KORNER KOMMENT KOLLECTION
Uncertain US Winter May Perplex Oil Traders
Rapidly fluctuating temperatures and uncertain weather patterns are expected in the United States this winter with the arrival of La Nina, the cold weather sister of destructive warm weather phenomenon, El Nino, according to meterologists.
Mike Palmerino, a senior meteorologist at Weather Services Corp., a Lexington, Mass.,-based forecasting company, said La Mina will be the major influence on U.S. weather this winter and rapid weather changes may create difficulty for oil traders.
''This year, the major problem that I see is a lot of rapid changes in temperature, '' Palmerino said in a telephone interview with Reuters, adding ''We will not be looking for the persistent warmth we saw last year.''
Palmerino said episodes of fairly cold weather could create problems for trading in the energy markets.
''There will be situations where there will be quite a bit of fluctuations from warmth to cold,'' he said, adding that this could create difficulties for trading based on current forecasts.
But Tim Evans, senior energy analyst at Pegasus Econometric Group, discounts the affect of long-term weather forecasts on trading.
''Traders don't generally bank on long-term forecasts to base their trading on. But if we start to see those below-normal temperatures show up in the 30-day and six-to-10-day forecasts, then we'll start to see some buying interest, but until the actual weather is upon us there may be reluctance to bet heavily on those weather forecast,'' Evans said.
''Colder than normal winter is expected to sweep across the western - northwestern part of the U.S., including portions of the Great Lakes region,'' Palmerino said.
But it will be generally warmer than normal in most of southeastern U.S., as far north as the Ohio River Valley and about as far west as the lower Mississippi River valley, Palmerino said.
Palmerino's forecast of a warmer winter in some parts of the South was earlier reported by Dr. Gerry Bell, a research meteorologist at the National Weather Service Climate Prediction Center.
Bell, in recent briefings concerning La Nina, said Texas, New Mexico, Oklahoma, Georgia and Florida will likely be drier and warmer this winter.
Louisiana, Mississippi and Alabama will be likely warmer, but those states will have near normal precitipation in January, February and March, Bell said.
Colder weather means greater demand for heating, Evans says. But he cautions that upside potential on heating oil seems limited especially in light of high product inventories and a persistent global oil glut.
''What those preliminary forecasts indicate is that generally there will be higher demand for heating oil and the northern and central parts of the U.S. and less demamd in the southeast,'' he said.
''I think we are in what you may call a 'transitional' winter season and the glut that we have since last year won't go away in just one season.''
U.S. inventories of distillates, a big part of which consists of heating oil, have been rising recently. Last week, the inventories were over two million barrels higher than the year earlier in the week ending September 25 at 152 million barrels, the highest it has ever been at this time of year and well above previous peaks in October and November.
Palmerino's forecast of a warmer winter in some parts of the South was earlier reported by Dr. Gerry Bell, a research meteorologist at the National Weather Service Climate Prediction Center.
Bell, in recent briefings concerning La Nina, said Texas, New Mexico, Oklahoma, Georgia and Florida will likely be drier and warmer this winter.
Louisiana, Mississippi and Alabama will be likely warmer, but those states will have near normal precitipation in January, February and March, he said.
As for Canada, Palmerino said it will also have a colder than normal winter.
The venerable Old Farmer's Almanac, in its recently released 207th annual edition, echoed much of what the two forecasters said.
''New England and the Northeast, we think, will start off kind of warm and then get very cold in December. And then back to a warm spell in January and through February, and then very cold again in March,'' said Judson Hale, who is marking his 40th anniversary with the Almanac.
''The rest of the country will be just the opposite, except at the end we will all be cold. But we figure it will start off cold, then be warm in December, then entrenched cold for the rest of the winter out west,'' he said.
La Nina translates from Spanish as ''the girl child'' and refers to extensive cooling of the central and eastern Pacific Ocean. The term has recently become the conventional label for the opposite of the El Nino weather effect.
