MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, MARCH 23, 1998 (5)
RESEARCH NOTES
Oil Shares Rally Sharply, But Caution Warranted
NEW YORK, March 23 - Shares of major international oil companies rallied sharply on Monday on the back of a deal between Saudi Arabia, Venezuela and Mexico to cut oil production, but some analysts note the sector has already discounted higher prices and say caution is warranted.
''It is a case of 'been there, done that,''' said Deutsche Morgan Grenfell analyst Michael Young.
''The majors already look overvalued. They have moved up sharply relative to the market and have discounted 90 percent of the recovery in oil prices,'' he said.
The deal agreed over the weekend could, if implemented by the Organization of the Petroleum Exporting Countries and other major oil producers, cut 1.6-2.0 million barrels per day from anoversupplied market and spurred the benchmark May Brent crude oil blend to about $15 per barrel, up by $1.75 on the day and from $12.00 last week.
Light sweet crude futures for May delivery on the New York Mercantile Exchange (NYMEX) have risen by about the same amount Monday as Brent to $16.41 a barrel.
The S&P International Oil Index, which tracks the share performance of the world's major oil companies, rose 25.39 points, 3.10 percent, to 845.35 points by 1100 EST/1600 GMT after a series of analysts upgraded major oil shares to market weight from underweight.
However doubts remain over the size of any crude cuts and Schroder & Co analyst Michael Mayer said that he was ''very skeptical'' that total sustained cuts would be more than 1.3-1.5 million barrels per day.
It is unclear whether Norway, one of the largest non-OPEC producers will join the cuts.
And Iraq, which recently won the right to sharply increase exports under an oil for food deal with the United Nations, could end up pumping 2.2 million barrels per day (bpd) later this year, up from about 1.3 million bpd this month.
Although Mayer raised the major oils to ''market weight'' from ''underweight,'' he warned that a sharp runup in share prices may not be justified. He maintained his 1998 average spot West Texas Intermediate oil price at $16 a barrel, but added that guess ''may prove too low by about $1 a barrel.
''We would look to downgrade the group, and individual stocks, should they surge more than five to ten percent,'' Mayer said.
Young at Deutsche Morgan Grenfell remains underweight the major oils and said they are trading in excess of 25 times 1998 earnings and 23 times 1999 earnings.
As crude on the New York Mercantile Exchange opened at $17.00 per barrel from Friday's $14.61, Eugene Nowak, analyst at ABN AMRO Inc said he expects the shares of major oils to rise five to eight percent in the short term.
He raised the major oils to market weight from underweight and upgraded Texaco Inc (TX) and Atlantic Richfield (ARC), but is maintaining his average spot price for the West Texas Intermdiate blend at $17.00 for 1998.
Any rise in crude prices comes too late for the first quarter earnings, which are due at the end of April.
Nowak is forecasting a 40 percent decline in earnings for the major oils from a year ago due to the $6.75 per barrel decline in average crude prices to $16.00 per barrel.
McDonald Upgrades Oil Stocks
NEW YORK, March 23 - McDonald said on Monday it raised its rating on shares of various oil companies including Texaco Inc (TX) and Atlantic Richfield Co (ARC).
-- Texaco and Arco raised to hold from underweight.
-- Chevron Corp (CHV), Oryx Energy Co (ORX) and Santa Fe Energy Energy Resources Inc (SFR) to buy from hold.
-- Over weekend, Saudi Arabia, Venezuela and Mexico reach decision to cut oil production and seek cuts from other countries.
-- Analyst Jack Aydin said deal could give psychological lift to crude oil markets and industry in general.
-- Deal could result in establishment of a crude price floor at around $14 per barrel.
Merrill Upgrades Oil Drillers
NEW YORK, March 23 - Merrill Lynch said on Monday it raised its rating on shares of oil drilling companies including Global Marine Inc (GLM) and Diamond Offshore Drilling Inc (DO).
-- Global Marine raised to near-term accumulate from neutral and long-term buy from accumulate. Stock gains 1-3/4 to 26-1/8.
-- Diamond Offshore raised to near-term buy from accumulate while maintained as long-term buy. Stock up 2 to 49-3/16.
-- Transocean Offshore Inc (RIG) raised to near-term buy from accumulate while maintained as long-term buy. Stock up 2-14/16 to 52-1/16.
-- Santa Fe International Corp (SDC) raised to near-term buy from accumulate while kept as long-term buy. Stock gains 3-1/2 to 38-5/8.
