MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURS. JUNE 25, 1998 (5)
TOP STORIES
OPEC Fights Weak Market With More Production Cuts
OPEC ministers said Wednesday night they will slash daily production by almost 1.4 million barrels to boost prices as they fight the weakest oil market since the disaster year of 1986.
But oil traders were not immediately impressed, and OPEC said it might take months before a global supply glut is erased and prices can bounce back by a few dollars per barrel.
OPEC will withdraw 1.38 million barrels of oil from the market every day beginning July 1, ministers said, adding to earlier cuts that failed to reverse the damage OPEC itself created by pumping too much oil.
The OPEC president, United Arab Emirates oil minister Obaid bin Saif al-Nasseri, vowed that the new cuts will "banish the volatility so plaguing the market."
OPEC confronted a pricing crisis that pushed its average crude price below $11 US a barrel last week - less than half the group's target price of $21 US a barrel. But it could be a while before prices recover.
"It's a slow-burn fuse," said Leo Drollas, chief economist at the London-based Centre for Global Energy Studies. "Then it's going to go higher if they deliver - $16 or more."
The cheap prices have been a bargain for consumers, including gas guzzling North Americans, but a disaster for the oil producers, who will have problems meeting their national budget targets if the latest effort to rescue oil prices fails.
The Kuwaiti minister, Sheik Saud Nasser al-Sabah, said he would even consider further production cuts if prices don't respond - an idea echoed by his Algerian counterpart, Youcef Yousfi.
Others in OPEC hope the latest measures, which are aided by 203,000 barrels in daily production cuts from non-OPEC members Mexico, Russia, Oman and Egypt, finally can end their financial nightmare.
OPEC made an ill-judged decision in November to raise its output, just as the economic crisis in Asia was starting to choke off the growth in global oil demand.
OPEC ministers met informally Wednesday, and thought they had a deal, until last-minute questions about Iran's likely compliance forced some quick haggling that delayed the formal start of the group's summer meeting until late in the night.
Iranian oil minister Bijan Namdar Zangeneh assured his OPEC counterparts that his production cuts - 190,000 barrels - will be real.
OPEC did not immediately confirm the size of all cuts to be made. But OPEC delegates said privately the reductions would be led by the Saudis, who are chopping 425,000 barrels a day from their production beginning on July 1. Venezuela has promised to cut 325,000 barrels a day.
Kuwait, the United Arab Emirates and Nigeria each pledged to cut production by 100,000 barrels daily, with smaller cuts coming in from smaller OPEC members, delegates said on condition of anonymity.
Even Indonesia, which has faced the double whammy of an economic collapse at home and lower oil prices, said it would remove 30,000 barrels from the market.
Oil market analysts have been looking for new output reductions of at least 1 million barrels a day from OPEC.
"This is a powerful agreement," said Michael Rothman, senior energy analyst at Merrill Lynch in New York. Rothman said traders may have initially pushed prices lower on news of the deal because it was a bit confusing, but he predicted oil prices can rise by several dollars if the producers stick with their promises.
Oil futures prices ended mixed. Light sweet crude oil to be delivered in August rose eight cents to $14.60 US a barrel on the New York Mercantile Exchange. Brent crude oil for August fell 31 cents to $13.61 US on London's International Petroleum Exchange.
Other analysts have cautioned that OPEC needs to show that it can deliver.
Despite the gravity of OPEC's recent problems, traders can't ignore the fact that the producers in recent years have persistently lacked the willpower to stick to their production agreements.
The oil ministers held an emergency meeting in March, agreeing to cut 1.245 million barrels of daily production. They didn't deliver all, of those cuts and prices plunged further, leading to the latest effort to restrain production further.
Members of the Organization of the Petroleum Exporting Countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
OPEC Cuts Will 'Banish Volatility'
Cartel Vows To Cut Output By 1.38M Barrels A Day
Calgary Herald
Talk from OPEC's oil ministers was cheap Wednesday -- apparently worth only a few pennies a barrel.
A pledge to cut production by 1.38 million barrels a day at OPEC's meeting in Vienna didn't do much to impress oil traders immediately, as crude gained only eight cents on the New York Mercantile Exchange to $14.60 US a barrel.
Members of the Organization of Petroleum Exporting Countries announced their second production cut this year to boost prices in the weakest market since the disaster year of 1986.
