SPECIAL REPORT / Stocks To Watch In 98
BASKET OF CHEERS FOR THE NEW YEAR
KERM'S FINE NINE
December 27, 1997
I've noticed quite a few financial writers have established their Christmas list of stocks to watch in 1998. Since I like a good parade, I thought marching to my own drums would be appropriate.
Before I get into the heart of my listing, permit me to briefly expand on where we are at the present. I want to touch upon subjects involving personal emotions, market sentiment, perceptions and fundamentals.
As 1997 begins to fade in bearish sentiment, it's not easy to be gung-ho on oil and gas stocks. Shares in oil and gas producers, drillers and service companies have been under pressure. Investors have been fleeing from the sector very quickly due to overhanging negative factors. On top of the list are the current declining crude oil and natural gas prices. Additionally, producer netbacks are being squeezed due to higher costs of doing business and that will effect bottom lines. Companies got hung up with their drilling plans for 1997, and as a result, companies will not be meeting their objectives this year. Company programs were delayed in 1997 due to past winter weather conditions which did not allow for early timely drilling. We face the same condition today, even more so. Further delays were experienced in 1997 due to shortages of drilling equipment and services. According to many analysts and industry organizations, drilling in 1998 will easily surpass that of 1997. If this does occur, the same demand for rigs and services will exist and companies will again be threatened by potential delays. In particular, small oil and gas producers will experience the blunt of any shortages. The last point I want to stress is that many companies, large and small, took on quite a little debt in 1997. I forsee debt as a coming major issue in 1998 as some companies fail to meet their operating objectives. In summary, the perception of the industry include many negative factors and individual companies will face stiff challenges in 1998.
To quote another financial writer's emotions, " I would like to turn the lights out, pull the covers over my head and curl into a fetal ball. Wake me when it's over." Let's be completely honest, the last thing most of us want to do at this point in time, is look ahead to 1998. We've seen quite a little profit go down the drain over the past six months.
I don't know about you, but I'm not ready to go into hybernation. I don't believe the oil and gas industry is ready to do that also. In fact the industry in many respects, is coming out of hybernation. Sometimes we get caught up into current emotions and perceptions to the extent that we forget what attracted us to this industry in the first place. Long term outlook for the oil and gas industry is still very positive. It's simply a matter of supply and demand in a growing world economy.
In coming up with my Basket Of Cheers For The New Year, I found the exercise forced me into seeing a clearer picture of conditions and trends of both, markets and economy. Attention must be directed at the longer term. Although near term perceptions are negative, the intermediate and longer term fundamentals are becoming very attractive. Due to the severe correction that is currently in place, the premium in share prices of many oil and gas producers has been removed. There has been quite a little conversation over the past few months about shares of companies in the oil and gas industry being overvalued. Maybe so, but certainly not at this point in time. In some cases, shares of oil and gas producers have dropped to levels which are at a discount to net asset value. When looking at forecasted cash flow per share numbers for 1998, one will begin to see that cash flow to share price multiples are attractive. I can't quote any specifics at this time, but I believe one would find average 1998 cash flow multiples (as a group) are less than the average over the past decade. As for drillers and service companies, their fundamentals are also strong. I don't see any slowdown in demand for their services in 1998. The p/e multiples have fallen and appear to be resonable when looking at group averages. Look for the smaller upstart companies with good equipment, technologies and services to make giant strides in 1998 as they gain market share.
BASKET OF CHEERS FOR THE NEW YEAR
KERM'S "THE FINE NINE"
At the time of selection, all companies had market capitalizations under $50.0 million. Total outstanding shares ranged from 6.8 million to 16.5 million. You can begin to see that these are very small cap situations, speculative in nature and, not exactly household names in the industry. As I have stated in the past, it is wise to own a "basketful" of these companies. Although all these companies have put themselves in position to provide further growth, don't increase your risk by being selective. For those of you who wish to measure the progress of these nine companies, the closing prices on the last trading day for 1997 are to be treated as the recommended prices. I will list them at that time.
