Oil prices slide as investors fret about


Oil futures traded sharply lower Tuesday as concerns about the coronavirus and its impact on demand resurfaced, fueling a broader aversion to assets considered risky on Wall Street. Growing doubts that a group of global crude producers, particularly Russia, are inclined to reduce output further to stabilize prices also weighed on prices.

West Texas Intermediate crude for March delivery

CLH20, -1.86%

 lost $1.11, or 2.1%, to $50.94 a barrel on the New York Mercantile Exchange, while April Brent crude

BRNJ20, -2.05%

 fell $1.33, or 2.3%, to $56.34 a barrel on ICE Futures Europe.

“The risk-off tone was also driving oil on Tuesday, with WTI and Brent crude prices off by between 1.5%-1.8% amid fading hopes that OPEC and its allies will be able to agree to emergency production cuts to counter the deteriorating demand outlook,” wrote Raffi Boyadjian, senior investment analyst at XM in a Tuesday research note.

The decline comes after both grades last week booked their first weekly gains in six weeks, with WTI notching a 3.4% weekly rise, while Brent, the global benchmark, saw a 5.2% gain over the period, according to Dow Jones Market Data.

Crude oil traders have been waiting for signs that members of the Organization of the Petroleum Exporting Countries and other major producers like Russia — a group known as OPEC+ — will move forward a planned March meeting to sometime this month. However, Reuters, citing unnamed sources, reported that there are no indications that such a gathering will take place, heightening fears that the there isn’t sufficient will to dial back production further, in line with an advisory panel’s recommendation to shrink output by a further 600,000 barrels per day.

Russia, one of the largest exporters of crude, has been reluctant to reduce oil output further. OPEC+, is currently under an agreement to cut oil output by 1.7 million barrels per day, which ends at the end of March.

The slump in oil prices comes as the outbreak of COVID-19, the infection that reportedly originated in Wuhan, China last year, has sickened more than 72,000 people and killed more than 1,800, according to the most recent data out of China.

Commodity investors are concerned about the spread of the disease because it is expected to harm demand from China, the biggest importer of crude in the world. Infections elsewhere in the world could also harm global uptake of fossil fuels, producing a drag on prices.

Indeed, the International Energy Agency slashed its 2020 oil demand-growth forecasts by 365,000 barrels a day, a reduction of 30% to its previous forecast made in January, citing the impact of the outbreak of the novel coronavirus.

In other energy trading, March gasoline

RBH20, -0.20%

 was down 0.4% to $1.578 a gallon, after gaining 3.9% for the week, while March heating oil

HOH20, -2.11%

 lost 2.1% to $1.662 a gallon, following a 3.3% advance last week.

March natural gas

NGH20, +5.72%

 soared 5.9% to $1.945 per million British thermal units. The commodity suffered a loss of 1.1% for the week, and hit its lowest trade since March 2016.



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Woodside holds on to stake in Senegal oil field as FAR challenge fails By Reuters



(Reuters) – ConocoPhillips’ (N:) sale of a stake in a $4.2 billion Senegal oil and gas project to Woodside Petroleum (AX:) has been cleared by an international tribunal, resolving a long-running challenge by Australian partner FAR Ltd (AX:).

Woodside and FAR said on Friday an International Chamber of Commerce panel had ruled that FAR did not have a pre-emptive right to match the offer for the 35% stake in the Sangomar project that ConocoPhillips sold to Woodside in 2016 for just $350 million.

FAR said it was reviewing the arbitration award. It holds a separate 15% stake in the Sangomar project, which also counts Cairn Energy Plc (L:) as a stakeholder.

FAR’s shares fell as much as 9% to 3.1 cents, their lowest level since the middle of 2013, on the news that it would miss out on the chance to potentially raise its stake in Sangomar for a comparatively low price, or win compensation.

At that level the shares were also well below the 4.25 cents apiece that investors paid in a recent issue of new stock by the company.

The resolution of the case comes just as Woodside and its partners have begun development of the Sangomar project, following final investment decisions in January, with first production expected in 2023.

