MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, JANUARY 27, 1998 (7)
ARTICLE FROM MOTLEY FOOL
Tuesday, January 27, 1998
Nabors Industries
(AMEX: NBR)
Price (1/26/98): $24 5/16
HOW DID IT FIND TROUBLE?
How does a company that has been growing earnings at a greater than 100% year-over-year clip have its stock price cut in half? Welcome to the world of cyclical, commodity-based investments. While oil drilling contractor Nabors Industries continues to put up impressive numbers, the future have been clouded by declining oil and natural gas prices.
Nabors' business depends on oil exploration and production companies continuing to pump oil. With the price of oil declining, there is less profit in searching for more oil. The increasing oil prices that helped moved oil services stocks up sharply through the first part of 1997 have come backdown, and oil services stocks have declined as well.
Investors' fears that oil supplies are ahead of demand has meant trouble for Nabors Industries.
BUSINESS DESCRIPTION
Nabors Industries is the largest land drilling contractor in the world. It operates 386 land-based rigs and 37 offshore rigs in all major oil producing areas worldwide. In addition, the company provides ancillary services in oilfield management, engineering, transportation, and construction. The company also manufactures, sells, and leases top drivers and oilfield instrumentation.
Nabors has grown through the acquisition of smaller drilling companies and a program of fleet upgrades. It leases its rigs on a daywork basis. Dayrates have stayed at lofty levels up to this point, which accounts for the stellar earnings performance of Nabors.
FINANCIAL FACTS
Income Statement
12-month sales: $1115 million
12-month income: $136 million
12-month EPS: $1.23
Profit Margin: 12.2%
Market Cap: $2756.8 million
Balance Sheet*
Cash: $3.9 million
Current Assets: $305.8 million
Current Liabilities: $235 million
Long-term Debt: $295.5 million
(*As of Sept. 30, 1997)
Ratios
Price-to-earnings: 19.8
Price-to-sales: 2.5
HOW COULD YOU HAVE SEEN IT COMING?
At the peak, oil services stocks looked solid. It was the #1 ranked industry sector for relative strength in Investor's Business Daily, "buy" recommendations were flying out of brokerage houses, and Value Line rankings were #1 and #2 for the entire industry. Bearish voices were pretty quiet. However, over on the oil and gas industry message board on America Online there were some negative voices. The link between oil prices and oil service companies is well known, and the drop in the price of oil would have been expected to move the stocks down.
That said, there are legitimate reasons to believe that some investors have overreacted to the drop in prices. Whatever the case, the message for investors is that when stock prices are linked to volatile commodities such as oil, expect a bumpy ride.
WHERE TO FROM HERE?
In last week's earnings report Nabors fell short of expectations by $0.02 a share. The company also discussed a decline in the number of rigs in use in the continental U.S. Even so, the company did report that dayrates are stable and that gross profit margins on rigs in service are expanding. The management expressed concern over the effects of the drop in oil prices and natural gas prices. Schlumberger (NYSE: SLB) was equally cautious in its recent earnings report.
The future for Nabors and other oil service stocks rests on the supply/demand relationship for oil. While there are government reports showing that oil supplies are increasing, there are other voices. In last week's Barron's, oil guru Matt Simmons is quoted as saying that the statistics on oil supply are wrong and that there is a shortage of oil. He predicts sharply higher oil prices ahead.
So, it comes down to who you believe. Any investor in this sector should be ready for a wild ride. There is informed and useful opinion available on the Oil and Gas Industry message board. Before "buying the dip" in Nabors or any other oil services stock, an evening reading that folder would be well worth an investor's time.
Kerm sez go here boards.fool.com
PIPELINES
Higher oil production in Western Canada and strong natural gas demand from Ontario consumers bolstered IPL ENRGY INC.'s 1997 profit to $217.3 million ($3.15 a share) from $180.3 million ($2.90) last year, the Calgary-based company said yesterday.
Revenue for the year was $2.52 billion, up from $2.46 billion in 1996.
But earnings slipped in the fourth quarter, ended Dec. 31. IPL showed a loss of $5.2 million (13›), compared with a loss of $3.5 million (10›) during the same period in 1996. Revenue for the quarter was $346 million, up from $327.4 million a year ago.
