MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY JUNE 29, 1998 (6)
TOP STORIES
$827M Oilpatch Merger
Strong Canadian gas sector, weak C$ draw Devon Energy into friendly merger deal with Calgary's Northstar Energy
The Financial Post
The ranks of large independent energy firms in Canada declined again yesterday with Oklahoma based Devon Energy Corp.'s announcement of an $827 million share swap merger with Northstar Energy Corp.
Based on a June 26 closing price of US$36.50 for Devon, the bid equals $12.17 for each Northstar share, a 25% premium to its closing of $9.75 June 26. The total value of the deal, including assumption of $455 million in debt, is about $1.2 billion.
Northstar and Devon announced the proposal after the market closed. Earlier, after a request from the Toronto Stock Exchange, the company confirmed it was in merger discussions. Shares of Northstar (NEN/TSE) closed up 85› at $10.60 before trading was halted. Devon's shares (DVN/AMEX) rose to US$36-11/16, a gain of 3/16. Northstar shares have ranged between a high of $13 and a low of $8 in the past year; in the same period Devon has fluctuated between US$49-1/8 and US$32-5/8.
John Hagg, Northstar's president and chief executive officer, said the merger creates one of the largest independent energy firms in North America.
He said Northstar started thinking about a cross-border structure a couple of years ago after seeing similar deals in the financial and pipeline sectors.
"We think we're at the leading edge of new kinds of structures and visions for a North American energy company," he said in a conference call with reporters.
The operating philosophies of the two companies are quite close and there is little overlap in operations, he said.
Larry Nichols, president and CEO of Devon, who will occupy the same slots at the combined corporation, said Northstar's attractions included its assets, staff and management.
"By combining the expertise and local knowledge of Northstar ... with the financial statement that Devon has, the resulting entity will be much stronger and much more exposed to greater growth," he said.
Devon already has a small presence in Canada, from its purchase of Kerr-McGee Corp.'s properties in December 1996, which will be rolled into Northstar's operations.
The resulting company will have 53% of its reserves in the U.S. and 47% in Canada. It will have total reserves of 1.2 trillion cubic feet of gas and 117 million barrels of oil.
Nichols said the new firm would have only US$312 million in total debt while having some US$500 million available in lines of credit.
In a different twist from other transactions already announced, Northstar will continue to operate under its own name and with existing management.
A strong US$ plus optimism about the future of Canadian gas prices are bringing many U.S. producers shopping north of the border. Northstar had been a target in many analysts' eyes because of its debt and operational problems stemming from last year's takeover of Morrison Petroleums Ltd. In the first quarter ended March 31, the firm had earnings of $30.2 million, including proceeds from assets sales, on net revenue of $53.2 million.
Paul Beique, a Calgary analyst with Dundee Securities Corp., said the proposal will recapitalize Northstar and may allow it to pursue opportunities more aggressively.
He was somewhat surprised that Northstar was able to attract a friendly bid. "I thought the stock was cheap. I thought the stock was vulnerable to a hostile bid," he said.
Northstar joins a long list of Canadian firms that have been bought or taken over by American companies. In late May, Marathon Oil Co. gave investors a choice of cash or stock for a US$1.1-billion takeover (including debt) of Tarragon Oil & Gas Ltd., while Union Pacific Resources Group Inc. kicked off this year's trend by paying US$2.6 billion in cash for Norcen Energy Resources Ltd. and assuming another US$900 million in debt.
Oil prices continue to languish around US$14 a barrel despite promises of production cuts by big producers around the world as well as members of the Organization of Petroleum Exporting Countries. Second quarter financial results are not expected to be pretty for many firms, especially oil-oriented producers. Dundee's Beique expects the merger and acquisition trend will continue. "There are a lot more to come," he said. "There are a lot fewer big ones to come because there aren't that many big ones left."
Husky Oil To Buy Canada Offshore Oil Interests From Talisman Energy & Gulf Resources
Husky Oil Ltd. said on Monday it agreed to buy oil properties off Canada's East Coast from Talisman Energy Inc. and Gulf Canada Resources Ltd. for a total of C$70.66 million.
Calgary-based Husky said the deal included stakes in such Jeanne d'Arc Basin properties as White Rose, Terra Nova, North Ben Nevis, Nautilus and Mara, all located off Newfoundland.
Calgary-based Husky said the deal included stakes in such Jeanne d'Arc Basin properties as White Rose, Terra Nova, North Ben Nevis, Nautilus and Mara, all located off Newfoundland.
A total of 12 "significant discovery areas," and 55,000 acres of exploration lands were included.
Talisman would receive C$50 million for its interests and Gulf Canada C$20.66 million, the companies said.
Husky, which recently announced a major heavy-oil upgrading plant expansion on the Alberta-Saskatchewan border and takeover of gasoline retailer Mohawk Oil Canada Ltd. , said the increased offshore interests were part of a key strategy to expand in the growing oil region.
Talisman said it would use the proceeds to focus on its main operating regions of western Canada, the North Sea and Indonesia, while Gulf said it would reinvest the funds into exploration on its properties in Canadian and French waters near Saint-Pierre and Miquelon in the Gulf of St. Lawrence.