But OPEC members have a history of breaking promises.
"It's more than I thought they would cut but talk's cheap," said Martin Molyneaux, an analyst at FirstEnergy Capital Corp. in Calgary. "If oil prices react too much or too quickly, then people are going to start to cheat."
OPEC will withdraw the crude from the market beginning July 1, the ministers said, adding to earlier cuts that failed to reverse the damage OPEC itself created by pumping too much oil.
The cartel said it may take months before a global oil supply glut is erased and prices bounce back by a few dollars per barrel.
OPEC's president, United Arab Emirates oil minister Obaid bin Saif al-Nasseri, said the new cuts will "banish the volatility so plaguing the market."
Crude has climbed $2.76 US a barrel this week amid speculation about the cuts. The price hit a 12-year low of $11.77 last Thursday.
"It's easy to announce cuts," said Bob Hinckley, a New York-based analyst with Merrill Lynch. "It's a lot harder to go out and actually turn the valves down and abide by that promise and that's what has created the credibilit problem."
The Kuwaiti oil minister, Sheik Saud Nasser al-Sabah, said he would even consider further production cuts if prices don't respond, an idea echoed by his Algerian counterpart, Youcef Yousfi.
Others in OPEC hope the latest measures, which are aided by 203,000 barrels in daily production cuts from non-OPEC members Mexico, Russia, Oman and Egypt, finally can end their financial nightmare.
The group made an ill-judged decision last November to raise its output by 10 per cent, just as the economic crisis in Asia was starting to choke off growth in global oil demand. OPEC supplies about one-third of the 75 million barrels of oil the world consumes daily.
OPEC has now pledged to cut a total of 3.1 million barrels of oil a day this year, more than making up for the 2.5 million barrels of production added last fall.
The reductions would be led by Saudi Arabia, which is chopping 425,000 barrels a day from production.
Waiting Game
Cautious Optimisim Greets Additional OPEC Cuts
Calgary Sun
The Canadian Association of Petroleum Producers (CAPP) wrapped up its annual investment symposium Wednesday on an optimistically cautious note.
After the National Petroleum Show, which earlier this month brought some 42,000 delegates to Calgary, some 100 Canadian oil and gas companies -- mainly from Alberta -- presented their assessments and predictions to more than 300 oil and gas analysts from around the world.
The timing couldn't have been better.
On Monday, the spot price for West Texas Intermediate crude rose $ 1.55 U.S. a barrel to to $13.38, and on Tuesday it wa another $1.05 U.S. to close at $14.43.
Wednesday, it rose by 15 cents.
That three-day rally ended a 12-year low drop in oil prices.
Then, yesterday, the Organizaton of Petroleum Exporting Countries (OPEC) agreed cut output by and additional 797,000 barrels a day, bringing total cuts pledged by world producers this month to 1.537 million barrels a day.
With non-OPEC countries participating in the cuts, that means 3.3 million barrels a day -- or 4.4% of world consumption -- have been taken off the markets. David Manning, president of CAPP, cautioned the situation is still unstable and unpredictable.
But Manning pointed out the theme of the conference has been that long term projects by the Canadian industry -- including Athabasca oilsands, East Coast endeavors like Hibernia and foreign exploration and development plays -- are still going ahead.
He also stressed natural gas prices are high; U.S. demand rising ; the Canadian dollar is at an all-time low; and that a number of pipeline projects are about to go ahead, or await expected regulatory approval.
Analysts concurred, warning producers will have to wait weeks -- if not months -- before they know how the cuts will impact the industry.
"Like anything OPEC does, the real question is not whether they've promised to cut production, but whether they'll actually do it," said Martin Molyneaux of FirstEnergy Capital Corp.
OPEC Promises Find Cool Reception In Oilpatch
The Financial Post
If the Organization of Petroleum Exporting Countries delivers its promised production cuts, Canada's oil industry could start bouncing back within three months, analysts said yesterday.
"The question is, can they [OPEC] live by their word? In the past, they have not been able to cut the whole amount," said New York-based Robert Hinckley, vice-president of global securities research at Merrill Lynch & Co.
"The market initially is going to pop and then it's going to settle back and take a wait and see attitude."
The cartel's oil ministers agreed yesterday in Vienna to reduce their combined daily production by 1.36 million barrels - or 2.5 million b/d when combined with cuts announced in March.
