MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, MARCH 31, 1998 (4)
TOP STORIES con't
NEW YORK, March 31 - Oil shares failed to join in a rally for the wider market as investors remained wary that the deal from the Organization of the Petroleum Exporting Countries will actually lead to production cuts.
By mid-afternoon, the benchmark West Texas Intermediate crude blend was trading 51 cents lower at $14.27 per barrel, which left the Standard & Poors Oil International Index lagging a one percent rise in the Dow Jones Industrials, with just a 0.11 percent rise, or 0.92 of a point to 818.50 points.
Analysts said that despite the deal emanating from the Vienna OPEC meeting, inventories of crude will continue to build during the second and third quarters of this year.
Salomon Smith Barney analyst Paul Ting said he believed OPEC's move would strengthen prices but noted ''the world would like to see evidence of cuts.''
Amoco Corp (AN) closed down 5/16 at 86-3/8, Mobil Corp (MOB) down 9/16 at 76-5/8 and Texaco Inc (TX) down 11/16 at 60-1/4. Among Dow components, Exxon Corp (XON) was down 5/16 at 67-5/8 and Chevron Corp (CHV) shed 2-3/4 to 80-5/16.
Ting said that a cut would gradually bolster share prices and recommends Texaco, British Petroleum Co Plc (UK & Ireland: BP.L), Exxon and Mobil among the majors.
ABN AMRO analyst Eugene Nowak says that investors are aware of the high dividend yield of the sector and that 1998 will be a depressed year for earnings.
He sees first quarter earnings alone down 40 percent from a year ago.
''There are opportunities from restructuring consolidation and the chance for stock repurchases and Texaco Inc (TX) took the opportunity on Monday,'' he said.
Texaco announced a $1.0 billion stock repurchase yesterday and said that at least half of it would be completed this year.
Conversely, oil drilling and related issues sagged along with crude
prices, sending the Philadelphia Oil Service Index (OSX) down 2.68 to 109.76 while the AMEX Oil Index (XOI) dipped 4.44 to 477.38.
Camco International (CAM) led individual declines, sliding 2 1/16 to 60 1/2 while Smith International (SII) dipped 2 1/8 to 55 1/16. A slew of oil drilling and services stocks fell more than $1.
In Toronto, the Oil & Gas Composite fell 1.4% or 93.76 to 6573.14. Among the sub-components, the Integrated Oils fell 0.9% or 78.30 to 8794.17. The Oil & Gas Producers dropped 1.5% or 90.68 to 5805.76. The Oil & Gas Services fell 2.1% or 63.61 to 3026.20.
Poco Petroleums, Anderson Exploration, Talisman Energy, Petro-Canada, Gulf Canada Resources and Ulster Petroleums were among the top 50 most active traded issues on the TSE.
There were no oil producers among the top net gainers. Percentage gainers included International Rochester, up 13.6% to $1.25 and OGY Petroleum 12.% to $1.40.
On the downside, Talisman Energy fell $1.70 to $42.75, Paramount Resources $1.20 to $13.30, PanCanadian Petroleum $0.90 to $22.50, Canadian Natural Resources $.80 to $29.50, Reaissance Energy $0.80 to $28.95, Imperial Oil $0.70 to $80.15 and Seven Seeas Petroleum $0.70 to $25.00.
Percentage losers included Petrobank 16.7% to $2.50, Abacan Resources 9.3% to $2.06, Paramount Resources 8.3% to $13.30, Upton Resources 7.9% to $3.50, Pan East Petroleum 7.7% to $1.80, Bow Valley Energy 6.7% to $1.25, Purcell Energy 6.4% to $1.03, Spire Energy 5.7% to $1.65, New Cache Petroleum 5.6% to $6.75 and Numac Energy 55.6% to $5.10.
There were no service sector companies listed among the top 50 most active traded issues on the TSE.
Veritas Energy gained $30.40 to $71.90 and American Eco $0.80 to $13.70.