FAR, which discovered the Sangomar field in the world’s largest oil find of 2014, disputed Woodside’s acquisition of its stake in the acreage, arguing it was not allowed to exercise its right to pre-empt the sale of Conoco’s stake.ConocoPhillips and Woodside, now operator of the project, had maintained that FAR’s challenge was without merit.

“Woodside is committed to working … to progress the Sangomar Field Development, which achieved final investment decision in January 2020,” Woodside said in a statement on the tribunal’s ruling on Friday.

ConocoPhillips had no immediate comment.

Analysts had thought that if FAR won the arbitration, it might get some form of compensation from Conoco or Woodside which would have helped the minnow fund its share of Sangomar development costs.

“While disappointing for FAR, we think it remains in a reasonable position with respect to its forward funding profile albeit this as come at the cost of significant equity value dilution,” RBC analysts said in a note.

The company raised A$157 million ($105 million) in December through the sale of new shares to help cover its $480 million portion of Sangomar development costs. It plans to cover the rest of its costs by taking on debt.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Distilling Refinery Data: Early Read On Coronavirus Oil Impact – SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)


We’ve been tracking refinery margins for a while, and there’s always an interplay between the input costs (i.e., crude prices) and product prices (i.e., gasoline, diesel, jet fuel, etc.). Refiners make the difference between the two and in complex refineries, can dial up or down the production of certain products. So while difficult to pinpoint exactly, it’s helpful to understand what is broadly happening.

In the past month, the coronavirus has severely impacted the crude market and driven it into bear territory on fears of demand destruction. The prevailing narrative is that the Chinese economy is frozen, and fossil fuel demand has fallen off a cliff. Demand for transportation fuel in particular has been materially affected as travel restrictions inside and outside of China have been imposed in an effort to curtail movement inside/outside of the country and contain the spread of the virus.

As we previously noted, JPMorgan (NYSE:JPM) estimated oil demand in China will decline by 500Kbpd in Q1 2020. In its latest STEO, the EIA estimates total liquids consumption in Asia will decline by ~500K bpd from February to April, so roughly in line with JPMorgan’s estimates.

So logically, we’d anticipate product demand to be weak in China and product prices to weaken. Then either products would need to be pushed out of China (i.e., exported) or inventories would balloon. If they are exported, the product prices regionally should in turn decline, and net/net refinery margins regionally and globally should fall despite the fall in crude prices. Since the demand destruction isn’t small, the price cascade should accelerate.

Yet in China, Arab Medium cracking margins averaged minus $1.84/b last week. Negative yes, but an improvement from the week prior when margins fell to near minus $4/b.

Outside of China? This is what we’re seeing.

(The left side is refinery margins on a quarterly basis and the right side is refinery margins on a weekly basis).

Interestingly, refinery margins have rebounded in the past few weeks outside of the US. In the US, the trend is similar…

Now we are the first to admit that we still don’t know the total impact of the coronavirus, particularly as China is just restarting its economic engine after a protracted shut-down. Will the number of confirmed cases increase dramatically given the mass movement of people as they re-enter the workforce? How long will the quarantine of tens of millions continue, and how long will it take for the manufacturing sector and consumer sentiment to recover? Those are obviously unanswered and currently unanswerable questions. So far… dare we say, it seems to be recovering, or at the very least, the number of confirmed cases appears to be falling.

What is noticeable amongst the murky data is that refinery margins are recovering outside of China, which means product demand outside of China is perhaps stronger than the current narrative would have you believe. We’ll continue to monitor this, but if the coronavirus is contained in short order, we’d anticipate refiners inside and outside of China will quickly reverse their throughput cuts and accelerate their crude purchases to take advantage of the healthier margins currently on offer. Ultimately, this would quickly push WTI and Brent pricing higher following the recent sell-off.

