Another positive article in the Financial Post:
Note the $16.50 target for Stelco - any comments?
Friday, January 30, 1998
Pipelines bonus for steel makers
Projects coming onstream will help sector recover Asian losses
By IAN McKINNON
The Financial Post
Steel manufacturers serving the Canadian energy sector are optimistic for 1998, with big pipeline projects proceeding on schedule and a focus on gas drilling offsetting weak oil prices and increased imports from Asia.
Several analysts are bullish on the sector, with at least one firm's stock predicted to double in value within the next 18 months.
Gazing into their crystal balls, officials from some of the major players, including IPSCO Inc., Prudential Steel Ltd. and Stelco
Inc., were upbeat for the remaining 11 months of this year.
At first glance, the rosy view may seem misguided, but analysts say the fundamentals are good and steel makers are positioned
to recover from the beating they took last fall when fears about Asia's problems hammered their stock.
The apparent negatives include low oil prices cutting drilling from the record levels achieved in 1997. Even if drilling falls 20% from last year's peak of 16,500 wells, some 13,750 wells will be completed in 1998 - more than 50% above the 10-year average of 9,000.
A key statistic that is sometimes overlooked is the number of gas well completions rather than the total number of wells, says Tammy Fournier, analyst with Newcrest Capital Inc.
Gas wells usually require more extensive gathering systems than oil, boosting demand for pipe. If Alliance Energy Ltd. obtains regulatory approval for its $3.7-billion pipeline project across northeastern B.C. down to Chicago, gas should start flowing in late 1999. This,
combined with this year's major expansion by Northern Border Pipeline Co., means producers will have to crank up gas well drilling to meet this new capacity.
"Even if we see a flat to slightly down year for drilling [compared with 1997], there's going to be a switch to gas drilling. In that case, this will offset any decline," Fournier says.
Another possible blot on steel makers' pages is the cull of competing pipeline projects. For instance, Alberta Energy Co. Ltd. and Husky Oil Ltd. recently suspended construction of a $400-million oil pipeline in northeastern Alberta.
While not all pipeline projects will go ahead, steel demand is robust in North America because of expanding industrial and construction markets, says Anna Sorbo, analyst with CIBC Wood Gundy Inc.
"I think we have another prolonged steel cycle for two or three years as long as interest rates remain low," she says.
Sorbo has "strong buy" recommendations for both Stelco (STEa/TSE) and IPSCO (IPS/TSE). She has a 12-month target price of $16.50 for Stelco and $85 for IPSCO.
Both manufacturers are cutting costs, improving efficiency through technology and boosting quality of production, she says.
Stelco participates in the energy industry through two divisions: Camrose Pipe Co., a joint venture between Stelco and Oregon Steel Mills, which makes pipeline with diameters from two inches to 42 inches; and Welland Pipe Ltd., which makes pipeline ranging in size from 20 inches to 60 inches.
The Welland plant is expected to run at full utilization for about 50 weeks this year, up from 38 weeks in 1997. It appears this year is shaping up to be Welland's best in the past five.
"After at least two years of weak demand for large-diameter pipe in North America, you're seeing a number of projects move off the drawing board," says general manager Dave Hunter.
Stelco stock ended yesterday at $11.50, down 20›. The stock has a 52-week trading range of '$13.35 to $7.20.
Prudential and IPSCO account for about 70% of the steel used in drilling and producing oil and gas wells.
Softer demand from the oil and gas industry may be offset by strong demand for plate steel, used for heavy equipment, major construction and storage tanks, says MarioDalla-Vicenza, senior vice-president of corporate affairs at IPSCO.
"Steel demand is still very, very high in North America," he says.
IPSCO ended yesterday at $55.95, down 5›. Its 52-week high is $68; its low $36.
The dynamics for Prudential (PTS/TSE) are slightly different from those of IPSCO and Stelco because the firm buys steel and does not make it, Newcrest's Fournier says.
New capacity coming onstream from mini-mills and expansions could cause steel prices to decline and improve Prudential's margins, she says.
Fournier rates Prudential a "buy", with an expectation that the stock will double in 18 months.
Prudential closed yesterday at $13.75, up 45›. In the past 52 weeks it has ranged from a high of $26.63 to a low of $7.33.
The firm split its stock in the past year.
Regarding the Asian economic crisis, Sorbo says the fear of Asian steel imports flooding the North American market has been
exaggerated.
"Lower demand in Asia is not necessarily going to result in [Asian] steel being shipped over here," she says.
Sorbo says Asian steel has limited appeal in North America because of its poor quality. The high percentage of inputs priced in
US$s also reduced the advantage of buying products in hopes of taking advantage of declining Asian currencies.
In addition, European buyers are paying higher prices for Asian steel than are North Americans, which means Asian exports are being diverted to the European market.
Regards,
Mike |
