Talisman: Best upstream maple leafs - Oil & Gas Investor, May issue
Brian A Toal
Four leading Calgary analysts offer their top Canadian E&P stock picks for 2000.
In most other industry cycles, $25 to $30 oil prices and $2.50 to $3
natural gas prices have triggered market jubilation and soaring share
prices for E&P stocks. But alas, many investors of late, steeped in
their whirlwind courtship of "new economy" high-tech and Internet
issues, have put their energy portfolios on hold. Meanwhile, many other
institutional buysiders simply don't believe that $25-$30 oil is
sustainable. So they've been playing a waiting game, looking for West
Texas Intermediate (WTI) crude prices to plummet to a more historical
trading range of $18-$20.
Could they be right? A lot of top oil and gas analysts don't think so.
This includes many of the leading energy market seers in Canada, where
the disconnect between commodity prices and E&P stock-price performance
on the Toronto Stock Exchange (TSE) has been just as acute as it has
been on the corner of Wall and Broad streets.
Says one Maple Leaf energy analyst, "Investors are soon going to wake
up to the ridiculously high cash flows and earnings that Canadian E&P
companies have achieved so far this year-and the likelihood that crude
oil prices will remain above $25 for the rest of 2000. "
But will that be enough to end the market malaise that has plagued oil
and gas stocks over the past six months?
To find out, Oil and Gas Investor recently visited with four top
Calgary-based exploration and production analysts. Joining the
discussion were Wilf Gobert, managing director, research, Peters & Co.;
Scott T. Inglis, managing director, research, FirstEnergy Capital
Corp.; Peter Linden oil and gas analyst, Harris Partners; and Andrew
Hogg, oil and gas analyst, Yorkton Securities Inc.
We asked them about their outlook for commodity prices over the balance
of this year and next, and about key market trends that will likely
affect the performance of Canadian upstream stocks over that time. We
then asked them for their top Canadian E&P stock picks for 2000, along
with their 12-month stock price targets for those stocks.
Among the 14 senior, intermediate and junior oils they cited, the most
frequently touted stock was Canadian Natural Resources, followed by
Talisman Energy Inc., Canadian Hunter Exploration Ltd., Bonavista
Petroleum Ltd. and Genesis Exploration Ltd. The common denominators in
each of the stock picks: good managements and the ability to grow
reserves, production, earnings and cash flow in line with-or
exceeding-investor expectations.
(Editor's note: Except for U. S. oil and gas prices, all dollar amounts
expressed are Canadian. Recently, US$1 equaled C$1.45. Also, at press
time, Peters cPc Co. was revising upward its 2000 and 2001 earnings and
cash flow estimates for its top upstream stock picks.)
Investor Wilf, among the senior producers, you like Talisman Energy
Inc. What's the attraction?
Gobert One of Canada's largest international producers, Talisman has
seen volatility in its stock price lately because of criticism that the
company operates in Sudan, where there has been a history of civil
rights abuses. However, this is the region that will account for much
of the company's gains this year in oil-production volumes. At the same
time, Talisman has made a very strong push on natural gas output
throughout western Canada.
For 2000, we're looking for total daily production to be up about 20%
over last year, to 233,000 barrels of oil and 1 billion cubic feet of
gas. Assuming only US$20 oil and C$3 gas, we're projecting cash flow
this year of $11.25 per share, rising to $12.50 in 2001, as earnings
grow from $1.30 per share to $1.55. Our 12month stock-price target is
$55 per share.
Inglis I agree with Wilf. Talisman is going to realize substantial
production growth this year-as much as 52% on the oil side versus last
year-mostly from Sudan. On the natural gas side, volumes should be up
modestly in 2000-about 12%-as the result of drilling results in
Indonesia, the North Sea and Canada.
Talisman has gotten a foothold in Sudan early on in the development of
that region, and its upside from further exploration is very
meaningful. I wouldn't be surprised to see the company's oil production
there double over the next three years, to about 70,000 net barrels per
day. Our stock-price target is $60.
...
CANADIAN TRENDS
Investor What market trends are going to have the greatest impact on
Canadian upstream stocks this year?
Gobert The recently announced production increase by OPEC probably
isn't going to be enough to simultaneously solve the problem of
worldwide inventory deficits in 2000 and satisfy the increasing global
demand for crude. 50, we see WTI oil prices remaining firm, in excess
of $25 per barrel, for the majority of the year. As we move into 2001,
the higher oil prices are, the more momentum will build toward new
reserve and production additions from non-OPEC countries like
ourselves. This should translate into an improved market outlook for
Canadian oil producers.
