ARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, FEBRUARY 13, 1998 (2)
TOP STORY
Tarragon, Unocal In $308M Exchange Deal
Ian McKinnon - The Financial Post
If the devil is in the details, some investors in Tarragon Oil & Gas Ltd. might think they were jabbed with a pitchfork in the $308-million deal with Unocal Canada Ltd. unveiled Friday.
Tarragon issued 21 million treasury shares valued at $9.90 and a $100-million subordinated debenture in exchange for Unocal's oil and gas assets in Alberta and British Columbia.
While some analysts praised the deal for diversifying Tarragon's asset base and adding properties with exploitation potential, Scott Inglis of FirstEnergy Capital Corp. said the low value put on Tarragon's equity could dismay investors who bought in at $16 a share in October.
Tarragon shares (TN/TSE) slipped 15› Friday to close at $9.80.
"I don't think people that owned the stock, up until today, would have thought that their net asset value had deteriorated so much with heavy oil prices," Inglis said.
Ed Chwyl, Tarragon's president, said the acquisition "balances our growth portfolio in conventional oil. It strengthens our growth portfolio in natural gas, and we already have in place a growth portfolio for heavy oil."
Unocal's properties had revenue of $77 million last year, and will contribute to Tarragon's cash flow and earnings, Chwyl said.
Capital spending for 1998 will now top $200 million, up from $140 million prior to the deal.
Unocal's properties in northwest Alberta were a prime attraction for Tarragon, Chwyl said. "It's been one [region] we've coveted, we've looked at, we've tried to get into on several other occasions but we were not able to."
The company expects merged daily production in 1998 to average 16,500 barrels of conventional oil, 8,000 barrels of heavy oil and 215 million cubic feet of gas.
While spending of $30 million to $35 million on the Edam heavy oil project in Saskatchewan has been delayed, Tarragon is not abandoning heavy oil, currently plagued by low prices.
Work is proceeding on the second phase of the South Bolney project in Saskatchewan, expected to lift output from 5,000 b/d to 14,000 b/d by April 1999.
Once the deal is completed, Unocal will own 27% of Tarragon's shares, which it will hold for at least two years. It will have three directors on Tarragon's board, which expands to 11.
Unocal's 9.1% interest in the proposed $3.7-billion Alliance pipeline, now under review by the National Energy Board, is not part of the agreement.
FEATURE STORY
Gas Producers Expect New Pipelines To Deliver Fat Returns
Sydney Sharpe, Calgary Herald
Alberta natural gas producers are dazzled by the prospect of moving more gas to the United States at much higher prices.
And the dream may become a reality this fall and next, as several pipeline projects prepare for deliveries to the vast consumer markets south of the border.
"It's going to be very positive for prices, because we won't have all this excess gas backed up in the supply basin," says J.C. Anderson, chief executive of Anderson Exploration Ltd.
The eastern U.S. in particular needs far more gas than it is now receiving, as a National Energy Board study revealed last year. While the eastern states could have consumed 19.5 trillion cubic feet in 1995, they were only able to get 15.6 trillion. Total U.S. needs were 22 trillion cubic feet.
This vast market potential was out of the reach of Canadian gas producers because there simply wasn't enough pipeline space to carry the fuel.
As a result, the industry was frustrated by the low prices that gas producers in Canada received compared to their American counterparts. They also yearned for new markets for their natural gas liquids (NGLs).
Frustration continued to mount over the lack of competition. Nova Corp. had a virtual pipeline monopoly in Alberta, and TransCanada PipeLines Ltd. continued that trend across to eastern Canada.
Add the perennial resentments over tolls charged to ship the gas, and soon the oilpatch became a cauldron of simmering hostility.
It all boiled into the Alliance Pipeline -- a project initially conceived by 22 gas producers.
The $3.7-billion Alliance line would carry 1.3 billion cubic feet daily (bcf/d) of natural gas and NGLs from northeast British Columbia to the hot Chicago hub by November 1999. The high-speed pipeline would be designed to expand to 2 bcf/d.
Today the Alliance consortium is the subject of an NEB regulatory hearing that promises to be one of the longest, costliest and most contentious on record. The traditional pipelines are fighting Alliance on grounds that it's not needed.
"Alliance should provide more pipeline capacity than producers have the ability to deliver," says Craig Langpap, an industry analyst with Peters & Co.
"In that situation, we will maybe see the end of the trapped gas and realize connected prices between Canada and the U.S."
Alliance is now primarily controlled by energy service and pipeline companies.
