Weekly Energy Market Review
This week's economic data from Statistics Canada:
- After a flat April, Canada’s GDP grew by 0.5% in May, on gains in 19 out of 20 sectors. Oil and gas extraction rose 2.5%, as the industry recovered from the spring maintenance outages. Extraction from the oil sands rebounded 5.2% while conventional oil and gas extraction was unchanged for the month. An an annualized basis, GDP growth is tracking at 2.6%.
- Canada's total exports rose 4.1% to a record $50.7 billion. Gains were led by a 7.1% gain in energy products, rising to $9.9 billion, the highest since October 2014. Imports edged down 0.2% to $51.3 billion in June, including a 15.1% decline in imports of energy products, falling to $2.9 billion. About 73% of Canada's total exports are destined to the US.
- The Industrial Product Price Index (IPPI), rose 0.5% in June on higher prices for copper, precious metals and motor vehicles. Energy and petroleum products contracted 0.5%, the first decline in four months, led lower by gasoline prices (-2.5%) and diesel fuel (-1.4%).
- The Raw Materials Price Index (RMPI), also increased 0.5%, mainly on higher prices for live hogs, metal ores, and mineral concentrates. After rising for three consecutive months, prices for crude energy products fell 1.5%.
Notable US economic news:
- Non-farm payrolls rose by 157,000 in July, while May and June figures were revised higher by 59,000. The US unemployment rate declined to 3.9%. Annualized wage growth was unchanged at 2.7%.
- The US federal reserve (FOMC) kept US interest rates unchanged this week but says they remain a path of gradual rate hikes. The FOMC says they see strong economic activity and low unemployment. Economists are expecting a hike at the next meeting in September.
The Bank of England unanimously voted to increase its key benchmark rate to 0.75% this week. Economists do not expect another rate hike until 2020 due the UK's impending divorce from the EU.
After spooking bond markets earlier in the week, the Bank of Japan pledged to keep its interest rates "very low" and promised to maintain its super-easy monetary policies for an "extended period of time." The BoJ targets a 10-year yield of 0% through its massive bond buying program.
Western Canadian Select (WCS) took a big haircut this week as the Canadian heavy oil discount widened to US$30.46, breaking below the lows of February and now headed back to the lows of late 2014.
In contrast, the differential on Canadian Light (CLS) narrowed to US$5.51 this week, giving CLS a 2% boost.
Oil rig counts in the US declined by 2 this week, falling to a total of 859. Canada also lost 2 oil rigs, bringing the number of rigs in service to 152.
US equity markets rebounded on Tuesday after the US and China agreed to restart negotiations in hopes of avoiding a full scale trade war. However, US officials later threatened to increase tariffs from 10% to 25% on US$200 billion worth of Chinese imports to "encourage China to change its actions."
Global equity markets mostly declined this week, led lower by China's Shanghai Index (-4.6%) and the Hang Seng (-3.2%). The TSX was roughly unchanged.
The TSX energy basket declined 0.5% for the week, led lower by smaller cap E&P names. Heavy-weights Enbridge (ENB) and TransCanada (TRP) pulled the midstream subsector higher on positive second quarter earnings. Pembina Pipeline (PPL) also posted good Q2 results, powering to a new 1-year high on Friday.
Energy stocks were the biggest drag on the S&P 500, falling almost 2% for the week. Declines were broadly based across all subsectors.
This week's Canadian energy news:
- Suncor Energy (SU) says it has severed all ties with HSBC after the bank announced it will no longer be funding new oil sands or pipeline projects in Canada. Suncor CEO Steve Williams says it's unfortunate the bank has chosen to target a specific reservoir, ignoring all other performance metrics. HSBC was the seventh largest lender to the oil sands between 2015 and 2017, after the big 5 Canadian banks and JP Morgan.
