MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY JUNE 30, 1998 (5)
TOP STORIES
Northstar Was Prospect-Rich But Cash-Poor
Grand plans to drill a spate of expensive, high-risk Canadian natural gas wells but shrinking cash to fund them led Northstar Energy Corp. to its planned merger with Oklahoma based Devon Energy Corp. , Northstar Chief Executive John Hagg said on Tuesday.
"We think we're prospect-rich in these deep, exciting things but on the other hand, relative to our overall size and relative to having C$400 million or so in debt, maybe we were a little bit too skewed to those kinds of projects," Hagg said in an interview.
"You want to pursue them all. The quality is so good you don't want to give them up, so this is one way to give us the time to develop them."
Devon on Monday announced a C$830 million stock-swap offer for Northstar , a Calgary based company that had struggled after its 1997 takeover of Morrison Petroleums Ltd.
Under the friendly deal, which has the approval of both firms' boards of directors, shareholders of Northstar would receive 0.227 of a Devon share for each Northstar share.
The bid circular was expected to be mailed in the next three to four weeks. Morgan Stanley and RBC Dominion Securities acted as financial advisers to Northstar in the deal.
Northstar is involved in drilling three deep exploratory gas wells in the southwestern Alberta foothills, where drilling costs can run as high as C$10 million a well. Most industry experts agree that vast gas reserves lie deep beneath the foothills of Alberta and British Columbia, but drilling success rates are low because of the tricky geology.
Through a joint venture signed late last year with Chicago-based Amoco Corp.'s Canadian subsidiary, Northstar also gained numerous exploratory drilling prospects in another gas rich region, northeastern British Columbia.
Northstar at the time committed to spending C$45 million over three years.
"We're seeing more opportunities up in northeastern British Columbia to spend more money there and those are very deep, high-cost, remote-location wells there as well," Hagg said.
He said he had been in discussions regarding a merger with another U.S.-based company about two years ago because of a belief that Northstar could benefit from the higher cash flow multiples U.S. markets afford independent oil companies in their stock prices.
Current low oil prices, which have constrained financial fortunes throughout the Canadian energy sector, rekindled Northstar's desire to merge with a U.S.-based company armed with a strong balance sheet, he said.
"We think a lot of the value in Northstar is in our deep prospects that don't have any reserves booked right now and we felt, quite frankly, with our debt a little too high and oil prices as low as they were that there was a risk that in the months ahead we could be getting into a bit of corner."
He pointed out that none of the prospects would bear fruit within the next few months and getting a well on stream would be a lengthy process if the company made a discovery, so financial wherewithall was a prerequisite.
Devon Chief Executive Larry Nichols said on Monday that Northstar's gas prospects and a strengthening outlook for Canadian gas prices attracted him to the company.
"The cold, hard facts are that it's a higher-debt company getting together with a low-debt company and we think that over the next couple years it's the best way for us to get the full value out for our shareholders," he said.
Northstar on Tuesday closed up C$0.60 to C$10.60 on most-active turnover of 16.2 million shares, representing nearly 24 percent of the company's outstanding stock.
Devon's shares on the American Stock Exchange closed down US$0.75 to US$34.94.
Petro-Canada Drops ICG Spinoff, Plans Sale Of Unit
The Financial Post
Petro-Canada has pulled the plug on the sale of its propane unit to a royalty income fund because of uncertain stock markets.
The Calgary-based firm had several companies express interest in ICG Propane Inc. after filing an application last February with securities officials to spin off the non-core business, which was acquired in 1990.
As a result of the decision, ICG Propane Income Fund has withdrawn its preliminary prospectus. The single-purpose trust was established to buy ICG from PetroCan.
The deterioration of energy sector stocks persuaded PetroCan to negotiate a deal with another firm, said spokesman John Percic.
"We had a real offer that was brought forward and we entered into negotiations to get fair value for the asset," he said.
He declined to name the buyer but said PetroCan hopes to conclude a deal within the next several weeks.
"The only thing I can figure out is that they can get better value in the private market," said Robert Hinckley, a Merrill Lynch & Co. analyst in New York. He said U.S. propane partnerships such as AmeriGas Partners LP or Suburban Propane Partners LP might be interested.
