MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, DECEMBER 31, 1997 (4)
OIL & GAS
The market for foreign crudes in the U.S. was quiet on Wednesday, with many players out or leaving early in anticipation of the New Year's holiday.
There were some offers for Brent at March WTI minus 25 cents, traders said, but they expected little to be done before the new year.
But imports of Brent into the U.S. Gulf may become more viable as the WTI-Brent arbitrage widens. The arb settled at $1.10 on Wedneday, 17 cents wider than Tuesday.
West African grades were meanwhile still being talked in the U.S. Gulf, traders said with a U.S. major heard offering Equatorial Guinean Zafiro at March West Texas Intermediate minus 60 cents, traders said.
February cargoes of Nigerian Bonny Light were also being shown at a premium of $1.80 to dated North Sea Brent, traders said. No deals were heard on Angolan Cabinda, which was on offer at Dated Brent minus $1.20.
Little was heard about Latin American crudes, though cargoes of Cusiana were being shown earlier this week.
One player was trying to resell a cargo of late January loading Colombian Cusiana at a discount of 47 cents to WTI. The last three January-loading cargoes sold at WTI minus 58 cents.
Traders expected details of the February loading program for Cusiana to be available after the New Year's day holiday, but there was talk of an equity producer offering an early February-loading cargo at a discount of 50 cents to WTI.
NYMEX
Oil prices closed mostly lower with traders eyeing ample supplies confirmed by this week's American Petroleum Institute stocks data issued late Tuesday.
The API said that for the week ended December 26, gasoline stocks in the United States rose 3.66 million barrels. Dealers had expected a build of only 1 million barrels. Heating oil stocks fell 1.38 million barrels in the U.S. Northeast, the largest heating oil market in the world, but were still 11.4 million barrels higher than a year earlier.
January gasoline settled 0.68 cent lower at 52.81 cents a gallon after falling to a new life-of-contract low of 52.50 cents before the the contract expired at session's end. That was the lowest price for prompt gasoline since February 1996.
January heating oil ended 0.38 cent lower at 49.08 cents, also making a new contract low before expiry -- the fourth new contract low in as many sessions.
February crude oil ended 4 cents higher at $17.64 a barrel after API showed a small drop in weekly stocks.
But the entire oil complex generally remains at its lowest levels in nearly two years, with prompt crude having fallen more than $3.00 a barrel since early November. The selloff started in November when the Organization of Petroleum Exporting Countries said it would increase its official production ceiling by a whopping 10 percent.
Iraqi oil sales are also expected to restart soon under a United Nations deal, adding to supplies in 1998 when global demand is not expected to be as robust as first thought due to economic turmoil in Asia.
NYMEX Hub natgas futures, helped by a steady to firmer physical market, mostly ended higher Wednesday, but trade remained very light ahead of the New Year's Day holiday tomorrow, market sources said.
February gained 2.9 cents to close at $2.264 per million British thermal units. March settled 2.7 cents higher at $2.23. Other months ended flat to up two cents.
"There may be a little (cold) weather later next week and that's keeping the shorts nervous, but if it doesn't materialize, prices will be coming off," said one Texas-based trader, noting the market this week held in a fairly narrow range amid little certainty about market direction.
Very cold weather in the Northeast and Midwest is expected to moderate to seasonal or above-seasonal levels by the weekend and continue into the middle of next week. Near to slightly above-normal weather is expected in Texas, with warmer air forecast for the Southeast by the weekend.
Traders said today's weekly AGA stock draw of 96 bcf was below estimates in the 105-115 bcf range and slightly bearish, but it was not enough to crater prices.
Overall stocks climbed to 106 bcf, or 5.1 percent, above last year but still lag the three-year average.
Eastern stocks last week fell 55 bcf and were 2.6 percent over last year. Consuming region west storage, which dropped 22 bcf on the week, was now 1.4 percent below 1996 levels. Inventories in the producing region dropped 19 bcf for the week but remained 16 percent over year-ago.
Chart traders still saw minor February resistance at Monday's high of $2.34, with better selling expected at $2.46, $2.515 and the $2.68 double top from early December. Support was pegged at last week's prominent low of $2.14, with psychological support at $2.
In the cash Wednesday, Gulf Coast prices were steady to up slightly in the low-to-mid $2.20s. Midcon pipes were pegged a few cents higher in the mid-to-high teens. New York city gate firmed more than 15 cents to about $3, while Chicago was a nickel higher in the high-$2.30s.
The NYMEX 12-month Henry Hub strip rose 1.4 cents to $2.266.
NYMEX will be closed Thursday for the New Year's Day holiday and will close early Friday at 1300 EST.
CANADA SPOT GAS
Canadian spot natural gas prices were steady in Alberta but higher in Ontario and British Columbia on Wednesday as players worked to finalize their deals before the New Year's holiday, traders said.