My list comprises six (6) oil and gas producers with operations in western Canada, one (1) international oil and gas producer and two (2) service sector companies.
WESTERN CANADIAN OIL & GAS PRODUCERS
1. Draig Energy (DRA/ASE) The company exited fiscal 1997 producing oil and gas at a rate in excess of 700 BOE per day. This is a 217 percent increase from the 222 BOE per day at November 30, 1996. (Draig will change its fiscal year end to December 31 from November 30 effective December 31, 1997. )
Draig plans to drill 25 (14.1 net) wells during the upcoming drilling season in its Alberta core areas of Chigwell, Brent/Hanna and Tony Creek. Draig will be the operator of 19 (12.2 net) of these wells. At Hanna the company drilled and cased all five wells targeting the Second White Specks zone. These wells will be tied into the company's 100 percent owned gas plant at Hanna and will be placed on production by mid January 1998. The capital budget for 1998 has been set at $6.4 million.
2. Richland Petroleum (RLP.A/TSE) Current company production levels exceed 4,100 barrels equivalent per day. Base case projections for 1998 indicate growth of at least 18 percent in both production and cash flow. Production is forecast at 4,200 barrels equivalent per day. These projections do not include incremental production from the development drilling at Bienfait, nor any 1998 exploratory success. As the CEO states, "the forecast is conservative, as year-end 1997 exit rates should exceed that level. With these new production volumes, Richland has replaced its 1998 production declines, even before the year begins. With additional production anticipated from a successful drilling program on the newly-acquired Bienfait lands, 1998 is looking like it will be a very good year for Richland!"
An active drilling program is planned for 1998, both in Alberta and southeastern Saskatchewan. Numerous Red River opportunities are being explored, subsequent to the 1997 drilling successes at Clarilaw and Kingsford. Four 3-D seismic shoots are currently under way, two of which are being jointly conducted by Berkley Petroleum Corporation on land offsetting their recently-announced Red River discovery well,
which was reported to have tested at 4,200 barrels per day.
3. Spire Energy (SEY/TSE) Spire Energy Ltd. is a junior resource company engaged in oil and gas exploration and production in Western Canada. Spire commenced operations in September 1993 and since that time has demonstrated that it is a low cost finder and producer of natural gas. Spire is Currently producing 12.5 MMCFD with three wells capable of 2 MMCFD awaiting tie in, pending rig availability. Spire planned to drill five additional wells prior to year end. Spire is positioned to control its destiny and maximize profitability. Spire's operations are geographically focused in two core areas. The Company operates 99 percent of its production, owns processing facilities and works in areas where reserves are found at shallow drilling depths.
4. Tethys Energy (TET/TSE) An investment into very capable management. The company went public this year. Tethys reported record cash flow from operations of $2,807,772 ($0.17 per common share) for the nine month period ending September, compared to $662,722 ($0.08 per common share) in the first nine months of 1996. The cash flow increase was as a result of an increase in oil and liquids production of 231% from 202 barrels per day (Bbl/d) in 1996 to 669 Bbl/d in 1997 and a 136% increase in natural gas production from 2,416 thousand cubic feet per day (Mcf/d) in 1996 to 5,698 Mcf/d in 1997. Net income was $266,032 ($0.02 per share) in 1997 compared to a loss of 12,501 ($0.00 per share) in 1996.
Tethys intends to drill ten horizontal wells in southeast Saskatchewan during the next eight months with four of these wells scheduled to be completed by December 31, 1997. In addition, Tethys is continuing its exploration and development program in west central Alberta and in the Peace River Arch.
5. Thunder Energy (THY/TSE) Thunder's production base has continued to grow through the third quarter as a result of drilling successes and exploitation of its core properties. Third quarter production averaged 5.1 mmcf/d and 419 bbls/d as compared to 4.2 mmcf/d and 193 bbls/d recorded in the second quarter of this year. Production has continued to increase averaging 6.5 mmcf/d and 550 bbls/d in October (total of 1,200 boe/d).
