Weekly Energy Market Review
This week's notable Canadian economic data:
- Wholesale trade jumped 1.2% m/m to a record $63.7 billion in May on higher purchases of farm products and building materials. Motor vehicles and parts posted the biggest declines.
- After being unchanged for 5 months, average weekly earnings rose 0.4% m/m in May to $998, now up 2.9% y/y. Canadians worked an average of 32.8 hours a week in May, roughly unchanged from the previous month.
Strong consumer and business spending helped boost US GDP growth to 4.1% in the second quarter, the highest since Q3/2014, but slightly less than analysts were expecting. First quarter figures were revised to 2.2%.
10-year JGB bond yields spiked to 1-year highs despite "unlimited" bond buying by the Bank of Japan (BOJ). Investors dumped Japanese bonds this week sending the 10-year yield to 0.1% on rumours the central bank might be scaling back its massive stimulus program. The move in Japanese yields boosted global bond yields, including Canada, where the 10-year rate moved up to 2.29%. The US 10-year also spiked to 2.96%.
The US Federal Reserve, the Bank of Japan and Bank of England are all set to announced interest rate decisions next week.
According to Citigroup's global head of commodities, forecasts for higher oil prices going forward are based on "faulty analysis." Ed Morse is forecasting Brent to remain strong through the rest of this year and into the first quarter of next year, but falling to a range between US$65 and US$45 by the end of 2019. The bearish forecast assumes production efficiency continues to be strong, technology continues to improve and decline rates won't be nearly as bad as predicted.
Geopolitical events in the Middle East helped boost Brent prices 1.7% this week, its first gain in four weeks. A new record high in Lower 48 production pushed WTI lower by 2.5%, falling for the fourth week in a row. After declining for the past few weeks, the spread between Brent and WTI has started to widen again, now sitting at US$5.60/bbl. Brent futures have now moved firmly into contango over the next few months, while WTI futures remain firmly in backwardation, although the spread has eased in recent weeks.
According to Wells Fargo, pipeline constraints around the Permian Basin might last longer than expected, potentially into 2020. The bank says rapidly increasing production and delays in new pipeline construction will keep a lid on Permian prices. The Permian Basin currently produces 3.3 million bbl/day and is projected to grow by another 1.5 million bbl/day by 2020. The discount on Permian crude (versus WTI) currently sits at about US$13/bbl.
The US energy patch put three new oil rigs into service this week, bringing the total to 861. Canada added 12 rigs, to a total of 154.
US markets were dragged lower by heavy declines in several mega-cap social media names. The Dow Jones Industrial Average was a notable exception, rising 1.6% for the week. However, most US sectors ended Friday in the positive, with the technology and discretionary sectors hitting new record highs early in the week.
European markets had a very good week after the Trump Administration reached a trade deal with the EU, abandoning plans to add duties to German auto imports.
Chinese markets also rebounded nicely this week, with the main Shanghai Index gaining 1.6%. The yuan dipped to a 1-year low before rebounding slightly on Friday.
In Canada the TSX was roughly unchanged.
US energy stocks had a very good week, led by big gains in independent refiners. Discounted crude from Canada and the Permian basin helped boost second quarter cracks spreads, powering the refining sub-sector higher by almost 10%.
On the TSX, oilfield services stocks mostly posted declines for the week, led lower by heavy losses in Trican Well Services (TCW) and CES Energy Solutions (CEU). Large-cap integrated names, such as Husky Energy (HSE) and Suncor (SU), had a good week thanks to good Q2 earnings results, with both trading near or at 1-year highs.
After a choppy start to the week, US energy services stocks rebounded nicely by Friday, expect for Halliburton (HAL), who warned of slowing growth out of the Permian Basin.
