MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 19, 1998 (4)
FEATURE STORY
This Year's Magic Word Is Gas
Tuesday, January 20, 1998
By Mathew Ingram The Globe & Mail
By now, the message has sunk in: Oil is no longer where it's at, at least not in the short term. Last year, everyone was drilling for oil and paying billions for oil companies, especially heavy oil. Now, the price of crude is in the dumpster, bumping around lows not seen since mid-1996, and the price of heavy oil is even lower. Forget about oil for awhile, is the current refrain -- think natural gas. If you don't have some already, go get some.
At first glance, this doesn't seem like such great advice. After all, the price of gas is in the doldrums too. The spot price at the AECO (Alberta Energy Company) trading hub in Alberta was $1.41 per gigajoule or about $1.48 per thousand cubic feet (mcf) last Friday -- down from a price of $3 per mcf last January. That hardly seems like the kind of juicy opportunity that would convince oil and gas producers to switch their focus from oil to natural gas.
And yet, that is just what many producers have been doing. Companies such as Poco Petroleums are making deals like the one they announced two weeks ago -- the purchase of Shell's gas properties in the Monkman Pass area of British Columbia -- or the strategic alliance Gulf Canada signed recently with Merit Energy to explore for gas in central Alberta. Even Petro-Canada says it is looking to gas for future growth rather than oil.
The current low prices for natural gas are a result of a number of factors. As with most commodities, the key is the balance of supply and demand -- not to be confused with the perception of supply and demand, which can be a totally different thing. As it stands now, mild temperatures in both Canada and the United States in the fall resulted in an excess of gas, and mild weather for the early part of the winter has exacerbated the problem.
This has helped fuel the idea that demand will continue to fall because of El Nino, the global weather system that periodically produces milder winter temperatures throughout most of North America. The combination of those factors has driven the price of gas in Alberta down almost 50 per cent from last year to last week's $1.50 per mcf, and down more than 40 per cent to $2.17 (U.S.) per mcf last week in the United States.
Despite low prices, however, there are a couple of reasons why Canadian natural resource companies are more attracted to natural gas at this point, analysts say. One is the expectation that an increase in pipeline capacity from Western Canada to the United States will get Canadian producers a higher price even if U.S. prices stay low -- in other words, that the price difference between Western Canadian gas and U.S. gas will shrink.
At the moment, the Alberta price is about $1.50 (Canadian) lower than the U.S. price on the New York Mercantile Exchange. That isn't as large a gap as in the past, but it is still substantial -- and the reason is too much gas in Alberta and not enough pipeline capacity to the United States. That price gap is the driving force behind pipeline expansion, including the Alliance proposal, which is currently before the National Energy Board.
Most industry-watchers expect Alliance to be approved, despite the best efforts of existing players such as Nova and TransCanada. But even before Alliance starts moving the 1.3 billion cubic feet a day it plans to haul, there are expansions of existing pipelines such as the Foothills/Northern Border system that will take an extra 700 million cubic feet of gas a day to the United States. That is expected to come on line later this year, and the Alberta gas price should see a boost as a result.
Over the longer term, a number of developments tend to favour increasing demand for natural gas -- a demand that would far outstrip Western Canada's current supply capabilities. The first is a trend toward natural gas as a home energy source, replacing heating oil; this trend is mirrored by a similar move toward natural gas as a source of power for industrial users. So-called co-generation gas and electricity plants are becoming the fuel source of choice for manufacturing, mining and other industries.
In addition, natural gas-powered generation is expected to replace current nuclear power facilities -- particularly in Ontario, where Ontario Hydro is closing down half its nuclear plants. Even in British Columbia, where the province benefits from relatively low-cost hydroelectric power, industry analysts agree that if power generation were deregulated, the most prominent source of new power would be natural gas generation.
Those are just some of the reasons why the oil patch is looking to gas, and why market watchers figure companies that are big in gas are the ones to pay attention to. Among the major ones are Amoco Petroleum, PanCanadian (a subsidiary of Canadian Pacific), Petrocan, Shell, Talisman Energy, Alberta Energy, Norcen Energy, Anderson Exploration and Canadian Natural Resources. Smaller gas-leveraged companies include Crestar Energy, Poco Petroleums, Canadian Hunter and Rio Alto Explorations.
MOST ACTIVES
Paragon Petroleum, Petro-Canada, Poco Petroleums, Canadian Natural Resources, Northrock Resources, Newport Petroleum and Blue Range Resources were among the top 50 most active traded issues on the TSE.
Net gainers included Norcen Energy Resources $1.35 to $15.45, Talisman Energy $1.30 to $40.00, Imperial Oil $1.00 to $85.80, Petro-Canada $0.85 to $25.00, Shell Canada A $0.80 to $24.10, Canadian Natural Resources $0.75 to $28.75, Canadian Occidental Petroleum $0.75 to $29.25 and PanCanadian Petroleum $0.75 to $20.50.
Percentage gainers included Gentry Resources 12.1% to $1.20, Canadex Resources 12.0% to $1.40, Westfort Energy 11.2% to $1.08, Genesis Exploration 10.2% to $5.95, Norcen Energy Resources 9.6% to $15.45, Cypress Energy 9.2% to $4.15, Courage Energy 8.8% to $1.74, Black Rock Ventures 7.1% to $1.35, Magin Energy 7.1% to $2.25, International Petroleum 7.1% to $6.80 and Bow Valley Energy 6.9% to $1.55.
On the downside, Seven Seas Petroleum fell $0.55 to $17.75, Berkley Petroleum $0.35 to 13.80 and Renaissance Energy $0.35 to $28.15.
