₪ David Pescod's Late Edition November 8, 2006
TRISTAR OIL & GAS (T-TOG) $6.10 -0.05
TSX OIL & GAS INDEX $319.49
It’s becoming more apparent that it’s not just the trust
companies that are being affected by the recent change
in tax implications. While we haven’t much talked about
the trusts here before and never bought them, it looks
like all the oil and gas companies are going to be affected
by that decision.
Genuity Capital analyst Jim Welykochy writes in a
short, brief and precise note, “The implications of the
Fed’s tax Fairness Plan for Canadians not only affects the
oil and gas trusts, but could have a significant negative
impact on the junior and mid-cap sector.” He writes, “A
natural exit opportunity will close for the junior sector—
The oil and gas trusts provided an exit for the juniors, as
the trusts relied upon the juniors to take on exploration
risk...Without an obvious exit opportunity, capital into the
junior sector will likely contract or dry up.”
He also suggests that “management is ill-prepared for
the new environment—The explosive growth of the junior
sector over the past five years was centred around the
“trust takeout” plan. Now, without a trust exit, the only
way the juniors can add value would be through continued
accretive growth, which in most cases, management
does not have the asset base or possibly the skillset.”
He suggests, “We are going to see consolidation of
juniors gravitating around management teams that have
the wherewithal to grow into a mid-cap company.”
He also suggests that we are going to see “contraction
of share price multiples—We are likely to see a contraction
especially on the “Trust candidate” companies.”
He also points out that of the stories he follows that
could suffer might be TriStar Oil and Gas (TOG) and Capitol
Energy (CPX).
In summary, he writes, “The ripple effect onto the junior
and mid-cap E&P companies is negative and significant.
It is too early to nail down quantitatively the effect
of the government’s plan on our price targets, as the oil
and gas trusts go-forward strategies have yet to be decided.”
CAPITOL ENERGY (T-CPX) $4.30 -0.05
Monty Bowers, the President of Capitol Energy, is one of
virtually all Calgary oil and gas executives not particularly
pleased with the recent decision on income trusts and yes
folks, it has definitely affected his company.
As we’ve mentioned in the previous article with income
trusts suddenly not the big generous buyers of small and
mid-cap oil and gas companies, exit strategies (takeovers)
have suddenly just been whacked.
We interviewed Bowers back on September 5th and he
suggested at the time, either selling to a trust or trusting
themselves was part of their plan and exit strategy at that
time. That of course was hopefully after the recently commenced
waterflood on their big Dixonville play was successful
with production reserves as well.
Bowers tells us today that everything they can control is
going well. He points to March 9th as an important date—by
then they should have a handle on how reserves might have
grown as well as what new production numbers could be,
courtesy of Dixonville.
He wouldn’t be surprised to see a little tweaking here and
there on the Fed’s trust plan, but in the main it stays, he
thinks. He does suggest though that trusts will still have to
buy assets in the oil and gas patch as trusts do have wasting
assets that they will need to replace. The question is, what
kind of valuations will they be paying?
When we ask him as far as any new exit strategies, he suggests
anything is possible including a potential merger and
building a much bigger cap oil and gas company.
NATURAL GAS $7.823 +0.068
We’ve learned over the last year just how dependent
natural gas prices are on weather. After hitting an unbelievable
$15.00 an mcf last Christmas, it’s tumbled because
we didn’t have a normally cold winter, which limited
the demand for heating. Then we had no hurricanes
in the Gulf to cause supply problems, plus a summer
that was a tad cool so no need for air-conditioning.
You get the drift.
Now we are in a winter that so far has seen most of
the United States warmer than usual. But gas prices are
getting a bit of a boost from way out of left field. It’s
being reported by the Nuclear Regulatory Commission
that due to maintenance concerns, nuclear plants are
now running 24% below normal and some utilities are
having to replace that capacity with natural gas production.
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