Canada oil driller shares rise on producer profits
By Dann Rogers
CALGARY, July 23 (Reuters) - Rising cash flow reported by Canada's oil and gas producers is boosting the share prices of well drillers as investors bet the extra money will be plowed into exploration, analysts said on Friday.
Calgary's Ensign Resource Service Group Inc. (Toronto:ESI.TO - news), a well driller with the fastest-climbing stock in the booming oil and gas industry, rose another C$1.30 on Friday to C$34.30 but later slipped back to $34.00. Since the rally began at the start of March, Ensign shares have climbed from a low of C$11.05.
Shares of Precision Drilling Corp. (Toronto:PD.TO - news), Canada's largest driller with 37 percent of the country's 580 drilling rigs, are up close to 160 percent during the same period. The stock gained C$1 to C$34.90 on Friday. That's despite warnings from Precision executives that they expect only to break even with the company's fiscal first-quarter results, which will be released in mid-September.
The higher share prices have helped Precision embark on an acquisitions campaign that includes a C$109 million pending takeover of Computalog Ltd (Toronto:CGH.TO - news). and a C$5-million friendly bid for Underbalanced Drilling Systems Corp (Alberta:UDS.AL - news).
''Service stocks lead the bleeding edge during a downturn, but they also rise the fastest when the industry is recovering,'' said Miles Lich, service sector analyst with Calgary-based brokerage Peters & Co.
''In a bull market, the investment community sees service firms as the first ones to benefit from new money flowing into the industry. When producers start reporting higher cash flows or increased capital spending budgets, investors assume that money will go into exploration, which means the drillers.''
And that's what Alberta Energy Co. Ltd. (Toronto:AEC.TO - news) did on Wednesday when it said it was boosting capital spending this year by 17 percent to C$1 billion because its cash flow was rising with higher oil and gas prices.
PanCanadian Petroleum Ltd. (Toronto:PCP.TO - news) announced on Monday a 90 percent increase in quarterly profits. It also reiterated that it was boosting capital spending by C$120 million to C$770 million, with much of the extra cash earmarked for oil development in western Canada.
Lich cautions, however, that the faster they rise, the harder they fall.
During the bear market of 1993-95, the service sector index on the Toronto Stock Exchange fell 45 percent, while the oil and gas producers index declined by only 26 percent.
After a two-year recovery, the oil sector again entered a bear market and the producer index fell by 51 percent, yet the drillers plunged by 73 percent.
''Service sector stocks follow the trend of producers, but they are more pronounced,'' he said. ''The volatility results because they have smaller market capitalization than the producers and fewer shares making them less liquid.''
($1=$1.51 Canadian)
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