MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JULY 06, 1998 (5)
TOP STORIES
Oil Exploration Spending Rise Seen Smaller In 1998
Capital spending by oil and gas companies on exploration and production is set to rise 6.2 percent globally, according to Salomon Smith Barney, down from a projected 11 percent growth survey at the end of 1997.
The mid-year study showed that international exploration and production spending would rise nearly 14 percent, thet the U.S. would be flat this year and that Canadian spending would drop by nearly 12 percent.
''The 1999 outlook is unusually uncertain, but 50 percent of respondents plan increases,'' analyst Geoff Kieburtz said in a report.
Shakeout In Intermediates Kindles Juniors' Hopes
The Financial Post
The dwindling ranks of intermediate Canadian energy firms probably mean more competition for survivors and increased investor interest in juniors, observers say.
The latest, but probably not the last, intermediate to lose its independence was Pinnacle Resources Ltd. Bidder Renaissance Energy Ltd. said yesterday it won about 95% of the common shares in its share exchange takeover offer, announced June 8. It offered 0.66 of a share for each Pinnacle share and about 38.7 million shares were tendered.
One analyst, who asked not to be named, picked Barrington Petroleum Ltd. and Crestar Energy Inc. as other strong takeover candidates in the sector.
Pinnacle joins a growing list of mid-sized companies taken over by larger U.S. or Canadian competitors in the past year. They include Archer Resources Ltd., CS Resources Ltd., Dorset Exploration Ltd., Elan Energy Inc., Stampeder Exploration Ltd. and Tarragon Oil & Gas Ltd.
Canadian firms, such as Renaissance, hope management and operating synergies will allow them to raise oil and natural gas production while cutting costs. U.S. companies are taking advantage of a strong US$ to increase access to Canadian gas, which is expected to rise in value as new pipelines are built.
Some of the targets, such as CS and Stampeder, had heavy oil developments that were in hot demand last year when crude prices were strong. Others, such as Elan, were known for their technology knowledge. This exploration and production expertise made them attractive targets.
Company names change, but the need to develop technology that cuts costs and boosts efficiency will not be altered by the increased U.S. presence north of the border, said Verne Johnson. The former president and chief executive of Elan, who now heads consultancy Ziff Energy Group in Calgary, said new owners' asset rationalizations and sales by cash-strapped rivals suffering from low oil prices are setting the stage for a resurgence of mid-sized players.
"This recent evolution -- the change of ownership and turnover of companies -- it's just going to set up a wave of juniors who will be the intermediates in two or three years."
The resources large U.S. players bring to Canada may increase competition for property and skilled staff, and put more pressure on surviving intermediates, said John Ferguson, vice-president and chief financial officer of Poco Petroleums Ltd.
The company is hiring several people with doctorates to develop exploration ideas and technology over the next few years. He said Poco is attracting a following from U.S. analysts. It's difficult to tell whether this is a result of less competition or recognition of Poco's focus on gas.
George Fink, chairman of the Small Explorers & Producers Association of Canada, said investor interest will probably trickle down and benefit his members. "If those intermediates disappear, [investors] generally go to a smaller one and hope it grows and reaches that size rather than going to a major."
Analyst Peter Linder, with CIBC Wood Gundy Securities Inc., picked Bonavista Petroleum Ltd., Genesis Exploration Ltd. and Probe Exploration Inc. as juniors with potential to evolve into intermediates.
Catch-22 Time In The Gas Patch
Globe & Mail
It's a funny thing about the so-called oil patch these days -- you'd be hard pressed to find any oil companies in it. Dozens of companies took part in the recent Canadian Association of Petroleum Producers (CAPP) conference, but not one of them appeared to be an oil company. They were all natural gas companies, or claimed to be on their way to becoming gas companies.
Even producers that eight or nine months ago were crowing about the fact that they were heavy oil companies have become natural gas companies. Perhaps Baytex Energy chief executive officer Dale Schwed said it best at the CAPP conference when he said his company "is not a heavy oil company, as we have been accused of being -- we have the potential to become a heavy oil company."
