MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, JANUARY 21, 1998 (3)
TOP STORY
Opportunities For Well Service Players
The Financial Post
Servicing oil and gas wells is not as glamorous as punching down new gushers, but the segment provides a steady source of income and there is substantial room for growth as private companies still own a big chunk of the business.
Each year energy companies drill thousands of new wells in Canada. The names of the leading drilling contractors, like Precision Drilling Corp. (PD/TSE) and Ensign Resource Service Group Inc. (ESI/TSE), are well known to investors.
Less understood is the well servicing market.
After a drilling rig finishes its work with the bit, a service rig is used to prepare the hole for production.
Oil wells, in particular, also need to be maintained every few years as old equipment is replaced. Service rigs are used to "work over" a problem producer to boost volume.
In some cases, the rigs are used to re-enter old vertical wells and to extend them horizontally, again with a goal to raise production. Service rigs are also called in at the end of a hole's life when the well needs to be abandoned.
With the number of wells climbing by the thousands each year, plus demand flowing from existing wells, the long-term prospects for the well service sector is good.
"There is a tremendous ongoing demand for service rigs even if drilling stopped tomorrow," says Carl Hoyt, analyst with Goepel Shields & Partners Inc. in Vancouver.
Some listed drillers, often through subsidiaries with different names, compete with more than 40 private firms for the service work.
Hoyt views the fundamentals of service rig players as positive, despite being bearish on the prospects for the drilling segment.
The major risks include prolonged low oil and gas prices that could depress activity, says Scott Lamacraft, analyst with Sprott Securities Ltd. in Toronto.
The presence of small firms with old equipment which can afford to undercut rivals' prices is another problem.
Most service rigs fall into two categories - singles that handle one segment of nine-metre pipe and doubles that can handle two stands at a time. Singles cost about $800,000 to build and a new double can be worth up to $1.5 million.
Rates for the units run at about $350 an hour for a single and slightly higher for a double.
At the end of 1997, private owners controlled 375 service rigs in Canada, compared with 389 owned by publicly traded companies. The latter have 51% of the market, according to data from the Canadian Association of Oilwell Drilling Contractors, an industry group.
The picture for contractors drilling new wells is markedly different. Public entities own almost 75% of the available fleet, a recent CAODC survey shows.
With lower capital investment and overheads, smaller service firms were able to survive the downturns of the mid-1980s and early '90s that killed numerous independent drillers, analysts and contractors say.
Ensign and Bonus Resource Services Corp. (BOU/TSE) each carry "buy" recommendations from Lamacraft, with 12-month share price targets of $35 and $10, respectively.
Ensign shares have a 52-week trading range of $57 to $23 and closed yesterday up 80› at $28.80.
Bonus shares have traded in a range of $7.75 to $3.60 in the past year and closed yesterday up 5› at $4.50.
Goepel's Hoyt particularly likes Bonus and has a 12-month target price of $7 on the stock. Other firms with exposure to the sector that Hoyt rates as "buys" include Canadian Crude Separators Inc. (CCR/ASE) (target price $7 in 12 months) and Petro Well Energy Services Inc. (PWS/TSE) ($1.40 in 12 months).
Canadian Crude, which has a 52-week range of $6 to $1.90, closed yesterday up 15› at $4.50.
Petro Well ($2.10-95›) closed yesterday down 12› at $1.05.
Canadian well service players are underpriced compared with their American counterparts, says Tammy Fournier, analyst with Newcrest Capital Inc.
She says many Canadian firms are trading at price-earnings ratios of less than 10 times their forward earnings, compared with a comparable average¬ of 18 for U.S. firms.
Fournier says the P/Es for the Canadian firms could double over the next year. "We believe the fundamentals are much more attractive than the fundamentals of the drilling industry," she says.
Bonus is one of Newcrest's top stock picks. The firm, which focuses solely on service wells, is an aggressive acquisitor. It made eight purchases in the past 18 months for $104 million, raising its fleet to 141 service rigs - the largest in Canada.
The buying binge by public companies could continue, Lamacraft says, because the large number of private operators means there are consolidation opportunities.
"There is some good upside [in the sector] because there are valued added acquisitions out there that can be made at a discount to replacement value," he says.
With $46 million in the bank from a financing last summer, Bonus believes current market uncertainty plus succession or exit strategies by aging independent operators are opening new doors.
"We're looking forward to this shakeup," says Bonus president Tom Alford. "We think it opens a large number of opportunities."
He thinks the prospects for service firms are good as about 110,000 wells are now in production, compared with 40,000 in the early 1980s. During the same period the number of service rigs has climbed to about 750 from 550.
Glenn Dagenais, president of Ensign's two well servicing firms, says the service business is geographically focused and based on relationships, factors that can favor small private firms.
However, the table is tilted in the direction of public companies by the desire of producers for new technology, stricter safety and insurance regulations, big capital investments required to maintain and refurbish equipment and the ability to supply a consistent level of service across a wide area.
