Barclays lowers its outlook on North American oilfield services to Neutral, a day after cautioning investors to expect ongoing depressed sentiment among North American integrated oil majors, as "stubborn" global imbalance weighs on shares.
The firm downgrades Superior Energy Services (SPN +0.6%) to Equal Weight with an $11 price target, cut from $18, saying pressure pumping asset-level net present values show limited valuation upside; it similarly lowers ProPetro (PUMP -0.3%), Forum Energy Tech (NYSE:FET) and Mammoth Energy Services (NASDAQ:TUSK).
Amid the pessimism around the majors, Barclays remains more positive on the market outlook 12-18 months out.
The firm thinks Overweight-rated Cenovus Energy (CVE +1%) and Suncor Energy (SU +1.5%) offer the best value during the next 12 months, with Petrobras (PBR +5%) and Husky Energy (OTCPK:HUSKF +3.1%) offering the least; the firm upgraded Exxon and Imperial Oil (IMO +2.7%) to Overweight while downgrading HUSKF and Murphy Oil (MUR +0.6%) to Equal Weight.
"Everybody knows they are selling and that they have a weak hand. [The divestitures] are not impossible and they have good assets, but it's challenging," says John Stephenson of Stephenson & Co. Capital Management, which has sold most of its CVE holdings since the company's March purchase of ConocoPhillips' oil sands assets.
CVE should be able to achieve at least the low end of its divestiture target, said Ryan Bushell of Leon Frazer & Associates, but it will depend on commodity prices and finding buyers with a positive long-term view on the oil market.
The pool of potential buyers is limited, as global majors such as Shell already are pulling out of Canada, and large domestic firms such as Canadian Natural Resources are digesting sizeable acquisitions.
In addition to its big downgrade of Chesapeake, Macquarie also lowered several other oil and gas producers, including BP (BP -0.9%) to Underperform, and Chevron (CVX -1.9%), Royal Dutch Shell (RDS.A -1.3%) and Eni (E -0.1%) to Neutral as the firm cuts its oil price estimates and says the global majors will slip back into deficits and suffer additional painful cost reductions.
Whiting Petroleum (WLL -9.3%) is cut to Neutral from Outperform with an $8 price target, citing increasing liquidity concerns given its 2019 debt maturities which will negatively impact activity and production levels; Macquarie says WLL has limited options to boost its balance sheet despite improving results.
The firm also downgrades Cenovus (CVE -3.5%) to Underperform from Neutral a day after CEO Brian Ferguson's retirement announcement, and Canadian peer Encana (ECA -4.2%) to Neutral from Outperform.
Analysts and attendees at today's Cenovus Energy (NYSE:CVE) shareholders meeting criticized outgoing CEO Brian Ferguson for not sufficiently addressing concerns over CVE's debt levels or how the company plans to receive fair value for its planned sale of assets.
“The elephant in the room... is that they did not address the last 2.5 months of carnage that the market has had to deal with,” says Rafi Tahmazian, a senior portfolio manager at Canoe Financial.
Ferguson also declined to address whether his decision to step down coincided with last month's purchase of Canadian oil sands assets from ConocoPhillips, which has left CVE increasingly exposed to prices at a time when the oil markets have turned bearish; most analysts peg CVE’s breakeven costs after the acquisition at ~US$50/bbl or higher.
CVE shares have plunged by nearly half since the deal announcement, while COP is roughly flat; CVE tumbled to an all-time low before settling -8.6% on the day.
Cenovus Energy (NYSE:CVE) says President and CEO Brian Ferguson will retire on Oct. 31; he will continue in a transition advisor role until March 31, 2018.
Ferguson has been President and CEO since CVE was formed in November 2009.
CVE also establishes a five-year plan that it expects will generate 14% annualized free funds flow growth through 2021 while increasing production at a 6% compound annual growth rate and reducing debt.
CVE is progressing in its plan to divest non-core assets and is targeting US$4B-US$5B in announced sales agreements by year-end, which it says should more than satisfy the $3.6B asset sale bridge facility used to help fund the purchase of western Canadian oil sands from ConocoPhillips.
Alliance Pipeline, a joint venture between Enbridge (NYSE:ENB) and Veresen (OTC:FCGYF), says heavy rain in Alberta caused sections of its mainline, which delivers 1.6B cf/day to Chicago, to shift and the company would reduce service on its line as it investigates the problem.
The pipeline’s outage is impacting 500M cf of natural gas production and is expected to negatively affect gas prices at the Station 2 pricing hub in British Columbia and the AECO pricing hub in Alberta.
Canadian Natural Resources (NYSE:CNQ), the largest natural gas producer in the country, says it is affected by the force majeure but the interruption “will be immaterial to our overall operations.”
Cenovus Energy (NYSE:CVE), which recently acquired natural gas assets in a $17.7B deal with ConocoPhillips, says it is partially impacted by the pipeline shutdown but does not provide details on volumes.
Seven Generations Energy (OTC:SVRGF), a major shipper on Alliance, says its liquids-rich gas production is downstream from the affected portion of the pipeline.
Plans by Royal Dutch Shell (RDS.A, RDS.B) and ConocoPhillips (NYSE:COP) to flip $6.8B worth of stakes in Canadian oil sands producers after acquiring them just months ago raises fresh doubts about investor confidence in the area and threatens to swamp Canadian equity markets, Reuters reports.
The two companies acquired shares in Canadian Natural Resources (NYSE:CNQ) and Cenovus Energy (NYSE:CVE) as part of deals struck earlier this year to sell off oil sands assets, but reports say Shell has decided to sell its $4.1B stake in CNQ and COP has said it is not a long term investor in CVE.
Shell’s decision to sell its 8.8% stake in CNQ is a “surprise and not immaterial,” according to a source familiar with the latter’s thinking, and COP owns nearly 20% of CVE in a stake worth ~$2.7B.
“I would be very cautious about investing in more traditional oil production like the oil sands on a longer-term basis,” says David Cockfield, managing director of Northland Wealth Management, which holds some CNQ stock for clients.
“The share overhang is one of the reasons we should not expect much movement upward in the Cenovus share price,” says Len Racioppo, managing director of Coerente Capital Management, a CVE shareholder.
ConocoPhillips (NYSE:COP) says it completed the sale of its 50% interest in the Foster Creek Christina Lake oil sands partnership and western Canada Deep Basin Gas assets to Cenovus (NYSE:CVE), saying the deal will achieve a "step-function improvement" in its balance sheet strength and the pace of its planned share repurchase program.
At closing, CVE issued 208M common shares to COP as partial payment for the C$17.7B sale, and COP now owns a 16.9% stake in CVE.
COP revises its Q2 production guidance to 1.365M-1.405M boe/day, reflecting the partial quarter impact of the sale.
Cenovus Energy (CVE -2.2%) says it will provide more details during Q3 on its divestiture plan to fund the C$17.7B purchase of ConocoPhillips assets which wiped out ~20% of the company's market value.
CEO Brian Ferguson also said in today's earnings conference call that he was “absolutely not worried” about a dissident shareholder asking the Ontario Securities Commission to block its deal, saying the company fully complied with all securities regulations.
The CEO reiterated that CVE would sell some of the newly acquired assets after the deal closes in Q2.
CVE reported reasonably solid Q1 results - in-line earnings, with oil sands operating costs falling 6% to C$8.97/bbl and an operating margin of C$450M, a three-fold increase from last year - but "the acquisition overshadows everything else,” says Edward Jones analyst Lanny Pendill.