"It's easy to announce the cuts," Hinckley said. "It's a lot harder to actually go out and close the valve. That's what created the credibility problem today and that's why the market will settle back below US$15 for a while, to see if those cuts actually occur."
One major producer, Gulf Canada Resources Ltd., will wait a week or two to gauge market reaction before taking any steps, said president and chief executive Dick Auchinleck.
"If prices continue to increase through that period of time, then we are looking good for the remainder of the year. If they stay down though, then for the remainder of the year we are in a low price environment."
An oil price increase may slow merger and acquisition activity in the industry, now running at high levels and expected go into top gear this summer. Producers battered by low oil prices will gain more confidence in their ability to survive, said Martin Molyneaux, director of research at FirstEnergy Capital Corp. in Calgary.
The news gave the industry pause to cheer, but champagne corks weren't popping in downtown Calgary boardrooms.
Producers will have to wait weeks - if not months - before getting a clear idea of how the cuts will impact them, industry observers said as news of the deal trickled out of Vienna.
"Like anything OPEC does, the real question is not whether they've promised to cut production, but whether they'll actually do it," said Molyneaux. "Once again, they're in a position to either keep their promises or keep on producing at the same rate. I think everyone is just waiting to see what actually happens."
Higher prices could also precipitate a period of heightened activity by the end of the year, when the industry will also have to step up production of natural gas to fill new pipelines to the U.S.
The Best And Worst Of Times
Globe & Mail
What a difference a year makes. Last year, the annual investment forum put on by the Canadian Association of Petroleum Producers (CAPP) arrived smack in the middle of an acquisition frenzy in the oil patch, and everyone was smiling. This year, there are some pretty long faces -- and unlike last year, some of those who look the saddest are the takeover candidates.
Last summer, those in the takeover cross-hairs -- such as Dee Parkinson and Dennis Sharp of CS Resources, or Jeff Tonken of Stampeder Explorations -- looked pretty happy with the prices their companies were fetching. This year, buyout candidates know that for many of them, the only reason they are being seen as attractive prey at all is that they are cheap.
That doesn't include natural gas companies, however, thanks to bullish prices for the commodity. You could walk through the CAPP conference and spot the CEOs of gas companies and the CEOs of oil companies -- especially heavy oil -- from a mile away. The oil guys seemed on edge, like they hadn't slept, while the gas executives had a certain swagger about them.
Canadian 88 chief executive officer Greg Noval, for example -- never one to shy away from a cutting jab at a competitor, or a self-aggrandizing remark -- seemed to want to take home the title in the swaggering department. Mr. Noval's company is focused entirely on gas and has some of the lowest costs in the entire industry, something he made sure to mention several times.
Mr. Noval said the name of the game is "kickin' ass in oil and gas" and that his company wasn't scaling back at all like some others. "It's balls to the wall, excuse my French for any of the ladies in the audience," he said. As for any companies who have gotten over their heads in debt, and are watching their cash flow dry up, "we'll take advantage of that."
Some of those under the most pressure at the CAPP conference were companies with too much heavy oil in their portfolio -- unlike last year, when everyone wanted to get some. While the three-day CAPP song-and-dance show was under way last summer, for example, PanCanadian Petroleum announced that it had bought heavy oil producer CS Resources for $465-million.
Having failed in his bid for the company, Gulf Canada's then-CEO J.P. Bryan gobbled up Stampeder Explorations for $688-million in July, and in September Ranger Oil bought heavy oil producer Elan Energy for $565-million. Smaller companies got into the act too -- Baytex Energy, a fast-growing intermediate producer, paid $267-million for Dorset Exploration.
Not long after Ranger and Baytex bought, however, the price of oil started to head south at breakneck speed -- and didn't stop until it got to about $16 (U.S.) a barrel. Then it continued its descent, and appeared to hit bottom last week at about $11.50, before climbing on news of OPEC production cutbacks. Heavy oil is even lower, since it trades at a discount to regular crude.
Not surprisingly, Baytex Energy CEO Dale Shwed was one of those looking rather pinched during this week's CAPP conference. Giants like PanCanadian and Ranger can reduce the impact of their heavy oil excesses by focusing on other parts of their business. Baytex, by contrast, has found its Dorset purchase acting like a big brake on its previous track record of growth.