-- Cooper Cameron Corp (RON) raised to near-term buy from accumulate while maintained as long-term buy. Stock up 2-10/16 to 64-7/16.
Gordon Capital
Oil and the TSE Oil & Gas Producers
Yesterday, oil advanced US$2 and the TSE Oil & Gas Producers Index advanced 6.4%. Our model for the TSE Oil & Gas Producers shows that stocks are undervalued based on the current US$16.51 oil price. We feel this is justified based on the dramatic one day rise in oil. The TSE Oil & Gas Producers Index is currently pricing in US$16 oil. Given the undervaluation of the TSE Oil & Gas Producers, we would not expect that a pullback in oil to the US$16 level would have a meaningful negative impact on shares.
Our technical support zone for oil is US$15.30-15.45. Major support is at US$14. We do not expect a pullback to the major support. Our upside Q3 target for oil is the US$18.50-19 resistance zone. We continue to recommend an overweighed position in oil shares
Goepel Shields & Partners Inc.
A God First Step - But No Panacea For Low Oil Prices
Over the weekend, the oil ministers of Saudi Arabia, Venezuela and Mexico agreed to cut their current oil production by 600,000 b/d, commencing April 1, 1998. Five other OPEC countries, including Iran, Kuwait, the United Arab Emirates, Libya and Algeria, have also committed to cut their production by an additional 520,000 b/d, to yield an overall production cut to date of 1,120,000 b/d commencing April 1, 1998. This group hopes to encourage other oil producers and exporters to cut their production as well, so that maybe an overall production cut of 2,000,000 b/d can be engineered.
World markets have responded favourably to this agreement with oil stocks staging a good recovery and oil prices doing the same. Light Sweet Crude on the NYMEX rallied US$2.89/bbl in early trading today to reach a high of US$17.50/bbl for the spot month (May) contract. Subsequent trading has seen this contract give up some of its gains. At the time of writing, this contract is now trading at US$16.30/bbl.
We view this agreement as being a good first step to promote the recovery in international oil prices, but, in itself, the proposed cuts are not sufficient to sustain any prolonged recovery. The current proposed cut of 1.12 million b/d is not sufficient to negate extremely large inventory gains during the second and third quarters of 1998, that will continue to perpetuate surplus conditions on world markets.
Even with production cuts of 1.1 million b/d, inventories will still build up by 2.0 million b/d during the second quarter and by 1.4 million b/d during the third quarter. This comes after what appears to have been a build of 1.1 million b/d during the first quarter and 0.5 million b/d during the fourth quarter. Accordingly, the world still remains with surplus oil supply. Much greater cuts in production are needed to negate this condition. Obviously the Saudis and the Venezuelans are trying to solicit the support of other producers to join them in the overall production cut. Will this happen? There could be further cuts by other OPEC countries, i.e., Nigeria, Indonesia, and Qatar. However, we doubt there will be any significant cuts from other oil producers. That being the case, we would expect oil prices to continue to be under pressure for the foreseeable future.
It is encouraging to see that the Saudis and the Venezuelans could sit down together and hammer out an agreement. Hopefully this new found goodwill between the two countries will lead to further harmony in the future, should further production cuts be adopted. The risk to the current agreement, as we see it, is that the Saudis and the others react negatively to a lack of support from other oil exporters, and that they revert back to protecting their market share by once again increasing production.
Gordon Capital
Renaissance Energy (RES-T: $29.50) REDUCE
Forecast Update
Following an interview with senior management this week, we have revised our production and financial forecast.
The company is currently completing its winter drilling program. During the Q1, the company will drill about 425 wells, about 67% oriented to gas. Oil production is currently 82,000 bbls/d, down from last year's average rate of 82,375 bbls/d. Natural gas output, currently at 455 mmcf/d, is slightly above last year's average of 420 mmcf/d.
Should oil prices continue to be soft this year, Renaissance will de-emphasize activity in this commodity, and allocate 67% of its capital budget of $600 million to gas. Should oil prices recover, the company does have 700 development oil locations identified and "ready to go".
We are forecasting average production levels of 82,000 bbls/d of crude oil and 460 mmcf/d of gas this year. This translates to a forecasted CFPS of $4.05 in 1998, down from a reported $4.33 in 1997. Our preliminary CFPS forecast for 1999 is $4.30. Our current stock price forecast is $28.00.
