check out the Growth report and comments on PEY.TO
growthreport.com
Its listed along with Anadarko:-))
The Growth Report September 5th 2001
Vol. 1 Issue 2
Dow Jones: 9997.49
NASDAQ: 1770.78
S&P 500: 1132.94
ENERGY ISSUE
“Wind Power or just Pure Wind - What Energy Crisis?”
Energy Crisis? Hmmmm, let’s look at the lights going out on the American economy. No… it would appear that air-conditioning units are keeping the U.S. cool, despite the recent heat wave, the internet server farms, keep re-routing our e-mail, and we are able to keep filling our cars with gas without worrying about re-mortgaging the house (not a bad idea considering rates). In fact, the only real energy crisis seems to be Air Transat keeping enough fuel in a plane for to land its passengers safely across the Atlantic. (click here <http://dailynews.yahoo.com/h/nm/20010824/wl/crash_portugal_dc_4.html>))
So what was all the fuss about? The ‘fuss’ would certainly have appeared to calm down, but it has by no means gone away. What does this mean for the oil and gas producers, which have enjoyed tremendous profits the last couple of quarters as revenues soared on the back of higher oil and gas prices? Where can we find value in the energy sector if oil and gas prices remain at current levels? How prepared should we be for a return to higher prices which could fuel the whole sector?
Let’s examine the fundamental outlook for the underlying commodity prices. What has happened to cause the recent declines? What, if anything, could lead to a rosier picture over the next 6-12 months? In general market terms, fundamental analysis and investing has, in recent years, given way to market pressures which have inexplicably propelled prices to levels which have rarely correlated with the bottom line. As the bull market took full force, investors and analysts alike lost objective appraisal of company performance and concentrated on the self-fulfilling prophecy. If everyone believes that stock prices will keep rising then everyone keeps buying on the belief and indeed push prices continually higher regardless of such things as cash flow and earnings (Growth Report Vol. 1 Issue 1 <http://www.growthreport.com/gr1.html>)..
U.S. natural gas prices have fallen from record levels of around US$10 Mcf to recently close around US$2.50 Mcf (see chart). Many analysts and industry executives expect prices to rebound and remain at relatively high levels due to an increase in the construction of gas-fired electricity generation plants. This construction has come as the capitulation of states, most notably California, in building new generation capacity has given way to a flood of new projects, which Platts Power Markets (www.platts.com <http://www.platts.com>)) suggest could more than total all the new generation capacity of the 1990s by 2003. Recent declines in gas prices have coincided with reports of impending full storage capacity as we approach the winter months. Gas storage is running at approximately 15% greater levels than last year resulting from both a slow down in the U.S. economy as well as higher prices earlier this year pushing energy efficiency drives together with substituting of cheaper alternatives.
Oil has suffered a similar downturn in fortunes but has steadied in a trading range of US$26-30/bbl as OPEC reviews its decision to increase production quotas earlier in the year. US$26/bbl would appear to represent the support level at present. The Organization of Petroleum Exporting Countries (OPEC) starts to implement a 1 million bpd output reduction on September 1 and this should to serve to underpin the current market. While we don’t see a quick return to the +US$30 levels of last year, the outlook for sustainable oil prices above US$26/bbl is good and should allow the oil producers to post extremely robust financials as we go forward.
Despite lower prices, the bottom line remains the same. As the U.S. economy begins to strengthen toward the end of the year and into 2002, energy will once again become the commodity of choice. This week, speaking on Yahoo FinanceVision, Bob Christensen, an oil and gas analyst with FAC Equities commented about the correlation of electricity demand growth with GDP growth in the U.S. economy. In summary, there is a direct correlation between the two with forecasts of U.S. growth heading back toward 3% later next year as tax cuts and falling interest rates finally positively impact the economy, you can expect 3% growth in electricity demand (close to the 10 year compounded average of 2.9%). The U.S. economy is highly unlikely to grow without an improvement in demand for energy - the most obvious respondent to increasing industrial output and consumer affluence.
Oil and gas exploration and production companies have responded to the obvious need for supplies to the new generation capacity by embarking on aggressive exploration campaigns as well as merger and acquisition activity to bolster their oil and, most notably, gas reserves. Sure, the data suggests that there is now a risk of short-term full storage capacity of gas but this is inevitably pre-emptive of the industry’s outlook for more aggressive drawdowns next year.
So given this environment, what companies meet our criteria of exciting speculative appeal built on foundations of strong fundamentals which should underpin the current stock price. Growth Report’s first recommendation is by no means small-cap and a fascinating story of success over the last few years.