On Friday, Beau Canada Exploration Ltd. announced it has sold its interest in Fort Chicago Energy Partners L.P., which holds a major stake in Alliance. In the short time that Beau Canada held its position, the Calgary oil and gas producer made $9.5 million, after selling 5.3 million units in Fort Chicago for $40 million.
Other original Alliance producers that put their interest into Fort Chicago are expected to follow suit. Like many producers that have withdrawn their equity interest in Alliance, Beau Canada is solidly behind the project as a shipper.
"Most people are expecting Alliance will go ahead," said Rick DeWolf, senior vice-president of Ziff Energy Group. "But I think they will likely be delayed by a year. They're not going to get approval until this fall."
Alliance had planned to start putting steel in the ground this June and begin shipping gas by November 1999.
"It is clear that this hearing will not be a cakewalk for Alliance," states Brent Friedenberg, president of Brent Friedenberg Associates Ltd. "Alliance is stepping on some big toes, particularly those of NGTL (Nova Corp.) and TransCanada PipeLines."
Indeed, those toes will soon become a giant entity. Nova and TCPL have announced their massive merger, which should add fire to their expansion plans.
TransCanada is spearheading its own mega-plan to alleviate the trapped gas syndrome. The Viking Voyageur project is a vast maze of pipelines in Canada and the U.S. which would bring on 1.4 billion cubic feet of daily capacity that could be expanded to 2 bcf/d. The target date is the same as that of Alliance.
"It is scheduled for that timeframe, but realistically it will get delayed by a couple of years," added DeWolf.
TransCanada also has a 30 per cent stake in Northern Border Pipeline Co., which will add 700 million cubic feet daily (mmcf/d) of new capacity this fall. Called the Chicago project, Northern Border's expansion will be ready by November. Northern Border, which is majority-owned by U.S.-based Enron Corp. (70 per cent), currently moves 1.7 bcf/d of gas from Monchy, Sask., to Harper, Iowa, and on to the hub at Chicago.
Foothills Pipe Lines Ltd., which feeds western Canadian gas to Northern Border, is adding 700 mmcf/d of capacity to its eastern leg in Saskatchewan.
Interestingly, Foothills is equally owned by Nova and Westcoast Energy Inc. of Vancouver, which holds a 15 per cent stake in Alliance. Foothills vehemently and vocally opposes Alliance, and that doesn't sit too well with Westcoast. Nova, of course, doesn't want Alliance taking its Alberta market share.
TransCanada's chief executive George Watson has conceded that Alliance is likely to get built.
For this November, TCPL will add 400 million cubic feet per day of new capacity to its Canadian mainline.
Meanwhile, on the East Coast of Canada, Westcoast also has a 37.5-per-cent stake in Maritimes and Northeast Pipeline, which plans to come on stream by November 1999. It will carry 530 mmcf/d of Sable Island gas across Nova Scotia and New Brunswick down to the New England states.
Targeted for the same timeframe, the Vector Pipeline is an IPL Energy Inc. initiative which will ship one billion cubic feet of gas a day from Chicago to Dawn, Ont., near Sarnia. Vector could carry Alliance gas to eastern Canada, or move it on the Millenium pipeline project from Dawn to New York. Westcoast, IPL and TCPL have a stake in Millenium, which plans to ship 650 mmcf/d. For its part, IPL also has a 23- per-cent interest in Alliance.
By the dawn of the next millenium, an additional three billion cubic feet per day of new pipeline capacity will carry Canadian natural gas to U.S. markets, particularly those in the Midwest and Northeast.
In 1996 the Canadian oilpatch produced just under eight billion cubic feet daily, amounting to 5.6 trillion cubic feet for the year. This included exports to the U.S. of 2.8 tcf.
That's an increase of 32 per cent over the last five years, with Alberta carrying the bulk of that production at 84 per cent, and B.C. another 12 per cent.
The Western Canadian Sedimentary Basin is said to hold around 200 trillion cubic feet of conventional gas reserves remaining.
Analysts agree that filling the new pipeline capacity will be an initial challenge. The crucial factors are the economic climate and the number of gas wells the industry can drill.
The current low prices for oil have cut cash flow for producers, which could affect the amount of money they put into drilling for natural gas.
That in turn could produce a shortfall for current expansions, but one that is expected to be short lived.
"They are going to fill the pipes. It just depends on when Alliance actually comes on," says DeWolf.
If Alliance is delayed by a year, which seems likely, there should be enough gas to fill the pipeline.
"It is an issue but there will be gas. We just don't know the full consequence of all the pipes being built," noted DeWolf. "There are still a lot of unknowns and people are trying to understand it all."
One thing is certain: The producers are finally going to get what their gas is really worth.
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