MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 21, 1998 (5)
TOP STORIES, Con't
Current Wave of Industry Mergers Nothing New
Woodside Research Ltd.
The financial and general press has been spending a lot of ink on stories of corporate takeovers in the Canadian energy industry. While we are at a high point in the cycle of mergers, consolidation is a constant trend in this industry.
I recently reviewed the list of the top 100 oil and gas companies that appeared in July 1988 in The Financial Times of Canada. Only 22 companies are still in existence and some of those are very different from the company that existed 10 years earlier. The list of 22 companies includes many of the largest public companies in the industry. By the way, The Financial Times of Canada also disappeared: merged into The Globe & Mail.
Imperial Oil Still Top Company
Imperial Oil Limited remains the largest company in the industry and a ranking today would still place that company at the top of the list for production, reserves, revenue, assets and market share for retail gasoline sales. Imperial is also the leading company in development of Canada's oil sands.
Petro-Canada ranked #2 in 1987 reserves. Petro-Canada is one of the largest players in the development of Newfoundland's offshore oil fields. It still rates above the other integrated companies in reserves and revenue but is challenged by PanCanadian Petroleum for total reserves. Shell Canada still holds the same #3 spot among the integrated companies but has slipped to #4 or #5 overall among public companies in reserves. PanCanadian ranked #5 in 1987 and likely ranks #2 or #3 today among public companies.
Among the top five companies in the 1988 ranking, only Dome Petroleum is missing, having been taken over by Amoco Canada in 1988. Since Amoco is a private company, wholly owned by US-based Amoco Corp., it was not included in the 1988 list of public companies.
Texaco One of Largest Takeovers Ever
Among the next five companies #6 ranked Texaco Canada Inc. was taken over by Imperial Oil in 1989 for more than $5 billion. There is now a new Texaco Canada but it is a wholly owned subsidiary of its US parent. TransCanada Pipelines ranked #10 in the 1988 listing. It had a very large oil and gas division that was spun off to the public as Encor Energy and later taken over by Talisman Energy.
Gulf Canada Resources, Suncor Inc. and Alberta Energ rounded out the second group of five companies. All remain although all three have undergone massive changes in the last decade, mostly for the better.
CanOxy and Talisman Emerge as Global Players
The third group of five lost two or three companies, depending on how we count. Canadian Occidental remains in a much larger form, having made a major discover in Yemen and bought producing assets in the North Sea. Polysar Energy owned an oil and gas division that underwent a couple of name changes but was best known as Canterra Energy. It was eventually taken over by Husky Oil when Husky's parent of the day was NOVA Corp. NOVA bought Polysar, and spun the Canterra division to Husky Oil.
BP Canada was the Canadian subsidiary of British Petroleum in 1988. BP plc. sold its stake and the company adopted Talisman as its new name. Talisman is now one of the top two Canadian-based international oil and gas companies (Canadian Occidental is the other). Noranda is in the process of exiting oil and gas. It ranked # 14 in 1988 as the controlling shareholder of #15 ranked Norcen Energy and the sole shareholder of Canadian Hunter Exploration. Norcen has recently been taken over by US-based Union Pacific Resources. Canadian Hunter is being dividended out to Noranda shareholders to become a public company. CanHunter will become 40% owned by the Edper Group through its control block in Noranda.
Nine of the top 15 companies from 1988 are still active. Ocelot Energy Now International
The fourth group of five lost four companies. Ocelot Industries ranked #17 in 1988 and is the only survivor. It underwent two major transformations and a name change. The chemical division was sold but the oil and gas division is still around as Ocelot Energy. Most of its focus is now on very large projects in Africa but it still holds production in central Alberta and a very successful pipeline division.
The other companies in the fourth largest group of five all disappeared. Interprovincial Pipe Line sold its oil and gas assets, mainly by spinning off Home Oil as public company. Anderson Exploration later acquired Home. Bow Valley Industries was taken over by Talisman, Westcoast Transmission merged its oil and gas subsidiary with Edmonton-based Numac Oil & Gas to form Numac Energy. Westcoast no longer owns producing assets. North Canadian Oils was taken over by Norcen Energy
None of the companies in the fifth group of five survived. Westmin Resources sold its oil and gas assets to Norcen. NOVA Corp. sold its oil and gas division. Total Petroleum sold its producing assets in both Canada and the US. Canadian Utilities sold its oil and gas division. Canada Northwest Energy was taken over by Sherritt Inc. Later, the Canadian holdings were sold to Barrington Petroleum while the Mediterranean assets went to Sherritt International.
Only 10 of Top 25 Companies Remain
Out of the top 20 and also the top 25 companies in the industry in 1988, only 10 remain active in some form. That is the only part of the industry with some semblance of stability. There are only 15 of the top 50 companies still around in 1998.