Thunder has secured drilling rigs for an expanded drilling program in this current quarter. A total of nine wells have been drilled to date, resulting in 5 (2.5 net) gas wells 3 (1.5 net) oil wells and 1 (.5 net) dry hole. For the balance of the quarter Thunder expects to drill an additional eight wells, three at Matziwin, two at Manola and three horizontal wells at Rosalind. Total capital expenditures for the year are now forecasted to reach $18 million. To finance this expanded budget Thunder has secured a $10 million line of credit with its bank. Forecasted exit rates have been increased from 1,500 boe/d to 2,000 boe/d by year-end.
6. Wolverine Energy (WVE/ASE) Company average production grew by 141% to 526 BOE's per day for the first three quarters of 1997 versus 218 BOE's per day for the same period in 1996. As production continues to come on from the fall. Third quarter exit rates was 1,050 boe/d consisting 74% crude oil and 26% natural gas. Wolverine Energy expects to exit 1997 at a rate of 1,500 boe/d.
As a result of Wolverine Energy's recent discoveries in their fall drilling program, the company has lready begun to assemble the follow-up development drilling locations at these new fields for the 1998 drilling program. During the 1998 winter/spring program, Wolverine will also continue drilling its exploration targets that it has identified on its undeveloped acreage in the Alliance Halkirk area. Wolverine Energy expects that based upon the Company's recent drilling and acquisition successes, the Company will drill up to 50 wells in 1998.
INTERNATIONAL OIL & GAS PRODUCER
7. CanBaikal Resources (CBQ/ASE) An Alberta based company which was established for the purpose of exploring for and developing oil and gas in Russia. In addition to its Calgary home office the company is currently establishing a Russian operating base in the City of Neftayugansk, Province of Khanty Mansiysk. The company went public this past August.
The Company has entered into an extensive Protocol Agreement with YUKOS Oil Corporation, the second largest producer in Russia. This agreement provides the authority and framework for the Company to operate its Untegey Block, through detailed agreements for access, power, transport and logistics. The company has made arrangements to market its oil at a pumping station 10kms from its licence block. The Company believes that this agreement will be to the advantage of both CanBaikal and YUKOS by providing a formal basis for the ongoing co-operation.
A technical and engineering team is preparing the 2 discovery wells on the block for extensive production testing expected to begin in December 1997. CanBaikal has purchased over 500kms of seismic data and interpretation programs are underway to guide the placement of subsequent wells. Management has extensive experience in both, Canadian and Russian operations. Estimated new production for each well in the block is estimated between 500 and 2,000 bbl's/d. The company should see initial cash flow early in the first quarter 1998.
SERVICE SECTOR COMPANIES
8. Hyduke Capital Resources Ltd. (HYD/ASE) The company provides equipment, products and services needed by the oil and gas industry on a basis as quickly and efficiently as possible. This commitment to timeliness has enabled the company to become the premiere remanufacture, repair and supply source to the oil and gas industry in Western Canada. Hyduke just recently went public. The company is acquisition minded and will grow via this route, as well as internally. Sales for the half year ended October, 1997 were $14,999,000. This compares to sales for the entire fiscal year ended April, 1997 of $15,107,000. As such Hyduke is on track to achieve its goal of doubling sales on a year-to-year basis. Earnings are showing even better performance as the efficiencies of integrating The Hyduke Group of Companies starts to show on the bottom line. Earnings for the six month period ended October, 1997 exceeded $1,092,000; as compared to annual earnings of $840,500 for the last fiscal year. Without acquisitions, I see the company earning a minimum $0.40/share in 1998.
9. Tetonka Drilling (TDI/TSE) Another new public company with exceptional strong management. Most key people are from Precision Drilling. The company's initial share offering of $15 million had been heavily oversubscribed. By spring break-up, the company will have seven rigs built. The first four rigs have all been contracted for four years, long enough to recover their capital cost of $3 million apiece. Two more rigs have three year contracts and Tetonka is optimistic that the seventh will soon have a long-term taker.
|
