MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, APRIL 21, 1998 (3)
TOP STORIES
Top 20 Listed Petro-Canada Reports Big Drop In Profits
Weak oil prices and plunging revenues hammered profits at Petro-Canada in the first quarter, cutting the big oil company's earnings by nearly two-thirds.
Petro-Canada reported Tuesday it made a profit of $36 million for the January-March quarter, down from $104 million in the same 1997 period. Sales plummeted to $1.27 billion from $1.65 billion
The Calgary-based energy producer said lower prices and falling production, offset improved profit margins from the company's refining and gasoline marketing business.
Petro-Canada also said it's reviewing capital spending in light of current weak worldwide energy markets and the company warned it could cut capital projects if oil prices remain low for a prolonged period.
"The current low crude price environment promises to make 1998 a challenging year for the exploration and production business," Petro-Canada president Jim Stanford said in a release.
Stanford, added, however, that Petro-Canada's profitable gasoline operations and the company's heavy production of natural gas will help cushion the blow from weak oil prices, down about 30 per cent from last year.
In addition, 1998 will be the first full year of production from the Hibernia offshore oil project, while Petro-Canada's proposed gasoline marketing joint venture with U.S.-based Ultramar Diamond Shamrock Corp. should also begin to produce cost savings for both companies.
Crude oil prices averaged $19.07 Cdn a barrel during the first quarter, compared with $28.32 a barrel in the 1997 period, while natural gas prices averaged $1.75 per thousand cubic feet, down from $2.42 a year ago.
A breakdown of Petro-Canada's operations showed:
Quarterly operating profits in oil exploration and production plunged to $2 million from $86 million last year because of lower oil and natural gas prices and lower production. That was mainly because Petro-Canada sold non-core properties after the first quarter last year.
Refining and marketing profits rose to $63 million from $50 million because of higher margins refinery efficiencies.
Petro-Canada's 20 per cent share of Hibernia production amounted to 7,700 barrels of oil a day in the first quarter and should hit about 12,000 barrels a day over the entire year.
The development off the coast of Newfoundland is projected to reach peak production of 135,000 barrels a day in the first half of 1999. By the end of this year, Hibernia should have six producing wells pumping oil.
As Reported By Calgary Sun
PETRO-PLUNGE
Claudia Cattaneo
A 97% drop in earnings from exploration and production shaved Petro-Canada's first-quarter profit to $36 million (13 cents a share), from $104 million (38 cents) a year earlier.
Not even higher margins from its refining and marketing operations could offset weakness in crude oil prices and lower production volumes, the company said yesterday.
The earnings were lower than forecast by 15 analysts polled by First Call Corp., who expected an average of 18 cents a share.
Plans for $1.1 billion in capital spending are under review -- and if there is further oil price deterioration, spending may be cut, the company warned.
"The current low crude price environment promises to make 1998 a challenging year for the exploration and production business," said president and chief executive officer Jim Stanford.
"We expect that, for Petro-Canada, the effect of this environment will be mitigated by our industry-leading refining and marketing operations and our significant exposure to natural gas."
Cash flow was $260 million (96 cents) down from $389 million ($1.44); revenue was $1.27 billion, down from $1.65 billion.
Earnings from refining and marketing were $63 million, up from $50 million, supported by high-asset utilization and the low cost of heavy oil, which reduced the price of feedstock for its refineries.
But net earnings in its exploration and production units were slashed to $2 million from $86 million. First-quarter production also declined to 168,600 barrels daily from 179,500 BOEs.
Nonsence Or Good Sense - PanCanadian Petroleum Demise
Sagging Oil Prices Tarnish Jewels In CP Ltd. Crown
Vancouver Sun
Sagging commodity prices have lowered the ante at Canadian Pacific Ltd. and left the storied conglomerate's investors holding three of a kind instead of a straight flush. Of CP's five core businesses, PanCanadian Petroleum Ltd. was the only subsidiary to post waning profits for the first three months of 1998, the company said Tuesday.
Coal sales were also flat during the quarter at Fording Coal Ltd., which managed to eke out a modest profit improvement despite lower prices, thanks in large part to the faltering Canadian dollar.
And while three out of five ain't bad, it was clear at CP's annual meeting in Toronto that chief executive David O'Brien is thinking about how to improve his company's hand.
"We must examine each of our businesses and determine which of them can compete most successfully and how many of them we can support," O'Brien told shareholders beneath the ornate crystal chandeliers of CP's Royal York Hotel.
"In the course of time it is likely we will have to narrow our focus further."
PanCanadian, one of Canada's largest oil producers, saw its first-quarter profits slump to $35.6 million for the quarter from $113.9 million last year.