Percentage gainers included Veritas Energy 73.3% to $71.90, Geophysical Micro 23.8% to $1.30, American Eco 6.2% to $13.70 and Badger Daylighting 5.8% to $8.20.
On the downside, Dreco Energy fell $2.00 to $47.00, Canadian Fracmaster $0.80 to $21.25, Precision Drilling $0.80 to $29.95, Tesco $0.80 to $23.00, NQL Drilling $0.70 to $12.25 and CE Franklin $0.60 to $10.15.
Percentage losers included CE Franklin 5.6% to $10.15 and NQL Drilling 5.4% to $12.25.
Over on the Alberta Stock Exchange, AltaPacific Capital, Bearcat Explorations, Prize Energy, ICE Drilling, Parkcrest Exploration, J&L Capital Vent and HEGCO Canada were among the top 25 most active traded issues.
Mera Petroleum gained $0.21 to $0.55, Jett Investment $0.17 to $0.79 and Belfast Petroleum $0.15 to $2.65.
On the downside, CanBaikal Resources fell $0.19 to $1.01, HEGCO Canada $0.17 to $2.45, Avid Oil & Gas $0.15 to $1.35, Invader Exploration $0.15 to $0.70, Underbalanced Drilling $0.15 to $2.75, Hampton Court $0.14 to $1.95, Hawk Oil A $0.12 to $0.88, Blue Power Energy $0.10 to $0.40, BriAlto Energy $0.10 to $0.55, Corlac Oilfield $0.10 to $0.85, Meota Resources $0.10 to $1.15, Parkcrest Exploration $0.10 to $0.95 and Total Energy Services $0.10 to $2.00.
RESEARCH INFORMATION
Gordon Capital
Pendaries Petroleum
(PDQ-T: $7.75) BUY
Back Drilling Offshore China
The company is back drilling on its acreage offshore China in the Pearl River Basin of the South China Sea. The EP11-11 well was spudded last week and is currently drilling ahead at approximately 860 meters. The targeted depth of the well is 3050 meters which should be reached in approximately 35 days with completion and testing if warranted expected to take a further two weeks. Kerr McGee is the operator of the block holding a 50% working interest with Pendaries holding a 10% working interest. Prospects in this area are approximately 100 million barrels in size.
In the Bohia Bay, which has been the focus of the company's activity, there is no drilling occurring as the rig is currently in dry dock for maintenance. Pendaries and its partners are completing a 3D seismic program over the 2-1 discovery on block 04-36 and plan to drill a well during the third quarter. Prior to this, a second exploratory well will be drilled on block 05-36 which should commence drilling in August. In June, a barge mounted rig will be available and will drill an exploratory well on the Getuo block in shallow water north of the 04-36 block.
Pendaries has US $15 million in cash which should be sufficient to sustain its drilling program into the first quarter of 1999. Based on a recent reserve report we estimate the net asset value of the company to be approximately $14.00 per share based only on valuation of the existing proven and risked probable reserve base of 16 million barrels (net to PDQ) associated with the 2-1 and 11-1 discoveries that have been confirmed on block 04-36. It does not include any valuation for the 130 million barrels of risked, potential reserves on 27 other prospects that have been identified. While the share price performance will be dictated by drilling news which is not expected for the next few months, we believe the shares offer good value trading at a significant discount to NAV. Accordingly we are maintaining our BUY recommendation and a target price of $14 per share.