This week's Canadian energy news:
- The Transportation Safety Board of Canada (TSB) released its investigation report on the cause of a 2017 spill in Sherwood Park, after a construction crew struck and punctured an Enbridge (ENB) pipeline, spilling about 60,000 barrels of condensate. A crew from Ledcor were in the process of installing the Grand Rapids Pipeline on behalf of TransCanada (TRP) using horizontal directional drilling in an area where other pipelines were already in place. The TSB concluded the crew failed to make accurate field measurements to confirm the exact locations of adjacent pipelines. There were 17 buried hydrocarbon pipelines in the vicinity of the incident.
- According to media reports this week, several First Nations communities in BC and Alberta are in discussions with major Canadian lending institutions to buy part of the Trans Mountain Pipeline recently purchased by the federal government. There are 43 aboriginal groups along the pipeline's right of way who have signed $400 million in mutual benefits agreements. The government paid Kinder Morgan Canada (KML) $4.5 billion for the existing line and marine terminal. Completion of the Trans Mountain Expansion is pegged at about $7 billion.
- Newfoundland and Labrador (NL) announced a deal with Equinor (NYSE:EQNR), formerly known as Statoil, to develop the Bay du Nord field in the Flemish Pass, located 500 km off the coast of St. John's, NL. Bay du Nord contains almost 300 million barrels of oil and would be the deepest offshore project in the region at a depth of 1,200 meters. The province has taken a 10% stake in the project, which has a projected capital cost of $6.8 billion. If sanctioned, the government estimates the project will generate $14 billion in economic activity and bring in $3.5 billion in government revenues. Equinor filed its environmental assessment last month and expects to make a final investment decision sometime in 2020. If all goes according to plan, first-oil is expected in 2025.
- Nova Scotia's Offshore Petroleum Board (CNSOPB) has cleared BP (NYSE:BP) to resume drilling operations off the coast of Halifax at its Aspy D-11 well, one month after work was suspended to due to a leak of synthetic drilling mud. The board says the leak appears to have been caused by a loose connection, although the investigation is still ongoing. The CNSOPB is due to release a full report to the public once the investigation is completed, including any potential environmental effects.
This week's notable Canadian second quarter earnings results:
- Net income at Suncor Energy (SU) more than doubled in the second quarter to $972 million, including a $218 million forex gain. Profits, excluding various one-time items, rose over 22% to $1.19 billion. Suncor’s total upstream production was 661,700 boe/day in Q2, up from 539,100 boe/day in the prior year quarter. The recent unplanned outage of the Syncrude upgrader has forced the company to lower its top-end 2018 production guidance, now adjusted to a range of 740,000 to 780,000 boe/day. Full year capital spend was also adjusted higher by about $500 million, to $5.2-5.5 billion.
- Imperial Oil (IMO) posted a net profit of $196 million for the second quarter. The company says Q2 results were greatly affected by planned maintenance turnarounds at its upstream and downstream facilities, including Kearl, Cold Lake and Syncrude. CEO Rich Kruger says the company is now well positioned for a strong second half of the year. Imperial produced 363,000 bbl/day in Q2 (gross), up 1.5% y/y. Gross production at Cold Lake declined 17% to 133,000 due to a 38-day maintenance turnaround. Kearl averaged 180,000 bbl/day during the quarter, up 5% y/y. The company says it is operating the world's largest autonomous haul truck at Kearl mine, with an estimated payload of 400 tons. Imperial hopes to have up to seven self-driving haul trucks by year-end.
- Net losses at Cenovus Energy (CVE) were reported at $410 million, down from a $2.56 billion profit booked the same time last year. Cash flow from operations were cut in half to $533 million, including a $697 million hedging loss. Total production rose 61% y/y to 518,530 boe/day. By the end of Q2, hedges have been cut from 80% of liquids production to just 37% for the remainder of the year. The company has been working towards boosting its rail transport capacity and says it is seeing signs of increased activity at its Bruderheim rail loading terminal and other terminals in Alberta.
- Husky Energy (HSE) reported a second quarter profit of $448 million, versus a loss of $93 million for the same time last year. Funds from operations rose 69% to $1.2 billion. Total production dipped to 295,500 boe/day, blamed on maintenance outages and bad weather. The company also boosted its quarterly dividend from $0.075 to $0.125 per share.
