Another bullish article on the oil industry's prospects, especially juniors and mid tier producers...
E&P Mid-Caps' First Half Earnings Up
357.5%
Petroleum Finance Week
MID-CAPS' FIRST HALF EARNINGS UP 357.5 PERCENT - Exclusive Petroleum
Finance Week Scoreboard Shows Which Producers Achieved the Biggest Gains -
Dramatically higher oil and gas prices produced significantly more profitable operations in
the first half for more than the major oil companies and large independent producers.
Mid-sized upstream independents and royalty trusts also did dramatically better
year-to-year as a group during 2000's first six months. But individual companies'
performances were more mixed, Petroleum Finance Week's latest Mid-Caps at Mid-Year
Scoreboard shows.
The survey covers publicly traded E&P firms with market capitalizations from $250 million
to $1 billion as of Aug. 18. The 24 companies in that range this year increased their total
operating income by 357.5 percent on revenues that climbed 61.8 percent year-to-year
during the first half. But dramatic improvements did not necessarily occur in every case.
Wall Street oil analysts agreed that hedging probably had the biggest negative impact on
these companies' results. "Some of the more financially leveraged companies had to lock
in part of their production to provide base cash flow to make interest payments. So they
missed a lot of the price upside," observed Michael C. Schmitz, who follows mid-cap
independents for Salomon Smith Barney in New York. "The ones that already had paid
down debt were able to keep cost structures lean and bring increased commodity prices
directly to the bottom line."
"It's a mixed bag so far, caused by the quality of the companies," added his colleague,
Robert Morris, who tracks larger independents. "Recently, there was a little catch-up. But
the bigger-cap names tend to take the lead. A lot of it has to do with market cap and
liquidity. Some investors want to be able to move into and out of a stock quickly, so they
go for the bigger names at first. But as they grow more confident, they start to pay more
attention to mid-sized and smaller producers."
Most of the changes from last year's Mid-Caps at Mid-Year lineup reflect investors'
growing confidence. Stone Energy Corp. (NYSE: SGY), Louis Dreyfus Natural Gas Co.
(NYSE: LD), Pogo Producing Co. (NYSE: PPP), Vintage Petroleum Corp. (NYSE: VPG),
Cross Timbers Oil Co. (NYSE: XTO) and Triton Energy Ltd. (NYSE: OIL) each moved out
because of a more than $1 billion market cap this year. Several more in the group
increased their market caps while a few others declined. Evergreen Resources Inc.
(NASDAQ: EVER), Harken Energy Corp. (AMEX: HEC) and the Permian Basin Royalty
Trust (NYSE: PBT) dropped out as their market caps each fell below $250 million.
Pure Resources Inc. (NYSE: PRS) led the arrivals as it made its debut near the top of the
scoreboard with a nearly $913 million market cap. The Midland, Texas, independent was
created late last spring when Titan Exploration Inc. combined with Unocal Corp.'s (NYSE:
UCL) Permian Basin operations. Swift Energy Co. (NYSE: SFY) was next as it came
onto the survey with a more than $590.3 million market cap, more than 175 percent higher
than its $214.1 million market cap a year earlier. They were followed by the Hugoton
Royalty Trust (NYSE: HGT), Clayton Williams Energy Inc. (NASDAQ: CWEI), Basin
Exploration Inc. (NASDAQ: BSNX), Prima Energy Corp. (NASDAQ: PENG), Nuevo
Energy Corp. (NYSE: NEV), Patina Oil and Gas Corp. (NYSE: POG), Belco Oil and Gas
Corp. (NYSE: BOG), Denbury Resources Inc. (NYSE: DRI), Pennaco Energy Inc. (AMEX:
PEX), The Meridian Resource Corp. (NYSE: TMR) and the B.P. Prudhoe Bay Royalty
Trust (NYSE: BRT).
The outlook for this group is more bullish than it has been in years. "The mid-caps have
outperformed the large caps, and the small caps have done even better," noted John
Myers of Dain Rauscher Wessels in Austin. "Their stock performance is up about 70
percent, year-to-date. Investors are starting to take more notice. Also, the companies are
doing a better job. Unlike the last cycle, when producers spent more than their cash
flows, the companies are paying down debt and repurchasing stock while growing
production. Wall Street likes that. It complained about lack of financial returns from this
group for two years. Now, it's seeing some real value being built."
Wayne Andrews, who follows mid-sized independents for Raymond James and
Associates Inc. in Houston, confirmed that producers are showing more discipline now.
"It's a recurring theme. They've decided to be more constrained," he told Petroleum
Finance Week. "Instead of chasing volume for volume's sake, which did not impress
investors during the last cycle, independents are trying to generate higher rates of return.
If they continue to use the low price decks they have for the last couple of years, I think
they'll do very well. They'll only run into trouble if they start using $5 gas and $30 oil
prices for their assumptions."
"We went through a period where the investment community really beat this group up,
and the stock prices still haven't recovered fully," said Morris. "They're still sensitive, even
with $5 gas and $30 oil on the screen. They're using price decks of $22 for oil and $2.25
for gas, so their returns at today's prices are tremendous. Some of these companies are
posting returns of more than 100 percent on some of their projects."
Several producers also did not have prospects in their portfolios to pursue as their cash
flows improved. "Many of them simply didn't have prospects ready to drill. They also don't
have professionals capable of generating prospects quickly any more. So they put money
aside to buy back stock and improve their balance sheets," said Schmitz. Wall Street oil
analysts also expect mergers and acquisitions to continue. Nevertheless, they think the
outlook is exceptionally bright for producers. "By and large, most of the industry is pretty
much unhedged going into 2001. The companies whose results didn't look good in the
first half will look a lot better as their hedge positions roll off," Myers maintained.
Dain Rauscher's price forecasts are among the more conservative predictions, with U.S.
gas prices expected to average $3.50 per thousand cubic feet in 2000 and $3.30 in 2001,
and crude oil prices averaging $28.55 per barrel this year and $23.50 in 2001. "With 2.6
trillion cubic feet of gas in storage going into the heating season in November, that would
be at least 400 billion cubic feet below where it was last year at that time," said Myers. "If
we have another 2 Tcf draw as we did last winter, that would leave us with about 600 Bcf
in storage next summer as more gas-fired power plants are scheduled to come on line.
That's what drove inventories down so much this summer."
"We've been bullish for some time," Andrews indicated. "Last October, we said we were
moving from a $2 to a $3 gas price. We didn't know that we'd be this right this quickly.
Now, we think we'll see a $4 average next year. We differ from the Street in this regard.
But everything we see in terms of supply and demand leads us to believe that we're
headed for a higher gas price - and there's no quick fix coming."
He also expects crude oil prices to remain strong (averaging $28 per barrel this year and
$30 in 2001). "Everything we see from the Organization of Petroleum Exporting Countries
and tanker availability, which is becoming an issue, suggests that it won't be possible for
prices to move back down into the mid-20s, as some people are hoping," Andrews said.
- Nick Snow in Washington |