This was a heroic attempt to distract the stock market's attention away from the fact that Baytex paid $267-million for heavy oil producer Dorset Exploration last September, just as the price of crude oil -- and the corresponding price of heavy oil -- was tanking. So where is Baytex focusing its energies now? Why natural gas, of course.
The fact that companies are desperately trying to twist, manoeuvre and otherwise transform themselves into natural gas companies is hardly surprising. No one in their right mind wants to say they're focusing on oil, since the price hasn't budged from the $14.50 (U.S.) level despite OPEC's efforts. But moving to natural gas isn't as easy as just saying you're a gas company.
FirstEnergy Capital analyst Martin Molyneaux explained why last week during a discussion of his firm's comprehensive survey of the industry's "finding and development" costs. Those are all the costs that go into producing a barrel of oil or the equivalent amount of natural gas (the current standard is that 10,000 cubic feet of gas is equal to one barrel of crude oil).
The current environment has companies caught in a Catch-22 squeeze, Mr. Molyneaux said. The price of natural gas is rising, largely because of the prospect of increased pipeline capacity to the United States, where prices are higher, and everyone wants to increase their gas production as quickly as possible. But moving from oil to natural gas production can't be done overnight.
Much of the natural gas that remains to be discovered in the Western Canadian sedimentary basin is located in the southwestern Foothills area of Alberta and across the border into British Columbia, analysts say. And most of those natural gas "pools" are extremely deep formations -- meaning they require specialized drilling rigs that can dig deeper than the traditional oil well.
These double-and triple-height rigs are far more expensive than traditional drilling rigs, and are likely to become even more so as demand for them increases, Mr. Molyneaux added. Partly because of these kinds of costs, and partly because deep natural gas deposits are more risky, companies are likely to see costs increase as they try to move into gas.
That's where the squeeze comes in. The whole reason companies are moving to natural gas is because there just isn't the cash flow available from oil to make it economically attractive -- and yet that same lack of cash flow is going to make it harder for companies to undertake the kind of expensive exploration and production that a lot of natural gas requires.
"The golden goose is gas, and everyone is in the starting gate ready to go after it," Mr. Molyneaux said. "But they've got an 80-pound anvil tied to their right ankle, and that's a sub-$15 oil price."
Companies that are already oriented toward natural gas are looking like geniuses at the moment, of course -- companies such as Rio Alto Exploration , Alberta Energy ,
anadian 88 Energy , Newport Petroleum and Encal Energy . Those whose primary focus is oil include Pacalta Resources (whose exploration is based in Ecuador), Canadian Occidental and Renaissance Energy .
A company such as Pacalta, mind you, is rescued by the fact that its costs are much lower than other companies -- about $1.61 (Canadian) a barrel of crude, compared with an industry average in 1997 of $6.77. Companies such as Cabre Exploration and Numac Energy, however, have a harder time because they are more leveraged to oil but have relatively high costs, about $10 a barrel.
Some of the larger companies, such as CanOxy, Imperial Oil and Ranger Oil, have the kind of balance sheet stability and breadth of operations that makes it easier to withstand a sustained downturn in oil prices, Mr. Molyneaux said. But some of the medium-sized and smaller companies -- especially those whose debt is on the high side -- are likely getting nervous.
"With 11 years in the business, I've never seen producers sweat like they are now," the FirstEnergy analyst said. "There's a lot of guys lying there staring at the ceiling, and thinking about selling or finding a partner." Medium-sized companies will be hardest hit, he said. "The big guys have the wherewithal to get by, and the smaller guys are more flexible."
Foreign Oil Experts Here
Edmonton Sun
Foreign oilmen and government managers are on a six-week tour of Alberta to learn about Canadian technology and regulatory systems.
The Canadian Institute for Petroleum Industry Development (CIPID) is hosting 48 senior managers, specialists and government officials from 14 countries.
"Many of them are interested in privatizing," said Karen Foster, spokesman for CIPID. "They look at Alberta as model of private oil industry. They look at our regulatory system as a model."