TALKING POINT-Oil Stocks, Safe Haven Or Bear Trap?
A tussle is raging among investors and analysts as to whether shares of major oil companies offer a refuge in from market turmoil or whether their earnings power has already eroded.
For those investors who see oil companies as a safe haven, oil prices have seen the worst that they can wreak on the industry after the benchmark West Texas Intermediate blend hit a 12-year closing low of $11.58 per barrel on June 15, or a 25-year low in inflation-adjusted terms.
''Oil companies have taken on the same aura as utilities. Whether you are in a recession or not, people still turn on the lights when they get home,'' says Gary Hovis, analyst at Argus Research.
Debt levels for the industry are at historical lows and whatever the oil price, giants such as Exxon Corp. (NYSE:XON), the nation's largest, have the financial muscle to hike dividends and buy back more stock.
Also for the oil bulls, the 3.1 million barrels per day of output cuts agreed by major producing nations will eat into stockpiles of crude oil and restore price stability, albeit at a lower level than $18-$21 10 year average for WTI prior to the current meltdown.
At present, investors appear to be putting their money behind the bulls.
Shares of big oil as measured by the S&P Oil International Index, which includes Amoco Corp (NYSE:AN), Mobil Corp (NYSE:MOB), Texaco Inc (NYSE:TX), Exxon Corp (NYSE:XON), Chevron Corp (NYSE:CHV) and Royal Dutch/Shell Group , have outperformed the Dow Jones by more that 13 percentage points in anticipation that oil prices and hence earnings will improve.
''If you look at it from a physical and psychological point of view, oil companies have got their oil in the ground, while Internet companies have nothing but ideas in their heads,'' said Hovis.
Hovis is forecasting that WTI will recover from an average $15.25 per barrel this year to around $17.50 by the end of 1999 and has a buy rating on all of the international majors apart from Chevron, which he rates as a hold.
For Joseph Barthel, chief investment officer at Fahnestock & Co, the dividend argument is persuasive and he says that we have seen the worst from oils and draws comfort from the recent rally among big-cap oil shares.
He believes that big oil and other cycical stocks could lead Wall Street next year.
''Oil shares have grossly underperformed the market since Moses,'' said Barthel, who believes that the recent quarter point cut in U.S. interest will trigger greater investor interest in commodities.
He sees oil trading as high as $16.50-$17.00, with a base of $13.00 - $14.00.
''They (the shares) are not going to hurt you any more,'' Barthel said.
However, the naysayers, such as Michael Young, analyst at Deutsche Bank Securities, believe that the recent strength of oil shares is a classic bear trap and says he and his fellow analysts cannot cut earnings forecasts fast enough to keep ahead of daily company pre-announcements.
''Oil stocks are not defensive. They are not defensive because the earnings power of the industry has already eroded and is unlikely to recover to meet Wall Street expectations,'' says Young.
Young, who believes that oil's 1998 earnings will be half those of last year and that 1999 earnings will be 30 percent below current analyst expectations, says that stocks without earnings do not outperform and are not defensive.
He looks at the global economy and says the prognosis is gloomy.
Young forecasts that worldwide oil demand will drop 200,000-500,000 barrels per day, which will hurt refining and marketing earnings, the one bright spot in earnings this year.
And as the U.S. Federal Reserve signals its worry over the slowing U.S. and global economy by easing interest rates, there is even less reason to look at oil stocks.
''Historically, one buys oils as rates are rising because of the strong underlying economic environment. We believe that the world is clearly in a more recessionary/deflationary environment, which overall does not bode well for oil shares,'' said Young.
In contrast to Hovis, Young recommends selling oil shares after their recent strength, and has no longer term ''buy'' ratings among the major international oils, and only one overall, for USX-Marathon Group (NYSE:MRO).
Canada Natural Gas Seen Gaining U.S. Market Share
After years of stagnating, Canadian natural gas is finally expected to grab a bigger share of the huge United States market, thanks to newly expanded export pipelines and languishing U.S. production growth, Canadian energy analysts say.
