MARKET ACTIVITY/ TRADING NOTES FOR DAY ENDING WED. JUNE 10 1998 (4)
TOP STORIES
Newport's battle with Canadian 88 heating up
The Financial Post
Newport Petroleum Corp. has filed a counterclaim seeking unspecified damages in its growing legal tussle with competitor Canadian 88 Energy Corp.
In a statement of defence and counterclaims filed with the Alberta Court of Queen's Bench, Newport says Canadian 88's recent $40-million action was an abuse of process intended to scuttle its own $56-million share offering.
"We thought this thing was without merit from Day 1 and we have not changed our position," Newport president and chief operating officer Sid Dykstra said yesterday.
The two companies have been locked in a legal battle since February over who should operate common producing assets in the Caroline area of central Alberta, in which they had agreed to be equal partners.
The battle was actually started by Newport, but in April Canadian 88 followed up with its own suit, claiming more than $40 million in damages.
Canadian 88's suit landed in the middle of a $56.6-million share offering launched by Newport to pay off debt.
The offering, a bought deal, has closed. But the issue has sold poorly, leaving its underwriters with a significant amount of unsold stock.
Newport stock (NPP/TSE) has slipped in value from the $6.90 offering price. It closed up 25c yesterday, at $5.75.
The syndicate is not participating in the suit.
"What we are claiming is that Canadian 88 intended to hinder our public share offering," Dykstra.
Newport is seeking damages in an amount to be determined by the court.
Canadian 88 president Greg Noval could not be reached for comment yesterday. But he has said he did not intend to scuttle the share offering.
It's mating season in the oil patch
Last year, oil firms in Western Canada had a record $16.3-billion in mergers and acquisitions. This year,the market has produced a sense of desperation that could push totals even higher.
The Globe and Mail
The summer is shaping up to be one of the hottest mating seasons ever in Western Canada's oil patch.
Poor oil prices and diving stock values have companies in the always volatile oil and gas industry courting and flirting with one another, each looking for the perfect partnership that will lift flagging fortunes.
Last year, when oil prices were still strong (the average price in 1997 was about $20.50 [U.S.] a barrel) exploration and production companies announced a record $16.3-billion (Canadian) in mergers and acquisitions, a 60-per-cent jump from 1996. Then, the deals were driven by market enthusiasm and companies with cash to burn. This year, with the price of oil falling below $14 (U.S.), analysts say there's a sense of desperation that could push totals even higher.
Through the first three months of 1998, $5.8-billion (Canadian) worth of deals were announced among explorers and producers, a number that falls just short of the single-quarter record of $5.9-billion set in 1989 when Imperial Oil Ltd. announced its $5-billion takeover of Texaco Canada Inc.
While the 1998 number is also skewed by one big deal -- Fort Worth, Tex.-based Union Pacific Resources Group Inc.'s $3.7-billion purchase of Norcen Energy Resources Ltd. of Calgary -- the latest figure only includes exploration and production companies, meaning it doesn't count the $15.6-billion merger of pipeline giants TransCanada Pipelines Ltd. and Nova Corp., both of Calgary, announced in January.
Why are some companies, after years of bachelorhood, suddenly doing the mating dance? When Clayton Woitas, president and chief executive officer of Calgary's Rennaissance Energy Ltd., announced his company's intention to buy Pinnacle Resources Ltd. earlier this week, it was the company's first takeover bid in its 16-year history. Mr. Woitas said the $684-million offer was made with an eye to the long term, beyond the present "painful conditions."
But it's those same conditions -- specifically, the low price of oil -- that are driving the recent consolidation movement. Low prices cut into revenue streams, forcing smaller companies to either curtail exploration programs or look for a partner to inject cash. Their share prices have also dropped, putting them in the right price range for companies in an acquisitive mood.
"It becomes a question of it being cheaper to acquire someone else's resources than to drill for your own" when oil prices are this low, said Wilf Gobert, an analyst with Calgary-based investment dealer Peters & Co. Limited.
Bigger companies are also being hit by revenue shortfalls. While they often have the cash to maintain exploration, that's no longer good enough in an industry increasingly driven by equity markets. When oil prices dipped, shareholder expectations didn't. To meet the demand for double-digit growth, companies are pressured into going shopping.
"In the decade I've been following oil and gas companies, I've never seen them under the intense pressure to add value per share that they're under right now," said Martin Molyneaux, an analyst with FirstEnergy Capital Corp. in Calgary.
