MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WED., APRIL 22, 1998 (3)
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Suncor Outlines Recipe For Success
The Financial Post
Higher production from its oilsands plant, lower costs and a successful hedging program sheltered Suncor Energy Inc. from weak oil prices in the first quarter, a trend likely to continue for the remainder of 1998, its president said yesterday.
"We expect a solid year," said Rick George, after addressing the annual meeting in Calgary. "We would love to see our sixth consecutive year of cash flow and earnings improvement. That is a tough goal, but is certainly not out of the question."
First-quarter results showed a marginal deterioration relative to Suncor's industry peers, many of whom are seeing their margins evaporate because of low oil prices.
Net income for the period ended March 31 was $50 million (46› a share), down from $60 million (54›) last year. Cash flow was $144 million ($1.31), down from $149 million ($1.37). Revenue was $543 million, down from $571 million.
Results were weaker because of low commodity prices, warm weather and higher expenses related to growth plans, George said.
But production rose to 135,000 barrels of oil equivalent a day, up from 121,000 BOE a year ago. Another offset was a hedging program for oil, with 30% of 1998 production presold at more than US$20 a barrel, US$5 above the going price.
"The biggest external factor affecting our performance this year will be low oil prices," George said.
"As a result, the industry in general will be under a lot of pressure to rationalize and, depending on how quickly prices recover, we could see more mergers and acquisitions in the exploration and production side."
But Suncor is not in a buying mode because it believes it can create more value by executing growth plans laid out for the next four years. These include a $2.2-billion expansion of its oilsands operation near Fort McMurray, Alta., by 2002.
George said second-quarter earnings should compare favorably with last year's, when the oilsands plant was shut down for part of the time for a routine turnaround.
In the third and fourth quarters, Suncor should see additional production from its new Steepbank mine. From the third quarter, this is expected to increase oilsands output to 105,000 barrels a day by yearend from 92,000 b/d in the first quarter.
The meeting was spiced up by a church group calling on oil companies to take more responsibility for cutting global warming. "We feel the church has a role to play to ensure all companies have a corporate, ethical responsibility in completing their work in a way that does not damage either the environment or the people that live in it," said Robert Gall, director of development of the Roman Catholic Diocese of Calgary.
George said Suncor is looking for middle ground between those who discount the risk of global climate change and those who believe industrial development must be halted.
Suncor Energy Slides Ahead With Oilsands Project
Canadian Press
Suncor Energy Inc. is bucking gloomy oil prices by moving its massive Alberta oilsands project off the drawing board and closer to construction, shareholders heard at their annual meeting Wednesday.
"We are going to ride through these low periods and we are going to continue to grow," said Suncor president Rick George.
Compared with the previous year, 1997 company profits were up 19 per cent, cash flow increased by 17 per cent and production hit a record high.
George said the main reason for the 1997 success is that the company hedged a huge chunk of its oil production by selling 30 per cent a year in advance at the 1996 price - averaging $5 more per barrel.
Suncor has applied to proceed with its $2.1-billion oilsands project, called Project Millennium, near Fort McMurray in northeastern Alberta.
The 3,000-page application, outlining the construction, operation and reclamation plans for the project, was submitted to the Alberta Energy and Utilities Board and Alberta Environmental Protection.
But George said job-seekers shouldn't buy their one-way fares to Fort McMurray just yet.
Construction won't start until sometime next year because of the regulatory process, he said.
The Millennium expansion project is expected to double Suncor's oilsands production to 210,000 barrels a day by 2002.
The company recently received a $1.3-billion line of credit from the banks - most which will go toward the Millennium project, said chief financial officer Dave Byler.
Although he wouldn't make any firm predictions, George said he is not expecting a quick recovery in ailing oil prices, and therefore the company will be involved in more mergers and acquisitions in exploration and production.
Suncor is also pumping more money into its Ontario retailer, Sunoco. Now selling diesel, the company will open five large truck stops in southern Ontario this year, and it plans to spend $75 million on retail convenience stores at its gas stations over the next three years.
"You just can't make effective returns on selling gasoline alone," said Michael O'Brien, Sunoco executive vice-president.
With recent record-breaking natural gas prices, Suncor will be exploring for more natural gas in 1998.
"The focus in the future is natural gas," George said, adding now that the company is firm on synthetic-oil production, it needs to balance its portfolio with more gas.
Suncor will also be making more explorations in the international arena.
"We always see our heartland right here in Canada," George said.
"But if we are going to continue with this goal of doubling our share price every five years, we need to start stepping out in a very methodical, dedicated way."