Another possible buyer is TransCanada PipeLines Ltd. It is interested in expanding its natural gas and gas liquids processing and marketing businesses, president and chief executive George Watson has said.
ICG employs about 875 people and controls 30% of the country's propane market, putting it behind only Superior Propane Inc., which has 40%. Superior was owned by Norcen Energy Resources Ltd. until it was spun off into the hands of Superior Propane Income Fund. Norcen sold its last 10% holding in May.
PetroCan's unit had revenue of $311.5 million in 1997 and earnings before income taxes, depreciation and amortization of $31 million.
The withdrawal came after PetroCan refiled the prospectus in late May. The firm said the amendments reflect first-quarter financial results of the parent company. RBC Dominion Securities Inc. was the lead underwriter on the cancelled financing.
Low oil prices have hammered energy sector royalty trusts in the past nine months. Some have fallen 50% from their highs as investors have sold out. Trusts usually buy mature assets and use the resulting cash flow to give investors a payment that includes a partial return of capital.
Oil Fight Ultimatum - Companies Given August Deadline
The Financial Post
The federal government is threatening to step in and resolve a dispute be-tween Newfoundland and Nova Scotia over the ownership of a potentially rich offshore oil and gas site.
Natural Resources Minister Ralph Goodale has written to the provinces telling them to resolve a boundary dispute in the Laurentian Channel by August.
If there is no deal by then, Goodale said, he will invoke offshore oil management agreements -- the Atlantic Accord Implementation Act -- with the two provinces to appoint a mediator and use binding arbitration.
"The first preference is for the provinces to settle it themselves, but if not, there is a mechanism to resolving it and the minister has said he will appoint a mediator," a spokesman for Goodale said yesterday.
Goodale's office has not yet received a reply from Chuck Furey, Newfoundland's mines and energy minister, or Nova Scotia Premier Russell MacLellan, who is also the province's energy minister.
The disputed site is estimated to contain one-billion barrels of oil and nine-trillion cu. ft. of natural gas, according to Suzanne McCarron of Mobil Oil Canada Ltd.
"We've only done some preliminary technical work. But it's certainly an area of interest," McCarron said.
Mobil is also involved in other East Coast developments, such as Hibernia, Terra Nova and the Sable Island oil and gas project.
"Once this boundary issue is resolved, we would probably run some modern seismic [tests] on the area and get some more definitive data," McCarron said.
In addition to Mobil, Gulf Canada Re-sources Inc., Imperial Oil Ltd. and French oil interests are keen to explore and develop the site.
The companies haven't moved beyond exploratory work due to the dispute.
The offshore zone has been the centre of a dispute for about 25 years and Goodale has said it is time to clear up the issue and allow companies an opportunity to develop the offshore site.
Analysts View From England
Daily Mail
Watch my face, said Saudi oil minister Ali al-Naimi after the latest Opec meeting in Vienna. 'You can see the confidence,' he boasted when asked whether oil producers really would cut production by another 1.4m barrels a day.
Watch for September, said analysts. If the deal holds until then prices should rise - but not before.
Together with cuts agreed earlier, oil ministers have thrashed out a deal to cut global production by nearly 10pc. Yet Brent crude slipped back 30 cents to $12.25 a barrel.
Flemings analyst Alan Marshall says: 'There is no rush to buy oil because every storage depot in the world is full of the stuff. All the speculative money got out at the start of the year and it will only go back in when supply shrinks.' Jonathan Wright at Merrill Lynch adds: 'The market has got to see a couple of months' data before Opec is given any credit.' If the deal sticks, Marshall sees Brent hitting $18 in September and $20 by the year end.
Wright says BP, down 15p to 875p, and Shell, up 3p to 425p, have most to gain from a higher oil price. Among explorers, Enterprise Oil (unchanged at 563p) and Lasmo (5 1/2p lower at 240p) stand out.
COUNTRIES IN THE NEWS
Russia Sees New Oil Cuts, Regulations From July 1
MOSCOW, June 30 - A new round of regulations governing Russia's oil sector kicks in on Wednesday, but enforcing them may prove difficult, analysts said.