- A BC lawyer is seeking to stall construction of TransCanada's (TRP) Coastal GasLink Project in hopes of convincing Royal Dutch Shell (RDS.A) to abandon its $40 billion LNG Canada project. GasLink will supply natural gas from northeastern BC to the proposed LNG export terminal in Kitimat, BC. The pipeline falls under provincial jurisdiction since it does not cross an interprovincial border. The lawyer argues GasLink should have undergone a full federal review since the gas is intended to be exported and the pipeline connects with the Nova Gas Transmission Line in Alberta. A similar argument was used against TransCanada’s Prince Rupert Gas Transmission Line, which would have supplied gas to the now-cancelled Pacific NorthWest LNG project. If a full federal assessment is deemed required, approvals for GasLink would likely be delayed to 2020. BC was hoping for a final investment decision on LNG Canada sometime this year.
- According to the Oil & Gas Journal, spending in Canada's oil and gas sector is still well below the highs of 2014, when oil prices were averaging almost US$100/bbl. Despite a recent improvement in oil prices, the energy patch is expected to invest $40 billion this year, down $900 million from last year and over $40 billion lower than 2014. Spending in the oil sands peaked at $33.9 billion in 2014, falling to just $11.4 billion this year.
- The Petroleum Services Association of Canada (PSAC) lowered its forecast for the number of wells to be drilled this year, once again blaming governments for wide pricing differentials on AECO gas and Western Canadian Select. Across Canada, PSAC is now forecasting 6,900 wells drilled, down 500 from its April estimate and 200 wells less than last year. About 54% of those wells will be in Alberta and 35% in Saskatchewan.
This week's Canadian political news:
- The federal Liberals took a baby step backwards this week on its plan to price pollution next year. Under the original plan, companies will pay a tax on emissions above 70% of the industry average. The government has now adjusted that figure to 80%. The government says the move is in response to concerns over the country's competitiveness, and it remains in talks with industry representatives. More details on the new plan are expected in the fall.
- Meanwhile in Ontario, the province announced a $30 million legal challenge over Ottawa's constitutional right to impose a carbon levy. Attorney General Caroline Mulroney, daughter of former PM Brian Mulroney, called Trudeau's carbon tax "unethical and unfair." A minimum carbon price of $20/t goes into effect next year, rising $10 annually to a maximum of $50/t by 2022.
Notable second quarter earnings on the TSX:
- Canadian Natural Resources (CNQ) reported a 15% increase in quarterly production, rising to a record 1.05 million boe/day in Q2. Cash flow from operations grew over 50% to $2.7 billion, while net earnings declined 8% to $982 million. Production of crude oil and condensate dipped 7% from the previous quarter due to maintenance turnarounds at its oil sands operations. CNRL produced 407,704 bbl/day of synthetic crude oil in Q2 at an operating costs of $22.94/bbl.
- Net income at Enbridge (ENB) rose 16% to $1.07 billion in the second quarter. The company's Mainline network, which brings Alberta crude to the US Midwest, delivered 2.64 million bbl/day in Q2, up from 2.45 million bbl/day for the same time last year. The company says it "continues to make good progress" on $22 billion in growth projects, including Line 3. Enbridge says the $9 billion replacement project is already 40% complete and remains on track to be in service in the second half of 2019, adding another 370,000 bbl/day of export capacity.
- Pembina Pipeline (PPL) posted a second quarter profit of $246 million, more than double the same quarter last year. Cash flow from operations rose 67% to $603 million, thanks to its recent acquisition of Veresen. The company handled a record 3.385 million boe/day in Q2, up 48% y/y.
- MEG Energy (MEG) posted a second quarter loss of $179 million, including an $89 million hedging charge. The company produced 71,325 bbl/day in Q2, down 1.6% y/y due to a maintenance outage at its Christina Lake in-situ facility. MEG upped its 2018 guidance by 2,000 bbl/day to 88,500 bbl/day.
- Second quarter operating earnings at Encana (ECA) rose 10% to $198 million on higher output and higher oil prices. Total production rose 7% to 337,900 boe/day, weighted 46% liquids. The company reported net loss of $151 million for the quarter, including a hedging loss of $326 million. The company says it remains on track to grow total production by more than 30% from last year's levels, adjusted for asset divestitures. Q4 production is expected to land between 400,000 and 425,000 boe/day.