- Net losses at Calfrac Well Services (CFW) widened to $32.8 million in the second quarter, blamed mostly on a $32.5 million loss on foreign exchange. Revenues hit a record $545 million, up 67% y/y, while operating income jumped 81% to 66.5 million.
- Precision Drilling (PD) posted a 14% gain in revenues, rising to $331 million in the second quarter. Net losses widened to $47 million. The company says it is well positioned to capitalize on strong demand in all the major US shale plays. Activity in Canada is also up 7% y/y. PD's 2018 capital spending budget has been increased to $135 million, up $19 million due to a recently awarded contract in Kuwait.
- Western Energy Services (WRG) reported a net loss of $15.5 million in the second quarter, down from a $16.6 million loss for the same quarter last year. Operating revenues nudged up 2% to $31 million. The company says it expects to benefit from future LNG construction in BC but weak natural gas prices are expected to persist through the remainder of 2018.
- PraireSky Royalty (PSK) posted second quarter revenues of $76.2 million, down 25% y/y. Royalty production averaged 22,944 boe/day, weighted 50% liquids, down over 10% from the same quarter last year. Funds from operations rose to $62.4 million, up 20% from the first quarter of the year.
This week's other Canadian investing news:
- Revenues on the transport of Petroleum and Chemical products over at CN Rail (CNR) jumped 12% y/y to $67 million in the second quarter, on higher freight rates, higher volumes of refined petroleum products and higher fuel surcharges. However, the company says it shipped lower volumes of crude in the quarter. The Petroleum and chemicals segment makes up 18% of CN's portfolio, which includes shipments of chemicals and plastics, refined petroleum products, crude and condensate, and sulphur. CN says it expects to see demand growth for crude oil, refined petroleum products and frac sand through the second half of the year.
- Bellatrix Exploration (BXE) announced a series of debt refinancing deals this week and says it has received a delisting notice from the NYSE as its US-listed shares have now traded below US$1/share for 30 consecutive days. The company says it intends to "cure this deficiency" and hopes to regain compliance in the next 6 months. Bellatrix has so far ruled out a reverse share split.
- AltaGas (ALA) announced the resignation of its President and CEO David Harris this week due to a complaint under review by the Board. The company says the complaint is not related to AltaGas' strategy, operations or financial reporting, but no further details were provided.
This week's US pipeline news:
- North Dakota is asking the US federal government to reimburse costs for policing Dakota Access Pipeline (DAPL) protestors between the fall of 2016 and spring of 2017. The state says the federal government, under the watch of President Obama, allowed protestors to illegally set up camp on federal lands, while failing to maintain law and order. President Trump pushed through completion of the project in January 2017, shortly after taking office. The US$3.8 billion project is operated Energy Transfer Partners (ETP), transporting crude from the North Dakota Bakken shale to a terminal in Illinois. Although the line has now been in service for over a year, several legal teams are still fighting the pipeline in state courts.
- ETP is also accusing Ohio state regulators of purposefully trying to delay completion of its US$4.2 billion Rover natural gas pipeline. The Ohio Environmental Protection Agency issued yet another violation after a chemical solvent was detected in its spent drilling mud. ETP claims it does not know where the chemical came from, and levels are well below state limits. Although segments of the line have already begun operation, federal regulators (FERC) have warned they will not approve the start of additional sections until the company completes land restoration around segments that are already in service.
- EQT Corp (EQT) now says its US$3.5 billion Mountain Valley natural gas pipeline won't be in service until at best the first quarter of next year, about three months later than planned. The delays are being blamed on legal challenges to the project's federal permits, which now includes the cancellation of two federal permits pertaining to right of way on federal lands. The 500-km pipeline will deliver up to 2 Bcf/day of gas from the Marcellus and Utica shale basins in Pennsylvania, West Virginia and Ohio to other parts of the US and Ontario. Mountain Valley will be operated by EQT Midstream Partners (EQM) and is owned jointly with NextEra Energy (NEE), Consolidated Edison (ED), AltaGas (TSX:ALA) and RGC Resources (RGCO).