Pinnacle Resources (PNN -T: $13.60) STRONG BUY
Oil Recovery + Gas Potential
Pinnacle is 70% levered to oil, offering strong upside to any recovery in global oil prices. The company is currently budgeting to spend $215 million this year, leading to the drilling of 400 wells. Of this, 200-250 will be drilled in the company's core southwest Saskatchewan oil prone region. However, Pinnacle is uncovering further potential from the natural gas properties that it acquired with HCO Energy in 1997. These two areas are at Ansell and Mcleod River, both in western Alberta. In management's opinion, the company could double its gas reserves (560 bcf at year-end 1997) on a risked basis with the potential identified in these two areas. Pursuant to this, the company will drill 40 gas wells into these areas during the 2Q and 3Q of this year. This could lead to the drilling of as many as 130-150 gas wells in these areas in 1999. The company will manage its spending this year so that the debt/cash flow ratio will not exceed 2.5x. We are forecasting CFPS of $3.50 in 1998 and $4.35 in 1999. Pinnacle is trading at only 3.9x 1998 cash flow and 3.2x 1999 cash flow. It is also trading at a discount to our estimated NAVPS of $15.00. Pinnacle offers leverage to an oil price recovery as well as significant upside potential from its natural gas assets. We recommend a STRONG BUY. Our 12-month stock price target is $20.00
Canadian Natural Resources
(CNQ - T: $30.30) BUY
Pelican Lake Production Estimates Shift
Road bands at Pelican Lake are in effect tomorrow, April 1st. CNQ has tied in 43 producing horizontal wells at this time, and have three rigs remaining in the area which will continue to drill at Pelican this summer. The company continues to work on the "engineering challenge" presented by a higher than expected gas/oil ratio from the project. The worst case would drive operating costs at the project to $3.00/bbl, vs. an expected level of $2.50/bbl. However, management expresses confidence that the problem can be solved within three months. As a result, the company's production at Pelican, when the pipeline is fully onstream, is expected to be 12,000 bbls/d, down from an earlier expectation of 15,000-20,000 bbls/d. We are lowering our 1998 oil production forecast for CNQ from 97,000 bbls/d to 93,000 bbls/d, as a result, but are increasing our gas production projection to 700 mmcf/d (from 680 mmcf/d). Our CFPS forecast for 1998 remains unchanged at $5.20, while our 1999 forecast is now $5.75 (down from $5.85). We continue to recommend a BUY, with a stock price target of $35.00.
Canadian 88 Energy Corp. (EEE-T: $7.20) HOLD
Receives Go Ahead for Waterton Pipeline
Final approval was granted from the AEUB and Alberta Environmental Protection for Canadian 88 to begin construction of its 27 mile (ten inch diameter) gas gathering and sales line. This pipeline will connect Canadian 88's Waterton gas field with the Shell Waterton gas plant. Construction will begin in April with expected completion and start-up planned for the third quarter. Presently, Canadian 88 has approximately 60 mmcf/d of shut-in capacity at Waterton from four cased wells. Two additional wells are currently drilling and a seventh is expected to be spud by June 1998. Our forecast fully diluted CFPS is $0.40 in 1997, $0.65 in 1998 and $1.05 in 1999.
Sectors & Trends
Five Sizzling Sectors for '98
We asked 20 Wall Street strategists for their best industry bets. The consensus: financials, technology, drugs, energy and commodities.
By Aaron Task - Microsoft Investor
In conjunction with the launch of Version 5 of Investor, we're presenting a series of articles about five sectors, funds, strategies, and companies to watch in 1998. The first of our series looks at the five sector plays that a panel of Wall Street strategists told Investor will be the best performers for the rest of 1998.
When the end of the year rolls around, many investors will look back with chagrin at all the easy money left on the table. Every year there are different sectors or industry groups that wildly outperform the market; often they're the ones that started the year well. Wouldn't it be great to know in advance the best performers of the final three quarters of 1998 -- and start buying them now?
We're not making any promises, but we polled nearly 20 of Wall Street's top stock strategists to discern which sectors they believe will outperform the market for the rest of 1998.
The short answer: Financial stocks showed up on the highest number of our panelists' "buy" lists, followed closely by technology and the drug stocks. All three industries were solid gainers in 1997 and have started this year with a bang. Given our affection for the number five this week, we'll add two groups that mainly lagged the market in 1997 but are poised for a turnaround, according to many experts: energy and commodities.
Playing Sectors
The benefits of sector plays can be impressive, if you get the right sector. In the past 12 months, for example, the AMEX Airline Index (XAL) rose a stunning 83%, well ahead of the 34% gained by the S&P 500 (SPX).