Probe Exploration (PRX-T: $5.00) STRONG BUY
Reserve Report Confirms Success At Leduc
Proven and risked probable reserves, measured at year-end 1997, were 37.0 mmboes vs. 16.7 mmboes in 1996 - well ahead of the 28 mmboes we had been forecasting.
Between July 31, 1997 and December 31, 1997, Probe increased the reserves attributed to the assets acquired at Leduc from 2 mmboes to 16.8 mmboes. Over the same period, production from these assets was increased from 1,900 boe/d to over 8,000 boe/d.
Currently, Probe's firm wide production is over 11,000 boe/d. Given the recent successes experienced year-to-date in the Wabamum, Nisku and Sparky formations, we estimate that Probe may already have added an incremental 5-10 mmboes of reserves.
Medium and heavy oil reserves represented less than 16% of Probe's overall reserve base, with light oil representing 38%, and natural gas and NGL's representing 46%.
Based on the new reserve report, our estimated NAVPS is now $4.00 up from $2.80.
Probe will release its year-end 1997 financial results in 2 - 3 weeks time. We reiterate our STRONG BUY recommendation on Probe with a 12-month stock price target of $8.00.
Goepel Shields & Partners Inc.
Ranger Oil (RGO, $8.70) BUY
Completion of Gas Well at Fort Liard
Ranger has completed drilling a successful gas well at its 50%-owned Fort Liard property which adds 200 bcf to the Company's gas reserves. The property is 30 miles from Westcoast Energy's transmission line and Ranger will construct a $5 million pipeline to join to this system. Production from Fort Liard is planned to come onstream in January 1999 at 20 mcf/d, however this level could be increased significantly with further work on the well. Also, the lower zone at Fort Liard is untested and it could add a substantial amount to reserves. This will add to our 1999 CFPS estimate we continues to rate Ranger shares as a Buy.
Richland Petroleum (RLP.A, $3.10)
1997 Results Announced
Richland announced 1997 fully-diluted CFPS results of $1.02 (versus $1.13 in 1996), a little lower than our estimate of $1.09. Our 1998 estimate is $1.01, using $17 WTI, and his target price for Richland shares is $3.85. we recommend investors Buy the stock in the $3 range and Sell at $4.
INTERNATIONAL
Kappa Energy Company Inc. has abandoned their South Ma'ber-1 exploratory well in Yemen. While oil shows were seen throughout the Qishn reservoir section, interpretation of electric logs run in the well showed the target reservoir sandstones to be primarily water bearing.
The two wells drilled by Kappa have confirmed the presence of a working hydrocarbon system, generating oil on the block with migration occurring up into the Qishn section. The drilling results will be integrated into the geological model developing new opportunities. Kappa has been in contact with other industry participants who share its view of the overall block prospectivity. Kappa will continue its efforts to capture value in the block by applying for an extension of the exploratory term beyond the May 28, 1998 expiry.
Nestemay Pursue Algeria Exploration
HELSINKI, March 24 - Finnish oil and energy group Neste is in talks to continue exploration drilling in Algeria, where it found oil and natural gas last year, business daily Taloussanomat reported on Tuesday. Neste was negotiating on the issue with Algerian state-run oil group Sonatrach, the paper said. Neste is exploring Algeria together with Gulf Canada Resources and Sonatrach, it said. The paper quoted Neste director Kalervo Makinen as saying that Neste may make investment decisions on the site -- 200 km west of the border with Tunesia -- after one or two more years of exploration. Makinen estimated that investments should amount to one billion markka ($180 million) if production was 50 million barrels a year.
SERVICE SECTOR
OTATCO Inc. announced its Offer to Purchase all of the issued and outstanding shares of three international oil services trading companies has been accepted by their shareholders. The companies are Premier Sea & Land Pte. Inc. of Singapore, Premier Sea & Land Limited of Hong Kong, and Westlink International Inc. of Calgary. Together these companies will give OTATCO access to oil and gas service markets in Southeast Asia, Europe, the Middle East, and the former SU countries.
For the past three years the Premier companies and Westlink have been responsible for all of OTATCO's international sales and market development activities. These efforts have helped OTATCO identify a strong need for its products and services internationally.
Total consideration offered for the three companies is six (6) million Class A Common Shares of OTATCO, $US 10,000 cash, and a percentage of profits from international business activities for the next five years. Completion of the acquisition is dependent upon completion of Share Sale and Purchase Agreements, regulatory approval, and the approval of OTATCO's Board of Directors. The effective date of the acquisitions will be January 1, 1998 with the closing to take place as soon as possible. Following this acquisition, OTATCO will have approximately 42 million shares outstanding.