Suncor Sees "Solid""1998 Financial Showing
Reuters
Suncor Energy Inc. will have a tough time matching its 1997 financial results this year, but oil price hedging, lower operating costs and higher production should cushion the blow of weak crude prices, Suncor Chief Executive Rick George said on Wednesday.
"You're not going to see a significant reduction in where our earnings and cash flow were last year. I'm not saying we're going to exceed it, but I don't think you're going to see a significant reduction," George told reporters after Suncor's annual meeting. "We expect a solid year."
Last year, Suncor posted earnings of C$223 million or C$2.04 a share and cash flow of C$575 million or C$5.75 a share.
The company earlier on Wednesday reported lower first-quarter earnings and cash flow than in the same quarter of 1997, but analysts have said the company, which operates Canada's second biggest oil sands operation, would be less pressured by weak crude prices than its Canadian integrated oil peers.
Suncor's earnings for the period were C$50 million or C$0.46 a share, down 17 percent from C$60 million or C$0.54 a share in the year-ago quarter.
Cash flow was C$144 million or C$1.31 a share, down 4 percent from C$149 million or C$1.37 a share in the first quarter of 1997.
George said lower oil prices would probably not force Suncor to claw back its 1998 capital spending budget of C$1 billion, which is up from C$850 million last year. Several Canadian producers have cut their original 1998 budgets.
"Our balance sheet is in good shape, our cash flow was only slightly down, so we're really right on track," he said. "We're going to keep these growth projects on schedule and proceed right ahead."
Suncor was on track to meet or exceed its 1998 exploration, production and oil sands output goal of 135,000-140,000 barrels of oil equivalent a day, he said. In the first quarter, output averaged 135,000 barrels a day, up from 121,000 in the first quarter of 1997.
For 1998, Suncor has hedged 30 percent of its crude output at about US$20 a barrel, about US$4.50 a barrel higher than the current market price, and 20 percent of its 1999 production at about the same level.
Its biggest and most expensive undertaking is the C$2.2 billion "Project Millennium" expansion of its northern Alberta oil sands operation, a plan aimed at boosting synthetic oil production to 210,000 barrels a day from the current 91,000 by 2002.
Suncor filed its application for the project with Alberta's Energy and Utilities Board and Environmental Protection ministry on Tuesday. George said he expected the regulatory process to take nine to 12 months.
In a positive move for the expansion, IPL Energy Inc. gained regulatory approval to build its Wild Rose oil pipeline, which will move Suncor's rising oil production to markets.
Oilsands Boom Causes Local Firm To Expand
Edmonton Sun
There's no need to sell Al Spracklin on the benefits of the northern Alberta oilsands boom - he's got a 120-tonne reminder sitting in the yard of his south Edmonton business.
The manager of Brytex Building Systems Inc. yesterday supervised the loading of a $2.2-million, six-metre-tall, nine-by-27-metre metal electrical building on a trailer for truck transport to Suncor Energy's Steepbank Mine near Fort McMurray.
"This is the electrical building for the crusher. They bring all the bitumen in from all the various pits and then it goes through a crusher to grind it up into smaller particles (to be transported to the refinery)," said Spracklin.
"It's ongoing. It's the same with Syncrude. There's always something that's going on out there. We provide, typically, about 75% of the electrical houses for Syncrude."
The reliability of oilsands business convinced locally owned Brytex to more than double its shop size recently to 2,340 square metres.
The extension, built for nearly $1 million, allows the firm to do more specialized welding jobs in-house.
"Probably about 75% is for the oilsands," he said.
"The extension that we just put on here is strictly welding for the manufacture of large projects of this nature."
Brytex has 65 employees now as it enters the slower part of the year, but had 85 to 90 employees at its peak last November, Spracklin said.
He said Suncor's submission of its $2.2-billion Project Millenium application to the government yesterday means the work will continue to pour in.
"We're already doing budgets on that. It'll provide an extreme amount of work locally for Edmonton and throughout Alberta."
Pipeline Closer - Alliance Could Start Soon
The Financial Post
Construction of Alliance Pipelines Ltd.'s $3.7-billion project could begin sooner than expected due to the demise of the Viking Voyageur pipeline and an early end to regulatory hearings, says the company's president and CEO.
Dennis Cornelson said yesterday the outlook for Alliance has improved recently and a previously announced delay of up to 12 months may not be necessary. However, he refused to be any more specific.
The proposed $1.24-billion US Viking Voyageur project, owned by TransCanada PipeLines Ltd. and two U.S. partners, is not expected to proceed.
It has withdrawn its opposition to Alliance from before the National Energy Board.
TCPL and Nova Corp. have also backed off their objections to Alliance in a deal to gain gas producers' support for their proposed merger, speeding up the NEB hearing. The hearings, into their 64th day, are expected to end by mid-May, with evidence to be completed by next week in Calgary.