"We would expect probably to be in fewer businesses then than we are -----TD-----," O'Brien told a news conference after the meeting.
"I can't tell you what we will keep and what we may sell over a period of time, but the idea is to focus in a little more . . . on expanding our horizons on a more limited number of companies."
O'Brien made pointed reference to expansions underway at CP Ships and planned for CP Hotels, where the company hopes to capitalize on feverish growth in the hotel sector.
Then there's the Canadian Pacific Railway, where quarterly operating profits jumped 142 per cent to $150 million in 1998, thanks to new efficiencies, falling costs, lower fuel prices and the booming domestic economy, which increased freight traffic.
That leaves Fording and PanCanadian, although analysts think it's unlikely CP would unload the oil and gas group - arguably its strongest asset and a cash cow in times of strong oil prices.
"I would think they would be pretty reluctant to divest of it; it's a pretty big part of their operation," said Michelle Weise, an analyst with Canaccord Capital Corp. in Vancouver.
"I think Fording would be a more likely candidate."
Despite a five per cent drop in Japanese coal prices, operating profits at Fording rose 15 per cent to $35 million while net profits inched up to $18 million from $17 million last year.
Fording is also pinning its hopes on a $150-million mine in Mexico that produces wollastonite, a ceramic-based mineral used to make plastics and as an asbestos substitute.
Some analysts suggested O'Brien - a former PanCanadian chief executive with a long history in the Alberta oilpatch - would be loathe to unload a company that's dear to his heart.
But Weise was quick to point out that O'Brien has to listen first to the shareholders of Canadian Pacific when it comes to maximizing value, which could well mean any of the company's five subsidiaries could one day be up for sale.
"Even with them building the other businesses, that doesn't mean that they won't get rid of them," she said.
"PanCanadian is (O'Brien's) baby . . . but he's at CP Ltd. now, and he has to think about the benefits of the overall company. Just because he's an oil guy doesn't mean that's not something they would look at getting rid of."
Other analysts said it would be folly for CP to get rid of a company that over the years has contributed the lion's share to its parent company's value.
Since the onset of the Asian crisis, oil prices have hovered near the $15 US-a-barrel mark and have battered crude producers like PanCanadian.
"I would not think that PanCanadian is a non-core asset just because there's a low crude price," said John Clarke, an energy analyst with Deutsche Morgan Grenfell in Toronto.
"Since the 1970s the price of oil averaged $18 to $20 a barrel, and this is a 10-year low," he said. "I'm not expecting a rapid rebound, but I'm certainly expecting oil prices to come out of this."
O'Brien told shareholders the company has already sold about $4 billion in assets since 1996 - half of that coming in the last year - and invested $2.5 billion in new capital.
Canadian Pacific Railway has doubled its operating income since 1993 and expects to spend more than $1 billion in 1998 on expanding capacity in an effort to build consistent profits, he said. CP Ships posted record results in 1997 with operating income climbing 32 per cent.
Canadian Pacific Hotels is even considering building a new hotel on a parcel of land on the edge of Toronto's waterfront district, O'Brien said.
Serv 10 Listed Canadian Fracmaster Taking On The World.
Oilpatch globalization keeps Fracmaster's Les Margetak sharp
The Financial Post
An accomplished back-country skier, Les Margetak once fell off a six metre cliff because he was chatting with companions and not looking where he was going. Today, the 44-year-old president and chief executive of oilfield service specialist Canadian Fracmaster Ltd. is staying alert as he guides his company around the crevasses of the oil and gas business.
Globalization in the oilpatch means the Calgary-based firm with annual revenue of about $500 million is a possible acquisition target. Sniffing around are U.S. firms that trade at higher price earnings ratios, have increased liquidity to attract wider institutional following and can use the more powerful US$ to fund any cash portion of a takeover offer.
Margetak's other concerns are serious as well. The list includes political instability in Russia, the company's prime market, commodity prices, the energy industry's greenhouse gas emission levels, staff retention and development of new technologies.
"I need excitement," says Margetak. "If it's not exciting, why do it?"
Fracmaster, which has 1,000 employees worldwide, specializes in a technique called fracturing. Material is injected at high pressure down a well bore to open small cracks in a formation and increase oil and gas production.
Its key markets are Canada, the U.S. and Russia, the last providing most of 1997 earnings. Fracmaster also has a contract to work on more than 700 wells in China and sees the country as another area of focus.
Marcel Brichon, an analyst with Global Securities Corp. in Vancouver, likes Fracmaster's management and balance sheet. While he acknowledges the company took risks by plunging early into Russia, he thinks it may also succeed in China, despite its reputation for tortuous bureaucracy. "If there's a company that's going to succeed, I would guess it's going to be Fracmaster," he says.