The quarter is traditionally a loss period because of the seasonality of natural gas consumption. It includes the 12-month results of Consumers' Gas Co. Ltd. on a quarter-lag basis.
IPL shares (IPL/TSE) closed yesterday at $65.75, up $1.25.
The company operates the world's longest oil pipeline system and owns Consumers', Canada's largest natural gas distribution company. Consumers' has 1.4 million residential, commercial and industrial customers in Ontario, Quebec and upper New York state.
It also owns a 21%-interest in the proposed Alliance natural gas pipeline, which would transport natural gas from Western Canada to Chicago starting in the fall of 1999 if approved by the National Energy Board. A decision is expected this spring.
Both IPL's core units contributed to last year's higher earnings.
The pipeline unit benefitted from unprecedented demand for transportation because of higher oil production in Western Canada, the company said.
The distribution arm, which includes Consumers' Gas, cashed in on the strong Ontario economy.
Consumers' signed up 55,000 customers last year -- more than offsetting the effect of the weather, which was 5% warmer than in 1996.
The company refused to comment on a major industry shakeup announced Monday -- the proposed merger of competitors Nova Corp. and TransCanada PipeLines Ltd.
NOVA CORP. results were affected by an $85-million writedown for Pan-Alberta Gas Ltd., the gas marketer put up for sale in December, pushed down Nova Corp.'s earnings for 1997 to $362 million (78› a share) from $431 million (91›) in 1996.
The company, which announced plans to merge with TransCanada PipeLines Ltd. on Monday, said yesterday it took the writedown after a review of Pan-Alberta revealed foreign exchange trading losses incurred late in the year.
Without the writedown, Nova would have earned a profit of $447 million for the year ended Dec. 31, down from $463 million in 1996.
Revenue was $4.84 billion, up from $4.69 billion.
For the fourth quarter, net income was $3 million, down from $115 million in the year-ago period, primarily because of the writedown. Revenue was $1.2 billion, up from $1.14 billion.
"At the end of the day, I don't think [the writedown] is a big issue," said Toronto-based analyst Kaan Oran of First Marathon Securities Ltd. He expected earnings of 95› a share before the writedown, compared with 96› reported by the company.
"Everybody is focused on the excitement around the merger," he said.
Nova and TransCanada are expected to conclude a merger by the end of the second quarter that will form one of North America's largest energy services companies.
When it is finalized, they will jointly spin off Nova's petrochemical unit as a freestanding, publicly traded company.
"Nova's solid operating results in 1997, including steady performance improvements in our energy services business, support this transaction," said vice-chairman Ted Newall, who is meeting investors this week along with TCPL chief executive George Watson.
"The significantly improved cost structure and the abundance of growth opportunities in our chemicals business positions Nova Chemicals well as it emerges into the public markets."
Poor chemical prices and the unplanned extended shutdown of an ethylene plant depressed earnings for chemicals, although cost reductions and new facilities are expected to improve profitability by next year.
Nova president Jeff Lipton, who will be leading the new chemical company, told analysts in a conference call he's aiming for a net income of $200 million from the chemical business in 1999.
Oran said Nova Chemicals, like Nova's virtual pipeline monopoly in Alberta, is attractive and is ripe for being targeted for some form of combination.
"Those assets are valuable. They are the lowest-cost producer in North America. You will have other people wanting to come in before anybody else does," he said.
Earnings from Nova's pipeline system rose to $200 million in 1997, up from $181 million, because of the energy sector's strong demand for natural gas transportation.
Nova shares (NVA/TSE) closed up 45› yesterday at $15.50.
POTENTIAL FURTHER PIPELINE PROPOSALS NOW A POSSIBILITY
Mergers involving the Canadian pipeline companies not part of the blockbuster TransCanada PipeLines Ltd -NOVA Corp deal are viewed as highly possible by some analysts, who say the two will have to bulk up to compete.
Westcoast Energy Inc , which operates British Columbia's gas pipeline network, and IPL Energy Inc , owner of the main crude oil pipeline to the U.S. Midwest and eastern Canada, would both be more than doubled in asset value and revenues by a merged TransCanada-NOVA.
