Still time to catch oil and gas train - Globe & Mail, September 14
MATHEW INGRAM
Calgary -- Admit it -- you feel pretty stupid, don't you? If you had
bought oil and gas stocks in the spring, when they were lower than a
snake's rear end, you'd look like a total genius right now. Some time in
March, with OPEC skepticism at its peak, the TSE's subindex of oil
and gas stocks bottomed out at about 3,955. And where is it now? At
about the 6,800 mark. In case you're wondering, that means the value
of the index has soared by about 70 per cent.
Just to rub it in, that's only the rise in the index -- which obviously
includes some laggards who bring down the average. Some individual
stocks have outperformed the index by a substantial margin. Take
Talisman Energy, for example. In March, it bottomed out at about
$22. On Friday, it hit $49.15 -- an increase of more than 120 per cent.
Or how about Canadian Natural Resources: Its share price climbed to
$38.60 on Friday from the $18 level in March, a rise of more than 110
per cent. And the list goes on.
In other words, you've missed it -- right? Not necessarily. Obviously,
the easy money has already been made, but that doesn't mean the party
is over. Before the bottom fell out in late 1997, after all, the subindex
was higher than 8,000, and some observers think the current situation is
even more favourable than it was then. Most are understandably leery
about letting their enthusiasm get the better of them, but nevertheless
there are still plenty of reasons to be (cautiously) bullish despite the
sector's recent rapid rise.
One major reason is that the oil and gas business is currently firing on all
cylinders, a situation that hasn't existed for some time. In the past,
whenever the oil sector was booming, natural gas tended to be
underwater -- and vice versa. Now the price of crude oil is higher than
it has been in two years, and at the same time, natural gas prices are
also higher than they have been in a long time. No longer are companies
making buckets of money on their oil business, with barely a trickle
coming in from the natural gas side.
As an example, oil prices were still up in the stratosphere in early 1997
with crude trading at more than $20 (U.S.) a barrel, and many
companies were floating on a sea of cash from their oil operations. But
natural gas was fetching just $1.70 (Canadian) or so per gigajoule in
Alberta, which isn't anything to write home about. The result was that
companies with both oil and gas operations were riding high on one side
of their business but treading water on the other, while gas-leveraged
companies were biding their time waiting for higher prices.
Similarly, the last time that natural gas prices got anywhere near the kind
of height they are at now (apart from occasional blips because of cold
weather) was in 1993, when the Alberta price was at about $2.25 per
gigajoule and the differential between local prices and U.S. prices had
narrowed to just 20 cents (in the years that followed, that gap would
widen to between $1.50 and $2). But while oil was relatively strong in
1993, it was nowhere near $22 (U.S.), and in fact was sliding
downward and would drop below $14 in 1994.
That situation was repeated last year, as crude oil slid lower and lower
while natural gas prices got stronger and stronger -- thanks to increasing
demand from the United States, combined with a boost in the amount of
pipeline space available to take Alberta gas south of the border.
Soon, oil-leveraged companies were the ones shutting down wells
because they weren't economic, and those involved with natural gas
became stock market darlings, with the price of natural gas at the
Alberta border at $2.80 (Canadian) per gigajoule by the fall.
The trend on the gas side of the industry has continued, and Alberta
spot prices have since gone as high as $3.40 per gigajoule. Industry
analysts such as those at FirstEnergy Capital see no reason why the
strength in gas shouldn't continue for the foreseeable future, as even
more pipeline capacity is scheduled to come onstream with the Alliance
project, which is scheduled to open for business late next year.
Production in the United States has also fallen off, creating even more
demand for Canadian supply.
As for oil, market watchers are relatively optimistic that OPEC will hold
to the production cuts it made earlier this year, and the official word is
that the cartel isn't planning to let up on those criteria until next March.
While strong prices inevitably encourage OPEC producers to cheat on
their quotas, the thinking seems to be that demand is strong enough to
allow for some of that, while still keeping prices at or near the $20
(U.S.) level.
Could any of this forecasting turn out to be wildly inaccurate at almost
any moment? Of course -- that's what makes investing so much fun. But
anyone choosing to take a ride on the oil and gas train right now can do
so in the knowledge that the industry has two powerful forces driving it
now -- strong oil markets and strong gas markets -- instead of just one.
Guessing how long that will continue is the hard part.
Business West readers can reach Mathew Ingram by fax at (403)244-9809
or by E-mail at mingram@globeandmail.ca |
