MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WED., DECEMBER 10, 1997 (2)
Crude plunged to the lowest level in nearly two years on the New York Mercantile Exchange as concern about ample supplies in coming months overcame a report that showed inventories fell sharply last week.
January light sweet crude oil fell $0.53 to settle at $18.14. January natural gas fell $0.172 to settle at $2.354. Unleaded gasoline and heating oil futures also fell sharply.
Iraq has suspended oil shipments pending United Nations approval of a new distribution formula to receive food under a program that allows the country to sell $2.1 billion in oil over six months for humanitarian aid. The program is an exception to the U.N. embargo imposed after Baghdad's 1990 invasion of Kuwait. Iraq was expected to submit a distribution formula later this month, and analysts predicted shipments could resume by mid-January.
The resumed Iraqi output would come at a time when members of the Organization of Petroleum Exporting Countries are boosting their production ceilings, which is likely to result in a flood of crude products coming to market.
Those concerns outweighed inventory figures released by the American Petroleum Institute that showed sharp declines in supply last week. Crude inventories fell 5.09 million barrels to 316,801 million barrels. Gasoline stocks also unexpectedly fell sharply, while heating oil inventories rose only marginally.
US Foreign Crude - Latam Grades Lose Recent Shine
Having held center stage in the U.S. Gulf for several weeks, Latin American crudes appeared to lose some of their sparkle on Wednesday as refiners eyed alternative grades.
A Colombian Cusiana cargo loading January 6-10 was heard sold by a Wall Street trader at a discount of 50 to 53 cents to February WTI, weaker than the price of a January 9-13 cargo sold through tender earlier in the week.
While the Brent/WTI spread held stubbornly at around 70 cents on Tuesday, West African grades, already loaded onto VLCCs were headed over the the Gulf, traders said.
Exports of Colombia's Cao Limn resumed on Wednesday after a rebel blast on Monday ruptured the pipeline running from the field to the Coveas terminal on the Caribbean, halting pumping operations.
Field production should be back to normal levels of 175,000 to 180,000 barrel per day on Thursday, operator Occidental said.
A Cao cargo was heard offered at WTI minus $1.90, but most traders valued the grade under $2.00.
An Argentine Canadon Seco loading mid-January, was heard sold at WTI minus $3.10 to $3.20, way down on the asking price of minus $2.50.
On the sour side, Ecuadorean Oriente for delivery to the U.S. Gulf in late December was on offer at January WTI minus $2.85, five cents firmer than a deal done on Friday. The cargoes are the first from the recently awarded term contracts to be shown.
The three 12,000 barrels per day (bpd) yearly contracts were won by local trader Tripetrol and its subsidiary Totisa, traders said. The term contracts were awarded at a discount of between $4.47 and $4.48 to WTI.
A prompt cargo of Oriente was also heard sold into the Caribbean on Tuesday at a $3.25 discount to WTI.
The market for Venezuelan sours remained murky, but players were expecting Uruguay to buy Venezuelan barrels as part of a current tender that is likely to lend the market some direction.
Venezuelan Mesa was seen as the likely candidate to win the Uruguay tender for one million barrels, delivered at the end of February. Uruguay's state-owned refiner ANCAP said the results of the tender, which closed on Wednesday, would be announced on Thursday.
"It'll be interesting to see what numbers are thrown out, it'll add another piece to the jigsaw," said one trader.
Sour traders were also keeping a close eye on developments in the Iraq/U.N. oil-for-food deal.
Iraq's oil minister Amir Mohammad Rasheed said he hoped the United Nations would agree an Iraqi oil plan for the distribution of aid "within a few weeks""clearing the way for Baghdad to resume crude exports.
"That's going to have an impact on the sours and really its bearish news. Some people had discounted seeing Iraqi barrels right through to the end of January," said a Gulf coast trader.
The news also put futures traders in a bearish frame of mind, reviving fears of market oversupply in 1998 after OPEC's decision to raise its production ceiling.
A sell-off led by institutional funds took January WTI trading on NYMEX to its lowest level in nearly two years, closing 53 cents down at $18.14 a barrel.
Canada Spot Gas Unchanged With Warm West Weather
Canadian spot natural gas prices were mostly unchanged on Wednesday and traders said warmer weather forecast for western Canada through the weekend suggested softening from current low levels.
Spot gas at the AECO storage hub in Alberta was quoted at C$1.355 / 1.365 per gigajoule, about on par with Tuesday, but down a dime from last week. January AECO was talked at C$1.39/1.40 per GJ, again equal with Tuesday's price.
''It's going to be warmer here. If anything, we've got some downside with this weather-driven pricing,'' a Calgary-based marketing manager said.
