MISC. SELECTED NEWS STORIES - SATURDAY A.M. 10/17/98
Good news for resource stocks
The Fed's latest interest rate cut and another in a series of oil-industry mergers may be good news for natural resource stocks.
Funds with big holdings in energy and other commodity stocks have taken a beating this year as oil prices hit a 12-year low of around $13 a barrel in June -- with dueling OPEC nations cast doubt on a rebound any time soon -- and a strong dollar put pressure on commodities such as gold. Economic turmoil around the globe also made prospects for recovery pretty bleak.
But recent central bank moves around the world may reignite demand. And a wave of M&A activity in the oil industry has companies scrambling to find ways to stay competitive, which is good news for shareholders, fund managers say.
"As a result of global financial meltdown, the world is going to have to reflate," says Barclay Tittman, co-manager of the Boston-based Eaton Vance Worldwide Developing Resources (EVNRX) fund. Eaton Vance manages assets valued at about $24 billion.
The fund's holdings are about one-third oil-and-gas stocks, a third gold related stocks and a third "everything else," such as aluminum, zinc, cobalt and palladium, Tittmann says. Lately, it's had a "dreadful" time, the co-manager says. But this week, there may have been signs that that's about to change.
"Investors that are piling into these stocks are making the bet that world banks will have to stimulate economies." If the bank moves result in increased demand, "that has implications for commodities," he says.
Change in tone?
Tittmann points to Alcoa (AA), Anadarko Petroleum Corp. (APC) and Newmont Gold Co. (NGC) as evidence of that bet. Three leading stocks in three commodities have been up more than the market this week, Tittmann says, while commodity prices haven't budged. "That could mean a general change in tone for commodities prices," he says.
On Wednesday, Kerr-McGee Corp. (KMG) said it would buy Oryx Energy Corp. (ORX) for $1.3 billion in stock plus assumed debt. That deal follows other mergers of refining operations by energy companies that are attempting to rein in costs. The wave was touched off in August when British Petroleum (BP) and Amoco Corp. (AN) said they planned to combine in a proposed merger that will shake up the oil industry worldwide if it's approved.
Last week, Ultramar Diamond Shamrock Corp. (UDS) agreed to buy Phillips Petroleum Co.'s (P) North American oil operations for $800 million. On Thursday, Atlantic Richfield (ARC) said it would cut 900 jobs and close offices to reduce costs.
"Companies are under the gun," says Stan Majcher, an analyst at Hotchkis & Wiley in Los Angeles, which manages assets of about $14.4 billion. "Companies that have been underperformers have to get their houses in order if they want to stay independent."
"It's good for shareholders when you have managements with that kind of incentive," Majcher says.
Prices on the rise?
One of the reasons Hotchkis & Wiley likes oil stocks right now is that there's tremendous incentive for oil producing countries to manage production, Majcher says.
He sees oil prices rising as a result and says they could climb to $17 to $19 a barrel within the next 18 months.
As oil prices have fallen, "a majority of companies have gotten killed," Majcher says. "Larger companies (such as Exxon (XON) and Chevron (CHV)) have held their value. There's a huge incentive to use their stock as currency to to buy smaller companies, since it immediately adds to earnings when a company is trading at a higher multiple," he says.
Hotchkis & Wiley likes smaller companies such as Arco, Phillips, USX Marathon (MRO), Occidental Petroleum OXY, and Ultramar Diamond Shamrock. The firm's oil-stock positions are valued at $600 million. Majcher said the firm stays away from behemoths Exxon and Chevron.
"Do we want to own those? No," he said. "Oil's a commodity business. Why would we pay exorbitant sums for those companies when we can find the pieces a lot cheaper?"
Tanks for a good idea
TankSafe Inc., a young Calgary-based company, is making waves in the oilpatch with its innovative design for storage tanks -- the type commonly used at well sites to store produced water and other liquids.
The company's name aptly describes its storage tanks, which are above ground, heated, dual-containment vessels with capacities up to 400 barrels.
TankSafe's senior management team -- president Reinhard Schuetz, vice-president of development, Ernie Jacobson and vice-president of production, Wayne Bowd -- are full of enthusiasm.