The most high-profile change in the sector will be a cut in oil exports by 100,000 barrels per day (bpd), a reduction offered by Russia at last week's meeting of the Organisation of the Petroleum Exporting Countries.
Although Russia is not a member, Fuel and Energy Minister Sergei Generalov attended the meeting as an observer, and offered the cut in line with OPEC and a range of non-OPEC countries looking to slash output to boost prices.
Deputy Prime Minister Boris Nemtsov had promised small cuts to start from July 1 as far back as April, and Generalov topped these up by announcing extra crude export cuts and a drop in product exports of 20,000 bpd to take the total to 100,000 bpd.
The ministry publishes export allocations for crude exports from Russia. In the third quarter this year, the allocation is 28.60 million tonnes.
This compares with an allocation of 29.84 million tonnes in the second quarter - a fall of 1.24 million tonnes, or just short of 100,000 bpd over the quarter, indicating at first glance Russia is keeping its part of the bargain.
But in fact, analyst Jim Henderson of MFK Renaissance in Moscow pointed out, the second quarter figure was bloated by an extra allocation rolled over into the second quarter from the first as exports then were delayed by bad weather.
A more realistic comparison may be with the third quarter last year, when exports were 28.07 million tonnes. In comparison with that quarter, exports in the third quarter 1998 are actually set to rise by 530,000 tonnes, or over 40,000 bpd.
Production cuts by OPEC members taking effect from July 1 are measured against February production.
Russian oil company Nizhnevartovskneftegaz (NZGZ.RTS) said on Tuesday it expected its output to fall to around 357,000 bpd from 387,000 bpd in 1997, and a company source said the decision was taken in line with Russia's OPEC commitment.
A further key change to export procedures will be introduced at the pipeline monopoly, Transneft, responsible for all crude oil movements by pipeline. In effect this covers all exports, since even seaborne exports are moved to ports by pipeline.
From Wednesday, companies will not be able to place oil for export in the Transneft system until they can show they are up to date with all tax dues.
Analysts said it was not clear which companies the government was targetting in its drive to increase tax revenues.
Transneft held its annual shareholders meeting on Tuesday at which it was expected to approve deputy energy minister Viktor Ott as chairman, following the recent dismissal of long-standing head Valery Chernyayev.
The government owns 75 percent of Transneft shares. Also on Wednesday Russia's lower chamber of parliament, the State Duma, votes on an austerity programme drawn up by the government to pull Russia back from economic turmoil.
Among measures expected to have a particular impact on the energy and other raw materials sectors are plans to shift the burden of tax from production to consumption.
''We need by all means to shift the tax burden from production to consumption. This is the main point, and virtually all the speakers agreed with that, in one form or another, and from different ideological positions,'' Prime Minister Sergei Kiriyenko told a press conference last week after he first announced his programme.
Petroleum, Gas Output of Qaidam Basin Hits Record-High
XINING (July 1) XINHUA - Because of new extracting techniques, the daily oil output of the Qinghai Oil Field, China's fourth largest natural gas field, has increased to 5,000 tons from the 4,500 tons produced at the end of 1997.
Located in the Qaidam Basin on the Qinghai-Tibet Plateau, the oil field has already produced more than 15.5 million tons of crude oil and refined eight million tons of oil since 1954.
By the end of last year, the oil field's oil and natural gas output had hit one million tons for seven consecutive years.
The field's oil resources are estimated at 4.2 billion tons and its verified natural gas reserve tops 150 billion cubic meters.
The annual outputs of oil and natural gas are expected to reach three million tons by the end of this century.
Amoco Urges Egypt to Market Gas, Sees Turkey a Buyer
CAIRO, July 1 (Reuters) - Amoco Egypt plans to spend more than $450 million by 2000 on developing natural gas fields but further gas investment will depend on local and export demand.
''We've found an awful lot of gas and we've got to move this into markets right now. Any investor wants to get a return on their investment and in the gas business the only way to do that is to have a market for gas,'' said Mike Ivy, Executive Vice President of Amoco Egypt, Amoco Corp's local unit.
