Calgary, AB, May 31 /SHfn/ -- On Monday, several hundred Calgarians attended an unabashedly bullish symposium featuring junior oil and gas companies. The crowd included both retail and institutional investors, most of whom appeared to be professionals from corporate Calgary. A trade group, the Small Explorers and Producers Association of Canada (SEPAC), stages the event twice a year.
Analyst David Street of investment firm Griffiths & McBurney Partners set the tone for the afternoon session in his keynote address. Street acknowledged that OPEC must engineer a soft landing as the organization takes steps to bring oil prices down. He also noted that the issue of lifting sanctions on Iraq remains a negative risk for oil producers. He believes WTI oil prices next year will decline to about US$22, which is within their historic range. But, he expects prices this year to average $27--the highest level since 1985. Among his reasons: US oil inventories have increased only slightly from a 10-year low, and M&A activity within the industry has slowed the search for new production.
"Street's investment recommendation: overweight the sector."
As for natural gas, Street raised the spectre of a "looming supply crisis" if the coming winter is one of only normal severity. Partly because the last four winters have been abnormally warm, which kept demand down, last year's peak winter drilling season did not bring substantial new gas supplies online in Alberta. "Industry's challenge will be to bring on enough supply to meet normal demand" next winter.
The potential supply problem is being complicated by lack of gas for storage in the US. Ordinarily, gas utilities and marketers fill storage facilities during the summer months for drawdown during the winter heating season. This summer, lack of gas for storage has caused gas prices to soar on the NYMEX, recently reaching US$4.50 per million BTU for a near-month contract. These unheard-of levels are a worrisome anomaly, since gas prices generally decline during the summer months. And despite the buyers' willingness to pay big bucks, storage rates are 37% behind last year's levels.
Street's firm forecasts Alberta spot gas prices this year and next at C$4-4.15 per thousand cubic feet, compared to $2.96 last year. This suggests excellent upside for producers, says Street. He says the TSE's Oil and Gas Producers index has "30-40% upside still to be realized."
Street's outlook for the sector is "undiluted growth." He lists five factors:
The sector's extremely strong cash flow means it will have a historically low equity requirement. Companies will be less likely to dilute their shareholdings with new offerings.
Companies can use their cash flow to reduce debt--and many companies within a now highly disciplined industry have already done so.
Many companies have announced decisions to make stock buybacks. This is decreasing the inventory of shares in the public float.
Acquisition and merger activity is reducing the number of publicly traded companies.
Industry activity is rising rapidly. According to many analysts, drilling activity is likely to be constrained this year only by the availability of drilling rigs.
In his view, the industry's fundamentals are better than ever. Street's investment recommendation: overweight the sector.
A Smattering Of Junior Oils
The CEOs who gave the eight company presentations StockHouse attended at the symposium were uniformly upbeat. It is easy to be cynical about this, since upbeat dog-and-pony shows are part of the job. The purpose of these presentations is, after all, to get investors to buy the CEO's stock. However, a number of common themes came up frequently: cash flow is extremely strong; margins from both oil and gas are substantial; finding and development costs are low; debt is under control or non-existent; there is opportunity in Western Canada; and the companies are working flat out.
"The sample suggests that the junior oil and gas sector is extremely strong."
As a simple gauge of price potential compared to the present price of these companies' shares, the following table calculates present price-to-cash flow for both 1999 and for 2000, based on company estimates. In general, a low P/CF ratio suggests a better value stock.
It is worth remembering that many factors affect oil and gas stock price performance. These include quality of management, exploration success and commodity prices, among other factors. Furthermore, this table uses company estimates for 2000 cash flow, some of which might reflect unjustified optimism. Taken together, however, the sample suggests that the junior oil and gas sector is extremely strong.
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