And so they should be,
The team boasts TankSafe's storage tanks are the most environmentally responsible solution to safely store produced water, oils, fuels, chemicals, pesticides, fertilizers, waste materials and other potentially harmful liquids commonly found in industrial environments. They meet or exceed regulatory guidelines to safeguard against leakage contamination and are compact and complete, enabling shipment to the customer's site pre-assembled and ready for use.
Manufactured at Sylvan Lake, Schuetz says TankSafe dual containment units consist of a primary fibreglas, or steel, storage tank, an insulated secondary steel containment enclosure, and standard features such as an attached insulated utility shed and a peripheral heating system. Many other accessories, tailored to the type of liquids to be stored, can also be specified by the purchaser.
In its first year of operation, the company produced 100 tanks. This year, Tanksafe celebrated its second anniversary by producing more than 400 tanks. More than 500 TankSafe units are in use in Alberta.
Tatarstan delegation goes to Canada to strengthen contacts
The aim of a visit by a Tatarstan government delegation, headed by republican Prime Minister Rustam Minnikhanov, which departed for Canada on Sunday, is to consolidate trade, economic and cultural relations with Canada.
During the visit, the delegation plans to meet leaders of the Canadianfederal government and members of the business community.
A delegation from the Quebec province, led by the energy ministry, visited Tatarstan last May where the sides reached an understanding on subsidising several Tatar industrial establishments by Canadian banks. Incidentally, partners intend to make investments up to 80 percent also for drafting feasibility reports of projects.
The delegation will meet the Quebec prime minister and plans to sign trade and economic agreements.
Distressed oil company fails to find buyer
Troubled by debt, poor commodity prices and sinking stock value, Rutherford-Moran Oil Corp. has finally scheduled its annual meeting for Dec. 15 after a delay of more than seven months.
The company has been on the sales block since late January, when officials announced they were seeking strategic alternatives, including a possible merger. Sources say the meeting was delayed in hopes the board could present a good merger deal to shareholders.
But time passed, no such transactions materialized, and now the company finds itself burdened with debt, no equity markets to tap and shrinking capital availability.
Not much beyond the start-up stage, Rutherford-Moran generates too little revenue to support its exploration and development program and must rely on borrowing to go forward. But borrowing has proved difficult because the company's oil and gas prospects and natural gas market are almost exclusively in troubled Southeast Asia. And the depressed commodity price of oil this year hasn't helped, say analysts.
"This company is shaping up for a distressed sale," says Andrew Byrne, analyst with John S. Herold in Stamford, Conn. "They were expecting to get $30 a share. They were stuck in quicksand, and time ticked away."
Lesser offers were rejected and potential buyers disappeared as the low commodity prices dragged on and the crisis in Southeast Asia deepened with no recovery in sight. All the while, Rutherford-Moran's stock price continued to deteriorate at an alarming rate.
In early July, the stock was trading at around $20 a share, but this week the price had slumped to about $6 a share.
In addition to being victimized by world economic events, the small Houston-based company borrowed heavily, signing a $117 million note at 10.75 percent interest in September of 1997.
"But when they did debt, they didn't get any cash flow from it," says analyst Byrne. "The company has a quarterly operating EBIDA (earnings before interest depreciation and amortization) of $0.4 million and interest due on the debt of $4.5 million. That's a cash flow problem."
The company's lender recently provided some breathing room by increasing its revolving credit facility from $150 million to $200 million and extending the debt's maturity. And analysts say that will keep Rutherford-Moran afloat, possibly for future acquisition.
"I value their assets at $6.60 a share, and that includes the unbooked reserves," says Michael Spohn, an analyst with the Petroleum Research Group of Rye, N.Y. "They will be lucky to catch that price."
In the early 1990s, when Southeast Asia was the darling of the investment community, Chairman John Moran and President and CEO Patrick R. Rutherford agreed to invest in reserves in the Gulf of Thailand. The government of Thailand sold the company a 46 percent working interest in a 1.3 million acre block in the Gulf.
The prospects were promising and supported a number of plays with major natural gas potential. Potential reserves for the fields are about a trillion cubic feet equivalent of gas and oil.
The company went public in June of 1996 at about $23 a share, raising proceeds of about $97 million. The company was lauded as a "pure play" at the time, specializing only in southeast Asia where natural gas consumption was forecast to grow at an annual rate of 17 percent.
But now, energy growth in that region is negative.