Environment Canada said temperatures in southern Alberta were expected to stick to daytime highs of between 8 Celsius (46 Fahrenheit) and 10 Celsius (50 Fahrenheit) and overnight lows of between -6 Celsius (21 Fahrenheit) and -8 Celsius (18 Fahrenheit) at least through Sunday.
At the borders, gas at Niagara in southern Ontario was discussed as high as US$2.66 per million British thermal units early, but sank to as low as US$2.50 per mmBtu -- unchanged from Tuesday -- as the NYMEX January contract price melted by 13 cents to US$2.40 in early afternoon trade.
Last week, Niagara spot gas fetched about US$2.80 per mmBtu.
In the west, Sumas, Wash. spot gas traded in the mid-US$1.80s, the same as Tuesday, but about 60 cents higher than last Wednesday, before cooler Pacific Northwwest weather sent utilities into the market late in the week.
A trader of British Columbia gas attributed current strong Sumas prices to cooler weather in Texas, which lifted pricing in the competing U.S. San Juan and Rockies regions, as well as interruptible transport constraints on ''T South,'' Westcoast Energy Inc's B.C. gas mainline.
Oil Finding Costs Rising
Those record-low costs of finding a barrel of oil are starlight memories for many producers.
"The environment is such that the costs will be higher," said Bob Hinckley, an analyst with Merrill Lynch & Co.
"The cost pressures are there and will continue to build in '98."
Peters & Co. Ltd. chief executive Mike Tims points to a mix of factors for the increased finding and development costs.
"There's both the higher costs of services, the large land purchases and expenditures on infrastructure like pipelines and plants," Tims said. "It also reflects the fact that it is reasonably tough to find reserves in the western Canadian sedimentary basin."
That's because the basin is increasingly maturing. In addition, the shortage of drilling rigs and workers have led to higher costs for rigs and labor.
The 81 companies that Peters & Co. tracked for their 1996 F & D study averaged $6.56 for proven reserves and $5.37 for proven plus probable.
While actual finding costs won't be available from most companies until March, some analysts are expecting costs of between $8 to $10 per barrel and even higher in some cases.
"That makes the economics of producing a barrel of oil pretty skinny," said Gord Currie, an analyst with Canaccord Capital Corp.
One of the reasons so many companies are pursuing heavy oil is because reserve additions costs are low. But the trade-off is higher operating costs and lower prices for heavy oil. So margins end up being the same or worse.
"It allows them to show growth in reserves and reasonable finding costs," said Currie. "That's what the market likes to see."
The high-cost shortage of workers has led to some creative hiring practices. One company that was looking for a reservoir engineer told employees that if they recommended a successful hire, they would be paid a bonus.
"I've heard of companies hiring people from health care professions who were just really excited to have a well-paying job," said Currie.
Yet analysts note that at some point the system corrects itself. Budget cutting is one aspect to that process.
"In addition, the service companies have all been scrambling to add capacity and rigs," said Hinckley.
"The tightness has forced companies to be more efficient and to tightly schedule. There's a lot more productivity coming out of the same equipment."
Price Squeeze Hits Heavy Oil
Rising output and a differential of $8 a barrel prompt companies to halt higher-cost production, but pain is expected to be short-term
A glut of heavy oil has depressed prices to the point companies are shutting in higher-cost production.
The price differential for heavy oil has widened to more than $8 a barrel recently from about $6.50 in October. The differential is a discount slapped on heavy oil because it needs more refining than lighter varieties.
With the price for conventional oil also in a slump, heavy oil prices have been squeezed to the point some production is no longer economic.
"We will be shutting in the higher-cost production, along with everybody else in the business," Fred Dyment, president and chief executive of Ranger Oil Ltd., said yesterday.
"If it costs more to operate the production than the wellhead price we get, we'll just continue to shut it in." His company is evaluating its heavy oil production well by well. Ranger was one of several senior companies that bought major heavy oil assets this year to gain a foothold in the sector. It acquired Elan Energy Inc. for $566
million. Heavy oil has increasingly been in vogue with producers because of declining conventional oil reserves.
With the increased emphasis on heavy oil, production has risen to such levels that "we have seen the inevitable results - differentials widening out to over $8, which could considerably widen some more," said Gordon Currie, oil and gas analyst at Canaccord Capital Corp. in Calgary.
The economics of producing heavy oil become marginal if costs exceed $6 a barrel, said Scott Inglis, managing director of institutional research at FirstEnergy Capital Corp.
Up to 10% of heavy oil production is at the high end of operating costs of $10 a barrel out of total Canadian daily production of 700,000 barrels.
At $2.50 operating costs a barrel, production from the hot Pelican Lake heavy oil play, dominated by Amber Energy Inc., Canadian Natural Resources Ltd. and PanCanadian Petroleum Ltd., is making good money at these prices, said Inglis.