- After being denied a waiver on steel import tariffs last week, Plains All American (PAA) is asking Congress for a "grandfathering" on its Cactus II pipeline, which will carry 585,000 bbl/day of Permian crude to New Mexico and Corpus Christi. The company already purchased its pipe from a Greek supplier and now estimates the 25% tariff will add US$40 million to the US$1.1 billion project. Permian crude currently trades at a US$13 discount to WTI due to delays in building pipeline infrastructure from West Texas to the Gulf Coast.
This week's other US energy news:
- ExxonMobil (XOM) announced the start-up of a new 1.5 million t/yr ethane cracker, producing ethylene feedstock for its newly expanded plastics plant in Mont Belvieu. The Mont Belvieu plant is one of the largest polyethylene plants in the world, with a capacity of about 1.3 million t/yr.
- According to Bloomberg, the US Administration and Environmental Protection Agency (EPA) is set to freeze national vehicle efficiency standards at 2020 levels through 2026, reversing plans by the previous Administration to target 46.8 miles per gallon (mpg) by 2026. The EPA will also be seeking to revoke a waiver that allowed California to set its efficiency standards to 50 mpg by 2025, which can only be achieved through the sale of significant volumes of electric vehicles (EVs). The new head of the EPA, Andrew Wheeler, says President Obama "jumped the gun" when he increased the fuel standards just before leaving office. California has set a target of 5 million EVs by 2030 and has vowed to fight the federal government in court. The average US vehicle fuel standard is currently 30.7 mpg.
This week's notable M&A activity:
- BP (BP) has agreed to buy various US shale assets in Texas and Louisiana from Australian mining giant BHP Billiton (BHP) for US$10.5 billion. The assets contain 4.6 billion barrels of oil equivalent (boe) and currently produce 190,000 boe/day. Once the deal closes, BP says it plans to divest another US$5-6 billion in upstream assets in order to fund a US$5-6 billion share buy-back program. These divestments will be in addition to the company's ongoing US$2-3 billion annual divestiture program. The UK-major also boosted its quarterly dividend 2.5%.
- Chesapeake Energy (CHK) has agreed to sell its Utica Shale operating assets in Ohio to Houston-based Encino Acquisition Partners (EAP) for US$2.0 billion. The assets encompass 900,000 net acres of land and nine hundred wells producing more than 600 MMcf/day of gas. Chesapeake says US$1.9 billion will be put towards debt reduction, saving it US$150 million annually in interest payments. Full year production guidance has been adjusted to a range of 494,000 to 524,000 boe/day. EAP is a joint-venture between the Canada Pension Plan Investment Board (CPPIB) and Encino Energy.
- Occidental Petroleum (OXY) is mulling the sale of its pipeline assets, which could be worth more than US$5 billion. According to Reuters, the company plans to use the funds to boost exploration and production activities, in hopes of capitalizing on higher oil prices.
This week's notable US second quarter earnings results:
- ExxonMobil (XOM) posted second quarter earnings of US$3.95 billion, up 18% y/y. The company produced 3.6 million boe/day, down 7% y/y, blamed mostly on maintenance outages and lower natural gas volumes.
- Chevron (CVX) reported a net income of US$3.4 billion in the second quarter, more than double the same time last year. Global upstream production average 2.83 million boe/day, up almost 2% y/y. The company also says it plans to buy back US$3 billion of its shares annually.
- ConocoPhillips (COP) reported a profit a US$1.3 billion in the second quarter, including a US$344 million non-cash write-down on its shares of Cenovus Energy (CVE). Net income was reported at US$1.6 billion, much improved from a loss of US$3.4 billion for the same time year, which included a US$4.9 billion impairment charge. Q2 production, excluding Libya, fell to 1.211 million bbl/day, down 214,000 bbl/day y/y due to assets divestitures. Full year 2018 production guidance was bumped up slightly to 1.225-1.255 million bbl/day, while full-year capital expenditures were also revised higher by US$500 million to US$6 billion. COP is the largest independent oil and gas producer in the US.
