MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, MARCH 3, 1998 (4)
MARKET ACTIVITY
U.S. stocks surged to a fifth straight record, crude oil prices fell and interest rates inched higher on Tuesday as OPEC struggled for footing and concern about the Asian economic crisis faded. OPEC appeared to be floundering in its bid to find a formula that might attract the group's big producers to emergency talks designed to prop up sagging world oil markets.
OPEC delegates said they were concerned that without a clear agenda, talks would fail and only cause more damage to stricken oil prices.
Oil-related stocks were also a highlight despite weakness in crude prices, helping lift both the Dow and S&P 500. Dow components Chevron (CHV) rose 1 3/16 to 83 3/4 and Exxon (XON) climbed 2/4 to 64 1/4, while the AMEX Oil Index (XOI) closed up 6.19 points to 469.74.
With merger speculation continuing after last week's blockbuster announcement between Halliburton (HAL) and Dresser Industries (DI), helped send shares of oil drilling and equipment stocks soaring, with the Philadelphia Oil Service Index up 4.36 points to 111.67.
Among individual names, stellar gains were registered by Cooper Cameron (RON), which jumped 4 3/16 to 60 15/16, BS Services (BJS) up 3 3/4 to 39 1/2, and Smith International (SII), which rose 3 1/16 to 58 1/4.
MAJOR INDEXES
The Toronto Stock Exchange 300 Composite gained 0.3% or 24.83 to 7137.93. In comparison, the Oil & Gas Composite Index fell 0.1% or 8.58 to 6550.41. The sub-components were mixed. The Integrated Oils gained 0.1% or 5.73 to 9031.33. The Oil & Gas Producers Index fell 0.3% or 19.96 to 5777.82 and the Oil & Gas Services gained 0.9% or 24.51 to 2768.24.
INDEX CHARTS
TSE 300.......... canoe.quote.com
O&G Composite. chart.canada-stockwatch.com
Integrated Oil's.... chart.canada-stockwatch.com
O&G Producers.. chart.canada-stockwatch.com
O&G Services..... chart.canada-stockwatch.com
NEW PHLX OIL SERVICE SECTOR
bigcharts.com.
lonestar.texas.net
HOT STOCKS
Unusual high volume trading activity occurred yesterday in Cypress Energy (CYZ.A/TSE), unchanged at $5.10 on 714,200 shares and Badger Daylighting (BAD/TSE), down $0.20 to $6.00.
MOST ACTIVES
Reflecting weakness in the producer grup, Poco Petroleums (POC/TSE) fell $0.20 to $14.65 on 2,021,500 shares, PanCanadian Petroleum (PCP/TSE) fell $0.15 on 1,281,900 shares. Petro Canada was one of the few companies reversing the trend, gaining $0.30 to $26.70 on 687,100 shares.
The service group per formed strongly with Dreco Energy Services leading the way, up $1.85 to $42.85.
Excellent summaries of most actives covering, all four of the Canadian Stock Exchanges can be found at canoe.ca or quote.yahoo.com
EXCHANGE INFO
The common shares of Questor Technology Inc. were posted for trading on the Alberta Stock Exchange at the opening of business Wednesday. Questor Technology Inc. is in the business of developing environmental technologies for use primarily by the oil and natural gas industry.
BUY - HOLD - SELL
Acquisition Opportunities Could Lure Investors Back To Royalty Trusts
Growing potential for property acquisitions at more reasonable rates in an equity market constricted by low oil and stock prices could be enough to lure investors back to royalty and energy trusts as the year progresses -- but it may take awhile.
Low oil prices are difficult for all forms of energy-related investments, said Brian Ector, who tracks the royalty trust sector for CIBC Wood Gundy Inc.
He noted the returns from royalty trusts have started to come down with stock prices for regular issuers. "You are going to see ... and you are seeing lower cash distributions."
Royalty trusts rely on commodity prices and interest rates, pointed out Gord Currie, an oil and gas analyst with Canaccord Capital Corporation. "Prices are down and interest rates have been going up. That's a bad combination for royalty trusts."
"Right now we're seeing the lows in the royalty trust market," said John Driscoll, president of NCE Resources Group. The NCE group is manager of the NCE Petrofund Royalty Trust.
The oil price and the natural inclination of investors to turn away from a slumping sector is driving down energy stocks and royalty trust unit values, "when there may be a buying opportunity," Driscoll said.
Commodity prices should be stronger going into the fourth quarter and interest rates will remain relatively low, he said. "We're anticipating $18 (U.S.) per bbl."
"If I were an investor, I'd be looking at acquiring some positions, which we (NCE's various investment funds) are doing," Driscoll said. And "the potential is there for availability of properties," CIBC Wood Gundy's Ector noted.
"For those with strong cash flow, there should be opportunities to purchase properties at prices much more reasonable than a year ago," he said.
Noting that trust funds are partly to blame for driving up prices (for properties), Canaccord's Currie said there may be less new capital available to all issuers and trusts, but savings on purchases could result.
Conventional or reflexive royalty trusts -- such as those operated under corporate entities like NCE, Enerplus Resources Corporation and PrimeWest Energy Trust -- grow mostly by acquisition.
Investors gain from cash distributions and royalty trust acquisitions, which can lead to more unit issues, trading opportunities and value.
"There are going to be opportunities (for acquisitions)," said Driscoll. "Right now, we're not being aggressive (in searching out potential purchases) ... but the time to start looking at it hard will be in the third quarter," he said.
Based on the perception that commodity and stock prices will be languishing until the fourth quarter this year, Driscoll said traditional oil and gas companies will be looking for funds through property dispositions as equity issue financings become more difficult to accomplish.