Although Dorset boosted Baytex's revenue to $124-million (Canadian) last year, its cash flow rose only moderately and its share profit fell -- largely because the company issued about 15 million shares in the takeover. Combine that with difficulty in producing the synergies the market was hoping for and Dorset's leverage toward heavy oil, and it's not a pretty picture.
The stock is currently trading for about $7 a share -- down 30 per cent from the $10 it was at just a few weeks ago, before the company's first-quarter results were released, and down more than 57 per cent from $17.50 in May. In the first quarter, the company reported that profit fell 56 per cent from the same quarter the previous year.
A tight-lipped Mr. Shwed admitted to the institutional investors and other industry players attending the CAPP conference that "the credibility of management has been called into question" by Baytex's plunging stock price and lacklustre performance. However, he did the best he could to argue that his company's assets are currently undervalued.
For example, he said, using the kinds of values for land and reserves that were implied by the recent takeover of Tarragon Oil & Gas, Baytex "has a net asset value of about $14.70 per share." He also made a point of mentioning that just 17 per cent of the company's production is heavy oil. "We're not a heavy oil company, as we have been accused of being," he said.
There were lots of investment types and other oil and gas executives taking notes, and studying their corporate handouts -- like bargain shoppers reading the K mart flyers in their newspaper.
Crestar Energy CEO Sees Net Loss In 1998
Crestar Energy Inc. is projecting a net loss and sharply lower cash flow this year as depressed crude prices weigh heavily on its financial outlook, Crestar Chief Executive Barry Jackson said on Wednesday.
Crestar expects a 1998 net loss of C$45 million or C$0.75 a share, down from a profit of C$32 million or C$0.64 a share in 1997, Jackson said at the Canadian Association of Petroleum Producers investment symposium.
Cash flow was projected to be C$235 million or C$4.10 a share, down from C$291 million or C$5.76 a share last year.
''It's hard to paint a very bright picture for 1998 given commodity prices and where they are,'' Jackson told reporters after his presentation.
''However, many of us have been around long enough in this business to have seen several of these down cycles, and the other side of the down cycle is the up cycle. You've just got to persevere.''
Jackson's forecast assumed an average West Texas Intermediate crude oil price of US$16 a barrel this year, a Crestar natural gas price of C$2 per thousand cubic feet and a Canadian dollar exchange rate of US$0.69.
The company expects its Alberta and Saskatchewan oil and gas properties to pump out an average of 93,000 barrels of oil equivalent a day in 1998, up 17 percent from 79,500 last year.
Crestar's stock price, which reached a peak of C$32 in November 1996, has been under pressure since then. It has recently touched lows of below C$17, amid investor concern over its exposure to oil prices, especially discounted Canadian heavy oil.
The company has recently been speculated as one of several takeover targets in the Canadian energy sector.
Jackson attributed some of the negative sentiment to Crestar's high debt levels, but said investors were more concerned with that than the banks.
The company expects its long-term debt to be C$640 million-C$710 million by the end of this year, which would result in debt being 2.7-3.0 times its projected cash flow.
''In a different interest rate environment that might be a different story, but the banks are not excited at all,'' he said.
Jackson said he placed little credence on the takeover rumors involving his company, although he acknowledged a growing trend toward studying merger possibilities as the industry has fallen on tough times.
Anderson Exploration Cuts Output Forecast
Anderson Exploration Ltd. has cut its projection for 1998 production by 2.6 percent because it had shut in several heavy oil wells and deferred some drilling due to low prices, Chief Executive J.C. Anderson said on Wednesday.
Anderson said the company now expected to produce 94,000 barrels of oil equivalent a day in western Canada this year, down from an earlier forecast of 96,500.
Also, a previous projection of drilling 570 wells has been reduced to 500, he said at the Canadian Association of Petroleum Producers investment symposium.
''It's not a huge cut, we're talking about 2.6 percent in the forecast, and the reason is we've shut in 1,500 barrels a day of heavy oil because we're not making any money on it,'' Anderson told reporters after his presentation.
Of the total expected output, the company now expected to produce 570 million cubic feet of natural gas a day, down from the earlier forecast of 585 million. Crude oil production, meanwhile, was expected to average 37,000 barrels a day, down from the previously predicted 38,000.
Anderson said an interruption in the company's production this spring, caused by a rash of forest fires that cut a swath through its Alberta operating areas, would not have a major impact on average output for the full year.