Westcoast and IPL, like TransCanada, are participants in several proposed and operating U.S. pipelines. The two also have large retail natural gas distribution operations.
Analysts said IPL and Westcoast could join forces or team up with big U.S. firms anxious to boost Canadian presence.
"Whether Westcoast and IPL join forces remains to be seen," said Scotia Capital Markets analyst Sam Kanes. "But now its gone from remote to impossible to remote to possible -- everything's on the table now."
Pipeline and gas services stocks have become hot properties after the merger announcement. The Toronto Stock Exchange's pipeline subindex, which inlcudes the stocks of TransCanada, Westcoastand IPL, was up 117.64 points, or 1.74 percent, on Tuesday to 6,875.19.
Kanes said he believed the two firms would have accelerate growth to compete with the merged TransCanada-NOVA in the energy services business, but said their Ontario gas distribution companies, which already dominate the province's gas utility business, could present regulatory problems.
Westcoast's asset value is about C$10 billion and IPL's is C$6.7 billion. The value of TransCanada's and NOVA's combined assets, including NOVA Chemicals, was pegged at C$21 billion.
Another possibility is either company joining forces with U.S. firms such as Duke Energy Corp and Coastal Corp in a joint venture or merger.
All are partners in the proposed Canada-to-Chicago Alliance Pipeline project. Westcoast, IPL and Duke are involved in the Sable gas production and pipeline project off Canada's east coast.Westcoast and Coastal merged their energy marketing operations to form Engage Energy in 1996.
"It's certainly not outrageous to say that we're following it with interest and making our own assessment on what effect this is going to have on the business side of Westcoast," company Vice-President Paul Clark said.
Clark said Westcoast was always examing potential joint ventures and mergers, but would not say whether one was currently in the works.
IPL spokesman Frank Ternan said his firm's stated strategy was to "seek leadership in both energy services and transportation," but also declined comment on whether the TransCanada-NOVA deal would intensify its search for mergers or joint ventures.
IPL owns Consumers' Gas and Westcoast owns Union Gas Ltd, recently merged with Centra Gas Ontario Inc. Together they make up the bulk of Ontario's gas distribution industry.
The threat to competition there was a key reason Goepel Shields & Partners analyst Robert Hastings deemed odds of a Westcoast-IPL union as slim. Hastings also argued that size wasn't the only factor in mergers.
"Size is important in terms of being able to attract interest from international players, but operating within Canada, they're all big enough," Hastings said. "It's not just size in terms of dollars, but it's location and what you bring to the table."
MISC.
Prices And Sales Volume Put Methanex On The Rebound
Petrochemicals giant Methanex Corp. said yesterday it had rebounded from last year's losses to post a fourth quarter profit of US$36.5 million.
The Vancouver-based company, which supplies about 38% of the world's methanol, attributed its results to stronger methanol prices and higher sales volumes.
The US20›-a-share profit in the three months ended Dec. 31, marked a sharp rebound from a year-ago loss of US$56.5 million (US30›).
Quarterly revenue rose to US$321.9 million from US$264.3 million a year earlier, when results included a US$93.4 million after-tax writedown on some methanol plants.
For the year, net profit was US$202 million (US$1.10) on revenue of US$1.3 billion, marking the second best results in the company's history.
In 1996, Methanex had a net loss of US$7.9 million (US4›) on revenue of US$945.7 million.
"We exceeded our sales forecasts and pricing remained firm, defying all industry projections,'' said chief executive Pierre Choquette.
He said Methanex, with 175.6 million shares outstanding and US$492 million in cash, is in a strong financial position after buying back 14 million of its shares last year.
Yesterday, Methanex shares (MX/TSE) rose 30› to $11.70.
The company is 27%-owned by Nova Corp., which this week unveiled a $14-billion plan to merge with another Calgary company, TransCanada Pipelines Ltd.
But Methanex spokesman Michael MacDonald said the merger is likely to have no immediate impact on Methanex.
Meanwhile, the company received an average of US$187 a metric ton for its methanol output in 1997, up from US$149 in 1996.
The current spot price for methanol is US$180 a metric ton.
Sales of Methanex-produced products also rose 10% to five million metric tons in 1997 from 4.6 million in 1996.
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