MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY, APRIL 20, 1998 (4)
RESEARCH NOTES
Gordon Capital
Amber Energy Inc.
(AMB-T:$15.60) BUY
Reported Q1 fully diluted CFPS of $0.24 vs. $0.32 for Q1 1997. Amber drilled 102 net wells in Q1 for a success rate of 93%. This compares to 152 net wells (93% success) for all of fiscal 1997 and 47 net well (83% success) for all of fiscal 1996.
At Pelican Lake, Q1 sales prices were $5.78/bbl. With royalties of $0.07/bbl and operating costs of $1.88/bbl Amber's field netback was $3.83/bbl. Note that the economics will improve by $4.00/bbl once the pipeline operational (on target for June 1st startup). The cost of diluant is down 30% from its peak in Q1 and heavy oil price differentials have also been falling over the quarter. With the pipeline and yesterday's price, Amber's netback would have been $8.00/bbl.
Due to lower oil prices, Amber chose to tie many of its wells drilled late in the winter directly into the pipeline which will only on stream on June 1st (instead of the temporary gathering system which would have brought production on earlier).
As a result we have reduced our 1998 production forecast for Amber Energy to 23,000 bbls/d down from 27,000 bbls/d. An early spring break-up resulted in 15 mmcf/d of production not being tied in at Wabasca this winter. As this is principally a winter access area we have reduced our 1998 natural gas production forecast from 120 mmcf/d to 105 mmcf/d.
Our fully diluted CFPS forecast is now $1.55 (down from $1.85) and $2.80 in 1999. We are maintaining our 12-month target price for Amber Energy of $20.00. BUY
Gordon Capital
PanCanadian Petroleum Limited
(PCP-T:$22.65)
Under Review
Reported Q1 CFPS of $0.84 vs. $1.12 -ahead of our expectations. Oil hedging activities increased the company's average oil price by $4.19/bbl in Q1 to $17.24/bbl. Year-over-year liquids production was up 7% to 150,893 bbls/d, while gas production increased by 5% to 765 mmcf/d.
We are currently forecasting liquids production for the year of 145,000 bbls/d and natural gas production of 800 mmcf/d. These estimates are slightly below management's production forecast of 148,000 bbls/d of liquids and 880 mmcf/d of natural gas.
Our fully diluted CFPS forecast for the year is $3.10 in 1998 and $3.40 in 1999. Our recommendation on PanCanadian is currently under review for a possible upgrade from a SELL to a HOLD.
The Howard Group Inc.
Arcis Corporation (RKS - TSE)
Note: The Howard Group is a marketing firm and the following comments are on companies who are clients of the firm.
Two new buy recommendations are out with targets of $1.00 on the stock which is currently $0.50 - $0.55. They come from Toronto based institutional brokerage firm Brawley Cathers and newsletter, Buy Low, Sell High. These come on the heels of an earlier 'buy' from Peter Tertzakian of Acumen capital Partners.
Arcis anticipates revenues in the range of $50 million for Fiscal 1999 (March 31) and a base case of $0.10 EPS on 31.5 million shares fully diluted. This budget includes a projected 20% downturn in oil and gas industry activity, this year.
Arcis originally projected revenues of $19.9 million for Fiscal 1998 but the Sourcex deal in combination with a very active fourth quarter could increase revenues to approximately $30 million. Initial EPS projections were $0.06 for Fiscal 1998 but look for slightly better results.
Arcis is a fully integrated geophysical services company with four principal lines of business: seismic participation surveys; seismic data acquisition; seismic data brokerage and management; and seismic data processing and archiving. Arcis' primary objective is to create a significant proprietary seismic data library in the next few years as well as to continue to provide outstanding service to over 150 oil and gas companies. Arcis will be presenting at the COPIC Conference in Toronto May 11th - 12th.
The Howard Group
Founders Energy (FDE-TSE/ASE)
Note: The Howard Group is a marketing firm and the following comments are on companies who are clients of the firm.