Husky is 49 percent owned by Hutchison Whampoa Ltd. , a firm controlled by Hong Kong billionaire Li Ka-Shing. Li and his family own another 46 percent of Husky directly, while Canadian Imperial Bank of Commerce owns the remaining five percent.
Precision Drilling Corporation Acquires Sixteen Well Service Rigs
Precision Drilling Corporation (PDS/NYSE & PD/TSE). announced that Drive Well Servicing has acquired 16 service rigs from Brockham Oilwell Servicing (1986) Ltd. and B.O.S. Well Servicing Inc., who carried on business under the trade names Widney Well Servicing and Brockham Oilwell Servicing. The acquisition was completed on June 25, 1998.
Drive Well Servicing is a well servicing business carried on by EnServ Well Services Limited Partnership which is wholly owned, directly and indirectly, by Precision Drilling Corporation. The acquisition of these service rigs results in Drive Well Servicing operating a total of 76 service rigs and 21 snubbing units.
Camberly Energy Works At Rehabilitation
The Financial Post
Problem-plagued Camberly Energy Ltd. said yesterday it is working to make itself an "active" company once again in the eyes of the Toronto Stock Exchange.
The exchange suspended the shares (CEL/TSE) from trading last week after it declared Camberly was no longer active. Yesterday, Camberly said it is reviewing a series of possible acquisitions and also exploring ways to provide shareholders with liquidity during the suspension.
Nova, TCPL Shareholders Approve Merger
The Financial Post
A bigger and stronger TransCanada PipeLines Ltd. flexed its muscles yesterday with the US$275-million purchase of a pipeline and natural gas reserves in Europe.
The deal was unveiled on the day TCPL and Nova Corp. shareholders overwhelmingly backed the largest energy merger in Canada's history.
The union, which will see Nova's chemicals unit spun off into a separately traded entity, now awaits approval from a Court of Queen's Bench judge. Shares of the two new companies are expected to start trading Friday in Canada and July 6 in the U.S. TCPL wasted no time in demonstrating its global vision. The operator of the largest natural gas pipeline system in North America is buying Occidental Netherlands Inc., the Dutch subsidiary of Occidental Petroleum Corp. of Los Angeles.
The Dutch unit owns portions of eight gas-producing licences in the North Sea and 38.6% of a gas pipeline that serves the region. Net production is 90 million cubic feet a day.
The price was US$275 million, but could go higher because of contingency payments based partially on the price of gas and reservoir performance. The deal will be financed by debt and cash reserves.
"We believe that the time was right to enter Europe, as it confronts deregulation across the continent," George Watson, TCPL's president and chief executive, told a standing- room only crowd at the annual meeting in Calgary.
The gas reserves should run out in five years, but the acquisition establishes a platform that can be built upon in later years, Watson said.
North and South America remain top priorities for new investments.
Shareholders of Nova and TCPL supported the complicated merger of the two rivals. Nova investors voted 98.9% in favor, while TCPL's figure was one percentage point higher.
Each Nova share will be exchanged for 0.52 of a TCPL share; a Nova preferred share will equal 0.5 of a merged company preferred share; and every TCPL common share will yield 0.2 of a Nova Chemicals Corp. common share, plus one merged company common share.
Ted Newall, Nova's vice-chairman and CEO said the merger unlocked the value of the chemical and gas transmission company. "We are more than closing a door on the past. We're opening two doors to an exceptional future."
He pointed to to Nova's share price to back his claim. The stock (NVA/TSE) closed up 10› at $16.95, versus a mid-November level of $13.30.
Its gain of 27% compares with TCPL's climb of 17% during the same period. TCPL shares (TRP/TSE) closed at $32.60, down 10›.
TransCanada Buys Occidental's Dutch Subsidiary For US$275 Million
TransCanada PipeLines Ltd. is expanding into Europe with a $275 million purchase of the Dutch subsidiary of U.S.-based Occidental Petroleum Corp.
The big Calgary energy services company announced today it will buy all the shares of Occidental Netherlands Inc. in a deal slated to close in mid-July.
"TransCanada is fully committed to expanding its international operations," company president George Watson said in a release. "The Occidental Netherlands purchase is a perfect fit, signalling our entry into the rapidly changing European marketplace."
Occidental Netherlands owns interests in eight gas-producing wells in the Dutch section of the North Sea and a 38.6 per cent interest in Noordgastransport B.V., which owns the gas pipeline system that services the area.
The North Sea wells produce about 90 million cubic feet of natural gas a day and have proved and probable reserves of about 191 billion cubic feet of gas.
"The European energy market is currently undergoing some fundamental changes due in part to the opening of the European gas industry," said Garry Mihaichuk, president of TransCanada's international development unit.
"These changes provide us with an opportunity to realize one of our strategic goals -- a position in the European mid-stream energy market."
Petro-Canada To Pursue Sale Of ICG Propane To Third Party, Withdraws Public Offering
Petro-Canada announced early Tuesday that it is pursuing negotiation of the sale of its interest in ICG Propane Inc. to one of a number of companies that expressed interest in the business, and that it does not intend to proceed with the sale to ICG Propane Income Fund.