On the natural gas side, we're witnessing a 15-year-high in Canadian
gas prices-the Alberta spot price was recently $3.60-and record
gas-drilling activity in western Canada that last year totaled 6,300
wells. However, that's not having much impact on deliverability at a
time when everyone is predicting strong North American gas-demand
growth, particularly in the U.S. So for 2000, we're forecasting a
healthy average Alberta spot gas price of $3 per thousand cubic feet
and an average Henry Hub gas price of US$2.50 per Mcf. This should
serve to increase investor interest in Canadian upstream stocks that
have a high natural gas exposure.
There's another trend we're seeing in the Canadian Patch, and it's
going to affect M&A activity. Usually, low share prices result in
increased levels of takeover activity. However, this time around, even
the share prices of would-be acquisitors are low. As a result, these
companies are using excess cash flow to buy back shares to enhance
shareholder value rather than finance acquisitions, Therefore, we may
not see as much upstream M&A activity as people think.
Inglis We've had an anomalous situation recently in the energy sector
where commodity prices have continued to trend up while oil and gas
stocks have generally trended down. As a result, we've seen capital
availability to the industry essentially dry up, with funds flowing
more into technology and other higher-return sectors.
Given these market conditions, we're going to see Canadian producers
spending less money and high-grading projects. In addition, we're going
to see significant consolidation in the junior-oil sector, and among
some of the senior oils that have been generating sub-par returns.
On a more positive note, we should see this year and next the
continuation of strong commodity prices. In light of OPEC's recently
announced production increases, we expect WTI this year to average
US$24-$25 per barrel. Longer-term, we remain bullish
on oil prices because supply and demand are going to be relatively in
balance. Meanwhile, we're maintaining our average 2000 gas-- price
forecast of C$2.95 per Mcf. Longer term, however, we think North
American gas prices could rise a lot higher, given tightening supply
and demand fundamentals.
Linder Certainly the biggest negative for Canadian oil and gas stocks
has been the recent flight by investors into high-tech and Internet
equities. However, I foresee over the next six months a strong rebound
in market interest in Canadian oil and gas issues, due largely to
healthy oil and gas prices.
I agree with Wilf that for the rest of this year, there's a good chance
WTI will remain above $25 per barrel. Moreover, I'm particularly
bullish about North American gas prices. We're experiencing flat to
falling Canadian and U.S. production, and at the same time, strong
demand for gas on both sides of the border. The result: rapidly
depleting inventories.
As we get into this spring and summer, there's going to be severe
competition between consumption and requirements for storage injection
to get ready for next winter. That competition will significantly drive
up prices. For 2000 and 2001, we're forecasting an average gas price of
C$3.50 per Mcf.
Nearer term, investors are soon going to wake up to the ridiculously
high cash flows and earnings that Canadian E&P stocks have achieved so
far this year. On top of this, I anticipate a very active M&A market.
The big Canadian oils are flush with cash and are aggressively looking
at acquisitions. At the same time, the smaller to mid-cap producers,
which have been totally out of favor, should be more and more willing
to put themselves up for sale. The merger of these players will create
bigger, more efficient entities-and that will also help rekindle
investor interest in the Canadian E&P sector.
Hogg The most important trend will be rising commodity prices. The
forward market for oil and gas seems to indicate that prices will be
dropping this summer. However, we don't think that's going to happen.
Instead, we should see an upward spike in oil prices by that time.
That's because there isn't much room for production increases
worldwide-- except in Saudi Arabia and Kuwait-until next September.
Meanwhile, crude demand continues to rise. Given this outlook, we're
conservatively forecasting an average $24 WTI crude price for the rest
of the year.
We see the same situation occurring on the natural gas side.
Productivity in western Canada isn't keeping pace with demand in the
U.S., where gas output appears down from last year. Thus, we're
forecasting for 2000 an average Alberta price of $2.75 per Mcf.
However, Canadian producers with a high exposure to the spot market
could easily realize $3.25-$3.50 per Mcf.
This overall commodity-price outlook, coupled with recently weak stock
prices for Canadian producers and the desire by institutions to
consolidate their portfolios, should lead to another major
trend-mergers and takeovers. |
