CANADIAN OILPATCH / HOT SECTOR
CALGARY - The proof of how well oil companies are doing is not only in how much money they're making, but how much they're leaving on the table.
For Alberta Energy Co., it is $15 million so far this year. At PanCanadian Petroleum Ltd., the 1996 bonus from high oil prices has translated into $88 million of missed opportunity.
That's net income, money that someone else is making after agreeing to buy large volumes of their crude oil at fixed prices.
Pre-selling future oil and gas sales provides companies with an insured price, which is valuable when they have heavy capital spending on the horizon. The growth companies, such as PanCanadian and Alberta Energy, are in that mode.
Alberta Energy, which will double capital spending in 1997 to $600 million, sold about half its oil production at a price of $23.60 a barrel this year. The current Edmonton price is about $34 a barrel.
On the plus side, about half of Alberta Energy's production benefited from the recent unexpected price surges that have poured millions into Calgary's oil towers and the provincial government's coffers.
Crude oil prices are expected to stay strong through the spring. On Friday, the New York Mercantile Exchange sold contracts for oil to be delivered in April at $22.93 US a barrel.
As Calgary oil companies near the end of 1996, the rise in crude prices will generate healthy profits.
ARC Financial Corp. of Calgary is projecting $10.9 billion of collective cash flow, a 26 per cent increase over 1995.
"It is now readily apparent that 1996 will turn into a banner year for the upstream Canadian oil and gas industry, reflecting a combination of high commodity prices, solid production gains and relatively flat cost structures," ARC says in a fall industry report.
Not all the gain is from oil prices. Production this year is forecast to be 13 per cent higher than 1995.
On the companies it covers, ARC expects an average return on capital employed of more than nine per cent, similar to the record profitability of 1993 and 1994.
"More importantly, the group will earn returns in excess of the sector's average cost of capital, which we currently estimate to be about seven per cent."
For companies in the top quartile, they should achieve an average return on capital employed of 14 per cent, ARC said.
While PanCanadian may have not captured all the windfall of oil that's climbed above $25 US a barrel, it has used hedging to win in the currency exchange game, buying $2 billion US over the next five years at 71 cents. With the Canadian dollar trading at 74 cents US, PanCanadian is winning the currency game.
Oil prices and hedging are long-term strategies.
"You have to take that hedging program and judge it over five years," said Rick Jeffrey, a spokesman for PanCanadian, which has earned 10.2 per cent return on average invested capital this year.
In the longer term, no analysts are expecting oil prices to stay at the $25 US level. They closed Friday on NYMEX at $24.86 a barrel, up 35 cents.
But while it's there, they are not complaining.
"We're enjoying the day," says Gwyn Morgan, president and chief executive officer at Alberta Energy.
On the natural gas side of Canada's petroleum industry, there are a series of promising conditions that bode well for the rest of the year, says Peter Linder of CIBC Wood Gundy.
"We're getting into the heating season in the United States with storage levels at 10-year lows. Demand is strong. The export pipelines to the United States are all full. All the incremental demand is going to have to come from the U.S."
That will take U.S. gas prices above $3 US per thousand cubic feet (mcf). Inside Canada, the surplus remains, but prices should average $1.50 per mcf. If it's cold, look for $3.50 US south of the border and $2 in Canada, Linder said.
Another promising event is the return of strong prices to California.
Drought and wildfires have returned to the Golden State, drawing down hydro reservoirs, and that's pulling peak gas volumes out of Alberta for delivery via the Pacific Gas Transmission system to fuel the state's electricity generators.
The traditional east-west price gap across the American West has closed from peaks above $1.50 US per mcf to a few pennies in recent weeks, said Martin Molyneaux, a senior analyst of FirstEnergy Capital Corp. of Calgary.
The ripple effect of stronger demand across the U.S. Southwest has flowed all the way north into Alberta and British Columbia, said Molyneaux.
However, not all of the oil industry is winning. Companies that sell gasoline, such as Imperial Oil Ltd., Shell Canada Ltd. and Suncor Inc., have suffered from having to buy crude at much higher prices. But they have not yet been able to add the cost at the pump.
For integrated companies, "all the of the wins they made producing oil were wiped out at the pump. The price at the pump is five cents too low" to earn a reasonable return, says Rick Roberge, an oil analyst at Price Waterhouse.
Competition, often led by the independents, is keeping gasoline priced in Calgary at 50.9 cents a litre.
"You're not making any money today selling at 50 cents," Roberge said.
In any event, 1996 has turned out better than all the experts predicted and 1997 holds strong promise. The winning companies will not plan for the hot oil prices to continue, but focus on the mantra of the past decade - cost control, say analysts.
- The Calgary Herald |
