/y to US$2.5 billion. Net profits were reported at US$121 million, up from a net loss of US$318 million for the same time last year.
  • Chesapeake Energy (CHK) reported a 250% increase in net income for the first quarter, rising to US$268 million on higher production and higher oil and gas prices. The company produced 554,000 boe/day in Q1, up 11% y/y adjusted for asset sales. Revenues declined 15% to US$1.24 billion.
  • First quarter revenues at Marathon Oil (MRO) rose 62% to US$1.73 billion, resulting in a net profit of US$356 million. Production averaged 398,000 boe/day, excluding Libya, up 9% y/y adjusted for divestitures.
  • Higher oil prices and higher production helped boost first quarter profits at Whiting Petroleum (WLL). Production rose 8% to 127,050 boe/day in Q1, while net profits rose to US$15 million, up from a loss of US$87 million incurred the same time last year. WLL is the largest oil producer in North Dakota's Bakken shale formation.
  • Apache Corp (APA) reported a net profit of US$145 million in Q1, down from US$213 million for the same quarter last year. Production declined 8.5% y/y to 440,336 boe/day.
  • Net income at HollyFrontier (HFC) rose to US$268 million in the first quarter, up from a loss of US$45.5 million for the same time last year. Revenues rose 35% y/y to US$4.13 billion while crude processing volumes averaged 415,260 bbl/day in Q1, up 12% y/y. The company says it expects wide discounts on Permian and Canadian crude will support refining margins in the second quarter.
  • Murphy Oil (MUR) reported an adjusted net income of US$168 million in the first quarter, almost triple the same time last year. Production averaged 168,000 boe/day during the quarter and is expected to average 167,000 to 170,000 boe/day for the full year.
  • TransCanada subsidiary TC Pipelines (TCP) reported a net income of US$96 million and distributable cash flow of US$112 million in the first quarter. The company also cut its dividend 30% this week in response to recent changes made by FERC with respect to tax allowances for MLPs.
  • Adjusted net income at BP (BP) rose 71% to US$2.6 billion in the first quarter. Production averaged 3.7 million boe/day in Q1, up 6% y/y. Total sales increased to US$68.2 billion, up from US$55.9 billion for the same quarter last year.

Around the world this week:

  • According to Bloomberg, BP (BP) is looking at buying energy assets from Australian mining giant BHP Billiton (BHP). The company has hired Morgan Stanley to evaluate opportunities for joint ventures or asset swaps. BHP is selling 800,000 acres in the Eagle Ford, Permian, Haynseville and Fayetteville Basins, said to be worth at least US$10 billion. Royal Dutch Shell (RDS.A) has also expressed interest in BHP's Permian assets.
  • Royal Dutch Shell (RDS.A) and China's CNOOC (CEO) announce the start-up of their second ethylene cracker at the Nanhai petrochemicals complex in Huizhou, China. The new ethylene cracker has a capacity of about 1.2 million t/y.
  • ExxonMobil (XOM) announced the purchase of PT Federal Karyatama, a manufacturer and distributor of motorcycle lubricants in Indonesia. The deal is reported to be worth US$436 million.
MARKET TECHNICALS
BULLISH INDICATORS
TSX
S&P 500
TOP 5
GAINERS
• Enbridge (ENB)
• MEG Energy (MEG)
• Pason Systems (PSI)
• Pembina Pipeline (PPL)
• Trican Well (TCW)
• Andeavor (ANDV)
• Devon Energy (DVN)
• Marathon Oil (MRO)
• ONEOK (OKE)
• Phillips 66 (PSX)
12-MO
HIGHS
• Baytex Energy (BTE)
• Gran Tierra (GTE)
• Kelt Exploration (KEL)
• MEG Energy (MEG)
• Parex Resources (PXT)
• Anadarko Petroleum (APC)
• Marathon Oil (MRO)
• Occidental Petroleum (OXY)
• Phillips 66 (PSX)
• Pioneer Natural Res (PXD)
10-YR
HIGHS
• None • Andeavor (ANDV)
• Concho Resources (CXO)
• EOG Resources (EOG)
• ONEOK (OKE)
• Valero Energy (VLO)
GOLDEN
CROSSES
• None • None
BEARISH INDICATORS
TSX
S&P 500
TOP 5
LOSERS
• Advantage Oil & Gas (AAV)
• ARC Resources (ARX)
• Crescent Point (CPG)
• Paramount Resources (POU)
• Peyto Exploration (PEY)
• Cimarex Energy (XEC)
• EQT Corp (EQT)
• Marathon Petroleum (MPC)
• Newfield Exploration (NFX)
• Noble Energy (NBL)
12-MO
LOWS
• None • None
10-YR
LOWS
• None • None
DEATH
CROSSES
• None • None
ANALYST RATINGS

UPGRADES

  • Andeaver (NYSE:ANDV): Upgraded from Hold to Buy at Jefferies Group.
  • Baytex Energy (TSX:BTE): Upgraded from Underperform to Neutral at Macquarie.
  • Clean Harbors (NYSE:CLN): Upgraded from Hold to Buy at Canaccord Genuity.
  • EnLink Midstream (NYSE:ENLC): Upgraded from Sector Perform to Outperform at RBC.
  • Imperial Oil (TSX:IMO): Upgraded from Underweight to Equal Weight at Morgan Stanley.
  • Marathon Petroleum (NYSE:MPC): Upgraded from Hold to Buy at Jefferies Group.
  • PetroChina (NYSE:PTR): Upgraded from Hold to Buy at HSBC.
  • Phillips 66 Partners (NYSE:PSXP): Upgraded from Neutral to Buy at BofA.
  • PraireSky Royalty (TSX:PSK): Upgraded from Hold to Buy at TD Securities.
  • Superior Energy Services (NYSE:SPN): Upgraded from Market Perform to Outperform at Wells Fargo.

DOWNGRADES

  • American Midstream (NYSE:AMID): Downgraded from Buy to Neutral at UBS.
  • Andeaver (NYSE:ANDV): Downgraded from Outperform to Sector Perform at RBC.
  • Andeavor Logistics (NYSE:ANDX): Downgraded from Outperform to Market Perform at Wells Fargo, from Outperform to Sector Perform at RBC and from Overweight to Equal Weight at Morgan Stanley.
  • Bellatrix Exploration (TSX:BXE): Downgraded from Sector Perform to Underperform at National Bank.
  • Boardwalk Pipeline Partners (NYSE:BWP): Downgraded from Buy to Hold at US Capital Advisors.
  • Keyera (TSX:KEY): Downgraded from Strong Buy to Buy at Industrial Alliance Securities.
  • Marathon Petroleum (NYSE:MPC): Downgraded from Top Pick to Outperform at RBC.
  • Seven Generations (TSX:VII): Downgraded from Buy to Neutral at Eight Capital and from Buy and Hold at TD Securities.
  • TC Pipelines (NYSE:TCP): Downgraded from Outperform to Sector Perform at RBC.
NEXT WEEK'S EVENTS

Monday:

  • NAFTA negotiations continue in Washington, DC
  • Inter Pipeline 2018 AGM in Calgary, AB
  • Q1/2018 earnings: Inter Pipeline, Andeavor

Tuesday:

Wednesday:

Thursday:

Friday:

  • April Labour Force Survey released by StatsCan
  • Obsidian Energy 2018 AGM in Calgary, AB
  • 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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