Canadian supplies are expected to make up more than 17 percent of all gas consumed in the U.S. by 2001, up from just under 14 percent in 1997, said Roland George, a natural gas analyst with consulting group Purvin & Gertz in Calgary.
To achieve that figure -- an increase from just 4 percent when the natural gas industry was deregulated in 1986 -- Canadian producers are set to drill an unprecedented number of gas wells each year.
''From deregulation to now, we've nearly quadrupled exports to the United States,'' George told Reuters. ''Because of the export capacity constaints over the last few years, we've kind of tapered off. But now with these new projects coming on, market share will be increasing.''
George said his studies indicate net exports of Canadian gas are expected to total 3.1 trillion cubic feet in 1998; 3.4 trillion cubic feet in 1999; 3.7 trillion cubic feet in 2000 and 4 trillion cubic feet in 2001.
In 1997, Canadian gas producers shipped 2.9 trillion cubic feet of gas to the U.S.
Meanwhile, U.S. gas demand, expected to total between 21 trillion and 22 trillion cubic feet this year, is expected to grow at an average rate of 2.1 percent a year for the next four years, based on projected increases in economic activity and growth in the use of gas to fuel electricity generation, he said.
Most of the increase in Canadian exports is expected to be in supplies from Alberta and British Columbia shipped to the U.S. Midwest market, on pipelines like Northern Border Pipeline Co.'s system to Chicago from the Saskatchewan-Montana border.
A 700-million-cubic-feet-a-day expansion on that line is slated to be completed early this winter, as is an addition of 400 million cubic feet a day of new capacity on TransCanada PipeLines Ltd.'s (Toronto:TRP.TO - news) Canadian mainline, which serves markets in eastern Canada and feeds gas into the U.S.
Together, the two projects -- expected to result in a long-awaited rise in gas prices after years of glut within Canada -- will boost export capacity by about 14 percent.
Gas from the Sable Offshore Energy Project off the coast of Nova Scotia in the east is slated to add to Canadian exports further at the turn of the century.
Analyst Martin Molyneaux of Calgary-based FirstEnergy Capital Corp. said Canadian gas producers will further their inroads into the huge market south of the border as U.S. production growth falls amid fewer new drilling prospects.
''As our decline rates are accelerating, the Americans' are too, expecially in the shallow waters of the Gulf of Mexico, because the pools that have been drilled in the last couple of years tend to be much smaller,'' Molyneaux said.
In western Canada, where overall drilling is down because corporate cash flow has been eroded by low crude oil prices, gas producers will likely struggle in coming months to drill enough wells to fill the new pipeline space.
''If producers don't sprint to fill the pipes, the market signal will be that the prices in Alberta will be going up until it becomes attractive to drill like crazy,'' George said (clarifies quote is from George).
''We're anticipating that, sustainably over the next five to 10 years, we'll need something like 6,000 (gas) wells a year, which will be record drilling year in, year out, compared to anything that's been done historically in Canada.''
Achieving that heady drilling activity will require a jump in exploration in northwestern Alberta and northeastern British Columbia, where gas reservoirs are larger and produce at high rates for longer periods, but are more expensive to develop.
Molyneaux said he believed Canadian producers would drill 4,600 gas wells in 1998, but crank up activity next year.
''We are really pushing the envelope in terms of gas drilling next year,'' Molyneaux said. ''We've pumped our estimate up to about 6,700 wells in 1999 and we have that well count flat-lined from then on out. It takes us a while to fill up all this export capacity.''
Canadian Oil Service Firms Enter Survival Mode
The coming winter drilling season is expected to offer cold comfort to Canada's struggling oil and gas service industry contractors, which face consolidation and poor results over the next 12 months, analysts said.
Hard-hit oil and gas producers cannot afford to drill as many wells because of an ongoing slump in world oil prices and stock markets. That means a further drop in activity for the companies that provide oil field services, FirstEnergy Capital Corp. analyst Janet Spensley said.