- Athabasca Oil Corp (ATH) swung to a $19.3 million loss in the second quarter, versus a $24.3 million profit for the same quarter last year. The company produced 37,658 boe/day in Q2, weighted 84% liquids, up 3% y/y. Funds from operations slipped 2% to $27.6 million. Athabasca says it is looking at ways to monetize infrastructure around its Leismer and Corner leases.
- Second quarter sales at Parkland Fuel Corp (PKI) more than doubled in the second quarter, rising to $3.8 billion. The company delivered 4.2 billion litres of petroleum products in Q2, up 62% y/y, thanks to recent acquisitions. Profits rose to $60 million for the quarter, up from a $1 million loss for the same time last year.
- Altagas (ALA) reported a 13% increase in second quarter revenues, rising to $610 million. The company closed on its acquisition of WGL this past quarter and says integration activities are well underway. The company's 2018 capital expenditure plan is expected to be $1.0 to 1.3 billion, reflecting the original $500 to $600 million budget for AltaGas, and $500 to $700 million of additional capital related to WGL.
- Second quarter production at ARC Resources (ARX) averaged 127,879 boe/day, up 13% y/y. The company swung to a net loss of $45.9 million in Q2, versus a $124 million profit booked the same time last year. Full year production guidance for crude oil was reduced to a range of 25,000 to 26,500 bbl/day, while condensate production guidance was increased to 6,500 to 7,500 bbl/day.
- Seven Generations Energy (VII) posted a $24.6 million loss for the second quarter, down from a $178 million profit for the same quarter last year. Second quarter revenues declined 8% y/y to $560 million while funds from operations rose 62% y/y to $434 million. Total Q2 production grew 13% y/y 187,100 boe/day, weighted 59% liquids.
- Whitecap Resources (WCP) reported second quarter record production, rising 35% y/y to 75,813 boe/day. Full year production guidance was boosted to 75,000 boe/day. The company swung to a $3.6 million loss in Q2 but says it plans to grow 6 to 8% annually over the next 3 years.
- Funds from operations at Painted Pony (PONY) more than doubled in the second quarter, rising to $39.1 million. Production grew 48% to 60,116 boe/day, weighted 9% liquids. The company posted a net loss of $33.2 million in Q2, versus a $13.8 million profit for the same time last year. Analysts at Desjardins Securities say Painted Pony stands to be one of the biggest beneficiaries of the proposed LNG Canada export terminal.
- Bonavista Energy (BNP) reported a loss of $49.6 million in the second quarter, down from a $44.5 million profit booked the same time last year. Production dipped 6% to 68,214 boe/day in Q2, mostly on lower output of NGLs.
- Secure Energy Services (SES) posted second quarter revenues of $720 million, up 23% y/y. Net losses narrowed to $6.9 million, down from a $13.5 million loss for the same quarter last year. The company repurchased 2.8 million SES shares during the quarter.
- Losses at Baytex Energy (BTE) narrowed to $59 million in the second quarter, down from a loss of $63 million reported the same time last year. Production rose 1.6% to 70,664 boe/day. The company says about one-third of its heavy oil production was shipped by rail (8,300 bbl/day) and it plans to increase those volumes to 9,500 and 10,500 bbl/day in Q3 and Q4, respectively.
- Raging River Exploration (RRX) reported a 42% jump in oil and gas revenues, as production rose 7% to 23,611 boe/day, weighted 93% liquids. Net earnings rose 63% to $15.2 million. The company says its merger with Baytex is expected to close on August 22, 2018.
- Vermilion Energy (VET) reported a net loss of $60 million in the second quarter, up from a loss of $48 million for the same time last year. Q2 production rose 15% y/y to 80,625 boe/day due to its recent acquisition of Spartan Energy and additional output from its Q1 drilling program. The company says it will accelerate its Australian drilling program, boosting its 2018 capital budget by $70 million to $500 million.
