MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, JANUARY 22, 1998 (7)
ENERGY TRUSTS
Oil and gas royalty trusts will have to work harder this year to hang onto the trust of investors after delivering unimpressive results in 1997.
As a group, conventional oil and gas trusts had a total return, including capital appreciation and income, of -5% for the year - better than oil and gas producing companies, but still a negative return.
By comparison, the oil and gas producers' index declined more than 10% in 1997.
The exceptions were the two oilsands royalty trusts: Canadian Oil Sands Investments Inc., managed by PanCanadian Petroleum Ltd., and Athabasca Oil Sands Investments Inc., managed by Gulf Canada Resources Ltd.
Athabasca returned 31% in 1997 (22% capital appreciation), and Canadian Oil Sands returned 39% (32% capital appreciation).
"These are the two highest quality oil and gas trusts out there," says oil and gas analyst Brian Ector, who follows the investments for CIBC Wood Gundy Inc. in Calgary. As in the broader market, "there was a real flight to quality," he says.
Among the conventional oil and gas producers, Pengrowth Energy Trust (PGFun/TSE) was the top performer. Appreciation was aided by a large acquisition last summer of producing properties from Imperial Oil Ltd., which led to a total 1997 return of 18%.
The overall lacklustre performance of oil and gas royalty trusts was caused by several adverse factors.
"What you have in the last six months of 1997 is the worst of all worlds - lower commodity prices and higher interest rates, and those are the two things that determine their value," says oil and gas analyst Gord Currie, of Canaccord Capital Corp. in Calgary.
Weaker prices for both oil and gas in the latter part of the year caused an investor exodus from the entire sector. Interest rates were trending upward, making these income-producing instruments less attractive.
Oil and gas trusts emerged from virtual obscurity in 1996 to bankroll an increasing share of the energy sector's capital requirements.
Research recently compiled by Calgary-based oil and gas specialist dealer Peters & Co. Ltd. shows trusts raised $3.68 billion in equity in 1997, up from $2.44 billion in 1996 and $363 million in 1995.
Some industry analysts expect oil and gas trusts to fizzle in popularity this year as the energy sector continues to struggle around the bottom of the cycle.
"Lower commodity prices mean lower cash flow," says Ector. "We are expecting lower distributions for this year."
Even the oilsands trusts are expected to reduce distributions, as they will be funding from cash flow the four stage, $6-billion expansion of the Syncrude Canada Ltd. operation in northern Alberta.
Ector has downgraded a number of recommendations to reflect a US$18 West Texas Intermediate scenario for oil prices.
"The lower commodity price environment is reflected in today's unit prices, so we see limited downside from current levels, but we don't see a huge capital appreciation potential under the lower commodity prices," he says.
"But in a quiet market with weaker commodity prices, you still get that 13% to 15% cash yield, even in a lower pricing environment. That's the advantage over some of the exploration and production companies today."
Ector rates the Shiningbank Energy Income Fund (SHNun/TSE) as a "strong buy".
The trust's production is 70% natural gas, and the rest is conventional light oil. Natural gas prices are expected to rise later this year as export pipeline capacity expands.
Royalty trusts can turn to acquisition to boost capital appreciation. Those with low debt levels or cash on hand are expected to benefit from a favorable environment for property acquisitions.
"First-quarter results across the oilpatch will be disappointing," says Eric Tremblay, vice-president of corporate development at Enerplus Group.
"We foresee there is a good chance stock prices might go down further still, with first-quarter results coming, and we might see a flood of new properties coming into the market."
With $1.8 billion in assets, the company runs the EnerMark Income Fund (EIFun/TSE), the Enerplus Resources Fund (ERFg/TSE) and Westrock Energy Income Fund I (WREun/TSE) and Westrock Energy Income Fund II
(WRFun/TSE). Tremblay said it could buy more than $1 billion in assets this year.
Another big spender is likely to be Calgary-based NCE Income Resources Corp., which is poised to spend $300 to $500 million for new producing assets, companies and stocks in the Canadian oil and gas sector.
President John Driscoll said his company is already targeting more than six oil and gas producers for acquisition for its NCE Energy Trust (NCAun/ME), which buys companies for conversion into trusts.
Currie agrees that the acquisition market this year could allow well capitalized trusts to buy new assets at reasonable prices. But the other side of the equation is whether they will find investors to back them up. Oil and gas royalty trusts are owned mostly by retail investors.