Countries represented for the annual summer program include: Algeria, Argentina, Bangladesh, China, Colombia, Cuba, Egypt, Ethiopia, Hungary, India, Niger, Pakistan, Peru and Thailand.
The participants, who have been in Edmonton for a week and will remain here two more before moving on to Calgary, are in some cases also seeking joint ventures with Canadian businesses.
The program includes seminars by Alberta industry experts and meetings with government officials like Pat Nelson, minister of Alberta Economic Development and Tourism.
Enerchem International Boosts Profit By 87%
Edmonton Sun
Nisku-based oil and gas chemical and equipment rental company Enerchem International Inc. has posted record profits for its third quarter.
After-tax earnings increased 87% to $1,594,120 from $851,608 for the same period last year, said Larry Phillips, Enerchem president and CEO.
For the period ended May 31, Enerchem reported revenues were $12,742,099 versus $8,935,842 in the same time last year, a 43% increase.
The profits will be funnelled into the company's expansion plans, said Phillips.
"We're doing some major expansions both in Nisku and outlying distribution centres," said Phillips.
"Also, we're doing some additional expansion in Midland, Texas."
Phillips chuckled over the company's success in the face of some adverse conditions.
"Considering the long spring breakup and extended road bans, plus the fires that happened up north, plus what happened to the oil prices, we're doing very well," he said.
Phillips said word is getting out about Enerchem's top staff and product line, and that's keeping them busy.
The company has hired three new staff in its specialty chemicals group in the past 45 days, he said.
"We'll be looking at additional staff," said Phillips.
"Our market share is growing."
The specialty chemicals group formulates, manufactures and markets more than 200 kinds of chemicals used by oil and gas companies in various phases of their operations.
The company also has a wholly owned subsidiary, Enerchem International Corp., which services the Permian oil basin region in Texas.
Enerchem's other wholly owned subsidiary, Decarson Rentals Inc., rents a wide variety of oilfield equipment to oil and gas exploration companies.
Decarson also operates out of Nisku.
Hibernia Suspends Tests Of Evacuation System
Hibernia has halted testing of one of its evacuation systems following the second accident in nine months involving the gondola-style escape option.
Company officials made the decision Monday after an empty gondola hit the offshore oil platform's receiving terminal Sunday and slid down the control cable and into the water.
No one was injured in the incident, which is under investigation.
But Hibernia has also decided to conduct a separate study of the entire $11-million Gemevac system to see if it is reliable enough for the company's overall safety plan.
"We are obviously concerned that we've had this incident," said Dave Fitzpatrick, the head of Hibernia's safety team.
"Since we have had two incidents with Gemevac, as a prudent operator it beholds us to do a thorough review."
Newfoundland Energy Minister Chuck Furey has also ordered an independent review.
Gemevac, manufactured by the British company GEC Alsthon Engineering Systems Ltd., uses gondolas to transport people through the air - much like a cable car - from the platform to a nearby support vessel during emergencies.
Testing was temporarily suspended last October when one of the gondolas, capable of carrying 16 people, fell seven metres to the platform deck. No one was injured.
Early indications suggest that the more recent incident may have been caused by "a control problem" from the support vessel, said Fitzpatrick.
Representatives of GEC Alsthon were to arrive in St. John's Tuesday to help with the investigation.
The platform has other options available in an emergency, including lifeboats, a flexible pole that can drop the lifeboats, a life-raft escape chute and helicopters.
Hibernia officials say those options go well beyond the regulations set by the Canada-Newfoundland Offshore Petroleum Board.
However, the board's chairman said he is still concerned about the status of Gemevac because it is included in Hibernia's required safety plan filed with the petroleum board.
"If it can be proven reliable and effective, then yes we prefer to have it out there because it has the potential to enhance safety on the platform," said Hal Stanley.
Gemevac is a prototype in the offshore industry that many believe has greater potential for use in future projects. Its uniqueness prevented it from being adequately tested until the Hibernia platform was set up on the Grand Banks.
As a result, the system is still awaiting final approval from Lloyd's Register of Shipping, an international certifying authority.
|