* Tom Buchanan had meetings with institutional groups in Vancouver April 16th - 17th;
* Currently drilling an off-set Winnipeg sand zone well in Hartaven;
* Cased a gas well in Gilby; should have results before month-end;
* FDE announced year-end financials. Earnings of $0.10 per share and cash flow of $0.29 per share;
* Due to general stock market conditions, Founder's is trading at only 3.5 times 1997 Cash Flow Per Share,and less than 2.5X 1998 cfps.
Here is an interview with Tom Buchanan, president and CEO of Founders Energy, on the oil market and Founders Energy that occured one month ago.
Q: Over the past year, the W.T.I. crude oil price has dropped by more than $8 U.S and industry analysts are predicting that 1998 crude oil price could drop as low as $15 - $16 U.S. What effect does this have on Founders exploration and development program?
A: In October 1997, Founders prepared its annual budget for 1998. At that time we made an informed forecast for commodity prices for the upcoming year. Based on market information available to us at that time, we budgeted 1998 crude oil price to average $20 U.S. Obviously, in light of the current market conditions, this forecast appears to be optimistic. Based on the October 1997 budget, Founders was budgeting 1998 cash flow of approximately $13.7 million and capital spending of $28.5 million. Our 1998 capital program will be funded by a combination of cash flow, bank debt and the proceeds from the exercise of warrants. A downward revision in our forecast for crude oil price to $18 U.S. would result in cash flow decreasing to approximately $12.0 million. At this time we have no reason to adjust our capital budget for 1998 however, in June we will re-forecast for the remainder of 1998 and, at that time, we may make some revisions with respect to our capital program for the balance of the year.
Q: To what extent does the weak Canadian dollar benefit Founders?
A: As you know, crude oil price is based on the U.S. dollar, therefore a weaker Canadian dollar is advantageous to Canadian oil producers. Once again, our 1998 Budget is based on certain assumptions, one of which is an average Canadian/U.S. dollar exchange rate of $0.725. With the Canadian dollar weakening in early 1998 to as low as $0.68, we felt that that there was an opportunity to take advantage of this weakness by locking in a forward currency hedge. This involved entering into a 36-month contract to purchase $750,000 U.S. funds per month at an average price of $0.6965 for 1998. This hedging strategy helps to offset weaker world oil prices by taking advantage of currency upside when the Canadian dollar strengthens.
Q: What are your forecasts for 1998?
A: For 1998 Founders is forecasting to have average daily production of 3,000 barrels of oil equivalent per day and an exit rate of approximately 3,200 barrels of oil equivalent perday.. Based on an $18 U.S. oil price this would generate approximately $12.0 million in cash flow or $0.36 per share (basic). We are forecasting earnings of $3.0 million or $0.09 per share.
Q: What are your drilling plans for 1998?
A: Founders has budgeted to participate in the drilling of 26 (13 net) wells in 1998. Our drilling will be focused primarily in our three core areas of SE Saskatchewan, central Alberta and NW Alberta/NE British Columbia. In SE Saskatchewan we are budgeting to drill 5 horizontal and one vertical development well in our operated areas
of Hartaven, Weir Hill and Benson East. In addition, we are budgeting to drill 5 exploration wells, including three deeper Ordovician wells and two shallower Mississippian wells in new prospect areas. In the Gilby area of central Alberta, Founders has budgeted 4 wells on multi-zone prospects, targeting both oil and gas. In NW Alberta/NE British Columbia, Founders has six new exploration areas and has budgeted to drill up to seven wells on multi-zone prospects targeting long-life oil and natural gas reserves.
Q: Is getting drilling rigs going to be a problem for Founders?