"They have solid assets. But timing is everything," says Byrne.
New tools may hike US gas recovery by 500 TCF -DOE
New techniques to extract natural gas left behind in known Gulf of Mexico gas fields could help the United States eventually recover as much as an extra 500 trillion cubic feet of gas, the Energy Department said Friday.
The estimated 500 trillion cubic feet would more than triple current estimates of proven gas reserves in the nation, the DOE said in announcing $9 million in funding for a gas recovery project with the University of Texas.
The new techniques will use three-dimensional images of underground formations in the Gulf of Mexico to show how drilling in between existing wells can recover gas deposits missed earlier.
Researchers have already experimented with some of the new tools to increase successful gas well completions in the Gulf Coast region of South Texas. The increased success rate there is expected to add up to $1.3 billion in new gas production revenue through the year 2000, the DOE said.
"Some studies have estimated that the United States might recover more than 500 trillion cubic feet of natural gas -- more than triple the current estimates of proven gas reserves -- by employing techniques identified in this program," the DOE said in a statement. The Gulf of Mexico basin accounts for nearly 10 percent of the globe's known production of natural gas, and for more than one-fourth of all gas produced in the United States.
Producers Hang In There
Energy Secretary Bill Richardson today told those attending a U-S Oil and Gas Association meeting in San Antonio to ''hang in there.'' Crude oil prices are at their lowest level in decades. Richardson says tax incentives and regulatory breaks are in store for so-called ''marginal'' wells to help them stay in production. Richardson says high tech is an antidote to low crude prices. He also announced a nine-Million dollar federal grant to the University of Texas to help it develop ways to explore for oil and natural gas more efficiently.
Russian oil industry lost $15 billion last year
Russia's oil industry lost the equivalent of $15 billion Cdn over the last year, largely because of the drop in world oil prices, a legislator said Friday.
Oil is Russia's largest source of foreign-currency income.
Alexander Lotarev, a member of the legislature's natural-resources committee blamed Russia's financial problems, complicated tax laws and corruption for adding to the losses in the oil industry, Itar-Tass news agency said.
Alexander Lebed, former Russian security chief and now governor of the vast Krasnoyarsk region, said Friday that Russia may not be able to pay off its foreign debts next month, when a 90-day moratorium on payment expires. The moratorium was declared Aug. 17, the same day Russia devalued the ruble, two moves that precipitated the current crisis.
"Very big trouble is going to begin on Nov. 18," said Lebed.
"If we speak of the worst option, it would be the country's bankruptcy."
Russian negotiators held two days of talks on restructuring the debts with western bank creditors in London this week but failed to reach an agreement.
The government hasn't spelled out how it will pull Russia out of the crisis, insisting its plan will depend on whether the International Monetary Fund provides more aid.
A tentative program will be presented to an IMF delegation arriving in Moscow on Tuesday, Finance Minister Mikhail Zadornov said.
In other economic news Friday:
- The ruble fell to 17.1 against the U.S. dollar, from 16.2 Thursday.
- Russia's money supply grew by 5.2 per cent last week to the equivalent of $18.3 billion, the Central Bank said Friday. The money includes billions of rubles freed through lowering minimum reserve requirements. Russia also printed about one billion rubles in September.
- Foreign trade shrank by seven per cent in the first eight months of this year compared with the same period in 1997.
- Retail gasoline prices shot up by 10 per cent this week in and around Moscow.
Russians already facing the lowest grain harvest in decades may also be short of meat, vegetable oil and butter - staples of their diet - by the start of the year, a private agriculture group forecast Friday.
Basic foods have remained available, despite the economic crisis that hit Russia in mid-August and the government insists it doesn't expect any shortages.
Still, a sharp drop in food imports and a low harvest have prompted serious concerns. The government has created an emergency food reserve and approached the United States for grain and other food on long-term credit and as humanitarian aid.
Meat, butter and vegetable oil shortages may hit by the start of next year, said Russia's Institute for Agrarian Market Trends, Interfax news agency reported.
That would deal a blow to virtually all Russian kitchens and would be the first such shortages since the early 1990s.
The institute, headed by former agriculture minister Viktor Khlystun, said it is unclear whether Russian producers can fill the gap left by falling imports, although the government has said it will lower import duties on basic foods to stem losses.
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