In many cases, the performance of individual stocks has as much to do
with the market's perception of its industry as its own fundamentals. For example, Homestake Mining (HM) and Newmont Mining (NEM) are two of the best gold miners in the industry, but with the sector so out of favor, their stocks have declined 40% and 35%, respectively, in the past year.
Playing sectors is a way for investors to put their macro view of the economy to work in stock-picking. For example, those who think the economy is going to remain robust, or even heat up, recommend investing in consumer cyclicals, like housing and autos.
Predicting any sector's outlook is an inexact science, and past performance of group indices can be skewed by one or two big components. In addition, experts say a discriminating palate is needed before investing in any sector.
Dynamics of Energy
With the price of oil languishing near nine-year lows, investors will have to be patient if they expect to be rewarded with bets on the energy sector.
"It doesn't make any sense with energy prices going through the floor, but based on money flow into the sector, the best sector by far is energy," said Terry Bedford, president of Bedford & Associates. "People buying now believe that good things will happen in the next six months."
The best thing that could happen to the oil producers, as well as drillers and service companies, is for oil prices to rise. New technologies -- like computer-modeled seismic data -- have made these companies' earnings less sensitive to the price of crude. But the decline isn't helping generate enthusiasm for the group. Proponents are hoping the recent merger between Halliburton (HAL) and Dresser Industries (DI) -- and the expectation for more consolidation -- will help the sector stay afloat until oil prices rebound.
Strategies - How to Drum Up an Oil Play
Aaron Task - Microsoft Investor
To take advantage of firming prices, you've got to dig for value. Consider domestic drillers like Lomack and Burlington Resources.
Oil, oil, everywhere and plenty of barrels to spare. Therein lies the problem with crude prices, and a conundrum for investors interested in
the energy sector.
News that most of the world's oil-producing nations will curtail production caused a spike in crude prices last week, but the rise proved short-lived. By the time the deal was finalized Monday, most traders were resigned to the fact that 1.25 million fewer barrels of oil per day does not fundamentally alter the global supply/demand equation.
The recent drama in crude prices should not deter investors willing to drill beneath the surface, however. There are plenty of opportunities in the field, exerts say, even if oil languishes at $17 to $18 a barrel -- higher than recent lows, but still well below the $25-plus levels of the past couple of years.
With commodity prices apparently stabilized, consider putting money to work in beaten-up independent oil producers with a North American base of drilling activity. They may not have household names like Exxon (XON) or Chevron (CHV), but players like Santa Fe Energy Resources
(SFR), Burlington Resources (BR) and Lomack Petroleum (LOM) present real value stories.
"Majors get the limelight because of name exposure, but I'm looking for value in small-cap oil stocks," said Fadel Gheit, senior analyst at the New York brokerage Fahnestock. "These are guys that got hurt the most" by falling oil prices.
Despite hype to the contrary, the earnings of oil producers are mainly immune to oil-price fluctuations, assuming they remain solidly above the recent lows of under $14 per barrel. A big reason is technology.
Advances in seismic data surveys and horizontal drill bits, which act like "smart bombs" to find oil in difficult geological terrain, have sharply lowered exploration costs.
As is often the case on Wall Street, however, perception can overwhelm reality -- and as oil prices tumbled in the past year, shares of the major producers modestly lagged the Standard & Poor's 500 Index. However, the under-performance of their smaller brethren was far more unnerving. While the S&P 500 rose 42% in the last 52 weeks, the value of shares in Triton Energy (OIL) fell 16%, Lomack Petroleum fell 17%, Burlington Resources (BR) lost 13%, while Inland Resources (INLN) and Seagull Energy (SGO) both dipped 1%.
Poised to Play the Rebound
Yet there are signs of a recovery as oil prices bounce off historic lows and investors search for undervalued sectors in a richly priced stock market.