As always, we welcome your comments. If you would like to read more of our articles, please be sure to hit the “Follow” button above.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Arc Resources: Safe High-Yield Dividend Despite Pressured Oil And Gas Prices – ARC Resources Ltd. (OTCMKTS:AETUF)


One year ago, I argued Arc Resources’ (OTCPK:AETUF) juicy dividend was safe. The Canadian oil and gas producer proved me right since it has been returning C$0.05/share to shareholders every month.

But the company’s full-year results don’t look encouraging: Funds from operations diminished, GAAP net income turned negative, and net debt increased. Also, reserves’ net present value at the end of 2019 contracted compared to last year.

In addition, commodity prices have been dropping over the last several weeks. Yet, the company’s dividend remains sustainable in the medium term.

Image source: DrillingEngineer via Pixabay

Note: All the numbers in the article are in Canadian dollars unless otherwise noted.

Time to show free cash flow

Arc Resources delivered full-year results in line with guidance. Production volume increased from 132,724 barrels or equivalent per day (boe/d) in 2018 to 139,126 boe/d in 2019. Costs also remained within ranges management had forecasted.

Arc Resources full-year 2019 results

Source: Presentation February 2020

But because of lower year-over-year commodity prices, revenue diminished in 2019, despite the 4.8% year-over-year increase in production volume.

Arc Resources commodity prices evolution

Source: Q4 2019 MD&A

As a result, full-year funds from operations dropped to $697.4 million, down 13.6% year over year.

And since the capital program amounted to C$691.5 million, free cash flow remained barely positive. Thus, the company’s net debt jumped to C$940 million at the end of last year compared to C$702.7 million one year before because of the C$212.4 million annual dividend.

But Arc Resources has been spending capex to build its infrastructure to support its medium-term production growth. For instance, its Dawson phase IV facility in the Montney area will be on-stream during Q2 2020.

Thus, with a reduced 2020 capital program of C$500 million, management forecasted production growth would accelerate to 13.6%, based on the midpoint of the guidance range of 155,000 boe/d to 161,000 boe/d.

The company will only need to slightly exceed its 2019 funds from operations to fund its C$500 million capital program and pay its C$212.4 million dividend with free cash flow.

Pressure on commodity prices

The expected 13.6% increase in production volume this year will support higher funds from operations, though. But the recent development of commodity prices represents a threat to Arc Resources.

Based on production and reserves, natural gas should represent about 76% of the company’s production over the long term.

Arc Resources production and reserves mix

Source: Investor presentation February 2020

But given the much higher prices of oil compared to gas (for an equivalent volume), gas represented only 40% of the company’s revenue in 2019.

Thus, Arc Resources is exposed to the recent drop in WTI prices from an average of US$57/bbl last year to US$50/bbl.

ChartData by YCharts

But gas prices are also becoming a source of concern. The company’s realized gas price averaged C$2.12/mcfe in 2019 (before hedges) compared to an average AECO (Canadian gas hub) gas price of C$1.62/mcfe, thanks to its diversification to U.S. hubs. Management maintained its marketing diversification strategy since 34% of the company’s gas production will still depend on U.S. spot gas prices in 2020.

Arc Resources exposure to gas hubs

Source: Investor presentation February 2020

Unfortunately, because of gas oversupply concerns in the U.S., the spot and futures Henry Hub prices dropped in a significant way compared to 2019.

Henry Hub spot prices

Source: Petroleum Services Association of Canada

Management highlighted funds from operations would cover the company’s sustaining capital (C$400 million) and dividend (C$212.4 million) with WTI prices of US$45/bbl and NYMEX Henry hub at US$2.0/MMBtu, though.

Assuming such low commodity prices during this year, net debt would increase by C$100 million and reach C$1.04 billion given the 2020 capital program of C$500 million (C$100 million above the company’s sustaining capital). But the debt load would remain reasonable since net debt to funds from operations ratio would increase to only 1.7 (C$1.04 billion / C$612 million).

Arc Resources breakeven commodity prices

Source: Investor presentation February 2020

Then, management could decide to hold production flat beyond 2020 to keep on paying the dividend without increasing the company’s net debt.