Anderson Exploration was forced to shut down as much as 8,000 barrels a day of oil production during the peak of the fire threat, but that would only translate into a reduction of about 200 barrels a day when spread out over the full year, he said.
Anderson repeated that he had not had any discussions with potential acquistors for his company, despite numerous recent rumors that it was a takeover target, possibly for a U.S.-based oil company.
Gulf Indonesia and Talisman Energy Continue Successful Gas Drilling in South Sumatra
Gulf Indonesia Resources Limited and Talisman (Corridor) Ltd., a wholly-owned subsidiary of Talisman Energy Inc. (NYSE/TLM), announced a new natural gas discovery in the Corridor Production Sharing Contract (PSC) area located in South Sumatra, Indonesia. The Rebonjaro Dalam-1 exploration well tested four zones at depths between 1,801 and 2,124 metres (5,910 and 6,970 feet) and flowed at an initial rate of 6.2 million cubic feet of gas per day through a 3/4 inch choke during an eight hour period. The composition of the gas includes 26 per cent carbon dioxide. Gulf has initiated plans for additional wells on the structure to delineate the size of the field.
Rebonjaro Dalam-1 represents the eighth gas discovery made by the companies in the area since 1991. The proximity of the discovery to the Corridor Gas Project infrastructure will enable easy tie-in for future gas production from the area. The discovery lies 5 kilometres (3 miles) from the main gathering line that will transport gas to the processing plant. The first phase of the Corridor Gas Project is near completion and is expected to commence natural gas sales to Caltex's Duri steamflood project in central Sumatra within 90 days.
Gulf Indonesia Resources Limited maintains a 54 per cent interest in the Corridor Block PSC and acts as operator. Partners are Talisman (Corridor) Ltd. with 36 per cent and Pertamina of Indonesia with 10 per cent.
Gulf Canada Has Netherlands Natural Gas Discovery
Gulf Canada Resources Limited announced today a natural gas discovery at the Gulf operated Q4-8 exploration well on the Q-4 Block located offshore in the Dutch sector of the North Sea. Gulf Canada Resources, through its wholly owned subsidiary Clyde Petroleum Exploratie B.V., currently holds a 49.75 per cent interest in the block.
The Q4 discovery well tested 27 million cubic feet of gas per day and is located approximately 20 kilometres (12 miles) from Gulf operated infrastructure in the area, which will potentially reduce development time. The current plan is to submit a production licence application later this year, proposing to start production by year-end 1999.
Partners in the Q-4 Block are Dyas B.V. with a 17.25 per cent interest and Clam Petroleum B.V. (a 50/50 joint venture with Marathon Petroleum Netherlands, Ltd., which is a wholly owned subsidiary of Marathon Oil Company, and Burlington Resources Netherlands Inc., which is a wholly owned subsidiary of Burlington Resources Inc (NYSE:BR) with a 33 per cent interest. The State has a right to acquire a 40 per cent interest through Energie Beheer Nederland B.V. under ''back-in'' provisions.
Precision Drilling Has Record Quarter, Year
The Financial Post
Acquisitions and high demand pushed Precision Drilling Corp. to record earnings and revenue in the fourth quarter and fiscal year ended April 30.
The Calgary-based energy service company said yesterday revenue for the final quarter climbed to $238.4 million from $148.5 million, and profit more than doubled to $27.3 million (65› a share) from $13.5 million (42›) a year earlier.
For the full year, Canada's largest contract driller had profit of $117.5 million ($2.82) on revenue of $1.01 billion, up from profit of $42.4 million ($1.44) on revenue of $455 million the year before.
Drilling services accounted for 68% of Precision's revenue in the year and 79% of operating earnings. The percentage of earnings coming from specialty services will grow because of recent purchases of Inter-Tech Drilling Solutions Ltd. and Northland Energy Corp., said Dale Tremblay, senior vice-president of finance and chief financial officer.
The firm is still looking for acquisitions that build on its core strengths.
Precision expects to benefit from producers' focus on gas plays this year because of low oil prices. The company has many big rigs suited for deep gas wells, said Miles Lich, a service firm analyst with Peters & Co. Ltd. in Calgary.
However, he estimates profit will fall to $114 million ($2.67 a fully diluted share)for the year.
"Rig utilization is going to be off. Day rates for rigs are coming off and have been for a month or so. That pressure will continue until commodity prices improve," he said.
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