"The trust units were pretty valuable last year, but they have become less valuable this year. So, to the extent they have to raise money, it becomes more expensive for them to do so," Currie says. "There will be opportunities to buy assets. The question is, where will all the money come from?"
Investors have become more discriminating, says Nancy Lever, senior vice-president of ARC Financial Corp., which manages the $300 million ARC Energy Trust (AETun/TSE).
"There are an awful lot of competing products in the market now," she says.
Driscoll is convinced investors will continue to see value in the instruments because, even at today's lowerunit prices, the income is attractive.
"What's turning investors off is the price of [oil and gas]. But if you forget for a moment the price of commodities and look at your rates of return, and then look at the supply and demand fundamentals, it's got to tell you now's the time to be out there accumulating these oil and gas royalty trusts," Driscoll says.
PIPELINES
Big Implications Seen From Canada Pipeline merger
Players in Canada's natural gas industry scrambled on Thursday to sort out the potentially huge impacts from a possible merger of pipeline companies NOVA Corp and TransCanada PipeLines Ltd. NOVA and TransCanada confirmed Thursday that they were in talks regarding a merger that could rank as the biggest ever involving two Canadian companies.
Players in Canada's natural gas industry scrambled on Thursday to sort out the potentially huge impacts from a possible merger of pipeline companies NOVA Corp and TransCanada PipeLines Ltd .
NOVA and TransCanada confirmed Thursday that they were in talks regarding a merger that could rank as the biggest ever involving two Canadian companies.
"Alberta's going to be a very different place by the end of this year than it is now. That's the only certainty," said David Manning, president of the Canadian Association of Petroleum Producers (CAPP), the industry's main lobby group.
"Our interests are the competitiveness of (Canada's gas producing) basin and access to market, and CAPP will look at whatever happens in the context of those two elements."
NOVA operates Alberta's huge pipeline network, while TransCanada takes the lion's share of that gas and moves it on its pipelines to eastern Canadian and U.S. markets. A merger of the two would affect hundreds of gas producing companies, other pipeline firms, regulators, the Alberta and Canadian governments and any other entity connected to the growing and increasingly combative industry.
One analyst calculated that a TransCanada bid for NOVA could total C$7.3 billion, topping the C$5.2 billion takeover of Dome Petroleum by Amoco Corp unit Amoco Canada Petroleum Co Ltd in 1988.
The announcement of merger talks came in the midst of a hearing into the proposed C$3.7 billion Canada-Chicago Alliance Pipeline project, which threatens to take gas volumes off TransCanada's and NOVA's pipeline systems. Both companies are arguing vehemently at the hearing against Alliance being approved.
Executives with major gas producers expressed concern over the possibility of two firms with near-monopolies in their territories banding together to create one dominant force.
"One of the things that would disturb producers would be if the two major opponents of Alliance come together and form an even stronger dominant position and then continue to try and kill the only significant new competition they would have," Alberta Energy Co Ltd Chief Executive Gwyn Morgan said.
"If they were going to announce any kind of attempt to try to do a merger, they better also announce that they are going to change their position radically on the Alliance matter."
Said Alliance Vice-President Jack Crawford: "It's difficult to conceive of them having this kind of a merger approved by the Competition Bureau in the absence of any competition."
NOVA has faced several potential competitors aiming to build pipelines through its Alberta turf, and Alliance -- originally devised by several producers -- has come the closest to going ahead.
Producer dissatisfaction with a lack of export gas pipeline capacity from Alberta as well as NOVA's regulated one-size-fits-all toll structure have been large and contentious issues for years.
A spokesman for Alberta Energy Minister Steve West said the province, which has always regulated NOVA through its Energy and Utilities Board, would certainly be keenly interested in the deal.
Meanwhile, a positive aspect of a merger would be the ability to cut overhead and operating costs, and likely tolls charged to producers, under one corporate umbrella, said Paul Mortensen, director of natural gas supply with the Canadian Energy Research Institute.
MORE
Nova Confirms TCPL Talks
Analysts believe merger is a good fit, with little duplication
Rampant speculation forced Nova Corp. and TransCanada PipeLines Ltd. yesterday to confirm reports they're in merger discussions.
Analysts said the deal could further lift Nova's stock to the $17 to $18.50 range if the deal is finalized.
Nova shares (NVA/TSE) closed at $14.95, up 20› on volume of 4.3 million shares. TransCanada's shares (TRP/TSE) dipped $1.10 to $30.90 on volume of 1.3 million.