- Bellatrix Exploration (BXE) posted a second quarter loss of $34.8 million, down from a loss of $69.2 million for the same quarter last year. Production declined 2% y/y to 37,309 boe/day, as 4,000 boe/day of natural gas was shut-in due to low gas prices. Full year guidance was left unchanged at 34,000 to 35,500 boe/day.
- Net losses at Obsidian Energy (OBE) widened to $96 million in the second quarter, up from a $9 million loss for the same time last year. Q2 production averaged 28,697 boe/day, down 6% y/y. The company is still in talks with China Investment Corporation to sell its Peace River assets, and hopes to announce a deal near the end of this year.
Other Canadian investing news:
- Aecon Group (ARE) and Mikisew Group of Companies were awarded a $100 million service contract for overburden removal and earthworks at the Fort Hills Mine. Work began in Q2/2018 and is expected to be completed in Q2/2019.
- TransCanada (TRP) has agreed to sell its 62% stake in the Cartier wind power facilities to Innergex Renewable Energy (INE) for $630 million. Cartier consists of five wind farms located in Quebec's Gaspé Peninsula. Proceeds from the sale will be used to fund the company's growth projects.
- East River Oil and Gas has been selected as the buyer of assets belonging to Connacher Oil & Gas for $113.5 million. Connacher has been under creditor protection since the spring of 2016. The assets include the Great Divide oil sands complex, which consists of Pod One and Algar. The in-situ facilities continue to operate despite the company's financial woes, producing about 12,670 bbl/day in the first quarter of this year.
This week's Keystone news:
- TransCanada (TRP) dug up a section of the Keystone pipeline in South Dakota, after an inspection identified potential issues with the pipe's coating. No leaks have been reported but state regulators have ordered the company to inspect more sections. So far, no impact on transport volumes have been reported.
- The US State Department released its Draft Environmental Assessment (EA) of the Keystone XL pipeline this week, this time reflecting the Mainline Alternative Route, as recently approved by Nebraska's Public Service Commission. The federal review now lines up with state approvals, eliminating concerns that the project's permits were mismatched.
- TransCanada says it is awaiting a decision on three pending US court cases, two in Montana and one in Nebraska, before making a final investment decision (FID) on Keystone XL. The company confirmed it is seeing strong demand for remaining capacity on the network and expects the 830,000 bbl/day pipeline be fully subscribed. TransCanada says it hopes to announce a positive FID by the end of this year, or early 2019 at the latest, with construction slated to begin early next year. If all goes according to plan, Keystone XL is expected to be put into service sometime in 2021.
Other US energy news:
- A natural gas pipeline explosion in Midland County, Texas, the heart of the Permian Basin, resulted in one fatality and six serious injuries. The incident occurred at the intersection of two different pipelines, operated by Kinder Morgan (KMI) and Navitas Midstream Partners. Workers from both companies were sent to the site of a gas leak when one line suddenly exploded, sparking a rupture and explosion in the second line. The cause of the incident is still under investigation.
- The US Chemical Safety and Hazard Investigation Board (CSB) released an update on its ongoing investigation of last April's explosion and fire at Husky Energy's (TSX:HSE) Superior Refinery in Wisconsin. The CSB says air intake into a worn valve is believed to have sparked an explosion during a planned maintenance shutdown of the refinery’s Fluid Catalytic Cracking Unit (FCCU). A piece of debris punctured a asphalt tank, spilling 15,000 barrels of hot asphalt into the refinery, before igniting into a large fire. Most workers were on break during the incident. Eleven employees and contractors were injured in the explosion.
- China has threatened retaliatory tariffs on US$60 billion worth of US imports, after the US threatened to increase Chinese import tariffs from 10 to 25% on US$200 billion worth of goods. The Chinese are now threatening to cut-off US crude imports and add duties to LNG imports. Sinopec (SNP), China's largest refiner, has already suspended its purchases of US crude.
