Scott - here's the article you spotted. Nice find.
Page URL: nationalpost.com
January 5, 2002
Oil juniors are filling their pockets with opportunity
Startup oil and gas companies see value in the downturn
Claudia Cattaneo and Carol Howes
Financial Post
CALGARY - It's hard to find an optimistic soul in Canada's energy sector these days, unless you're talking about the juniors.
Take David Johnson. He sees so much opportunity for startup oil and gas companies in 2002 he wrote a $2-million cheque last month to purchase stock and get himself at the controls of Progress Energy Ltd., a junior exploration firm with operations in Saskatchewan, Alberta and B.C.
Here is his game plan: As larger companies pare back capital spending and sell assets to pull through the commodity downturn, Progress, cash rich from a recent equity issue, will wait in the wings and buy assets, hire drill rigs and other services at bargain prices so it can jump-start growth and ride the cycle up.
It's a strategy that's worked profitably for Mr. Johnson and his shareholders before. He sold Encal Energy Ltd., a $60-million enterprise when he took over its leadership 14 years ago, to California-based power company Calpine Corp. for $1.8-billion last February.
"Just running around the ankles of the majors, picking up crumbs, will be very profitable for Progress," says Mr. Johnson, 51, who quit as president of Calpine's large Canadian operations in November to take over as president and chief executive of Progress, a company some 20 times smaller with production of eight million cubic feet of gas and 2,000 barrels of oil a day.
"History has shown us that this [Western Canadian oil and gas] basin is very resilient for growth for small companies, and there is lots of appreciation and value in the early stages of companies' lives."
Other investors are also beginning to warm up to the junior players. Markets have been cool to the group since the 1997 oil crash, largely because of high-profile failures that left many holding worthless stock.
In an indication of the market's rising interest, the stock of Progress jumped 40% on the Canadian Venture Exchange just after Mr. Johnson joined the company, while a $10.5-million stock issue soon after was oversubscribed. The firm hopes to move its listing to the Toronto Stock Exchange early this year.
Along with Progress, analysts are also taking bets on such companies as Olympia Energy Inc., Gauntlet Energy Corp., Chain Energy Corp., Atlas Energy Ltd., Bow Valley Energy Ltd., Southward Energy Ltd. and Real Resources Inc.
"I see lots of opportunity going forward in '02," says Jill Angevine, an analyst with FirstEnergy Capital Corp. in Calgary. "I'm excited about the prospects for the new startup companies and existing juniors in terms of growth opportunities."
Industry analyst Andrew Boland, who specializes in junior oil and gas firms at Peters & Co., is so enthusiastic about the group's outlook he labelled 2002 the possible "rebirth of the small-cap year."
"Going forward," he predicts, "we're going to have two years of rebuilding of the junior and small market."
At a recent investment symposium to showcase junior oilpatch companies, where presentations were packed to the rafters, Jennings Capital Inc. painted the new market environment as one defined by a small number of large companies and a large number of small companies. This, it was explained, is the result of the fierce consolidation of the past two years that wiped out the industry's mid-sized ranks.
Startups with a market capitalization of less than $50-million now represent 63% of public oil and gas companies in Canada, while accounting for only 2% of overall production, Jennings Capital Inc. estimates.
Interest in the group has been renewed by a series of promising developments.
The industry's junior ranks are being replenished by firms headed by management teams with strong reputations for value creation in senior companies who, like Mr. Johnson, cashed out at the top of the cycle after receiving rich offers from U.S. buyers.
Another positive sign is that assets worth billions of dollars are expected to be sold by last year's big spenders -- primarily U.S. firms that made expensive acquisitions in Canada -- as their priorities in the downturn change to raising cash.
"There is a lot of product out there in terms of properties for sale, and a lot more to come. I think over the next six months to a year, it will be an opportunity-rich environment," Mr. Johnson says. Mr. Bowland predicts smaller companies will have to wait for the second half of 2002 before making their asset purchases, after bigger producers with deeper pockets get first dibs.
Some of those assets, explains Mr. Johnson, are finding themselves orphaned because there's a shortage of technical expertise. (Canadian technical staff tend to quit their jobs immediately after their companies are taken over, particularly if the new owners are American, gravitating toward small Canadian companies where they personally benefit from value creation through stock options.) With little remaining support, those assets languish, he says.
"When somebody calls from Houston and says, 'Sell $100-million worth of assets,' these kinds of things find their way into these packages for sale," says Mr. Johnson.
Lower prices for land, rigs and other services provide another key ingredient for smaller companies' growth.
"Progress's strategy now is to develop an inventory base that is much larger, essentially, to fill our pockets with opportunity," says Mr. Johnson. He is planning small fast-paced deals as well as partnerships with companies that have complementary strategies such as royalty trusts and utilities that want the production but are not set up to explore.
The junior story is enhanced by a new twist. Many new companies that are privately held are expected to go public over the next two to three years. These companies, too, are headed by top management teams that are cash rich.
Mr. Bowland says many of these private companies will want to make the transition to the public market as they look to raise larger sums of money to support the next phase of growth.
Not all analysts, however, see a junior comeback. Ian Ollers, analyst at Harris Partners, says junior companies are still being hurt because natural-gas prices are depressed.
And investors remain fearful of investing in junior energy companies because of their cyclical nature and higher volatility than larger-cap companies, he says.
"One thing that has happened in the past 15 to 20 years is that when portfolio managers and investors start to get really turned on by the gas business, it crashes. And it's done that three or four times. There is great distrust in these things and for a good reason. If the price of gas is good, it's almost by definition going to come down. If the price is bad, it's by definition going to go up."
However, he concedes, the stocks are cheap, many at 60% of asset value.
As for Mr. Johnson, he is pleased he decided to work with a junior.
"I wanted to be able to get the feeling that what I was doing was contributing, adding value -- that I could see the bottom line."
ccattaneo@nationalpost.com; chowes@nationalpost.com |