The two companies issued statements before the markets opened that discussions for a possible merger are under way.
"Rumors about these discussions have been circulating for some time," said Nova spokeswoman Lisa Neiles.
"Under these circumstances, it was necessary for us to acknowledge that discussions with TransCanada were taking place, so that we provided the same information to all investors in a timely fashion."
She said issuing the statement was "a stock exchange requirement and one that had to take precedence over other considerations."
Rumors of the merger began circulating in Calgary before Christmas. One source called the talks "the worst-kept secret in the city."
Analysts contacted yesterday said they believe an announcement of the merger is imminent.
It would create a pipeline giant with a market capitalization of more than $14 billion.
The combined companies would also form the largest natural gas pipeline network in North America, with assets of about $22 billion.
"Having announced they are in merger discussions, on Wall Street we would say they are more than a little pregnant," said New York based analyst David Silver, a vice-president of Credit Suisse First Boston Corp.
Calgary-based TCPL is expected to value Nova stock at $17 to $18.50, analysts said yesterday.
Silver is increasing his short-term target price for TCPL shares to $17 from $15.50.
ScotiaMcLeod Inc. analyst Sam Kanes has a takeover value of $18.30 a share.
That compares with $15 if Nova proceeds with current plans to split into two units - petrochemicals and pipelines - a move announced in November.
"Anything over $16 for Nova is a very generous bid," said Tom Kehoe, a principal with Peters & Co. Ltd. in Calgary.
Analysts believe TCPL will first buy the whole company on a pooling of interests basis because of accounting advantages, then sell off the chemical assets.
Potential buyers include Union Carbide Corp., Dow Chemical Co., DuPont Co., Mobil Corp., Amoco Corp. and Exxon Corp.
Union Carbide is rumored to be the most likely suitor because it already has several joint ventures with Nova.
A union of the two pipeline companies would be a win-win situation for both, analysts said.
"It's a very good fit. There is very little duplication. There could be a lot of cost-savers," said Robert Hastings of Goepel Shields & Partners Inc. in Vancouver.
Nova runs a virtual natural gas transmission monopoly in Alberta, while TCPL has the largest natural gas transmission system in Canada outside Alberta. Nova supplies 90% of TCPL's natural gas at the Alberta border.
TCPL is said to want to complete the transaction before the planned split to beat out competitors with deeper pockets.
Analysts and competitors say the big winner would be the proposed Alliance natural gas pipeline.
"Ironically, if it has an impact it's probably positive," said Jack Crawford, Alliance's vice-president for public and government affairs.
"It's my belief that to get approval for this merger by the Alberta government and Federal Competition Bureau, it would be helpful for the company to show they have competition."
The National Energy Board is now holding hearings into whether to approve Alliance, a $3.7-billion pipeline that would carry natural gas from British Columbia to Chicago, competing with the Nova and TCPL systems.
Fort Chicago Climbs On NOVA-TCPL News
Shares in Fort Chicago Energy Partners LP, the public vehicle representing a stake in the proposed Alliance Pipeline, climbed on Thursday to their highest value ever after NOVA Corp and TransCanada Pipelines Ltd confirmed merger talks.
Fort Chicago, which has a 27 percent interest in the C$3.7 billion Canada-Chicago gas pipeline, closed up 0.60 to 7.60 in Toronto with more than 116,000 units changing hands.
Scotia Capital Markets analyst Sam Kanes said a NOVA-TCPL merger would increase the chances of Alliance being approved by regulators, who would be wary of the deal creating a gas pipeline monopoly in Canada.
The Alliance project is the subject of a hearing before Canada's National Energy Board.
NOVA and TransCanada, whose pipeline dominance in Canada is threatened by Alliance, are arguing against the new project.
Fort Chicago was created out of Chauvco Resources Ltd's stake in Alliance when Chauvco was acquired by Pioneer Natural Resources Co . It has since absorbed the Alliance interests of several other gas producers.
The Alliance Pipeline would ship 1.3 billion cubic feet of Canadian natural gas a day to Chicago from northeast British Columbia starting in 1999.
Alliance partners include IPL Energy Inc with 21.4 percent, Fort Chicago with 26 percent, Coastal Corp with 10.4 percent, Westcoast Energy Inc with 10.5 percent, Duke Energy Corp with 9.8 percent, Unocal Corp with 9.1 percent, Gulf Canada Resources Ltd with 8 percent and MAPCO Inc with 4.8 percent.
END
|