Poco Petroleums ranked #29 on reserves in 1988. It is still active and ranks about 15th in revenue among public companies today. Renaissance Energy ranked #37 in 1988. It has been one of the most successful companies over the last 15 years and now ranks about 10th in revenue. Ranger Oil ranked #39 in 1988. It has continued to grow in the North Sea, where it made major discoveries in the 1970s and added a sizeable Canadian operation. Ranger now ranks about 15th among public companies.
Coho and Numac Emerge Reborn
Two other names from the top 50 remain on the list but in very different form. Coho Resources ranked #42 in 1988. The company sold all its Canadian assets in an effort to wind up operations, but could not find a buyer for their US assets. Eventually, the shareholders wound up with a US-based company that continues to do well. Numac Oil & Gas was taken over by Westcoast Petroleum (see Westcoast Transmission) with the resulting company renamed Numac Energy. Many Numac O&G shareholders took shares in the new Numac Energy in the takeover and the two staffs were merged. In a sense, the company continues under a different name.
Only 15 of the top 50 companies from 1988 are still active in roughly the same corporate form in 1998. The real Darwinian drama played out among the smaller companies. Only 7 of the next 50 companies are still around. Most have succeeded well enough to become important names in the industry. Most have risen to "senior producer" status by reporting revenue of more than $100 million.
Nearly All Companies Rated 51-100 in 1988 are Gone
Paramount Resources ranked #52 in 1988 and is still active as a successful gas exploration and production company with 1997 revenue of $113 million. Ulster Petroleum ranked #58 in 1988 and has one of the best growth records in the industry with 1997 revenue of $129 million. Summit Resources ranked #60 in 1988 and recorded 1997 revenue of $84 million. Northstar Energy rated #61 in 1988 and posted $266 million of revenue for 1997. Penn West Petroleum was close to insolvency twice over the last decade. It ranked #72 in the 1988 listing and reported $183 million of revenue for 1997.
Canada Southern is one of the few survivors in the entire industry that has not done well over the last ten years. Based on its 1987 results, it ranked #74 in the top 100. For 1997 it will end up ranking about #150 of all public companies. It is not in the top 100 and shows no prospects for vitality.
Only Cabre Remains From Smallest 25
The only company from the smallest 25 on the list of the top 100 from 1988 that is still around is Cabre Exploration. Cabre ranked #94 on the list in 1988. For 1997, Cabre reported $107 million of revenue and ranks about 24th in revenue.
The list of the companies that no longer exist reads like the who's who of junior oil and gas producers from the last decade. The tough competitive reality of the oil and gas industry is that most companies fail. Out of the top 100 companies only 22 remain. Out of the 26-50 group, only 15 remain, out of the 51-75 group, only 6 remain and of the 76-100 group, only one company, Cabre Exploration is still in business.
Majors Dominate but Juniors Always Challenge
The Canadian oil and gas industry is dominated by the huge integrated companies like Imperial, Shell and Petro-Canada and a handful of "senior producers" like PanCanadian, Canadian Occidental, Talisman, Alberta Energy, Gulf Canada, Canadian Natural, Renaissance Energy and Anderson Exploration. Most of these companies have been around for a long time. But Alberta Energy, Anderson, Canadian Natural and Renaissance are all relatively new players (the last two are less than 20 years old).
Much of the vitality comes from the highly competitive nature of the industry. It is easy to fail and very hard to survive from start-up to "senior producer" status. While there is much press attention to the current wave of takeovers, this is nothing new. Mergers have always been part of the industry. It is the way that less successful companies are swept away to be replaced by better ones.
In 1987, Dome Petroleum ranked as the 4th largest company in the industry yet it failed and was taken over. The recent takeover of Norcen Energy is the first $5 billion deal since 1988 (Dome) and 1989 (Texaco). It remains a Darwinian business.
Weekly Rig Count
In Canada, the number of oil and gas rigs was up 1 to 255 this week. On a year to year basis, the rig count was down 92 compared to the total of 347 a year ago, Baker Hughes Inc. said Friday.
The number of oil and gas rigs operating in the U.S. fell by five to 863 this week.
There were 966 rigs operating in the United States during the same week last year.
Of the rigs running this week, 589 were exploring for natural gas and 271 for oil. Three were listed as miscellaneous.
Houston-based Baker Hughes has kept track of the count since 1940. The tally peaked at 4,500 in December of 1981 during the oil boom. It dropped to a record low of 596 in the summer of 1993, exceeding the previous low of 663 in 1986.
The rig count represents the number of rigs actively exploring for oil and natural gas.
Of the major oil- and gas-producing states, Texas led rig gainers with seven, Ohio added four and Pennsylvania was up by two.
Oklahoma's rig count plunged by 10, Louisiana fell by five, Colorado and New Mexico lost three each and California and Kansas dropped by 1.