Based in Singapore and Hong Kong, Premier Sea & Land Pte. Inc. and Premier Sea and Land Limited have established operations in Southeast Asia, primarily in the areas of oilfield equipment sales, servicing, rentals, trading and procurement for customers in Malaysia, Australia, Thailand, China, Vietnam, Myanmar and Indonesia. Assets and infrastructure include drilling and production tools, rental equipment, warehousing, and equipment servicing facilities.
In the 12-month period ending December 31, 1997 the Premier companies had gross sales of approximately $9 million and after-tax profits of about $580,000. Based on OTATCO's 1997 revenues, this transaction effectively doubles the size of the company.
Based in Calgary, Westlink International Inc. represents a variety of Canadian oilfield service and supply companies including OTATCO in Europe, the Middle East and the former SU countries. Through an established network of agents and contacts, Westlink has been helping Canadian companies successfully penetrate foreign markets for the past three years.
With the current slowdown in Western Canada caused by low oil prices, OTATCO has received strong interest from other Canadian service and supply companies in using OTATCO's network to expand into the international arena.
When OTATCO was created in 1994, its name was shortened from Oilfield
Technology and Trading Company to OTATCO. The intent was to acquire a suite of leading-edge production technologies and services, and expand into markets outside of Canada through international trading activities.
These acquisitions will allow OTATCO to grow in 1998 despite reduced domestic spending and activity caused by current low oil prices and move closer to its long-term objective of being a world leader in the areas of Production Management and oil and gas well enhancement.
PIPELINES
Northern Border Pipeline Company announced that it has selected five contractors for the construction of the pipeline segments of The Chicago Project, which is scheduled for a November 1998 in service.
The Chicago Project, an $839 million expansion and extension of the Northern Border pipeline system, involves construction of 390 miles of 36-and 30-inch diameter pipe, extending the system to Chicago and the addition of 303,500 horsepower of compression. The Project, fully subscribed for long- term firm service, will bring an additional 700 million cubic feet per day (MMcf/d) of Canadian natural gas into
United States markets.
Construction has been divided into five segments or spreads. The contractors and spread locations are:
-- Spread 2 Tama/Marshall County Line, Iowa to Ventura, Iowa: Associated Pipe Line Contractors, Inc.
-- Spread 3 Harper, Iowa to Tama/Marshall County Line, Iowa: Gregory & Cook, Inc.
-- Spread 4 Harper, Iowa to west side of Mississippi River: Willbros Energy Services, Inc.
-- Spread 5 Township Line Road La Salle County, Illinois to east side of Mississippi River: U.S. Pipelines, Inc.
-- Spread 6 36-inch pipeline terminus in Will County, Illinois to Township Line Road, La Salle, Illinois as well as 30-inch diameter pipeline 18 miles north to Manhattan Meter Station North and 30-inch diameter pipeline 3 miles south to Manhattan Meter Station South: Sheehan Pipeline Construction.
''We are poised to begin pipeline construction in April. Additionally we have completed and placed into service one new compressor station, are in the process of commissioning a second new compressor station, completing construction on a third and have commenced the retrofit of one existing turbine compressor unit. We are on target for our November 1998 in service date,'' said Larry L. DeRoin, Chairman of the
Management Committee of Northern Border Pipeline.
Northern Border has also awarded contracts for the construction of three compressor stations on the existing 42-inch diameter Northern Border Pipeline system. A joint venture of A & S Development and Construction and Murphy Brothers Construction has been released to begin construction of Compressor Station No. 1 in Valley County, Montana and Compressor Station No. 3 in Roosevelt County, Montana. Bluewater Constructors, Inc. has been awarded the contract for construction of Compressor Station No. 5 in Dunn County, North Dakota and began work at the site on March 16.
Northern Border Pipeline Company is a general partnership which owns and operates a 969-mile interstate pipeline that transports about 20 percent of all Canadian gas imported into the United States. In 1997, the Northern Border Pipeline system delivered an average of 1,770 MMcf/d. Northern Border Partners, L.P. (NYSE: NBP) owns a 70 percent general partner interest in Northern Border Pipeline. The remaining 30 percent interest in Northern Border Pipeline is owned by subsidiaries of TransCanada PipeLines Limited.
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