As a result, ICG Propane Income Fund has withdrawn its filing of a preliminary prospectus with securities commissions and regulatory authorities across Canada relating to the issue of trust units. ICG Propane Income Fund is a single purpose trust established to acquire ICG Propane Inc. from Petro-Canada.
It's Time To Pump Money Into Oil
Pittsburgh Post-Gazette
The oil business has fallen on tough times - and that's good news if you're looking for bargains.
The price of oil recently hit a 10-year low, less than $12 a barrel. It's down 26 percent in the second quarter. On the supply side, the problems are too much production by oil-rich tries in the Mideast and Latin America and increased pumping by Iraq. On the demand side: a warm winter in the United States and a drop in demand as Asia's economy slumps.
Last Wednesday, members of the Organization of Petroleum Exporting Countries pledged to cut production by 2.6 million barrels a day, or about 3 percent, over the next year. Lower supply means higher prices, but the markets weren't particularly impressed with these promises, and oil closed at $14.60 a barrel, little changed from its price before the OPEC meeting.
Below $16, it's hard for most drillers and oil service companies to make decent money. The big, integrated international petroleum firms that sell to consumers can still do well because their costs fall, but up the production chain, businesses get creamed.
Or, more precisely, the businesses themselves get hurt a little (or even continue to thrive), but a panicky Mr. Market causes their stocks to get hurt a whole lot. This is one of those "rolling depressions" that Marty Whitman, manager of Third Avenue Value Fund, talks about. Masked by the general good health of the economy and the market, some sectors are suffering. Oil service is a prime example.
A good way to find stocks to buy is to look closely at such sectors, and the daily list of "Global Industry Groups" in the Wall Street Journal is the place to start. Since the start of the year, oil drilling stocks are down 26 percent, drillers are down 11 percent and secondary oil companies are down 10 percent.
But those aggregates don't tell the whole story. Excellent companies have been devastated.
Take Smith International Inc., which makes drilling equipment such as diamond bits. It has a good balance sheet and sales that have gone from $220 million to $1.6 billion in four years. According to Bloomberg News, the mean estimate of the 15 analysts who cover the stock is that profits this year will rise from $2.58 to $3.11 per share, or 21 percent. Not bad, but not as good as in 1997 and 1996; the gain in each of those years was over 50 percent.
Still, look at Smith's stock. From a high of $87.88 a share in October, it had fallen to $37.31 Wednesday - down 58 percent in eight months. (Halliburton Co.), which Houston analyst William Herbert, of Howard Weil Labouisse Friedrichs Inc., told me is the "best-managed company in the oil-service industry," is down 43 percent since the Asian crisis broke in October. Deepwater driller [ Transocean Offshore Inc. ] , is off 46 percent. (Schlumberger Ltd.), the biggest of the oil-service companies and a popular stock on Wall Street, is down only 27 percent, but a smaller firm, (Parker Drilling Co.) is down 61 percent in eight months, while [ Ensco International Inc. ] , a contract driller whose earnings have more than sextupled in three years, has fallen 60 percent.
What's going on here?
The answer, in a word, is Asia. If you believe the Asian crisis has been overdone in the stock market, your best play - better, perhaps, than Asian shares themselves - could be oil-service stocks.
Typically, these shares go to extremes, either down or up, says Angeline Sedita, an analyst with [ A.G. Edwards & Co. ] in St. Louis. Oil service, she believes, "offers wonderful appreciation potential." But what about that oil price? I ask. "My view is that what goes down eventually comes up," she says. "Oil at these levels becomes 'naturally correcting.' " In other words, when prices get low enough, production slows significantly, thus crimping supply, thus pushing prices back up.
Gerard Feenan, the oil-service analyst for Value Line, is bullish on the sector: "Though persistent weakness in oil prices is a cause for concern, we think industry fundamentals remain very positive." He gives a timeliness ranking of one or two to 14 of the 22 companies he covers. The entire sector is ranked fifth highest of the 90 that Value Line follows.
Feenan's highest ratings go to [ Varco International Inc. ] , which sells and leases highly advanced drilling tools and carries a backlog of orders that is as large as its entire 1997 sales volume, and [ Global Industries Ltd. ] , a Lafayette, La., provider of offshore construction and support services.
One large mutual fund specializes in oil-service companies: notably Fidelity Select Energy Service, whose portfolio is headed by Cooper Cameron and Halliburton.
For funds that buy energy stocks of all sorts, the choice is broader. Top performers, according to Value Line, include [ T. Rowe Price ] New Era, which I own myself and which has returned an annual average of 14 percent for the past five years at relatively low risk, and Dean Witter Natural Resources Development Securities, whose top holdings include big internationals such as (Exxon Corp.) and (Royal Dutch Petroleum Co.)
But if you are thinking of buying a diversified oil portfolio, consider a closed-end fund that trades, just like a stock, on the New York Stock Exchange. It's called (Petroleum & Resources Corp.), (PEO), and a recent report by Morgan Stanley Dean Witter calls it a "strong buy" partly because the investment firm expects "energy stocks to rebound as the price of oil recovers" and partly because the fund is so well run.
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