"We don't think it's going to go a lot wider," he said. "People shut in marginal production so that keeps a limit on it. But we don't see them improving, particularly over the next two years, until there is additional refining capacity."
He expects differentials to average $6 a barrel for the next two years.
"[Shutting in] almost has to happen," said Gwyn Morgan, president and chief executive of Alberta Energy Co. Ltd. "We are in a situation where, right now, the pipelines are full, so a new barrel has to displace an old barrel."
Heavy oil appears to be in the same position natural gas was a few years ago. It needs new upgrading capacity or additional transportation to markets where capacity is available, said Morgan.
About 25% of AEC's oil production is heavy, produced at a cost of $3 a barrel.
At least two companies, Shell Canada Ltd. and Gulf Canada Resources Ltd., are expected to decide next year whether to build heavy oil upgraders in Alberta.
But Dyment said while the Elan acquisition doesn't seem brilliant in the short term, the long-term outlook for heavy oil is positive.
"When we made the acquisition, we bought it at what we thought was the bottom of the market.
"The future in Canada, in my view, is going to be natural gas and heavy oil. That's why a number of the bigger players are getting involved."
Like Ranger, other companies that recently acquired heavy oil units are well equipped to take some short-term pain, said Currie.
"They are big enough that they can weather some ups and downs in commodity prices," he said.
Peter Sametz, president of Inline Petroleum Management Inc., a heavy oil consulting firm in Calgary, said heavy oil prices haven't been this low since first-quarter 1994.
"There has been a lot of interest in heavy oil in recent years and they haven't seen a downside yet," he said.
"Some companies, because they have gotten into this just recently, are starting to see the downside of heavy oil and will question whether it's something they will want to stay in strategically."
MARKET ACTIVITY
The Toronto Stock Exchange 300 fell 0.2% or 12.46 to 6754.53
In comparison, the Toronto Oil & Gas Composite Index lost 1.0% or 70.02 to 6817.10. Of the sub-components, the Integrated Oil's dropped 0.6% or 50.70 to 9021.93. The Oil & Gas Producers fell 1.2% or 71.25 to 6027.87 and the Oil & Gas Services lost 1.3% or 43.67 to 3272.62.
Berkley Petroleum, Petro-Canada, Maxx Petroleum, Orbit Oil & Gas, Canadian Occidental Petroleum, Startech Energy, Renaissance Energy, Anderson Exploration, Northstar Energy, Talisman Energy and Abacan Resources were among the top 50 most actively traded issues on the TSE. Canadian Fracmaster was the only company in the service sector which was listed among this group.
Over on the ASE, Red Sea Oil, Belfast Petroleum, Raptor Capital, Calahoo Petroleum, Cirque Energy, Colony Energy, Trego Energy and NTI Resources were among the top 30 most active issues. ICE Drilling was the only company in the service sector that made this list.
TOP 20 - SPEC 12 - SERV 7 COMPANIES IN THE NEWS
TALISMAN ENERGY Finds More Oil In Algeria
Algeria could become a new core area for Talisman Energy Inc., following another major oil discovery in the Ghadames basin.
The Calgary-based company said its fourth well in what's known as the MLN prospect tested at a rate of 22,700 barrels of oil and 58 million cubic feet of natural gas daily.
Talisman's 35% share is expected to contribute 7,000 to 10,000 barrels a day, starting in 2000 when production will come on stream.
LL&E Algeria Ltd., a wholly owned subsidiary of Houston-based Burlington Resources Inc., has the remaining 65% interest.
Sonatrach, Algeria's national oil company, has an option to participate in the development and production of commercial discoveries.
"This well clearly demonstrates the high potential of block 405 in what has proven to be a prolific hydrocarbon basin," said Talisman president Jim Buckee.
"This is our fourth successful well on the MLN prospect and provides us with an exciting new deeper oil play."
The senior oil producer started drilling in the area in 1996, having acquired it after taking over Bow Valley Energy Inc. in 1994.
The company expects to produce at least 10,000 barrels of oil daily from the wells drilled so far, discovered in a small part of a much larger block where it has further exploration plans, said spokesman David Mann.
Talisman now produces 225,000 barrels of oil equivalent daily from Western Canada, the North Sea and Indonesia.
The company, which does not operate the Algerian wells, does not expect political unrest to affect production. The exploration block is located in the Sahara Desert near the Libyan border.
The discovery marks another growth spurt for the company, which is in the process of absorbing recently acquired Pembina Resources Ltd.
"These are encouraging results from one area," said John Tysall, oil and gas analyst at Toronto-based Standard & Poor's Canada.
"Talisman is a good example of a company that has grown effectively by acquisition," he said. "I expect more of the same."
