IN THE NEWS / Oil And Gas May Not Have Hit Bottom
Monday, December 7, 1998
STEVEN CHASE
Alberta Bureau - The Globe & Mail
If investors think the badly beaten oil and gas sector can't get any worse, they should think again, analysts caution.
Investors looking to play the energy sector despite the risks are advised to strap on a crash helmet and stick to large natural gas producers because gas prices hold far more promise than oil over the next year, analysts say.
Candidates for a defensive position are Toronto Stock Exchange listed companies whose natural gas output makes up half or more of their annual energy production.
As for oil stocks, the outlook is dim. Still, some contrarians might be tempted to look for bargains in what are the darkest days for crude prices in a quarter century.
The TSE's oil and gas subindex is down more than 40 per cent from a high of around 8,000 in October, 1997. While it might look like the only way to go is up, analysts warn the worst may not be over.
The forecasts for oil and gas over the next 12 months call for the commodities to go their separate ways. Analysts are bearish on oil, which closed Friday at $11.18 (U.S.) a barrel, but still relatively bullish on gas, which ended at $1.17 (Canadian) per thousand cubic feet.
The world has an oil glut, and Asia's economic woes and their ripple effect have ensured that demand won't sop up excess production before mid-1999 at least, analysts say. So far, the Organization of Petroleum Exporting Countries (OPEC) has failed to agree on further production cuts.
As oil hits new 12-year lows, many analysts are cutting their crude forecasts for next year, some to below the $14.50 (U.S.) level, considered a survival level for many Canadian producers.
John Clarke of Deutsche Bank Securities in Toronto sees the TSE oil and gas subindex continuing to fall, dragged down by prolonged poor crude prices and current weak gas prices.
Vincent Lauerman of Calgary-based research group Energy Era forecasts oil will eventually bottom out at $9.50. He doesn't see a significant improvement beyond the $10 to $11 range before OPEC meets again in March.
Analysts differ on when crude prices will pick up.
"Having just set a new low, it's going to take a certain amount of time before people have the confidence" that oil prices have hit bottom, said Wilf Gobert of Peters & Co. Ltd. in Calgary. He's been forecasting a 1998 average price of $14.50 since the summer and projects 1999 prices will average $15.
The next key date for the future of oil prices will be the March OPEC meeting.
Mr. Lauerman believes dominant OPEC producer Saudi Arabia has been preventing agreement on production cuts to bring unco-operative member countries such as Venezuela into line. The kingdom also hopes to derail higher-cost production in countries such as Canada by keeping crude prices low a little while longer.
"They're waiting until we see some blood in the streets, heads rolling, layoffs. Things are going to be dismal until we get production cuts from OPEC."
He said a cut equal to 2 per cent of world production could come out of the March meeting if the Saudis decide enough oil investment has been wiped out.
This could drive prices back up to survival levels of $14 to $15 in the second quarter of 1999, Mr. Lauerman predicts.
Others are waiting for non-OPEC crude storage to drain. Calgary-based FirstEnergy Capital Corp., which still forecasts $16 for 1999, expects oil prices to recover in mid-year.
With crude on the ropes, many in the Canadian oil patch have been looking to natural gas to save their balance sheets from total ruin this fall and next year. But gas prices have begun eroding in the last few weeks as well, with Alberta spot prices down 50 per cent from levels a month ago.
That's because warm November and December weather across North America is depressing seasonal fuel demand.
Another five weeks of warm weather could sap natural gas earnings for many producers and keep gas stocks depressed, analysts warn.
But they remain confident a tight supply in Western Canada will put upward pressure on several years. "The fundamentals . . . remain as strong as ever," said Peter Linder of CIBC Wood Gundy Securities Inc. in Calgary.
Gas price forecasts for 1999 remain healthy, ranging from $2.30 (Canadian) to $2.60 per thousand cubic feet. Most expect the mild weather to end soon and the shortage of current production in Western Canada to push prices up again.
Another 7 per cent of gas pipeline capacity is coming on stream in November and December. Meanwhile, gas producers have been too cash-strapped to drill enough gas to meet the growing export demand. "I don't think people realize how much on the edge we are in terms of being able to fill [extra capacity]," said Ken VanderSchee of Energy Era.
If winter weather sets in by year-end, analysts expect stocks of companies with close to 50 per cent or more gas production to regain ground lost in recent weeks, when their stocks have fallen 10 to 20 per cent in value.
Companies topping the likely-to-recover list under this scenario include: Alberta Energy Co. Ltd., Poco Petroleums Ltd., Canadian Natural Resources Ltd., Anderson Exploration Ltd., Rio Alto Exploration Ltd., Penn West Petroleum Ltd., Newport Petroleum Corp., Paramount Resources Ltd. and Berkley Petroleum Corp.
However some analysts, including Gord Currie of Canaccord Capital Corp. in Calgary, are no longer comfortable with the suggestion that gas-biased producers are a safe haven, given high storage levels and warm winter weather.
"I think probably these are the most defensive. That's kind of a back-handed compliment, like saying, 'It's the least worst place to be'. I think frankly this is a very unsettled time."
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