- Marathon Petroleum (MPC) reported second quarter earnings of US$1.06 billion, more than double the same time last year, as total revenues rose US$22 billion, up 22% y/y. The increase was attributed to higher refining margins, on favourable crack spreads in the Midwest and Gulf Coast, as well a wide discount for Canadian heavy oil. The company says it plans to take advantage of cheap light/sweet crude out of the Permian Basin, boosting WTI volumes from 23% to 32% of feedstock. MPC's merger with Andeavor (ANDV) is expected to close in the second half of this year.
- Valero Energy (VLO) reported a 54% rise in quarterly profits, rising to US$845 million, on total revenues of US$31 billion, up almost 40% from the same quarter last year. The increase was attributed to higher crack spreads, discount foreign and domestic feedstock, and lower prices for renewable fuel credits. The company reaffirmed its 2018 capex budget of US$2.7 billion, split $1.0 billion for growth projects and US$1.7 billion for sustaining capital.
- Adjusted earnings at Phillips 66 (PSX) more than doubled in the second quarter to US$1.32 billion, thanks to discounted domestic light oil and Canadian heavy crude. PSX posted a global refinery utilization rate of 100%, up from 89% in the previous quarter.
- Second quarter revenues at Halliburton (HAL) rose 24% y/y to US$6.15 billion on strong demand for drilling services in the US. Net profits jumped to US$511 million, up from US$28 million for the same quarter last year, which included a US$262 million impairment charge. However, the company warned third quarter results won't be so rosy, as it has started to see signs of slowing growth out of the prolific Permian Basin.
This week's other dividend updates:
- American Midstream Partners (AMID) slashed its quarterly dividend by 75% as part of its revised capital allocation strategy. The companies is also looking at divesting US$350-400 million in non-core assets over the next 12 months.
- CNX Midstream Partners (CNXM) increased its quarterly dividend to US$0.3361 per share, now up almost 4% from the previous quarter and 15% y/y.
Around the world this week:
- ExxonMobil (XOM) has once again upped its estimate of reserves contained with the massive Stabroek Block off the coast of Guyana. The field is now estimated to hold more than 4 billion barrels of oil equivalent (boe) of recoverable reserves, enough to support over 750,000 boe/day of production. XOM has already sanctioned Liza Phase 1, which is expected to produce 120,000 bbl/day by early 2020. The 220,000 bbl/day Liza Phase 2 project is targeted for sanctioning by the end of this year, with anticipated start-up date of 2022.
- Workers at Total's (TOT) offshore oil and gas platforms in the UK North Sea staged a 24-hour strike last Monday and plan another 12-hour strike on Monday July 30. No further talks between the company and its union are currently planned. The union has also scheduled 24-hour work stoppages on August 6 and 20 and another 12-hour strike on August 13 if no agreement is reached. The fields account for about 10% of Britain's total gas output, and almost 50,000 bbl/day of crude, a key input stream to the Brent and Forties blends.
- Total also announced the start of production at its Kaombo field, currently the largest deepwater development off the coast of Angola. The Kaombo Norte FSPO produces about 115,000 bbl/day, while a second phase is expected to come online next year.
Second quarter earnings from across the pond:
- Net income at Royal Dutch Shell (RDS.A) rose 30% y/y to US$4.7 billion. Upstream production averaged 3.4 million boe/day in Q2, down 2% y/y. Shell also announced its long-awaited US$25 billion share buyback, as promised after its US$54 billion acquisition of BG Group. CEO Ben van Beurden says the shares will be bought from today through 2020, "subject to further progress with debt reduction and oil price conditions."
