Petro-Canada (U/A): Organic resource additions, oil sands management key for stock - Goldman Sachs - January 27, 2006
We believe successful exploration and managementof the Fort Hills oil sands project, development of Hibernia and potential acquisitions of North American natural gas assets will be the key drivers for Petro-Canada shares in 2006. While production growth over the next two years should be driven by the North Sea and Hibernia, without further acquisitions Petro-Canada?s resource growth is becoming more focused on oil sands and offshore Hibernia. Among oil sands-leveraged companies, we prefer Suncor and Canadian Natural Resources, both rated OP/A. Among large-capconventional- focused domestic oils/E&Ps with growing production, Newfield Exploration (OP/A), Noble Energy (IL/A), and Anadarko Petroleum(IL/A) among others are more attractively valued. We rate Petro-Canada Underperform relative to an Attractive coverage view.
Key company-specific catalysts
(1) Exploration success in 2006. We continue to believe that higher organic reserve replacement rates can be a positive catalyst for the stock. In 2005, Petro-Canada was very successful in booking additional reserves offshore Canada's east coast due to upward revisions to the company's key projects - Hibernia, Terra Nova and White Rose. Continued positive developments from these fields can lead to a longer stream of free cash flow for an otherwise short reserve life asset. Beyond Hibernia, we believe Petro-Canada needs to be successful in its 11-well exploration program, which is diversified in international reach. Making acquisitions has proved to be a successful strategy for most companies over the last few years, the result of rising commodity prices. However, the companies that have performed the best are those that have derived further profitable reserve addition opportunities. If Petro-Canada can show this from its acquisitions in the North Sea and North America, it can receive more credit for true organic growth.
(2) Potential North American natural gas acquisition. We believe that Petro-Canada is at a crossroads in its North America natural gas business and needs to make one of two choices: admit that it is comfortable with declining reserves and declining production because there are more intriguing areas for the company in the oil sands, Hibernia and abroad; or make another acquisition to bolster drilling inventory. Increasingly, management's tone has tried to take a middle ground by not writing off North American natural gas as an area for future growth but not admitting it is willing to do more than smaller sized bolt-on acquisitions. We believe that there is a greater chance the company will do a meaningful acquisition than be content with a declining production profile. We believe the most likely targets would be assets/companies in the Powder River Basin and other parts of the US and Canadian Rockies.
(3) Cost control and timing of Fort Hills oil sands startup. Petro-Canada has significant undeveloped and unbooked resource from its Syncrude, Fort Hills, MacKay River, Lewis and Meadow Creek oil sands assets. Through these projects, Petro-Canada has the potential to become a much larger player in the oil sands arena, though we believe this will manifest itself much more in the next decade. In the meantime, Petro-Canada's ability to keep the budget of Fort Hills in line with other oil sands mining projects can boost confidence in the relative quality of the Fort Hills leases.
4Q 2005 results in line with expectations Petro-Canada reported 4Q 2005 operating and financial results generally in line with expectations. Adjusted EPS was US$1.13 versus our estimate of $1.05, and operating cash flow was $1.15 billion versus our estimate of $1.01 billion. Total company net production of 332 MBOE/d was in line with our estimate of 334 MBOE/d. Commodity price realizations were $54.62 per barrel for oil and $9.62 per Mcf for natural gas. Lower than expected refining volumes were offset by higher margins, and total refining EBITDA of $196 million was in line with our estimate of $193 million. Net debt/tangible capital was 20% at yearend.
Updating and introducing estimates We are introducing 2006 quarterly EPS estimates and lowering 2006-2010 EPS estimates mostly to reflect lower production forecasts due to the Syria asset sale announced Dec. 20. Our 1Q, 2Q, 3Q, and 4Q 2006 EPS estimates are $1.02, $1.06, $1.10, and $1.22, and our 2006 EPS estimate is now $4.40 versus $4.81 previously. Our 2007 EPS estimate is $5.08 versus $5.28 previously. For 2008, we now estimate EPS of $2.36 versus $2.46 previously. For 2009, we now estimate EPS of $2.37 versus $2.49 previously. For 2010, we now estimate EPS of $2.36 versus $2.50 previously. Please see exhibit 1 for our Petro-Canada summary model.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