"(Producers) can't go to the market and they can't assume debt, so they're relying on cash flow for their drilling programs," Spensley said. "So, even if it is a cold winter, activity's not going to increase all that much."
Market carnage has characterized the oil service sector for several months amid stubbornly weak crude prices. The Toronto Stock Exchange's oil and gas service subindex was off 29.35 points on Monday to 1,408.51. That equates to a dramatic 68 percent drop from its year-high of 4,353.3.
The service industry, which includes drilling companies and other associated well-site service providers, is normally most active during the winter. In many western Canadian oil and gas production regions, that is the only time they can transport heavy equipment over normally soft bogs and marshes.
Spensley said she anticipated weaker performers could become takeover targets as early as the first quarter of 1999.
In the drilling sector, contractors are already in cost-cutting mode as clawbacks in 1998 drilling programs among producers have brought a round of price-slashing by drillers trying to maintain activity.
The Canadian Association of Oilwell Drilling Contractors estimates the average number of drilling rigs working per week in 1998 will be 303, a 28 percent drop from last year's average of 419.
The total number of wells drilled, meanwhile, is projected to fall to 10,855 in 1998, down 34 percent from the record-breaking 16,484 drilled last year.
The drilling industry is known for raising its rates in times of high activity and slashing them when activity slows.
"There's pretty significant price competition now," association managing director Don Herring said. "The contractors are their own worst enemy in some respects. They led the charge down."
The combination of low pricing and reduced activity is expected to expose high-cost or debt-ridden service companies to takeover attempts by their better-performing peers, Spensley said.
"There's going to be pretty clear separation between the companies that are successful getting their costs down and the ones that aren't," Precision Drilling Corp. chief executive Hank Swartout told Reuters.
Precision is Canada's largest drilling contractor, controlling 34 percent of the country's rig fleet, and a former stock market darling.
Precision's stock is down 64 percent to C$18.00 after soaring as high as C$49.50 in the past year on the Toronto Stock Exchange.
"In terms of who's going to survive, I think management is the issue, more than the capital structure of the company," she said. "The quality of the management and their ability to handle the downturn is much more important."
Spensley cited Ensign Resource Service Group Inc. , Trican Well Service Co., and Enerflex Systems Ltd. as examples of service companies with the management strength to ride out the downturn.
On the Toronto Stock Exchange, Ensign shares were off C$0.45 to $25.25 Monday, down 45 percent from their year-high. Trican was flat at C$3.35, down 60 percent from its high of C$8.25, and Enerflex was down C$0.10 to C$14.90, off 74 percent from its peak of C$57.
The acid test for service companies will come after activity drops off again during next spring's annual "breakup," when thawing roads and wetlands are once again off-limits to much oil and gas activity in many Canadian drilling regions, Spensley said.
"It's going to be awfully tough for these companies next summer," she said.
Natural Gas Rally Is Just A Bunch Of Hot Air
Industry Review - Individual Investor Magazine
Analyst: Will Frankenhoff
The price of natural gas has surged in recent weeks, rising about 40% since September 2, to $2.33 per million BTUs (British thermal units). Is it time to jump on this speeding bullet, or is this rally overdone?
The run-up in the price of natural gas was driven mostly by concerns about storm disruptions in the Gulf of Mexico, which supplies more than 25% of the United States' natural gas. Analysts predict that prices could rise even more in the near-term as Hurricane Georges and Tropical Storm Hermine, followed closely by Tropical Storms Ivan and Jeanne, could severely disrupt gas production, as did Hurricane Earl which reportedly affected nearly 20-25 bcf (billion cubic feet) of production when it struck.
While this surge in the price of natural gas has sent stocks such as Apache (NYSE: APA) and Seagull Energy (NYSE: SGO) up an average 25% from their August lows, we don't think this rebound is a sign of a stabilization in the natural gas market and would take a wait and see approach over the next few months due to a number of reasons.