Small firms active in one area can hold down rental rates but a recognition by producers of the real costs to replace aging equipment helps offsets this pressure, Dagenais says.
He foresees more buyouts of small independents, extending a pattern evident in the past few years.
"A lot depends on the 'mom and pop' contractors and what their exit strategies are and their expectations," he says.
The consolidation trend will continue because there is a natural fit between the drilling and service divisions, Dagenais says.
However, Rance Fisher, owner of the largest private Canadian contractor CentAlta Well Services Inc., disagrees. The firm has 125 rigs field ready and another 20 being built.
Fisher says different operating procedures and philosophies make the marriage between drilling and service divisions a rocky one.
While lower commodity prices may turn down the heat, a backlog of holes needing to be abandoned plus new wells in 1998 will keep the service industry from taking a cold bath.
"We're still confident in our abilities and in the future of the industry," Alford says.
FEATURE STORY
Imperial Profit Boosted By Gains In Asset Sales
The Financial Post
Imperial Oil Ltd. reported yesterday an 8% increase in earnings in 1997, with much of the gain coming from asset sales in the fourth quarter.
Earnings were a record, rising for the sixth consecutive year, but the percentage increase trailed improvements posted earlier this week by Petro-Canada and Suncor Energy Inc.
All three of Imperial's divisions - natural resources, petroleum products and chemicals - experienced higher earnings for the year.
Annual profit was $847 million ($5.50 a share) on revenue of $11.12 billion, up from $786 million ($4.47) on revenue of $10.5 billion in 1996.
The earnings were in line with expectations, said Eleanor Barker, an analyst with MacDougall, MacDougall & MacTier Inc. in Toronto.
After posting total returns (stock appreciation and dividends) of 45% in 1997, the gain should range between 5% and 10% this year, she said.
"There's a lot of life left in this old doll, especially if you look out at the next five or 10 years."
Cash flow from operations dropped to $987 million from $1.74 billion in 1996. A tax refund of $637 million boosted 1996 cash flow, while $223 million was deducted from last year's total due to income tax on refund interest.
Fourth-quarter earnings rose to $272 million ($1.81) from $198 million ($1.24) in 1996. Quarterly profit last year included $127 million from selling oil and gas properties, plus Imperial's interest in a chemical technology venture.
Revenue for the final three months advanced 6% to $3.05 billion from $2.89 billion in 1996. Fourth-quarter cash flow fell to $206 million from $453 million in 1996. Imperial's results were boosted by increased oil production and stronger gas prices.
Imperial proposed yesterday a split of common shares on a three-for-one basis. The move is subject to shareholder and regulatory approval.
FEATURE STORY
MORE ON IMPERIAL OIL
Imperial Oil Profits Up In 1997
Canadian Press
After a sixth straight year of record profits at Imperial Oil Ltd., Canada's largest integrated oil company may be headed for the end of its winning streak.
Imperial earned $847 million or $5.50 a share in 1997, compared with $786 million or $4.47 a share in 1996, the company said today.
Net profits in the fourth quarter were $272 million at the Toronto based company, which operates thousands of Esso gasoline stations across Canada. That compares with $198 million in the 1996 period.
But the strong showing by oil and gas producers in recent years could soon be headed south as plunging commodity prices - one of the most visible impacts of the Asian currency crisis - take hold, warned Imperial president Bob Peterson.
"Nineteen ninety-seven was a very good year for Imperial Oil and its shareholders," Peterson said in a statement.
"However, commodity prices have weakened substantially at the start of 1998, suggesting a challenging year ahead."
The faltering price of crude in the fourth quarter has carved a hefty slice of the bottom lines for more than one of Canada's big oil producers.
Petro-Canada's earnings were sharply lower in the last three months of the year, although the Calgary company still produced record profits of $306 million for 1997.
The former federal Crown corporation attributed its record earnings to strong performances across its businesses, from conventional and offshore oil production to refining and gasoline marketing.
Imperial also bought back 9.6 million of its shares for $694 million in 1997, reducing the number outstanding by six per cent. Imperial's board of directors has also approved a proposal to split the company's common shares three-for-one.
Earnings from natural resources were $466 million in 1997, up from $333 million the previous year.
The increase was due mainly to gains of $143 million on the sale of oil and gas properties and increased production at Cold Lake, Alta., offset in part by lower oil prices - particularly for heavy oil - and by decreased production of conventional oil.
Net profits from petroleum products were $297 million in 1997, compared with $146 million in 1996, largely the result of higher industry margins and increased sales.
The strong earnings from both Imperial and Petro-Canada continue the trend of robust annual results from Canada's major integrated producers - the four big publicly traded companies that produce crude oil, refine it and sell gasoline through large station networks.
Calgary-based Suncor Energy, which operates an oil sands plant in northern Alberta and owns the Sunoco stations in Ontario, said Monday it earned $223 million in profits last year, a 19 per cent increase.
The fourth major producer, Shell Canada Ltd., will report its results next week.
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