The company's international experience draws attention, adds Michele Weise, an analyst with Canaccord Capital Corp. in Vancouver. "They have established markets and I think it makes them a very attractive takeover target for some of these big [service] companies."
Fracmaster's emergence as a world player in the pressure pumping market was the result of the high costs of Canadian oil production. To compete domestically, it had to come up with low-cost technology and educate its producer customers to accept innovations. "Canadians aren't blessed with the best reservoirs," Margetak says. "We've had to squeeze every drop of production out of our reservoirs for years."
He argues his company was actually more vulnerable to a takeover last fall when former chairman and chief executive Alfred Balm sold his 67.5% stake. That, says Margetak, would have been the time for someone to take control. As it was, several institutions snapped up the shares.
Balm's exit gave management a chance to do its stuff, and it's been busy. In the past six months, Fracmaster and partner Yukos, a large Russian producer, used their joint venture, Uganskfracmaster, to acquire Intras, another Russian service company that had been wholly owned by Yukos. In the U.S., besides buying the 50% of American Fracmaster it did not own, the company made several deals this year for U.S. based service firms and assets.
Fracmaster also obtained a listing on the New York Stock Exchange (FMA/NYSE) to increase its profile with U.S. investors, who now account for 20% to 25% of shareholders.
Investors aren't too excited on either side of the border. Since Balm's exit, Fracmaster's total return (price and dividend yield) has slumped 13.1%, a fall that almost matches the 14.2% decline in the Toronto Stock Exchange's oil and gas index over the same period.
On the TSE, Fracmaster shares (FMA/TSE) have been trading just above the middle of their 52-week range of $27.25 to$11.25.
Despite this performance, analysts and industry players say the company has good staff, provides quality service and is a leader in carbon dioxide fractures, which are well suited to gas wells. They also say it's near the front of the pack with coiled tubing, a relatively new method of drilling wells that minimizes formation damage and increases production.
The only major knock against Fracmaster is its perceived weakness in research and development, particularly in coming up with proprietary chemicals that give it a competitive edge.
It's also dwarfed by multinational competitors. The proposed merger of Halliburton Co. and Dresser Industries Inc. will create a giant with US$16 billion in annual revenue; second-ranked Schlumberger Ltd. has yearly revenue of about US$11 billion. The "size matters" philosophy is rolling through the oilpatch as well as other sectors.
Fracmaster's most often mentioned potential acquirer is BJ Services Co. of Houston. The U.S. company moved into Canada in 1996 with a hostile takeover of Nowsco Well Service Ltd., a service firm that once rivalled Fracmaster in size. Nowsco shareholders benefited from the prolonged battle - BJ eventually upped its offer by 75% and paid $35 a share.
Global's Brichon says Fracmaster is also a target because of the trend for acquirers to go after niche players with particular expertise, in Fracmaster's case, fracturing and coiled tubing.
"It's a huge opportunity for the U.S. companies. I'm actually surprised that we haven't seen more interest," says Canaccord's Weise.
But Margetak is not a fan of the bigger-is-better mantra. He doubts one firm can be the best in all areas of the oilpatch and provide one stop shopping. A decision on offering integrated services is still some distance off.
"It's a few years out for us. We'll be able to show good, solid growth to our shareholders, year on year, over the next three or four years before we bump up into that question mark."
The business plan for the next few years calls for earnings to come equally from North America, Russia and new ventures. It also calls for putting a new idea into the field within two years of conception.
"Being the size that we are, we have to be nimble and we have to be able to get new ideas, new R&D, to commercialization quickly," says Margetak.
Canadian Oil Sands Warns Of Distribution Cut
The Financial Post
Canadian Oil Sands Trust, one of the 10 owners of the Syncrude Inc. oilsands project in northern Alberta, may have to cut distributions to about $1 a unit, from $1.80 last year, if oil prices remain at today's levels.
But the trust's managers told a feisty annual meeting yesterday it's now well capitalized to put up its 10% share of Syncrude's $6-billion expansion costs.
Given today's oil price environment, "it's a reasonable distribution level and it's in line with expectations," said analyst Brian Ector, with CIBC Wood Gundy Inc. in Calgary.
"It provides a stable cash distribution through the expansion years so unitholders benefit by receiving the distribution and they benefit from the expansion, when completed."
The trust was created in June 1996, when PanCanadian Petroleum Ltd. monetized its 10% share in Syncrude for $385 million.