A: In June 1997, Founders contracted a drilling rig in SE Saskatchewan that is capable of drilling both horizontal and deep exploration wells. As a result, Founders will have no problem meeting our drilling commitments for 1998 in that area. During the first quarter of 1998, drilling rigs have been more difficult to find in central Alberta and NW Alberta/NE British Columbia. However, there have been windows of opportunity and we expect that after spring break-up there will be more rigs available to us in these areas. At this point we do not believe that rig availability will pose a significant problem with our drilling plans for 1998.
Q: You have had a recent significant new deep discovery in the Hartaven area of southeast Saskatchewan. What is the status of these new wells and do you have any further plans in the area?
A: In July 1997, Founders drilled its first exploration well at 7B-2-10-9 W2M, targeting deep Ordovician light oil reserves in the Hartaven area of southeast Saskatchewan. This play was supported by three dimensional seismic which Founders had shot in late 1996. Founders has a 29 percent working interest and a 15 percent overriding royalty before payout and a 55 percent working interest after payout in this well. The well was placed on production in August 1997 and is currently producing at a rate of 300 boed of 42 degree, light sweet crude oil. In December 1997, Founders successfully drilled an offset exploration well at 12-1T-10-9 W2M encountering two Yeoman intervals, as well as the deeper Winnipeg Sandstone formation. To our knowledge and to the credit of our exploration team, this is the first time that significant commercial quantities of oil have been encountered in the Winnipeg Sandstone formation in Canada. Founders has a 55 percent working interest in this well which was placed on production in February 1998 from the Winnipeg Sandstone formation and is producing at a rate of 415 boed of 53 degree API light oil. The two upper Yeoman zones have also been production tested and are capable of producing an additional 300 boed of 46 degree API light oil, bringing to total production capability of this well to in excess of 700 boed. We are currently within a 90 day production test period set by Saskatchewan Energy & Mines for the 12-1T well. At the end of this period Founders will be making a decision on the operational feasibility of dually completing the well for production from both the Winnipeg Sandstone and Yeoman zones. In addition, we are also currently evaluating the 7B-2 well for a dual completion as the Winnipeg Sandstone is also evident in this well but has not yet been tested. A third party has recently licensed a Winnipeg Sandstone test immediately south of our wells at 13-36-9-9 W2M. Should this well be successful it will set up at least one additional development well on our lands.
Questions posted March 24, 1998
As a shareholder for some time now, and one who has seen the price of Founders stock drop quite drastically in the last few months, I have several questions. They are:
Q: Although Jr. Oil Companies are down substantially since Oct. /1997, why has Founders dropped well farther than the average company (i.e. $1.95 to less than a dollar).
A: Founders share price reached a high of $2.15 in the last week of July 1997 on speculation respecting the drilling of our deep Ordovician test well in the Hartaven area of southeast Saskatchewan. The share ten settled nicely in the $1.60 to $1.70 range from August to late October. Prior to this run-up, Founders stock was trading in the $1.20 to $1.30 range in early July 1997. There was significant trading in Founders shares in late 1997 and early 1998, probably a result of individuals exercising their warrants that became due on December 31, 1997 and selling them into the market. In 1998, Founders traded more than 28 million shares on the TSE and ASE representing a turnover of more than one times the outstanding balance. I believe this was the result of two events - firstly, when we acquired Golden Coast Energy in late 1996, we also acquired a sizeable shareholder base of more that 1,200 shareholders. The Golden Coast shareholders were widely disbursed and many of them were not familiar with the Founders story - as a result, there was significant turnover in Founders stock during the first quarter of 1997 (also the market softened in early 1997 causing many stockholders to lighten their portfolios). Secondly, Founders had approximately 5 million warrants outstanding in 1997, most of which were exercised during the year - as a result, we also saw a great many of these shares turnover subsequent to the warrants being exercised.