- The US Securities and Exchange Commission (SEC) has cleared ExxonMobil (XOM) of any wrong-doing in its climate change probe, concluding the company has met all legal and accounting requirements. Special interest groups and several states have accused Exxon of failing to disclose the impacts of climate change on its business, and ultimately its shareholders. Exxon handed over 4.2 million pages of documents and emails during the investigation.
Notable US second quarter earnings:
- Marathon Oil (MRO) reported a net income of US$96 million in the second quarter, up from a loss of US$139 million for the same quarter last year. Q2 revenues rose 34% y/y to US$1.42 billion. Total production rose to 20% y/y to 419,000 boe/day, ex-Libya. Full year guidance was increased to a range of 400,000 to 415,000 boe/day while the 2018 capital budget was left unchanged.
- Williams Co (WMB) reported a net income of US$135 million in the second quarter, up from US$54 million for the same time last year. Full year growth capital expenditures were increased to US$3.9 billion this year and US$2.6 million in 2019. Williams' merger with subsidiary Williams Partners (WPZ) has been cleared by the SEC and WMB's board of directors.
- Tulsa-based ONEOK (OKE) reported a net income of US$281 million in Q2, up from US$72 million for the previous year. The company says it is making progress on US$4 billion in organic growth projects to be completed by the end of this year.
- Chesapeake Energy (CHK) reported a US$40 million loss in the second quarter, including a US$46 million impairment charge. Production averaged 530,000 boe/day, roughly unchanged from the same time last year.
- Anadarko Petroleum (APC) posted a net profit of US$17 million in the second quarter, up from a US$334 million loss for the same time last year. Second quarter revenues rose 21% y/y to US$3.29 billion. Full-year guidance on capital expenditures has been increased by US$250 million to US$4.5-4.8 billion. Anadarko says it is progressing its massive Mozambique LNG project and expects to make a final investment decision during the first half of 2019.
- Devon Energy (DVN) reported a net loss of US$425 million in the second quarter, versus a profit of US$219 million for the same quarter last year. The losses were blamed on a 39% increase in operating costs, mostly on higher marketing expenses. Second quarter revenues rose 4% y/y to US$2.25 billion. Q2 production edged up 1% to an average of 541,000 boe/day, but the company says its light oil production is on track to grow 16% this year. Devon reported US$1 billion in share buy-backs at the end of July and boosted its repurchase program to US$4 billion by the end of Q2/2019.
- Apache Corp (APA) reported a 66% drop in second quarter profits, declining to $192 million including income tax provisions. Revenues grew 44% to US$1.94 billion. Total production edged up 1% to 464,109 boe/day, while output from the Permian rose to a record 202,000 boe/day.
- Denver-based Whiting Petroleum (WLL) reported an adjusted net profit of US$57 million for the second quarter, up from a US$65 million loss for the same time last year. Q2 production averaged 126,180 boe/day, up 12% y/y. Whiting's operating revenues rose almost 70% to US$526 million. WLL is one of the largest producers in the North Dakota Bakken shale.
- EOG Resources (EOG) posted a second quarter profit of US$697 million, up from $23 million for the same time last year. Crude and condensate production grew 15% to a record of 384,600 bbl/day. The company says it is targeting 18% production growth this year. EOG raised its dividend 19%, its second dividend increase so far this year.
- Net losses at Noble Energy (NBL) narrowed to US$23 million in the second quarter, versus a net loss of US$1.5 billion reported the same time last year, which included a US$2.3 billion write-down on several asset sales. Q2 revenue rose about 10% to US$1.2 billion. The company says it is shifting investments outside of the Permian Basin due to ongoing transportation bottlenecks.
- Second quarter net profits at HollyFrontier Corp (HFC) jumped six-fold year-over-year to US$345.5 million. Refinery throughput dipped 2% y/y to 490,200 bbl/day. Operating costs rose 19% percent to US$3.96 billion.
- Second quarter revenues at Range Resources (RRC) rose 32% y/y to US$745 million. Total production reached a record 2.2 Bcfe/day in Q2, up 13% y/y.