"I think you're going to see companies become more negotiable on prices," Driscoll said.
"I believe that most non-trust companies are having a tough time," said Eric Tremblay, vice-president of corporate development at Enerplus. He anticipates first-quarter results for most equity stocks could be down significantly from last year. "It's going to be tough to go back to equity markets."
Tremblay said property is going to open up as companies strive to bring in cash and keep debt down. This scrambling might see prices, restricting property acquisitions for a good part of last year, drop to more reasonable levels.
The Enerplus Group includes EnerMark Income Fund and Enerplus Resources Fund and also has the Westrock Energy Income Fund I and Westrock Energy Income Fund II operating under the Westrock Energy Fund Inc. banner.
During 1997, Enerplus focused its acquisition and development activities on gas properties adding 24.8 bcf of proven and 4.2 bcf of probable net reserves. This represented 77% of net 1997 reserve additions.
"I think it's going to be a good year for acquisitions," said Ron Ambrozy, vice-president of business development for PrimeWest.
His optimism is fueled by the commodity corrections that have occurred and "the good amount of product out there right now," he said. While the "last three years have been exceptionally strong for vendors," Ambrozy indicated acquisition prices may fall in this year's environment.
Schroder Cuts Oil Price, EPS View
Schroder & Co analyst Michael Mayer has cut his 1998 average oil price forecast for the benchmark West Texas Intermediate blend to $16 per barrel from $18 per barrel.
Mayer also has reduced his earnings forecasts for oil majors to nine percent below the 1998 consensus and 19 percent below the actual 1997 earnings.
-- Mayer said in a research report that OPEC must cut production by one million barrels per day otherwise oil prices would fall below $15.00 per barrel.
-- He said that shares of oil majors were still discounting $18.40 per barrel and is continuing to recommend an underweight position as they do not yet reflect lower crude prices.
-- His current weighting for oil majors is 80 percent of market weight and he expects underperformance for the sector of 5 to 10 percent relative to the wider market.
-- Mayer added that the outlook for oil prices in 1999 and even 2000 may not be better as oil supply will remain strong without OPEC cutbacks.
Here are the revised forecasted 1998 EPS numbers;
Amoco $4.10 from $4.50, ARCO $3.80 from $4.35, Chevron $3.60 from $3.80, Exxon $2.75 from $2.85, Marathon $1.90 from $2.05, Mobil $3.65 from $3.90, Phillips $2.80 from $3.10, Royal Dutch $2.15 from $2.35, Shell $1.65 from $1.80, Texaco $2.70 from $3.00 and Unocal $1.80 from $2.05.
Gordon Capital
Petro-Canada
(PCA-T:$26.40) BUY
Company Bucks The Industry Trend and Raises Capital Program
Petro-Canada has increased its capital budget for this year by $55 million to a total of $1,190 million. The increase is allocated to its international division and will be spent drilling three additional wells in Algeria. The company has recently announced two discoveries on its Tinrhert Block in Algeria. The first discovery was the HIM-1 well which flowed at a cumulative average rate of 55 mmcf per day of gas and 4,650 barrels of condensate. The second discovery was the TMLS-1 well which flowed at a cumulative rate of 117 mmcf per day of gas and 5,280 barrels per day of condensate. The three new wells that Petro-Canada plans to drill will not include any delineation work on these discoveries, rather they will focus on new exploratory prospects. While the company does not have any firm development plans for the existing discoveries, the Tinrhert block is located close to significant pipeline infra-structure and it is expected that the discoveries could be connected fairly easily and quickly. The large capital program that has been announced will be financed from cash flow and the proceeds of asset sales, including the announced proposed sale of the company's propane assets. We are maintain our BUY recommendation on Petro-Canada with a target price of $30 per share.
Goepel Shields
Westcoast Energy Inc. (W-T, $36.00)
Stock Fully Valued
Westcoast reported earnings before non-recurring items and weather effects of $0.76 vs $0.64 in Q4 and $2.04 vs $1.94, about in line with expectations. Reported earnings were $0.72 vs $0.54 in Q4 and $2.06 vs $1.96, the differences due to the impact of weather and a $0.15 provision taken in Q4/96 for pipeline restructuring. Looking forward, we estimate normalized earnings of $2.15 and $2.35 in 1998 and 1999. However, warm weather has likely hurt heating loads at Westcoast's distribution operations and has reduced gas prices, which affects the incentive return at Westcoast's gas processing operations. Consequently, the $2.15 earnings base in 1998 may be negatively affected by possibly $0.10 or more. However, a return to normal weather and gas prices later in the year could see a significant recovery. Normally, investors ignore weather-induced earnings swings, as they tend to balance out over time.
Stock Outlook
The shares of Westcoast have appreciated significantly over the last year. The stock is up 57% from the end of 1996, up 25% since the end of Q3/97 and up 9% from the end of 1997. The rise has been fueled both by lower interest rates and a recognition that the Company has transformed itself from a B.C. pipeline company into a significant North America energy player with international interests. Longer term, new projects should increase earnings by one third over the next few years, complementing internal growth and the recent entry into retail service operations. Therefore, it appears the Company can achieve its target of $3.00 in earnings by 2001.
The expected 10% annual earnings growth, combined with a current 3.5% dividend yield should equate to a 13.5% total annual rate of return for investors. While attractive longer term, note that earnings growth will be slower in 1998 as most projects only begin in 1999 or 2000. In addition, after such a rapid run-up in price, the stock may consolidate near term. Consequently, we now rate the stock a HOLD.
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