IN THE NEWS / Gas Find Gives Westminster Resources Blazing Potential
Ian McKinnon
Financial Post
Westminster Resources Ltd. stock already has sizzle but the firm is banking on stakes in Canadian natural gas properties to add fuel to the fire.
The Calgary based energy junior, which derives its daily production from gas and gas liquids, is a partner in a blazing well, raging out of control near Bakersfield, Calif.
The blowout could indicate a big find, and the accident has caused shares of some partners to flare almost as high as the fiery flames.
Westminster officials and analysts say the untested well, which has some people speculating about huge reserves in the trillions of cubic feet, is not the only reason to hop aboard the firm's bandwagon.
"It's encouraging that the well is burning at a high rate and at high pressure. It is encouraging that it's gas, but it's much too early to speculate as to the nature of the reservoir, if there is one at all. There are many unanswered questions," says Jeffrey Fiell, an analyst at Canaccord Capital Corp. in Calgary.
Still, he has a "buy" rating on Westminster stock. The shares (WML/TSE), which have a 52-week trading range of $4.50 to $11.50, have soared more than $2 in the past two sessions. They rose $1.75 yesterday to close at $7.45.
However, an experienced management team, a tight focus on a few core areas and rising production are the main reasons why Mr. Fiell likes Westminster. Those strengths also attracted a "strong buy" rating from Peter Linder, a Calgary based analyst at CIBC Wood Gundy Securities Inc. He has a 12-month target price of $8 on the company's stock.
"I like their range of plays, from low risk to high risk," he says. "I'm quite bullish about the company."
Stock prices are often a matter of timing and Westminster has paced itself well. After going public in April 1997, the firm enjoyed initial investor appeal because it participated in a high-profile oil play in Midale, Sask. Westminster sold its stake earlier this year, at a time when many incorrectly thought crude oil prices would rebound quickly, to concentrate on gas production.
Expectations that gas prices will rise this winter, assuming normal weather and new pipeline capacity coming onstream, has pushed up the value of gas-focused producers while oil-oriented rivals wallow near 52-week lows.
Lee Baker, president and chief operating officer, does not rule out a return to oil in the first half of 1999 if low crude prices persist. "We're looking for the right opportunity to capitalize on it," he says. "Should the forecast not improve, we'll be able to pick and choose what oil plays, if any, we'd like to get into in the new year."
A warm start to winter is putting pressure on gas prices. But Mr. Baker is confident his firm will grow cash flow -- an important yardstick because it indicates a firm's ability to finance internally the hunt for new reserves -- to at least $1.25 a share, more than double this year's estimate of 60¢ a share. He is counting on higher gas prices and increased production to achieve the target.
Acquisitions and drilling boosted output in the nine months ended Sept. 30 to 3,150 barrels of oil equivalent per day, a 320% gain from the 700 averaged in the same period a year earlier.
By spending up to $45-million to drill 58 wells between now and next spring, the firm expects to average between 5,500 and 6,000 boe per day in the upcoming year.
Westminster has a record of low finding and development costs, another important financial benchmark, and Mr. Linder of CIBC does not expect that to change. "They should be able to maintain their low finding and development costs. Just because they're small that doesn't mean they can't keep their costs down as they grow."
Westminster targets deep gas fields in western Alberta and northeastern British Columbia. The wells are more expensive and riskier than other areas of Western Canada, but the rewards are bigger, too.
Skeptics point to the firm's erratic stock performance -- it once hit a high of about $12 and issued flow-through shares at $10.20 a year ago -- as a reason to stay away.
Company officials say investor enthusiasm about the Midale oil play caused the stock to become overheated. Mr. Baker says the corporate refocusing and addition of exploration and marketing executives will help Westminster achieve its new objectives.
Mr. Fiell, of Canaccord, says market and investor expectations have altered substantially in the past 18 months. He says supply demand fundamentals for gas in North America during the next couple of years remain good, helping to explain his positive outlook on Westminster. "You have to look at a company's fundamentals in the context of the sector," he says. "And in this market, you want to be exposed to a gas-leveraged company."
Financial results indicate Westminster is on the right track. In the nine months ended Sept. 30, revenue of $10.9-million generated earnings of $646,293 (3¢ a share) and cash flow of $6-million (30¢). In the same period of 1997, revenue of $2.9-million yielded a profit of $393,382 (2¢) and cash flow of $1.4-million (15¢).
Peers with similar production rates and concentration on gas include Bonavista Petroleum Ltd., Compton Petroleum Corp., Cypress Energy Inc. and Genesis Exploration Ltd.
Westminster is trading at 4.6 times estimated 1999 cash flow per share, lower than Bonavista's ratio but equal to or higher its other rivals. However, Mr. Linder says none of the competitors have the upside of a potentially massive discovery in California.
"If you're looking for a junior that's in the right commodity [gas], Westminster is one of the most exciting companies around."
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