Some thoughts on the Oil and Gas sector:
Cannacord Morning Coffee:
TODAY'S TECHNICALS by Brent Woyat:
TSE OIL & GAS PRODUCERS (5893)
During the past two months practically all sectors of the market have
been experiencing an intermediate correction. The resources sector
has been hit the hardest with the gold's, metals and mining, paper and
forest products, and the oil and gas stocks declining the greatest.
Many of the groups are becoming oversold and could form an
intermediate bottom over the next couple of weeks. The chart above
shows the long term picture of the TSE Oil and Gas Producers index.
The group has been a strong performer during the past three years
gaining close to 100% from the 3783 low in 1995 to the 7461 high just
a few months ago. However, the long term uptrend that's been in place
could be coming to end. The well defined trendline that began in mid
1995 was penetrated to the downside a few weeks ago. The decline also
broke below the 40 week moving average and the 6010 support level
which by definition would suggest that the trend is reversing. While
the long term trend looks to be topping out the decline from the highs
looks to be getting oversold. The rate of change indicator in the
bottom half of the chart is now at a level consistent with important
intermediate bottoms of the past four years. Historically when the
rate of change is at or below -10% there is a good trading opportunity
once prices have stopped falling. The 5627 level is a 50% retracement
of the previous bull phase which would be considered a good support
area. With last weeks low of 5848 the index is close to the support
level so the odds would suggest that most of the heavy selling has
been done for now with a recovery rally pending.
Cannacord Daily Letter
We are pleased to deliver an electronic version of today's Canaccord
Daily Letter directly to you. For a more complete version that
includes tables and graphs please visit our web site at
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RECOMMENDATIONS
* ACCUMULATE Oil and Gas Producers Stocks on Weakness (A. Knowles, G.
Currie)
NEWS
* Oil and Gas Producers Stocks
In the September issue of the Canaccord 100 we cautioned that the
fundamentals of the petroleum industry in Canada were worsening but we
observed that the market multiples applied to producers stocks were in
line with long-term valuations at 5.6 - 6.2 times forecast cash flow,
and consequently did not anticipate a contraction. In fact, oil and
gas producers stocks have come under a great deal of pressure in the
past six weeks as a result of lower oil prices (reduced tension in
Iraq, OPEC threat to increase its quota, wider heavy oil
differentials), lower natural gas prices (no sign of winter yet), and
higher costs of services (land, drilling rigs, salaries, office rent).
Based on the results reported for the third quarter it is apparent
that many petroleum companies will fall short of their production
targets for 1997, and it is certain that finding and development costs
will be higher this year.
As investors began to understand these dynamics the TSE Oil and Gas
Producers Index declined by 20% from its high on October 7th. Cash
flow multiples are down one full multiple point and many producers
stocks are now trading at their 52 week lows. We believe this creates
a buying opportunity for patient investors who are contrarian by
nature. The following is our shopping list of quality stocks which
appear to be inexpensive relative to their longer-term valuation
parameters:
Anderson Exploration
* Reported CFPS of $3.14 for fiscal year 1997 which ended September
30, versus $2.54 in 1996
* Forecast cash flow for fiscal 1998 is expected to be flat as lower
commodity prices offset higher production
* Highly liquid with a market capitalization of $1.6 billion
* Long-term debt equals 1.4 times forecast cash flow for 1998
* Production is 40% crude oil and 60% natural gas
Poco Petroleums
* POC has locked in 300 mmcf/day, or 60%, of its gas production
through April 1998 at $3.00 per mcf
* several facilities in the Western Region are scheduled to be up and
running by year end adding significantly to its production capability
* several potential high impact wells being drilled this winter
including at Brazeau, Lapp and the first well in the Monkman Pass area
of northeastern B.C. acquired earlier this year
Newport Petroleums
* Stock was pummeled after releasing third quarter results and
reducing production estimates for 1998
* Drilling several very large exploration targets this fall and winter
which could have a meaningful impact on the Company if they are
successful
* Two thirds natural gas
Archer Resources
* Turnaround candidate with new management and a solid balance sheet
* 70% natural gas
* Now drilling the first of several high impact exploratory prospects
in western Alberta
Maxx Petroleum
* the pilot project in Kansas appears to be a success and will see at
least 10 wells in 1998
* the same is true for its East Central Alberta play, which while
heavier quality oil, the company has been able to maintain operating
costs between $5.00 and $5.50 with improvements expected as volumes
increase
* the Saskatchewan area has seen several new discoveries this year
adding to its production potential
Summit Resources
* Has been out of favour with investors since a high profile
exploratory project in North Dakota fizzled two years ago
* Has significant exposure to a deep gas play in East Texas and should
be drilling in the first quarter of 1998
Carmanah Resources
* CKM is in the final process of contracting the rigs for Natuna and
Camar
* Work is expected to begin on the first Camar well by the end of
January
* a seismic program is contracted for Natuna in the spring
* CKM is paid in US$ for its product, with its only Indonesian
currency exposure coming from salaries in country
Oil and gas producers stocks may very well come under continuing
pressure for a few weeks or months but a cold snap would provide a
near term lift, and longer term we believe that they will recover to
more normal long-term multiples. Put these stocks under the tree this
Christmas.
Alan Knowles, CMA, CFA (403) 508-3804
Gord Currie (403) 508-3805
The information contained in this report is drawn from sources
believed to be reliable, but the accuracy and completeness of the
information is not guaranteed, nor in providing it does Canaccord
Capital Corporation ("Canaccord Capital") assume any liability. This
information is current as of the date appearing on a report within
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information or advise on further developments relating to these
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at, and any securities being offered are available _only_ to, persons
resident and located in British Columbia, Alberta, the Yukon and
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