Spot gas at the AECO storage hub in Alberta was quoted in the C$1.30/1.37 per gigajoule range, about equal with Tuesday but up 40 cents from last Wednesday's meltdown. February AECO was talked at C$1.35/1.41 per GJ, up about two cents on the day.
The transport charge to Empress on the Alberta-Saskatchewan border dropped about a dime to 40 cents per GJ as interruptible transport was allowed to flow into the TransCanada PipeLines Ltd Canadian mainline, a Calgary based marketer said.
The Alberta market appeared to shrug off forecasts of much colder weather in southern Alberta. Environment Canada said temperatures were expected to drop from above-freezing on Thursday to -17 Celsius (1 Fahrenheit), and overnight lows of between -15 Celsius (5 Fahrenheit) and -20 Celsius (-4 Fahrenheit) were forecast through Sunday.
"There's a cold front moving in, but it's looking like the (gas in) storage can easily handle it," the marketer said.
Spot gas at the Huntingdon, British Columbia-Sumas, Washington border point was talked anywhere from US$1.87 to US$2.20 per million British thermal units, but one trader of B.C. gas said most deals were done in the US$2.00/2.03 range.
That compared to prices of US$1.80/1.85 on Tuesday and about US$1.90 last week.
The trader said temperatures in the Vancouver and U.S. Pacific Northwest regions were expected to be slightly blelow normal for the next few days, but prices were being talked up more by month-end short-covering and continuing interruptible transport constraints on Westcoast Energy Inc's "T-South""mainline.
In the east, gas for export at Niagara was quoted in the US$2.42/2.45 range, up about two cents from Tuesday, as colder weather and snowstorms hit New York state.
FEATURE STORY
COURTING OILPATCH INVESTORS
Rising costs, falling reserves will take time to remedy
Claudia Cattaneo - Financial Post
Patience is hardly a virtue of today's investors. But indications are it will have to become one for those wanting to participate in the oil and gas sector.
The steady decline of conventional oil and gas reserves, along with stiffening competition and rising costs for remaining conventional pools, have motivated many producers to move into a longer-term time-frame by venturing into heavy oil and oilsands development.
The industry's independent heavy oil producers were all swallowed by bigger companies, while many announced a long list of oilsands-related developments now estimated at $20 billion. While the industry's longer-term nature is accepted as inevitable by the investment community, investors clobbered companies exposed to heavy oil because of the commodity's poor short- and medium-term outlook.
For example:
Ranger Oil Ltd. stock (RGO/ TSE) started the year at $13.10, and closed the year at $9.60. The stock dropped from $14.65 in August, slipping in particular after acquiring heavy oil specialist Elan Energy Inc.
PanCanadian Petroleum Ltd. (PCP/TSE), a unit of Canadian Pacific Ltd., saw its stock slide to $23 on Dec. 31, down from $26.50 at the beginning of the year. PanCanadian purchased CS Resources Ltd.
Gulf Canada Resources Ltd. took over Stampeder Exploration Ltd. Its stock (GOU/TSE) closed the year at $10, compared with $9.95 at the start. While it didn't lose as much as other heavy oil buyers, it didn't gain either after a year of significant progress that included spinning off its Indonesian subsidiary.
Canadian Occidental Petroleum Ltd. (CXY/TSE) was the only company that posted a gain since the beginning of the year, after increasing its heavy oil exposure through the acquisition of Wascana Energy Inc. However, its share price slipped since October with the market decline. Can Oxy's stock closed at $32.35 on Dec. 31, compared with $9.95 on Jan. 2. The company sold off some of Wascana's assets in October for $308 million to reduce its debt.
Oil and gas industry leaders say keeping investors happy in the short term, while striving to create long-term value, is difficult.
Ranger Oil, for example, got an earful from some investors after it launched its bid for Elan. The purchase, of strategic importance because it provides balance to Ranger's portfolio of mostly international holdings, overshadowed other significant prospects around the world.
For example, two new oilfields in the North Sea are due to start producing. Daily production is expected to increase from 56,000 barrels of oil equivalent in 1997 to 90,000 in 1998 and 120,000 in 1999. The company is also well-positioned to exploit Iraq's massive reserves once United Nations sanctions are lifted.
Fred Dyment, the chartered accountant who runs Ranger Oil, says his company takes a long-term view because it takes years to develop an asset base. That's particularly the case in the international arena, where success is dictated as much by technical savvy and financial muscle as by working successfully with local authorities.
"We don't worry about short-term market fluctuations," he said. "We always build flexibility into our capital program to deal with commodity price fluctuations." Still, his company spends a lot of time talking to investors about its longer-term strategy, and looking for investors who want to stay for the ride.
"That's why a significant portion of our shareholders is outside Canada," he said. Many of Ranger's investors are U.S. institutions who take a longer-term view. He said Canadian institutions are so concerned with performance measurements they have a more short-term focus.
The company also works hard with employees to develop a long-term attitude. "I tell the staff the best way to stay around for the long run is to ensure the company remains a winner. The winners take out the losers," Dyment said.