We have had a recent buy recommendation (Feb/98 from David Street at Research Capital and it is the wide belief of several analysts and brokers that follow our stock that Founders is currently significantly undervalued. We are currently trading at approximately 3 times 1997 cash flow ($0.29) and less than three time estimated 1998 cash flow ($0.35). Also we are trading at an earnings multiple of approximately 9.5 times 1997 earnings of $0.10, while many other companies trade at earnings multiples of 20 to 30 times earnings. The Company's balance sheet is very strong - 1997 debt of $6.5 million is less than one times 1997 cash flow and approx. 0.6 times estimated 1998 cash flow. The Company is heavily leveraged to oil, which with the recent downturn in oil prices has had a significant short-term impact on the stock. We are well positioned to weather the storm, we have an aggressive capital program for 1998 and, because of our light oil blend, we can still show high netbacks - even at $15 U.S. WTI. I believe that Founders stock is currently significantly undervalued and that a significant turnaround will occur, particularly when world oil prices recover.
Q: When I initially bought shares in Founders, my broker at Midland Walwyn told me that there were 18.5 million shares outstanding and you were producing at near the 2000 BOED rate. Now I understand that there are over 30 Million shares outstanding, and you are producing only about 2400 BOED. Is this information correct? If so, this would answer my first question.
A: Founders had 21 million shares outstanding at Dec 31, 1996 (28.8 million fully diluted). In May 1997 the Company closed an offering of 3 million common shares at $1.00 per share and 3 million common share purchase warrants exercisable until December 31, 1997 at a price of $1.15 per share. In December 1997 the Company issued 723,000 common shares on a private placement flow through basis at a price of $1.40 per share (at the time the shares were trading at a price of $1.20) We are very cognizant of the impact that issuing shares has on the Company, and have only issued stock where we believe that it is in the best interests of all shareholders in order to fuel growth. You can track our production growth through 1997 against the dates of these share offerings and I believe that you will see that our production growth has never been too far out of balance with the outstanding share base.
Q: I recommended Founders to several friends who subsequently purchased shares in the company (most around $1.70 / Share). Consequently, I'm not very popular these days. Do you see the price turning around in the near future, or will it continue to slide?
A: See my answer to Question #1 - I believe that Founders is significantly undervalued (year end Net Asset Value of $1.19 per share, using 15% discounted cash flow value of reserves before tax. Using a 10% discount rate the Company's NAV is $1.39 per share).
Q: Diluting the company by issuing vast amounts of paper to generate working capital has not worked in the past. Are you evaluating this strategy ? Why can't you fund exploration projects with the current productionof 2400 BOED? Do you plan on issuing more paper over the next year? If so how much?
A: Founders 1998 capital expenditure program is targeted at $18.5 million and will be funded by cash flow, proceeds on exercise of warrants and bank debt. We also have set aside $10 million for acquisitions in 1998. Currently, we have no plans to issue equity, but if an opportunity arises, and we believe that it is in the best interest of all shareholders to issue common stock, then we will consider it at the time.
Q: I saw that you were planing on drilling 26 well this year but only forecasting on exiting 1998 with 200 BOED more than you are currently producing. Could you explain this very negative prediction to me.
A: Founders production estimates for 1996 are based on several assumptions. Firstly, our 1997 exit rate of 2,400 is obviously subject to normal production declines - If Founders did nothing to replace declines - our production would decline to approximately 1,800 boed by year end 1998. Secondly, for budget purposes we add incremental risked production from development drilling only and do not add any production from exploration success. Founders has budgeted to add an additional 400 boed from one or more strategic acquisitions in 1998 which would result in average 1998 production of 3,000 boed.
Q: Do you see moving away from oil in the near future and starting to target more gas plays? If not, why?
A: Approximately 65 percent of Founders' 1998 capital budget is earmarked for new prospect areas in central Alberta and NW Alberta/NE British Columbia. These areas are generally of medium depth, medium risk type prospects which offer multi-zone potential and long life, liquids rich natural gas reserves. Founders strategy since early 1997 has been to establish new core areas in central Alberta and NW Alberta/NE British Columbia and over time establish a better balance between oil and gas production.
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