"Everybody is getting beaten up in the equity markets pretty badly. They're thinking 'what can I do to make myself more attractive?' "
The depressed oil prices translate into lost revenues of $300-million a day across the world oil markets, Mr. Molyneaux said. Companies that are making acquisitions now are betting there are better days ahead, but if losses continue to mount they'll likely call a full stop to their shopping spree.
"If they thought oil and gas prices were going to stay where they are for two or three years, you'd see a lot of buyers dry up pretty quickly," said Frank Sayer, president of Sayer Securities Ltd. in Calgary.
He believes deals will be more infrequent in the coming months as the reality of the oil price sets in, but most analysts say there are too many other pro-consolidation forces at work for that to happen any time soon.
One of those forces is the strength of the U.S. dollar against its Canadian counterpart. It's undoubtedly a factor in Union Pacific's decision to acquire Norcen, and in two other Texas-based companies making billion-dollar bids for Calgary competitors in the past nine months.
Some companies, both Canadian and American, have also taken note of the stability shown by natural gas prices while oil has struggled, and are re-orienting their resources to concentrate more on gas. While oil continues to float around some of the lowest prices in decades, natural gas prices have remained steady in the past few months.Natural gas closed yesterday at $2 (U.S.) per 1,000 cubic feet.
Another factor is simply the belief that bigger is better. The oil and gas industry has always been prone to mergers and acquisitions, and Greg Stringham, vice-president of markets and fiscal policy for the Canadian Association of Petroleum Producers, warns that to read too much into the current consolidation movement is to ignore history.
"It's really an ongoing thing," he said. "Given the dynamics of the industry, it's just something that's bound to happen."
In other words, what's happening now is no big deal. While few analysts agree with Mr. Stringham, some say there is a precedent for what's happening now.
While the dollar figures are close to record-setting this time out, Angus Watt, an analyst with Edmonton-based L‚vesque Securities, points to a similar consolidation movement that began in the early 1970s -- the last time oil prices were this cheap (adjusted for inflation). Then, as now, companies big enough to absorb the revenue losses picked off those backed into a financial corner.
The difference between now and then, Mr. Watt says, is that a few decades ago companies looking to raise cash went to the banks and borrowed money for new exploration, using their land and cash flow as collateral. When prices dipped, companies were forced to sell their assets by banks looking to have their loans repaid.
Today, the wave of mergers and acquisitions is being driven by shareholders rather than banks, Mr. Watt said. When oil prices rebounded in the 1990s, companies needing money raised it through the equity markets instead of bank loans.
Not only has the new reliance on the stock market added fuel to the fire by thrusting growth expectations on companies, it has also made acquisitions easier. Instead of producing hundreds of millions in cash, the suitor can simply offer a stock swap, such as the one Renaissance is dangling before Pinnacle shareholders -- 0.66 of a Renaissance share for each Pinnacle share they own.
But what does it all mean? For consumers, not much. Consolidation at the exploration and production level -- where most of the deals are being made -- has little impact at the pump unless the same factors drive retailers and refiners to merge as well.
There are some signs that could happen -- Husky Oil Ltd. of Calgary bought Burnaby, B.C.-based Mohawk Canada Ltd. last week, doubling the number of stations it controls to 630 -- but so far the big players have been relatively quiet. Nonetheless, a federal government committee mandated to study the issue released a report yesterday that warned higher pump prices may be on the horizon as companies look for partnerships such as the proposed joint retailing venture by Petro-Canada and Ultramar Diamond Shamrock Corp.
More directly affected by the consolidation of ownership at the exploration and production level are employees of the affected companies. With mergers and takeovers comes the inevitable talk of job losses.
The other groups affected are investors and analysts. Investors will be happy if the deals result in a return to the good old days of profits and dividends, while analysts could make a living off trying to predict which companies will be the next to merge.
One company that surfaces in almost every conversation is Ranger Oil Ltd. of Calgary, a company that's been rumoured to be on the block for more than a year. Other takeover targets analysts often name include a host of other Calgary-based companies: Rigel Energy Corp., Anderson Exploration Ltd., Cabre Exploration Ltd., Crestar Energy Inc., Torrington Resources, and Summit Resources Ltd.
In fact, late yesterday, Magin Energy Inc. and Torrington Resources Ltd. announced they have entered into an acquisition agreement under which Magin will make a takeover bid worth about $100-million for all the issued and outstanding common shares of Torrington.