Closing arguments are scheduled to begin May 11. A decision from the NEB is now expected by fall. Cornelson said Alliance is ready to go as soon as it gets approval. More than 70% of materials and construction contracts are in place, Cornelson said.
Opposition to Alliance pushed back the project's startup date to the second half of 2000 from the end of 1999.
Alliance's high pressure pipeline system will transport 1.3 billion cubic feet of western Canadian natural gas daily to Chicago.
Gord Currie, an oil and gas analyst with Canaccord Capital Corp. said an early end to the opposition is a "good psychological thing" for Alliance. But he said doubts still remain that there is enough gas to fill the pipe when it starts up.
First-Quarter Profits Fall At Mobil, Shell
Associated Press
Mobil Corp. and Shell Oil Co. reported a drop in their first-quarter profits Wednesday because of weak oil prices and reduced demand for natural gas due to the warm winter in North America.
Mobil's earnings fell 15 per cent for the January-March period but still beat analysts' expectations. Shell's profits dropped 5.4 per cent.
At Mobil, the Fairfax, Va.-based energy company earned $705 million in the quarter, down from $826 million a year earlier.
Revenue fell 16 per cent to $13.63 billion.
The latest results included special charges of $10 million for costs associated with the oil company's alliance with British Petroleum in Europe. First quarter 1997 results included special charges of $18 million, much of that also related to the Mobil-BP alliance.
"Crude oil prices weakened considerably in this year's first quarter, averaging about $7 per barrel below the same quarter last year," said Mobil Chairman Lucio Noto. "Additionally, natural gas prices in North America were down substantially as a result of unusually warm winter weather."
Noto said worldwide production was up one per cent over last year's first quarter, primarily due to higher volumes in Equatorial Guinea and the Hibernia field in Canada.
Meanwhile, Shell reported it earned $489 million in the quarter, down from $517 million in the same period a year ago.
Revenue tumbled 37 per cent to $4.8 billion from $7.6 billion a year ago.
Shell Oil does not report earnings per share because it is a subsidiary of Royal Dutch Shell, one of the world's biggest oil companies.
President Philip Carroll said the company was hurt by a 40 per cent decline in crude oil prices and a 30 per cent drop in natural gas prices.
"Significantly increased production of both crude oil and natural gas was overshadowed by the steep price declines across all lines of business," Carroll said, repeating his prediction that 1998 will present a "very challenging business environment."
Shell also cited higher interest costs because of increased debt associated with the acquisition of Tejas Gas Corp.
Halliburton Co., Noble Drilling Post Strong profit Gains
Reuters
Energy services and engineering group Halliburton Co. reported a 42 percent rise in first quarter earnings on Wednesday which it said was entirely due to to its energy related businesses.
Separately, Noble Drilling said its profits nearly doubled due to due to higher day rates for contract drilling.
Dallas-based Halliburton's net income rose to $117.8 million or 44 cents per share from $83.0 million or 32 cents per share in the same period of 1997. Revenues rose 24 percent to $2.4 billion.
Operating income at Halliburton's energy services division jumped 58 pecent to $185 million, showing no signs of any ill effect from protracted oil price weakness which has eroded the earnings of its clients in oil exploration and production.
Halliburton's chairman, former U.S. Defense Secretary Dick Cheney, said in a statement that he expected the energy services business -- which generates two thirds of the company's revenues -- to make further progress during the rest of the year.
The company's engineering and construction business saw a small decline in operating income to $28.8 million, but Cheney said its performance was likely to improve as the year progressed.
Halliburton has previously announced plans to buy Dresser Industries for $7.7 billion, leapfrogging Schlumberger to become the world's biggest oil services group.
Houston-based Noble Drilling reported a 95 percent surge in first quarter net income to $46.2 million due to higher average day rates for contract drilling.
Noble Chairman James Day said he was pleased with the first-quarter results but pointed to a cloud on the horizon.
"Due to the weakness in oil prices we can anticipate some decline in dayrates in certain markets, most dramatically in the Gulf of Mexico. However, our continued strategy of seeking longer term contracts mitigates, to some extent, the near volatility in the commodity markets," he said.
Two oil majors, Exxon Corp. and Shell Oil, had some good news for drillers and service companies on Wednesday when they said they had no plans to follow Amoco and Unocal in cutting their capital spending on exploration and production.
Meanwhile, rating agency Standard & Poor's, upgrading the debt of Diamond Offshore Drilling on Wednesday, said the contract drilling sector's financial perfromance had been extraordinarily strong and could improve further over the next one to two years.
"However, Standard & Poor's also has concluded that such high level of financial performance is unsustainable over the long term," it added.
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