Percentage losers included First Calgary Petroleums 7.3% to $1.02, Black Sea Energy 7.1% to $1.30, Rider Resources 5.7% to $4.10, Highridge Exploration 5.3% to $3.55, International Rochester Energy 5.3% to $1.80 and Profco Resources 4.8% to $1.00.
There were no new 52-week highs or lows.
In review of oil & gas service companies, as well as those with close ties to the industry, Ensign Resource Services was among the top 50 most active traded issues on the TSE.
Net gainers included Precision Drilling $2.00 to $28.50, Shaw Industries $2.00 to $42.25, IPSCO $1.50 to $51.50, Ensign Resource Services $1.20 to $27.20, Prudential Steel $1.10 to $13.10 and NQL Drilling $1.00 to $10.75.
Percentage gainers included Kelman Technologiees 10.9% to $1.83, NQL Drilling 10.3% to $10.75, Prudential Steel 9.2% to $13.10 and Precision Drilling 7.5% to $28.50.
There were no net losers or percentage losers.
No new 52-week highs and Bowridge Resources reached a new 52-week low.
New 52-week lows were obtained by
Over on the Alberta Stock Exchange, Red Sea Oil, Colt Energy, Calahoo Petroleum, Lodestar Energy, Cirque Eneergy, Bearcat Exploration, Deena Energy, Esker Resources, First Star Energy, Commonwealth Energy, AltaQuest Energy, Panoil Resources and Belfast Petroleum were among the top 30 most active traded issues.
Net gainers included Red Sea Oil $0.95 to $3.80, Canadian Crude Separators $0.70 to $4.70, Sterling Resources $0.25 to $1.35, Brandon Energy $0.15 to $0.65, Calahoo Petroleum $0.12 to $0.87, PanOil Resources $0.12 to $0.42, AltaQuest Energy $0.10 to $2.50, Highpoint Energy $0.10 to $0.40, Justinian Exploration $0.10 to $0.50, Meota Resources $0.10 to $1.00, Stellarton Energy $0.10 to $4.60, Talon Petroleum $0.10 to $0.85 and Global Link Int'l $0.09 to $0.90.
Percentage gainers included PanOil Resources 40.0% to $0.42, High Point Energy 33.3% to $0.40, Red Sea Oil 33.3% to $3.80, Brandon Energy 30.0% to $0.65, Justinian Exploration 25.0% to $0.50, Sterling Resources 22.7% to $1.35, Canadian Crude Separators 17.5% to $4.70, High Plains Energy 16.7% to $0.35, Pheasantback Resources 16.7% to $0.35, Calahoo Petroleum 16.0% to $0.87, Sawtooth International 14.3% to $0.40, Talon Petroleum 1'3.3% to $0.85, Brittany Energy 12.5% to $0.45 and Meota Resources 11.1% to $1.00.
On the downside, Proprietary Energy fell $0.15 to $2.30, Prairie Pacific Energy $0.15 to $0.43, Underbalanced Drilling $0.15 to $2.75, Avid Oil & Gas $0.10 to $1.15, Clayoquot Resources $0.10 to $1.05, Del Mar Energy $0.10 to $0.40, Hyduke Capital Resources $0.10 to $2.10, Syner-Seismic Tech $0.10 to $1.90, Total Energy Service $0.10 to $2.30 and Monterey Energy $0.09 to $0.21.
Percentage losers included Monterey Resources 30.0% to $0.21, Prairie Pacific Energy 25.9% to $0.43, Green Maple Energy 20.7% to $0.23, Del Mar Energy 20.0% to $0.40, Cherryhill Resources 14.3% to $0.30 and Quest Energy 14.3% to 0.30.
Companies reaching new 52-week highs included Lodestar Energy and Pheasantback Resources.
New 52-week lows were obtained by Enterprise Developement anf Fox Energy.
An excellent summary of most actives covering all four of the Canadian Stock Exchanges can be found at quote.yahoo.com
RESEARCH / ANALYST COMMENTS
Newport Petroleum Corporation
(NPP-T:$4.90) SELL (Changed from a Hold)
Newport's exploration efforts failed to deliver significant growth for the second year in a row. We expect finding and development costs to exceed $10.00/boe again in 1997 --in 1996 proven F+D costs were $10.84/boe.
We are lowering our 1998 production forecasts from over 25,000 boe/d to 22,000 boe/d - comprised of 7,000 bbls/d of liquids and 150 mmcf/d of gas. As a result our fully diluted CFPS estimate falls from $1.15 to $0.85. This is flat with our 1997 CFPS forecast.
With approximately $105 million of debt at year-end, a 1998 capital expenditure budget of $145 million and forecast cash flow of $67 million, we estimate 1998 year-end debt to be 2.7X cash flow. On a positive note, Newport has 8% of a very successful well at Cutbank and 50% of a discovery at Caroline. Unfortunately this Caroline well is extremely sour and there is currently no processing capacity available.
We see very little upside in Newport over the next six months. We are reducing our recommendation from a Hold to a SELL with a six-month target of $4.00. David Stenason-Alistair Toward
Suncor Energy
(SU-T:$45.50) HOLD - 1997 Results Slightly Ahead of Expectations
Suncor reported financial results for 1997 slightly ahead of our expectations. The company generated earnings of $2.04 per share, up 19% from the $1.71 per share recorded in 1996 and ahead of our estimate of $2.00 per share.
Cash flow from operation increases by 17% to $5.24 per share versus $4.49 per share in 1996 and $0.14 per share above our estimate of $5.10 per share.
The major highlight of the year was the successful expansion of the oil sands plant. Despite a one-month planned production shut-down, the company achieved a record production rate of 79,400 barrels per day.
Synthetic oil production is expected to average approximately 92,500 barrels per day this year and increase to 105,000 barrels per day in 1999.
We are maintaining our HOLD recommendation on Suncor. Duncan
Mathieson
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