Michigan, Wyoming and North Dakota remained unchanged.
Gas Price May Drop
Edmonton Sun
A gasoline price war could break out at any time in Alberta thanks to the precipitous drop in crude oil prices, an oil company spokesman said yesterday.
World prices have slipped to a little more than half last year's average price but retail gasoline prices have barely moved.
Rocco Cianccio of Petro-Canada said the delay in chopping retail prices is because most companies are making up for money lost and investments put off due to razor-sharp profit margins of the last few years.
But, if crude prices stay low, gasoline prices will fall, he predicted.
"Somebody has to be the first (to cut prices)," he said. "There are 20 competitors out there and any one of them could start it up."
Petro-Canada said yesterday it's continuing to invest in its retail outlets. It plans to change all 26 of its Edmonton sites to its bold red-and-white format by year end.
"When we're done at the end of the year, it's going to be $18 million spent in Edmonton," Cianccio said.
He estimated Edmonton had 40 Petro-Canada stations 10 years ago.
While low oil prices are good news for consumers, they're causing anxiety among Alberta producers.
Oil analysts said yesterday they are pinning their hopes for higher prices on OPEC's summer meeting in Vienna Wednesday.
Related Article
A Solution In Search Of A Problem
Re-Run - The Globe & Mail
Dan McTeague is not a happy man. The Liberal MP for Pickering Ajax Uxbridge and chairman of the Liberal Committee on Gasoline Pricing, feels that his committee's recently released report is not getting the kind of respect it deserves. He said as much in a phone call concerning a column on the subject that appeared in this space yesterday.
Mr. McTeague feels his critics can only be opposed to his conclusions if they haven't read them, or haven't understood them. In fact, it's quite easy to read it, understand it -- and still feel that his report is wrong-headed.
For example, the committee says it believes that "normal supply and demand economics cannot account for the large price swings that Canadians see at the pumps." It says it is the "high level of concentration in the Canadian oil industry that is the cause of price volatility."
Further on in the report, however, the committee admits that if there were fewer independent retailers and less competition, there would be less price volatility -- because the price at the pump would stay unrelentingly high. And yet, sustained price hikes don't occur for more than a brief period in any major urban market. So where is the danger that has the Liberals up in arms?
In its conclusion, the committee admits that "Canadian consumers do have access to one of the world's lowest prices for gasoline." In fact, prices, adjusted for inflation, are currently lower than at any time since 1977. If the industry is controlling prices to keep them high, they're doing a pathetic job.
Mr. McTeague is right on two points: His committee cleverly refrains from stating -- as their Liberal colleague Mac Harb has on countless occasions -- that the industry is guilty of price fixing or collusion. They also refrain from calling for government intervention in setting gas prices.
However, the committee gallops full speed toward those two propositions before it manages to stop a hair's breadth away from endorsing them. When it comes to price fixing, for example, the reportsays "the committee believes price fixing and collusion does not occur."
But it later states that it doesn't occur because "it doesn't have to . . . price signs on retail outlets can be an easy way for market participants to achieve the same results that price fixing and collusion are supposedly said to bring without having to resort to any illegal activity."
And what are these results the big chains are achieving through all this legal activity? Maximizing their profits, it seems, by pushing prices up a few cents before a long weekend, or right after the federal budget. Mr. McTeague and his committee obviously feel this ought to be a crime.
In its report, the committee makes some statements that appear to be totally unproven. For example, it says that it "cannot support the contention . . . that retail gasoline prices are solely the result of market forces at play in a very competitive and complex industry."
Why can't the committee support that idea? Because it believes seven or so large refiners -- who are also large retailers -- "maintain absolute price controls . . . at both the wholesale and retail level" by effectively controlling supply. Is there any evidence of this? No. In fact, the report simply recommends that the government undertake a study of whether this is true.
Similarly, the report says "price wars should not be viewed as an indication that the marketplace is competitive, as is sometimes suggested," and that "price wars and uniform price fluctuations are not indications of true and effective competition." Why not? It doesn't say.
So what would the committee do about this non-existent crime? Well, for one thing, the Liberal MPs would like to make it easier to prove predatory pricing, or pricing designed to drive a competitor out of business. The report says proving beyond a reasonable doubt that this has occurred -- and that it resulted in less competition -- is just too difficult.
And why is it too difficult? Because it hasn't happened, that's why. Even after pages of evidence showing that dozens of independent gasoline retailers have fled the Ontario market because the big oil companies have squeezed their margins, Mr. McTeague's committee can't point to any evidence that this has resulted in sustained higher prices at the pump.
That's why it's hard to accept Mr. McTeague's conclusions -- not because they are hard to understand, but because there isn't any evidence to back them up. Any way you look at it, the report is a solution in search of a problem.
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