''We're going to continue to spend exploration dollars here but if we look at our near-term spending, it's going to be dominated by development,'' he told Reuters in an interview.
''In Egypt, the market is growing but the infrastructure really needs to be put in place to allow the market to develop. The government is very interested in continuing to take gas and hopefully some export projects will develop and that will allow us to continue to spend money here,'' he added.
Vice President for Exploration Denis Mascardelli said Amoco Egypt had budgeted $850 million for gas and oil exploration and development in 1998-2000, more than $450 million of which would go to the promising offshore Nile Delta gas field.
The executives said Egypt was sitting on estimated reserves of 32 trillion cubic feet (tcf) of gas, enough to cover local needs and support at least two major export projects.
Egypt is keen to start gas exports if the price is right, partly to compensate for falling oil production and exports. It now produces 1.6 billion cubic feet of gas a day and about 800,000 barrels per day of crude oil.
Mascardelli said more domestic gas use would help save crude reserves that were ''probably getting dangerously low'' and export schemes would catalyse fresh gas exploration and production.
Ivy said Amoco has agreed to sell 284 million cubic feet per day of gas from its Nile Delta Hapi field to the state Egyptian General Petroleum Organisation (EGPC) by October 1999. Some output from its Baltim field will also go to EGPC early in 2000.
But Amoco is eyeing foreign markets for Egypt's gas as more fields are developed and three deep Mediterranean concessions in the offshore Nile Delta are awarded soon.
''We see export markets as something very positive for Egypt and we want to be in the natural gas business big time,'' Mascardelli said. ''To crack export markets would support the contractor and give us an incentive to look for more gas.''
Amoco sees Turkey and Jordan as the most viable markets and believes Egypt can afford to sell them up to seven tcf of gas.
Ivy said Amoco Corp was involved in talks between Egypt and Jordan to build a gas pipeline across the Sinai Desert and under the Red Sea to Jordan's Aqaba port. ''But this (negotiation) is a difficult process because of prices,'' he added.
Amoco is also advising the government in talks with Ankara following a 1996 memorandum of understanding in which Egypt offered to sell Turkey's state-owned Botas about 10 billion cubic metres of liquefied natural gas (LNG) a year by 2000.
Mascardelli said Turkey would tender by September for LNG and Egypt's proximity and gas reserves made it an option.
''The Turks very seriously want to import LNG and that is where Egypt comes in. There are a lot of people who can supply them with additional LNG, like Yemen, Qatar, Algeria, but we believe Egypt is competitively positioned,'' he said.
EGPC officials said Egypt had proposed building a natural gas pipeline to Turkey, in addition to LNG exports, during a visit by Turkish Energy Minister Cumhur Ersumer last month.
Ivy and Mascardelli said LNG was a more flexible option given the perpetual tensions of the Middle East.
''In a perfect world, probably a pipeline would be the best way as you could easily lay a pipeline very close to the shoreline to hug the Israeli, Lebanese, Syrian coasts.
''But this isn't a perfect world. Such a pipeline is unlikely to happen given the political problems,'' Mascardelli said.
Any pipeline would have to lie in very deep water and would probably cost as much as an LNG plant. ''But the last word hasn't been written on that project,'' Mascardelli said, adding that TransCanada Pipelines had told Egypt it was feasible.
A ''peace pipeline'' supplying Egyptian gas to Gaza, Israel, Jordan and possibly Turkey was proposed at a 1994 regional economic conference, but the idea has fallen victim to the impasse in Arab-Israeli peace talks.
''In 1994 there was a lot of optimisim about the peace pipeline, but I think that is very much in the deep freeze now,'' Mascardelli said, even though Israel was the ''obvious customer.''
Amoco is the largest foreign investor in Egypt with energy investments of more than $7.5 billion.
It says its offshore Nile Delta concessions hold resources of five to 10 tcf of gas. Since 1993, Amoco and its partner the International Egyptian Oil Company, local subsidary of Italy's Agip Spa, have invested more than $600 million in the area. They also have concessions in the Western Desert and Sinai.
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