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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Tomas who wrote (58616)	1/17/2000 10:39:00 AM
From: Tomas	Read Replies (2) \| Respond to of 95453

Investors are ignoring the oil patch - The Globe & Mail, January 17 By Mathew Ingram Calgary -- Maybe it would be better if companies like Anderson Exploration, Canadian Natural Resources and Canadian Hunter changed their names to Pilesofcash.com, or announced that they plan to drill for oil remotely, using only their Palm Pilots and a new oil field version of Linux. The price of crude oil is still close to its high for the past decade, natural gas prices are still strong -- yet the stock market couldn't seem to care less. Market watchers like to call this kind of thing a "disconnect" (thus inventing a new word by turning a verb into a noun). By that, they mean a decoupling of two things that are -- or should be -- closely linked. There are a number of different theories about why this might be occurring, and there's probably a little bit of truth in all of them. What is clear is that, unless the market knows something about the future that no one else does, there are a whole pile of bargains in the oil patch. Of course, there's the dot-com theory, which blames the Internet craze for the lack of investor interest in oil stocks. Why would anyone want to buy a stock for which they must wait a year or more for results from some drilling or cost-cutting program, for which their return might be a measly 10 per cent or less, and whose price could be sent plummeting by a single press release by some shadowy consortium of third-rate Arab countries? Better to buy some dot-com stock you've never heard of and triple your money in a day. Beneath this facile, fad-driven explanation, some analysts see a more meaty justification for the wallflower status of the resource group. Goldman Sachs analyst Greg Pardy believes that, in the past, the oil patch won a larger share of investor interest because there wasn't as much competition for the Canadian investor's attention. That meant some companies could get away with much higher levels of debt and much lower rates of return. Now, he argues, producers must tighten their belts and change their financial benchmarks if they want to compete with companies that get valued at eye-popping multiples regardless of whether they have any profits. Another theory for what's ailing oil stocks: memories of the sudden downturn in late 1997 and early 1998, when crude lost altitude at a sickening pace -- plummeting to less than $10 (U.S.) a barrel from the mid-$20 level. Anyone who held stocks such as Amber Energy at that time, and watched their value free-fall to just $2 or $3 apiece from more than $30, probably still has a healthy skepticism. They know first-hand just how quickly the rug can get pulled out from under a nice resource rally. Then there are companies such as Blue Range Resource, Remington Energy and Merit Energy,whose sudden announcements about overstated reserves, understated debt and vanishing cash flow have made many investors nervous about junior and intermediate oil stocks. But why, when oil and natural gas commodity prices are trading at record highs, is a major player such as Anderson Exploration trading at barely four times projected cash flow per share for this year? When oil prices are at the heights they are now, senior producers often trade at multiples of between six and eight times cash flow -- and sometimes more. A recent report by FirstEnergy Capital said the average multiple for oil producers is actually below where it was when oil prices were at their lowest level, last February. And so you have companies such as Anderson, Talisman Energy,Canadian Natural Resources, Canadian Occidental,Canadian Hunter, Renaissance Energy and PanCanadian Petroleum,all trading at or below 4.5 times their projected cash flow for this year. In many cases, First Call estimates for next year -- which many investors consult -- show multiples that are even lower. Some stocks -- such as Ranger Oil,trading at 2.7 times this year's estimated cash flow -- are so cheap they look to be obvious takeover targets. It's true that for some of these stocks, there are exacerbating factors that explain the price downdraft. Talisman, of course, is in the doghouse because of its investment in Sudan. CanOxy's future is somewhat uncertain because its major shareholder has said it wants to get rid of its stake in the company. And Renaissance and Canadian Natural currently both have fairly high debt levels. In addition, despite recent assurances from OPEC that it will stick to its production cuts at its March meeting, some market watchers are concerned that the taps could get turned back on -- increasing the possibility of a sudden downturn in the oil price. But despite all these factors, there doesn't seem to be any compelling reason that stocks of almost all oil patch companies are trading at the same multiples they were when crude was selling for $10.50 a barrel. Readers can reach Mathew Ingram by fax at (403) 244-9809 or by e-mail at mingram@globeandmail.ca