An investment opportunity for dividend-oriented investors

The stock price of C$6.92 corresponds to an attractive 8.7% dividend yield. And even with low oil and gas prices over several years, Arc Resources’ dividend remains safe. In addition, the company doesn’t need to reduce its net debt.

But you should keep an eye on the company’s reserves. The 2P (proved + probable) reserves correspond to 15.3 years of production based on the midpoint of the 2020 forecasted production guidance range, which is not huge.

And given the challenging context in the Canadian oil and gas environment, the market values other Canadian producers such as Yangarra Resources (OTCPK:YGRAF) at much greater discounts to my NAV estimates (NPV10 before taxes (from reserves report) minus net debt).

For instance, Arc Resources’ stock price at 21.8% below the company’s proved NAV/share represents a discount that pales in comparison to Yangarra Resources’ discount of 90.8%.

Arc Resources NAV compared to stock price

Source: Author, based on company reports

In any case, Arc Resources remains attractive for investors looking for a safe and generous dividend. But given the low valuations of other Canadian producers, the company’s stock price upside potential may remain limited compared to some other Canadian producers.

Note: If you enjoyed this article and wish to receive updates on my latest research, click “Follow” next to my name at the top of this article.

Disclosure: I am/we are long YGRAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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U.S. Stocks Rally With Crude Oil; Treasuries Fall: Markets Wrap By Bloomberg



(Bloomberg) — Want the lowdown on what’s moving Asia’s markets in your inbox every morning? Sign up here.

U.S. stocks rallied toward an all-time high, while Treasuries slumped on speculation efforts will succeed at minimizing the economic impact from the coronavirus. rallied after tumbling into a bear market.

The S&P 500 Index’s three-day gain topped 3%. Energy producers surged as crude rallied the most in almost a month on the prospect of OPEC output cuts. Risk sentiment got a boost overnight after a string of reports on possible vaccines, but the World Health Organization later said there are no proven therapeutics. Treasuries retreated, sending 10-year yields above 1.64%, even as more quarantines were announced in an effort to control the virus.

Havens including the yen and Swiss franc slipped. The dollar rose, with data showing U.S. firms added more jobs than economists’ forecasts in January. jumped 1.7%.

U.S. stocks continued their torrid rebound from the virus-fomented sell-off as optimism mounted that the spread will be contained and more central banks signaled a willingness to act if the virus undermines demand, inflation and financial markets. Better-than-forecast corporate earnings also continued boost equities.

“The market is shrugging it off. You can see that the effort is there and the market is saying that this isn’t going to break out into a pandemic,” Michael Pytosh, chief investment officer of equities at Voya Investment Management, said by phone. “It’s not going to cause some cataclysmic medical problem in the world.”

Here are some key events coming up:

  • U.S. President Donald Trump looks set for acquittal on Wednesday in the Senate’s impeachment trial.
  • The Reserve Bank of India’s interest rate decision is due Thursday.
  • German factory orders for December are due Thursday, followed by industrial production on Friday.
  • The U.S. employment report for January is set for Friday release.

And these are the main moves in markets:

Stocks

  • The S&P 500 Index climbed 1.1% as of 3:13 p.m. New York time.
  • The added 0.5%.
  • The Index gained 1.2%.
  • The MSCI Asia Pacific Index rose 0.6%.

Currencies

  • The Bloomberg Dollar Spot Index gained 0.2%.
  • The British pound fell 0.4% to $1.2974.
  • The euro declined 0.4% to $1.1.
  • The Japanese yen weakened 0.2% to 109.75 per dollar.

Bonds

  • The yield on 10-year Treasuries rose four basis points to 1.64%.
  • Britain’s 10-year yield climbed four basis points to 0.6%.
  • Germany’s 10-year yield increased three basis points to -0.37%.

Commodities

  • West Texas Intermediate crude increased 3.4% to $51.45 a barrel.
  • Copper rose 1.4% to $2.578 a pound.
  • Gold added 0.2% to $1,556.47 an ounce.
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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