The list of those shopping could be even longer, since it might include virtually any company with the resources to take advantage of the market conditions. It makes for an unpredictable next few months.
"It's a fool's game to try to guess who's next," Mr. Watt said. "Everybody's looking at everybody."
Magin, Torrington in oilpatch's second deal this week
The Financial Post
Magin Energy Inc. unveiled a $100-million stock bid for Torrington Resources Ltd. late yesterday
In the deal, the second significant oilpatch takeover this week, Torrington shareholders are being offered one common share and one-half warrant of Magin for every 2.25 shares held. The warrants will have an exercise price of $9.50 a share and will expire on Sept. 1, 2000.
Investors holding 40% of Torrington shares have already agreed to tender to the offer.
The agreement allows Magin a right of first refusal if there's a competing offer.
The two Calgary-based companies have mutual core operating areas in central and western Alberta.
The acquisition would increase Magin's daily production to 11,854 barrels of oil equivalent and proven and probable reserves to 38.4 million barrels of oil equivalent.
"Undeveloped acreage of 540,000 net acres, together with significant combined free cash flow, which in the first quarter was in excess of $9.5 million, provides a platform for strong growth through the drill bit," Magin said.
Torrington's board is recommending acceptance of the bid.
Magin Energy shares (MGY/TSE) closed unchanged yesterday at $7.25. Torrington (TRN/TSE) was also unchanged at $2.90.
Gulf Canada Resources Acquires Production And Strategic Facilities in Australia
Gulf Canada Resources Limited announced yesterday that the Company has entered into a Memorandum of Understanding (MOU) to purchase BHP Petroleum's wholly owned subsidiary BHP Petroleum (Cartier) Pty Ltd. Key assets included in the company are a 50 per cent interest in the Jabiru and Challis production licences (AC/L1, 2 & 3), and a 43 per cent interest in the Skua production licence (AC/L4). These fields are located in the Timor Sea off the north coast of Western Australia. BHP Petroleum is currently the operator of the licences. The MOU also includes an option to farm-in to additional acreage in the region, allowing Gulf the opportunity to fully evaluate this additional acreage prior to exercising its option. This is part of Gulf's previously announced initiative to focus its international program on core areas, and the transaction will be funded from available cash.
The acquired properties are expected to produce 6,000 barrels of oil per day net to Gulf for the remainder of 1998. Based on existing operating conditions, the current operator estimates remaining reserves to be approximately five million barrels. Gulf plans to enhance economically recoverable reserves by introducing operating efficiencies to extend field life. Included as a component of the producing interests are the Jabiru and Challis floating production storage and offloading (FPSO) vessels. The Jabiru field and FPSO vessel are located 13 kilometres from the Tenacious oil discovery that flowed 7,667 barrels of oil per day as announced last July. Gulf holds a 25 per cent interest in the Tenacious well. Significantly, the Jabiru production facilities have sufficient capacity to process oil from the Tenacious field, which should expedite field development.
''This is a strategic transaction for Gulf and completes a major step in our Australian business plan,'' said Richard Auchinleck, President and Chief Executive Officer of Gulf Canada. ''We will add immediate production and cash flow, build on our concentrated position in this prolific Australian region, and gain control over infrastructure toenable fast-track development of the Tenacious field.''
Pertamina signs six oil production contracts
Indonesian state oil company Pertamina signed six oil production sharing contracts on Thursday, with companies including Total SA of France, Gulf Canada Resources Ltd and Lasmo Plc of Britain, the company's exploration director said.
"Indonesia is still attractive to foreign companies to search for oil. We have signed six oil production contracts, including with Total, Gulf, and Lasmo," exploration director Priyambodo Mulyosudirjo told reporters after the signing.
Under the contracts, Total will explore 6,865 square km offshore in the Walo Block, off Irian Jaya. Total committed to invest $29.2 million over 10 years.
Gulf Resources would explore 4,433 km sq of offshore in the Ketapang Block, North of Madura, East Java. Gulf will invest $43.9 million over 10 years.
Lasmo would explore offshore and onshore in the 4,235 km sq Malagot block in Irian Jaya and would invest $67.4 million over 10 years.
Pertamina also signed oil contracts with Japan Petroleum Exploration Co Ltd (JAPEX), Argentina's YPF SA and local company Wirabuana Pan Resources.