Anadarko Petroleum (APC:NYSE)
$53.31 Close August 30th 2001 250 million shares outstanding
$75.95 52wk high $46.52 52wk low $13.3 billion market capitalization
The company’s fortunes….and we are talking fortunes…have caught many an eye. Recently, the company was ranked the 22nd fastest growing company in the U.S. and entered the Fortune 500 at 314. This fascinating story is subject of an excellent article (click here <http://www.fortune.com/indexw.jhtml?co_id=1777&doc_id=203660&channel=artcol.jhtml&_DARGS=%2Ffragments%2Ffrg_top_story_body.jhtml.1_A&_DAV=artcol.jhtml>),, which summarizes the dramatic rise to success.
Let’s look at the numbers.
2000 1999 1998
Sales $5,686 million $1,771 million $1,301 million
Income $796 million $32 million ($49 million)
EPS diluted $4.16/share $0.25/share ($0.41/share)
Debt $4,000 million $1,400 million $1,400 million
Reserves 2.06 billion BOE 991 million BOE 935 million BOE
Note: BOE = barrels of oil equivalent
This year, fuelled by soaring oil and gas prices, the financials are even more impressive. Sales in the first half of the year have nearly surpassed those of 2000 at $5.3 billion and net income reached the $1 billion mark. Long-term debt has remained flat and is more than adequately serviced by cash flows, which have ballooned to in excess of $3 billion. All this corresponds to fully diluted earnings per share of $4.00. The company appears to be able to maintain its strong growth profile and its pursuit of Canadian assets, following the $700 million takeover of Berkley Petroleum, has been rewarded with a 96% success rate in the 159 wells drilled in the second quarter of the year. Anadarko continues to replace its reserve base at above industry levels and does so at costs below industry averages.
We recommend purchases of Anadarko at current market levels with a stop/loss of US$46.00/share. Our 6-12 month target is US$63.00/share as we believe a resurgence in gas prices coupled with an ongoing acquisition strategy solidify Anadarko’s position as the largest independent exploration company in the world. Anadarko management would also appear to agree that the stock is undervalued at these levels and announced a billion dollar stock buy-back program in July 2001.
Peyto Exploration and Development Corp. (PEY:TSE)
C$2.88 Close September 4th 2001 41 million shares outstanding
C$4.00 52wk high C$2.60 52wk low C$118 million market capitalization
We conclude this issue with our small-cap pick, Peyto Exploration and Development Corp. Peyto is an aggressive, growth play in the exciting arena of Canadian natural gas producers. The continuing consolidation in the gas industry has been skewed toward U.S. purchasers of Canadian natural gas assets. We expect this trend to continue. Just this week, Devon Energy (DVN:NYSE) announced the $4.6 billion acquisition of Anderson Exploration (AXL:TSE) (click here <http://biz.yahoo.com/apf/010904/energy_deal_6.html>)..
Peyto has been around for a couple of years and was quick to recognize the significance of natural gas assets (which amount to 97% of the company’s production). Furthermore, we like Peyto’s development of its own natural gas processing facilities which have dramatically reduced operating costs and eliminated the reliance on third party facilities.
Peyto produced some 2,000 boe/day in the quarter ended June 30th, 2001 (up 136% year-on-year). The company is currently producing at rates of 3,000 boe/day and we expect this to climb to perhaps 5,000 boe/day by year-end. This growth should more than offset the current decline in gas prices. Revenues for the first 6 months of the year were C$26.3 million, up from $4.5 million in the corresponding period of 2000. This helped net earnings surge to C$9 million from C$1.25 million. This translates to earnings of C$0.21/share and cash flow of C$0.43/share for the first 6 months of the year. Even allowing for lower realized gas prices in the second half of 2001, growth from new production should mean that Peyto is trading at less than 8 times our estimate of expected earnings for 2001 and less than 5 times our expected cash flow.
Reserves stand at approximately 17 million BOE, which are likely too small to fuel any takeover of the company, but organic growth should translate into higher prices going forward. We have a 6-12 month target of $4.50/share with a stop/loss of C$2.40/share. There is great incentive for management to build shareholder value. The weighted average of issued stock options is C$2.29/share and management and employees own approximately 35% of the company.
The oil and gas sector is likely to prove to be one of the most exciting areas for investors over the next year and we will continue to monitor the developments of our stock selections as well as the overall industry closely. We look forward to reviewing a positive shift in the sector over the coming months; one that we feel will have a significant impact on both of the growth companies we have focused on in this, our first Energy Issue.
Happy Investing,
Doug Ramshaw
Editor-In-Chief |