Why Waiting is Prudent
"The hurricane watch" has led to a situation of extremely volatility. As Jeff Shankman, managing director of natural gas trading at Enron Capital & Trade Resources said, " We're trading dots. Every time the Weather Channel puts another dot on the map and changes the prior assumption of where the storm was going to go, people go crazy buying and selling".
Given this rampant speculation, it's likely that once the traditional hurricane season ends, natural gas prices will fall to the $2.00/mcf range and stay there, pulling stock prices lower too. In addition, some of the recent run-up in the price of natural gas was due to short positions in the NYMEX market being forced to cover. And the most important reason why the recent surge in the market is unsustainable is that the underlying fundamentals remain weak in the near-term for companies in the natural gas market.
High Storage Levels
Storage levels remain extremely high, with 2.8 trillion cubic feet of gas in storage, or 89% of capacity, which represents a 15% increase over last year's period. This state of strong supply is likely to continue in the near-term. Baker Hughes (NYSE: BHI) -- while reporting that the gas rig count fell by another nine rigs to 558 -- also reported that the year-to-date rig average was 581, 7% higher than last year's average.
The final reason for holding off from investing in the sector is that we are entering a season (September - November) in which demand is generally weak. In addition, moderate weather is predicted for this period. Warmer weather would probably put downward pressure on gas prices.
While many analysts are bullish about demand in the winter due to La Nina, the colder winter which historically follows El Nino, we think it's wiser to wait until storage levels show some signs of lessening before investing in this sector.
Alliance Pipeline Advances With Canada NEB Report
The proposed Canada-Chicago Alliance natural gas pipeline moved a step closer to approval on Friday when Canada's National Energy Board said it believed the project would not be harmful to the environment if a host of recommendations in its report on the project were followed.
The long-awaited NEB report on the C$4-billion, 3,000 km pipeline, issued Friday, recommends Alliance take such measures as avoiding native prairie areas and cutting down trees during construction, protecting riverbanks from soil erosion, checking to see if grizzly bear habitats will be affected and monitoring air quality.
The 178-page report on the Canadian portion of the line, which followed a public hearing that spanned an exhaustive 77 days from January to May, was submitted to Canadian Environment Minister Christine Stewart and the Canadian Environmental Assessment Agency on Friday.
The agency is now set to kick off another 30 days of public comment on the project, after which the environment minister can recommend whether to approve or reject the project.
''The responsible authorities concluded that the project is not likely to cause significant adverse environmental effects, provided that the mitigative measures and undertakings committed to during the hearing are implemented together with the set of 41 recommendations contained in the report,'' the NEB said.
Construction of the U.S. portion of the pipeline was given the green light last week after Alliance proponents accepted the U.S. Federal Energy Regulatory Commission's terms for building it.
Alliance Chief Executive Dennis Cornelson said he was pleased with Friday's report, given the effort and spending the group made on environmental study and consultation, costs which rose into the ''millions of dollars.''
''It basically acknowledges that all of the work that we've done over the last 2-1/2 years in this area has demonstrated that there will not be any significant impacts as long as the mitigative measures are taken. Those are the words we really wanted to hear,'' Cornelson said.
The producer-supported pipeline, which would carry 1.3 billion cubic feet of gas a day to Chicago from northeastern British Columbia, could be completed on its target of the fourth quarter of 2000, if approvals are granted within the next few months, Alliance has said.
Alliance partners include IPL Energy Inc. (Toronto:IPL.TO) with 21.4 percent, Fort Chicago Energy Partners LP (Toronto:FCE_u.TO) with 26 percent, Coastal Corp. (NYSE:CGP) with 14.4 percent, Westcoast Energy Inc. (Toronto:W.TO) with 14.5 percent, Duke Energy Corp. (NYSE:DUK) with 9.8 percent, Unocal Corp. (NYSE:UCL) with 9.1 percent and Williams Cos. Inc. (NYSE:WMB) with 4.8 percent. |