The trust, which is still managed by PanCanadian, raised another $92 million in new equity in February when it issued four million units at $24 each. It also restructured its debt and increased its lines of credit to $250 million.
Units (COu/TSE) closed at $23 yesterday, down 25›. Although unit values are well below their October high of $28.70, investors are looking beyond near-term weakness in oil prices and see value in the underlying asset base, Ector said.
When Syncrude's expansion is complete in 2007, the trust's share of production will be twice today's.
The trust has also garnered enough financial flexibility to help bankroll part of the Syncrude expansion, the $1.5-billion Aurora mine, which is expected to be completed sooner than scheduled to help reduce overall costs, said chief financial officer Robert Fotheringham.
Revenue for 1997, its first full year of operation, from the sale of its portion of Syncrude production, was $209.5 million, and net income was $51.2 million. Distributable income was $41.4 million ($1.80 a unit).
But the high rate of return failed to impress some unitholders at the meeting, whose complaints ranged from the trust's lack of outside directors, to directors' compensation, to its way of accounting for its rate of return.
Another sore point was the 15% interest paid to PanCanadian, up from 11%, on 1,000 preferred shares awarded when the trust was created. Schultz said that's the price it had to pay to acquire an asset of such a high quality.
Exxon, Amoco Report Lower Profits For First Quarter
IRVING, Tex. (AP) - Weaker crude oil prices helped drive down profits by 13 per cent at Exxon Corp. and 43 per cent at Amoco Corp. in the first three months of the year, the huge energy companies said Tuesday.
Exxon, the world's biggest oil company, still beat Wall Street's expectations for the quarter. But Amoco's results were significantly below what analysts had expected.
Texas based Exxon, which owns Canada's biggest oil company, Toronto based Imperial Oil Ltd., said it made $1.89 billion US in the January March period. That's down from $2.18 billion in the same 1997 period.
Revenue fell to $30.2 billion from $35.2 billion in the year-ago period.
Crude oil prices were about one-third lower than last year due to the slowdown in Asian economies, mild winter weather and a surplus of crude oil supplies, said Exxon chairman Lee Raymond.
"Exploration and production earnings were adversely impacted by substantially lower crude oil prices which have been under pressure and falling since early in the fourth quarter of 1997, averaging about $7 per barrel less than the first quarter of 1997," Raymond said.
But he said chemical and petroleum product sales rose. Chemical earnings benefited from lower feedstock costs and sales volumes were up.
Meanwhile, Chicago-based Amoco reported net profits fell to $386 million, down from $674 million, a year ago. Revenues fell 15 per cent to $7.6 billion from $8.99 billion.
"Despite the current level of prices and earnings performance, we believe the strategies and plans we have in place will lead us to future growth and increased profitability," said Laurance Fuller, Amoco's chairman and chief executive.
"We also continue to identify ways in which to improve efficiency and streamline operations."
Spokesman Jim Fair said no wholesale layoffs of the company's 42,000 worldwide employees were foreseen, although there may be some job cuts on a "unit by unit basis, but that's always going on."
Petroleum products results rose, reflecting improved sales margins and volumes, the company said.
U.S. Oil Output at Risk Due to Low Prices, Group Says
NEW YORK, April 21 (Reuters) - Low prices could cut as much as 100,000 barrels per day from U.S. crude oil output as smaller producers are forced to shut in marginal wells, the head of the Independent Petroleum Association of America warned Tuesday.
In a new study, the IPAA forecast U.S. production to drop to 6.3 million bpd this year, undermining the country's longer-term balance between supply and demand.
"As bad as oil prices are, the reality is that we will be challenged to meet demand," George Yates, IPAA chairman, said. "The longer-term outlook for oil is very positive and we need to invest with that in mind."
Falling U.S. output will force an even greater reliance on imports, Yates added.
The IPAA study predicts oil imports will reach 10.7 million bpd within two years, accounting for 55 percent of the country's demand. This year's imports should top the 10 million bpd mark for the first time.
Independent producers have been particularly hard hit by the oil price collapse, with benchmark New York oil futures prices still more than 30 percent below last fall's levels despite a recent recovery. IPAA noted much of the forecast decline in production will come from independent marginal wells, which account for more than a million barrels daily of the country's output.
Nevertheless, Yates added that prices should soon stage a recovery. "I believe this is the bottom of the market," he said. "I don't think the current low prices are a permanent condition."
The recovery should be helped by solid growth in U.S. demand. The IPAA's forecast puts U.S. oil demand at 20.4 million bpd within two years, fueled by a robust economy. By 2010, consumption will hit nearly 24 million bpd, according to a forecast by the IPAA released at its fourth annual oil and gas investment symposium. |