It wasn't too long ago that investors viewed the oilsands in much the same vein -- too much of a long shot to want in.
But oilsands technology has improved dramatically, operating costs are declining steadily and return on investment has increased to the point where the giant Athabasca deposits are in investors' good books.
But in the beginning, the venture had a long-time horizon to profitability. How did executives sell investors on such an extended time-frame?
It's very hard to keep investors engaged, conceded Syncrude Canada Ltd. chairman Eric Newell.
The key is to demonstrate progress and profitability all the way. And the best plans in the world are worthless without a proven track record to go with them, he said.
"You have to sell them on what you are going to do in the short run and keep them profitable.
"If they can't look ahead and see that they are going to get a return on their business at least equal to the long-term cost of capital, then none are going to be interested."
Syncrude showed them just that. While it doesn't post standard financial results because it's owned by 10 partners, it said in pro forma results it earned net income of $368 million in 1996 on revenue of $2.14 billion, compared with net income of $265 million in 1995 on revenue of $1.76 billion. The company embarked on a strategic planning process in 1990 that produced a blueprint for continuous cost cuts, while hiking safety and sensitivity for the environment.
There is no question the industry's longer-term outlook is a big challenge, said investment banker Michael Tims, president of Peters & Co. Ltd. in Calgary. In Syncrude's case, the track record has been strong enough that the story plays well with institutional investors.
Hibernia's actual results are also helping investors buy into the long term. But "when you get to heavy oil, you get where it's a bit more of an act of faith," he said.
There's no magic formula to keep investors on side, but heavy oil should be explained in the context of a company's overall portfolio.
"I think all they can do -- because people aren't prepared to attribute huge values right now -- is to say, 'This is a play for the future,' " Tims said.
FEATURE STORY
ON THE HEELS OF A GREAT YEAR
Glen Whelan - Calgary Sun
This year holds the promise of becoming a watershed for Alberta's booming oilpatch. If not, it will at least be a very interesting window into the new millennium. Fast on the heels of a year that saw production records shattered, commodity prices flag and stocks hit two- and three-year lows, it's difficult to predict what 1998 will hold for the oilpatch.
But a host of major developments are due to unfold in 1998 that are certain to forever change the landscape of Alberta's energy sector.
With the final welds being placed in a pair of pipeline projects and final decisions due on others, major changes are in store for the new year, analysts say.
"The story in 1998 will be natural gas," predicted Martin Molyneau, oil and gas analyst for Calgary-based First Energy Capital Corp.
Expansions to the Northern Border Pipeline and the TransCanada Pipeline -- both slated for completion in November -- will increase natural gas takeaway capacity by 1.1 billion cubic feet per day.
That increased export capacity will have a profound and lasting impact on gas prices, especially within the underpriced Alberta market.
"Canadian prices will close in on the United States, and U.S. gas prices are going to rise," Molyneau said. "In the short-term the news is grim, but we're very bullish on gas-levered producers." Merger and acquisition activity -- already frenzied in 1997 -- is expected to pick up even more in the first quarter of the new year.
The first target of 1998 could be Norcen Energy Resources, which parent Noranda Inc. placed on the auction block last November as part of a plan to spin off its forestry and energy assets. The Calgary senior producer could fetch a whopping $2 billion, the largest sale in years.
But some analysts are calling for a whole raft production costs place more and more struggling firms under the gun.
"In this market, bigger is better," said Warren Holmes, managing director of First Energy. "If commodity prices drop, the smaller guy could get squeezed out because he doesn't have the necessary economies of scale."
With relatively few companies having deep enough pockets to finance bids for floundering firms, hostile bids should push out friendly deals as the takeover style of choice, Holmes added.
But the battle to watch will continue to be the ongoing scrap between Nova Corp. and the Alliance Pipeline project.
National Energy Board hearings into Alliance's $3.7 billion line from B.C. to Chicago could loosen Nova's monopolistic grip on gas transmission in the province and spell the final demise of the postage stamp toll system.
Nova has promised to fight tooth and nail at the hearings - scheduled to reconvene mid-month -- in a bid to maintain its 40-year monopoly on gas lines within Alberta.
The postage stamp system was dealt its first blow late last year when the Alberta Energy Utilities Board allowed Nova Gas Transmissions Ltd. to offer varied tolls for the first time in decades.
NGT granted the lower tolls to the PanCanadian Petroleum Ltd.-led group to convince it not to construct a competing Alberta project, the Palliser pipeline.
"It might be the most significant event for natural gas in the last 20 years," said Ian Doig, publisher of Doig's Digest.
"Changes to the toll system are definitely coming and Alliance could play a big part in that."
And with the ability to pump 1.3 billion bcf per day, Alliance could further impact North American gas prices.
"Whether Alliance is a go or not will have huge impacts on the industry," Molyneau said.
"If it is a go, it will force change on the industry like nothing before it."
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