Before we figure out a strategy for taking advantage of the depressed prices in the domestic group, let's look at the whole sector. The oil and gas business is by any measure the largest in the world, so here's a quick primer:
Giant companies like Exxon, Chevron and Royal Dutch Shell (RD) are known as "major integrated oil producers" because they participate in both "upstream" and "downstream" operations. Upstream refers to the task of finding the oil and getting it out of the ground, while downstream means transporting, refining and bringing the finished product to consumers. Because the majors participate in all aspects of the business and plan operations several years in advance, their earnings are largely insulated from oil price fluctuations. Exxon, for example, reported that its after-tax profit was $4.84 per barrel of oil in 1997, a year when oil prices slid $1.50. The company's return on capital in the exploration and production end of its business was 21% last year.
A notch below the majors in terms of size and name recognition are the independent oil producers. For the most part, they focus efforts entirely on the upstream side of the business. When you think of the oil business, the "wildcats" and "good ol' boys" from Texas, you're probably thinking of independent producers.
Beyond oil producers are a slew of companies that provide a wide variety of ancillary services. These include oil-refining companies like Tosco (TOS), large-cap conglomerates like Halliburton (HAL) and Schlumberger (SLB) that provide services to oil drillers, and companies like Coastal Corp. (CGP), which focus on the storage, transportation, and marketing of oil and gas.
Each of the sectors in the oil patch offers potential investment plays. Given that our focus here is on the "independents," we asked Jack Aydin, senior oil analyst and managing director at McDonald & Co.Investments, how to choose among them. His reply: Cash is king and it helps to be replacing reserves as well.
The analyst currently has "buy" ratings on Burlington Resources, Lomack, Mallon Resources (MLRC), St. Mary (MARY) and Inland Resources (INLN). He upped ratings to "buy" on Santa Fe Energy and Oryx Energy (ORX) on March 23, the day the production cuts were first announced.
"Each one has different niche [but] I think they all look cheap on cash-flow basis," he said. "They've also been finding and developing reserves at a reasonable price. They've been replacing production at rates of 300% to 400% [and] that's what you need. Everything else being equal, you need unit volumes to increase to offset inflationary factors."
Gheit mentioned many of the same favorites as Aydin, adding Seagull Energy, Triton Energy, and EEX Corp. (EEX) as other top picks.
Search for an Oil Opportunity
We decided to test Aydin's theory using the Investment Finder. We searched for independent oil and gas companies with a market cap over $50 million and price-to-cash-flow ratios as low as possible but not negative because we want companies with positive cash flow. We added the criterion of return on equity set at "as high as possible" to ensure we would find profitable firms.
In our screen, Oryx Energy ranked second but not one of the other names mentioned to us by Aydin or Gheit showed up in the top 25. Topping the category was TransTexas Gas (TTG), a domestic exploration and production firm whose stock is up 14% in the past year and 9% thus far in 1998.
Expanding our search a bit, we added criteria to search for companies with average price-to-earnings ratios near the industry average, annual earnings growth rate as high as possible, and 3-month relative strength greater than 12-month measurements.
Burlington Resources and Triton Energy -- two favorites of our experts -- both showed up in the top 15, but the top pick in our expanded search was Pogo Producing (PPP). But, like TransTexas, it looks as though the word is out about Pogo.
After falling 10% in the past 52-weeks, Pogo stock is up 10% thus far in 1998. It might not be too late to play Pogo's jump, but note the company has a price-to-earnings ratio of 29.47 times trailing earnings, while its 1998 earnings growth rate is expected to decline 28.30%. However, Pogo's growth rate is expected to bounce 67.80% in fiscal 1999, well ahead of the 25.50% projected for its peers.
Our takeaway from all this is that more than almost any other industry, the oil and gas business defies top-down analysis. Because companies operate in different geographic regions, with some by land and some by sea, it pays more than ever to do your homework with this group. Triton Oil, for example, is among the best performers in the group, but its focus is solely on the international scene. Of the names mentioned above, only Lomack and Mallon Resources have solely North American based drilling operations. Again, reason for investors to unearth the fundamental side of the story before putting money to work.
But with oil prices looking like they've found solid footing, prudence suggests it's a sector worth investigating. Investors willing to get their hands dirty you could well find themselves with a gusher.
|