Under the contract, JAPEX would explore 2,757 km sq onshore of Semirak, in Irian Jaya and invest $82 million over 10 years.
YPF would explore 11,250 km sq offshore of South Sokang block, in Riau, Sumatra. It would invest $46.5 million in 10 years.
Wirabuana will explore 4,000 km sq offshore of Karapan block, to the northeast of Java and invest $49.9 million over 10 years.
Hibernia Oilfield In High Gear
Calgary Sun
Hibernia management appears to be upping its initial estimate of the amount of recoverable reserves in the massive oilfield off Newfoundland.
In a statement yesterday, Hibernia president Harvey Smith said production at the company's offshore platform is back up to 60,000 barrels a day from 15,000, following the successful testing of a water-injection well last month.
The increased production keeps Hibernia on track to meet its target of 25-million barrels in the first year of production.
"More importantly, we are finding our long-term projections for Hibernia appear to be better than we originally anticipated," Smith said.
"The reservoir is of world-class quality and has the potential to produce more than our present estimate of 615-million barrels of recoverable reserves."
Last November, the lead partner in the Hibernia consortium, Mobil Canada, said it had increased its official reserve estimates to 750-million barrels and predicted peak production on the platform would increase to 180,000 barrels a day from 150,000.
But Hibernia didn't follow suit, saying it needed more data to make new predictions.
In an interview Wednesday, Smith indicated it may have some of that data.
We're getting some good confirmation that we have a very good reservoir in Hibernia," he said.aSome of the work that's being done, separately by the owners, is suggesting that perhaps we can get more out of the Avalon, so that just increases our confidence level on what we think our field will yield at the end of the day."
Several observers and politicians have pegged Hibernia's reserves at one billion barrels, and some insiders say peak production could surpass 200,000 barrels a day with minor modifications to the platform.
Hibernia will complete a second water-injection well in July and a gas-injection well in August.
Smith said production for the second half of the year should average 100,000 barrels a day and that actual output at year-end could be about 135,000 barrels.
Diplomats urge Canadians to tap Persian Gulf riches
There's a lot of money to be made' for oilpatch service firms
Daily Oil Bulletin
A group of Canadian ambassadors and diplomats were in Calgary this week toMurge Canadian oil and gas service firms to put more effort into marketing and selling technology to the largest oil-producing region in the world.
Compared to firms in other areas, Canadian companies have put little effort into getting into the Persian Gulf region, Robert Craig, counsellor for the Canadian embassy in Riyadh, told a Calgary Export Club meeting Wednesday.
"There's a lot of money to be made there, especially in the esoteric oil and gas business," he said.
With Saudi Arabia developing a more self-sustaining economy, power generating resources are badly needed, he said. Gas-to-electricity projects will become a major industry in the country, Craig predicted.
Since the early 1990s, about five trillion cubic feet of gas reserves have been added each year, and the reserves still need to be developed. Much of the gas is sour, and that's an area in which Alberta has a great deal of expertise.
Other areas which may benefit from Canadian technology are development of some of the country's smaller and isolated oil fields where seismic-processing knowledge and power can be employed, he said. Also big on the Saudi agenda is slant drilling technology and oilfield waste-management technology.
"The Saudi procurement process is not transparent," Craig said. "A good agent or joint venture partner are crucial to success."
Along with a competent agent, technological advancement is critical to attract attention. Customer service ability such as client support are evaluated to become a qualified supplier to Saudi Aramco, he said.
"Don't get blacklisted because of non-performance."
Canadian exports to Saudi Arabia are only around $800 million a year, noted Daniel Hobson, Canada's ambassador to Saudi Arabia, during a panel discussion.
"There is the potential to do a lot more than that," he said. "As (the Saudi) oil industry matures, they will be able to take advantage of our technology."
Hobson said firms need to work at getting a foot in the door to develop relationships and experience in obtaining contracts with Saudi Aramco.
"It's not an easy place to do business," he said. "(But) there are tremendous procurement opportunities for service companies."
Terrance Colfer, ambassador to Kuwait and Qatar, said the Gulf states rely heavily on countries which sit on the United Nations Security Council.
"The United States, the French and the British are the biggest competition we have," he said. "There is a preference to the United States."
Added Stuart McDowell, ambassador to the United Arab Emirates: "The
political influence from this competition is very strong."
The UAE is also looking at developing almost 200 trillion cubic feet of mostly sour gas reserves with some $8 billion worth of projects on the books.
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