Talisman shares (TLM/TSE) closed at $45.80 yesterday, up 55›.
Meantime, Mann said Talisman is finalizing a $100-million to $150 million medium term note issue, with proceeds to be used to refinance debt taken on to acquire Pembina.
"We're basically refinancing the Pembina acquisition debt, restructuring short-term into three- and five-year notes," Mann said.
VERMILION RESOURCES and CARMANAH RESOURCES are favorates of Pacific International.
Vancouver-based Pacific International Securities Inc. is optimistic about the Toronto Stock Exchange into 1998, based on low interest rates, improving employment numbers and a solid consumer sector, said Bert Quattrociocchi, the firm's vice president and director of institutional sales and research.
"But we will continue to experience significant world market volatility in the next quarter." Further major upsets in Asia may disrupt the North American equity market's balancing act. Present high equity valuations and some concerns about future earnings growth could cause markets "to move down sharply and quickly on any negative piece of news."
Quattrociocchi is not buying into the deflationary scenario for the North American economy. "The domestic economy in Canada and the U.S. will remain in excellent condition."
Pacific International notes that the long-term outlook for the energy sector is positive. Energy analyst Richard Oddy favors two junior producers with international projects in areas where acquisition and development costs "are significantly lower than in Western Canada."
Vermillion Resources Ltd. (VRM/TSE) $7.15 ($9.75-$3.85). The Calgary based company is developing several oilfields in France. Oddy sees cash flow per share growing 91% to $1.38 in 1998, from the 71› estimated for 1997.
Carmanah Resources Ltd. (CKM/TSE) $5.35 ($7.70-$4.30). The Calgary based energy producer has projects in Venezuela and Indonesia. Oddy expects increases in production and earnings in 1998, with cash flow per share of $1.65 or more. "The stock is trading at a modest three times forecast 1998 cash flow."
Gordon Market Opening Notes
PETRO-CANADA (PCA-T:$27.80) BUY
1st Hibernia Well A Record Breaker!
The initial well at Hibernia is currently producing 40,000 bbls/d. This is by far a record for any oil well in Canadian history. Hibernia is now preparing to bring the second well onstream, which could be producing before year end. It is also possible that the first tanker load could be filled prior to year-end, establishing initial revenue in 1997.
Petro-Canada, which owns 20% of Hibernia, has set its 1998 capital expenditure budget at $1.13 billion. This includes $300 million in spending in Canada's east coast offshore region.
We currently rank Petro Canada as our top ranked BUY among the Canadian integrated oils, with a 12 month stock price target of $33.00.
TARRAGON OIL & GAS (TN/TSE) announces that it has entered into agreements with Triax Resource Limited Partnership and Triax Resource Limited Partnership II to issue a combined one million shares at $14.50 per share on a flow-through basis.
PRIZE ENERGY (PZI/ASE) announced that, as a result of mailing delays during the recent postal disruption, its Annual General Meeting of Shareholders, originally scheduled for Monday, December 22, 1997, has been rescheduled to Monday, January 5, 1998 at 3:00 p.m. (Calgary time). Information relating to the meeting is currently being mailed to shareholders.
STOCK TO WATCH
Northrock Resources Ltd. ("Northrock") is pleased to announce the formation of PROGRESS ENERGY LTD.("Progress"), a new junior oil and gas company. To establish an initial base of operations, the companies have entered into an agreement for Progress to purchase Northrock's Rocanville and Birdtail properties located in southeast Saskatchewan andsouthwest Manitoba. The current net production that will be sold, effective November 1, 1997, is 325 barrels per day of light crude oil. In addition, approximately 180,000 net acres of undeveloped land in the area will be part of the sale. A recently updated reserve report prepared by McDaniel & Associates Consultants Ltd. places the total reserves at 1.2 million barrels of crude oil.
Northrock will receive $5.6 million cash and 6 million common shares of Progress at a price of $0.50 per share, for a total initial consideration of $8.6 million. With the share position, Northrock will maintain majority ownership in Progress and exposure to the growth potential of this asset. Northrock's objective is to realize the maximum value for these assets and for its shareholders by holding an equity ownership in Progress. Progress will focus specifically on these assets which were becoming a lower priority in Northrock's current opportunity base.
The purchase brings to Progress a high quality asset base with substantial development and exploration potential. In addition to a number of development drilling locations, a waterflood on the existing Rocanville pool has been implemented and production rates are increasing. As well, exploration opportunities exist on the undeveloped land base with several general drilling locations having already been identified. A drilling rig has been contracted for the winter drilling program.
Progress is a newly formed public company that has filed a preliminary prospectus with the Alberta Securities Commission.
Closing of the initial public offering is expected by December 31, 1997.
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