This week's notable US M&A activity:
- Investment firm KKR (KKR) and Williams Cos (WMB) have formed a joint-venture to buy Dallas-based Discovery DJ Services from investment firm TPG Growth for US$1.2 billion. Discovery's assets include an operating 60 MMcf/day gas processing plant and a 200 MMcf/day facility under construction. The new facility is expected to be in service by the end of the year. The new JV will be split 60/40 KKR/WMB.
- Williams subsidiary Williams Partners (WPZ) also announced the sale of its Four Corners Area business in New Mexico and Colorado to privately-held Harvest Midstream for US$1.125 billion in cash. Proceeds will be used to fund growth for the parent company.
- ConocoPhillips (COP) announced the sale of its Barnett shale assets to Lime Rock Resources for US$230 million. The assets produce about 9,000 boe/day, weighted 45% liquids.
- Pioneer Natural Resources (PXD) has agreed to sell all of its assets in the West Panhandle field in Texas to an undisclosed buyer for US$201 million. The assets produced about 6,000 boe/day in the first quarter.
Across the pond this week:
- French energy major Total (TOT) has agreed to sell 11 production licences offshore Norway to Aker BP for US$205 million. The assets are said to contain 83 million barrels of oil equivalent.
- Total also announced the start of production from the Ichthys gas and condensate field, located 900 km offshore northwestern Australia. At full capacity, the field is expected to produce 8,500 bbl/day of condensate and 1.6 Bcf/day of natural gas, which will be exported to Asia through the Ichthys LNG facility.
- BP (BP) reported a profit of US$2.8 billion in second-quarter, up 9% y/y. Revenues rose 34% y/y to US$76.91 billion. Second quarter production averaged 3.7 million bbl/day, up 3.3% y/y. Production is expected to be flat in Q3 due to maintenance activities. The company also raised its quarterly dividend by 2.5%, the first increase since Q4/2014.
- ARC Resources (TSX:ARX): Upgraded from Outperform to Strong Buy at Raymond James.
- Cabot Oil & Gas (NYSE:COG): Upgraded from Neutral to Positive at UBS.
- Ecopetrol (NYSE:EC): Upgraded from Sell to Neutral at Citigroup.
- Energy Transfer Equity (NYSE:ETE): Upgraded from Equal Weight to Overweight at Stephens.
- Energy Transfer Partners (NYSE:ETP): Upgraded from Market Perform to Outperform at Wolfe Research.
- EnLink Midstream Partners (NYSE:ENLK): Upgraded from Hold to Buy at Stifel Nicolaus.
- Helmerich & Payne (NYSE:HP): Upgraded from Equal Weight to Overweight at Stephens.
- Nabors Industries (NYSE:NBR): Upgraded from Hold to Buy at Societe Generale.
- Oceaneering International (NYSE:OII): Upgraded from Hold to Buy at Gabelli.
- Range Resources (NYSE:RRC): Upgraded from Equal Weight to Overweight at Capital One Financial.
- Seven Generations Energy (TSX:VII): Upgraded from Hold to Buy at TD Securities.
- Total (NYSE:TOT): Upgraded from Neutral to Buy at UBS Group.
- Advantage Oil & Gas (TSX:AAV): Downgraded from Outperform to Hold at Raymond James.
- Bellatrix Exploration (TSX:BXE): Downgraded from Neutral to Sell at Eight Capital.
- Dril-Quip (NYSE:DRQ): Downgraded from Equal Weight to Underweight at Barclays.
- Emerge Energy Services (NYSE:EMES): Downgraded from Buy to Hold at Stifel Nicolaus.
- EQT Midstream Partners (NYSE:EQM): Downgraded from Outperform to Market Perform at Wells Fargo.
- WPX Energy (NYSE:WPX): Downgraded from Buy to Neutral at Goldman Sachs.
- TSX closed for Civic Holiday
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- EIA Weekly Natural Gas Storage Report released @ 10:30pm ET
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