- Total (TOT) reported an adjusted net profit of US$3.6 billion for the second quarter, up 44% from the same time last year. Cash flow from operations grew 35% to US$6.2 billion while net sales rose over 30% y/y to US$52.54 billion. Upstream production averaged 2.7 million boe/day, up almost 9% y/y. The company says it is on track to save US$4.2 billion between 2014 and the end of this year, and raised its production growth forecast to 7%.
Husky Energy (HSE +4.7%)|
Advantage Oil & Gas (AAV +7.2%)
ARC Resources (ARX +4.8%)
Birchcliff Energy (BIR +7.3%)
Crew Energy (CR +7.9%)
Baker Hughes (BHGE +8.5%)|
National-Oilwell Varco (NOV +8.8%)
Valero Energy (VLO +9.5%)
Marathon Petroleum (MPC +11.7%)
Andeavor (ANDV +9.8%)
Husky Energy (HSE +4.7%)|
Parkland Fuel (PKI +4.5%)
Enerplus (ERF -0.1%)
Kelt Exploration (KEL +3.5%)
EOG Resources (EOG +5.6%)|
National-Oilwell Varco (NOV +8.8%)
Parkland Fuel (PKI +4.5%)||
EOG Resources (EOG +5.6%)|
Enbridge (ENB +0.5%)|| None|
CES Energy Solutions (CEU -7.6%)|
Crescent Point (CPG -6.9%)
Precision Drilling (PD -4.4%)
Parex Resources (PXT -4%)
Trican Well (TCW -9.2%)
Halliburton (HAL -7.5%)|
Cabot Oil & Gas (COG -5.9%)
EQT Corp (EQT -10.5%)
Newfield Exploration (NFX -3.8%)
Range Resources (RRC -11.3%)
PrairieSky (PSK -4%)|
Ensign Energy Services (ESI -2.5%)
Trican Well (TCW -9.2%)
| None|| None|
Halliburton (HAL -7.5%)|
- Baker Hughes (NYSE:BHGE): Upgraded from Hold to Buy at SunTrust Banks.
- Baytex Energy (BTE): Upgraded from Sector Perform to Outperform at National Bank.
- Continental Resources (NYSE:CLR): Upgraded from Hold to Buy at KLR Group.
- Concho Resources (NYSE:CXO): Upgraded from Hold to Buy at KLR Group.
- Pioneer Natural Resources (NYSE:PXD): Upgraded from Hold to Buy at KLR Group.
- Mullen Group (MTL): Upgraded from Market Perform to Buy at Cormark.
- Tidewater (NYSE:TDW): Upgraded from Equal Weight to Overweight at Capital One Financial.
- Buckeye Partners (NYSE:BPL): Downgraded from Hold to Sell at SunTrust Banks.
- Crescent Point Energy (NYSE:CPG): Downgraded from Buy to Hold at TD Securities.
- QEP Resources (NYSE:QEP): Downgraded from Buy to Hold at Tudor Pickering.
- Williams Partners (NYSE:WPZ): Downgraded from Overweight to Equal Weight at Stephens.
- Q2/2018 earnings: Vermilion Energy, Devon Energy
- May GDP and June Industrial Product/Raw Materials Product Indexes released by StatsCan @ 8:30am ET
- IEA releases World Energy Balances 2018 Overview
- Q2/2018 earnings: Painted Pony Energy, Whiting Petroleum, BP
- Last trading day for Brent (September contract) and RBOB gasoline (August contract)
- FOMC interest rate decision released @ 2:00pm ET
- EIA Weekly Petroleum Status Report released @ 10:30am ET
- Q2/2018 earnings: TransCanada, Secure Energy Services, Altagas, Marathon Oil, Williams Partners, Anadarko Petroleum
- EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
- Q2/2018 earnings: Canadian Natural Resources, MEG Energy, Enbridge, Pembina Pipeline, MEG Energy, Parkland Fuel, Seven Generations Energy, TC Pipelines
- Baker Hughes Rig Count released @ 1:00pm ET
- Q2/2018 earnings: Enbridge, Pengrowth Energy