MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 2, 1998 (6)
OIL & GAS
US Foreign Crudes - Brent
The U.S. market for foreign crudes remained quiet after the New Year holiday, and the few traders who came in on Friday said even talk was limited.
Few deals were heard done, though there was some talk of two cargoes of Nigerian Bonny Light being offered into the U.S. Gulf. Earlier this week light sweet crude was being offered at a premium of $1.80 to dated North Sea Brent.
Other West African grades being talked included Equatorial Guinea's Zafiro. A U.S. major which sold some Zafiro to a U.S. refiner earlier this week around dated Brent minus 90 cents was said to be offering another piece.
Angolan Cabinda was also said be on offer at Dated Brent minus $1.20, traders said.
Traders said there was still some talk of North Sea Brent in the U.S. Gulf, despite a WTI-Brent arbitrage that slipped uncooperatively under a dollar. The arb settled at 98 cents on Friday, down from $1.10 on Wednesday. Brent had been heard offered at March WTI minus 25 cents earlier this week.
Talk in the Latin American crudes was subdued.
Details were still unavailable on Colombia's Cusiana loading program for February, and traders said the holiday-season was to blame for that.
Indicating that the program is out, an equity producer was said to be offering a first-decade February loading cargo at March WTI minus 50 cents. Traders also said that Colombia's Ecopetrol had two or three Cusiana cargoes loading in the first decade of February.
A cargo of Ecuadoran sour crude, Oriente was said to be on the water, making its way to the U.S., but traders weren't sure whether the cargo had been placed or not.
NYMEX
Crude-oil and petroleum-products futures settled lower Friday during a thinly traded, half-day session on the New York Mercantile Exchange .
February crude oil settled down 21 cents at $17.43 a barrel. February crude pushed to an intraday low of $17.40, the lowest point for a nearby crude oil contract since Jan. 31, 1996, and it recovered only slightly. February gas line slipped 0.34 cent to 53.26 cents a gallon and February heating oil gave up 0.31 cent to 49.41 cents a gallon.
Stop-loss selling hit when the contract fell below $17.50, a trader noted. Stop-loss sell orders are preplaced and triggered automatically when a contract falls a predetermined amount under its purchase price.
Natural Gas Ends Off In Holiday-Shortened Session
Natural gas futures, pressured by mild forecasts and soft physical prices, mostly ended lower Friday, but trade was extremely thin in the holiday shortened session, with many still off for New Year's.
February slumped 11.1 cents to close at $2.153 per million British thermal units. March settled 8.6 cents lower at $2.144. Most other months ended down by 1.1 to seven cents though some year 2000 contracts finished up slightly.
"Cash for the weekend was off pretty good on the weather, but it was a dead day," said one East Coast trader, noting mild weather was expected for most of the nation well into next week.
NYMEX closed early Friday at 1300 EST.
Temperatures in the East are expected to range from normal to well above normal into next week. After a weekend cold snap in the Midwest, levels there are also expected to moderate to seasonal or slightly above seasonal. Texas temperatures also are forecast to stay mostly above normal though cooler weather is expected there by midweek.
Chart traders pegged February support at last week's prominent low of $2.14, with psychological support at $2. Resistance was seen first at Friday's $2.21-2.235 gap, then at Monday's high of $2.34, with better selling expected at $2.46, $2.515 and the $2.68 double top from early December.
In the cash Friday, Gulf Coast weekend prices skidded more than a dime to the low to mid teens. Midcon pipes were more than a nickel lower at about $2.10. New York city gate gas tumbled 25 cents to the mid- $2.70s amid very mild weather expectations for the weekend, while Chicago lost 15 cents to the low-to-mid $2.20s.
The NYMEX 12-month Henry Hub strip skidded 5.8 cents to $2.208. NYMEX said 14,684 contracts traded as of 1305 EST though the final totals were still not available at 1355 EST. Wednesday's revised tally was 11,513. Hub open interest on Dec 31 fell 4,828 contracts to 186,815.
REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
WORKING RIGS FALL 125 TO 368 IN CANADA THIS PAST WEEK
North American Rig Count
The number of rigs exploring for oil and natural gas in the United States stood at 1,003 as of January 2, down three from the previous week, and 158 above the year-ago total of 845, Baker Hughes Inc reported.
The number of rigs drilling on land fell by one to 851, while rigs working offshore fell by two to at 129. The number of rigs active in inland waters fell by one to 23.
Among the individual states, the biggest changes occurred in Oklahoma, down by 13, and in Texas and Ohio, both up by seven.
The Gulf of Mexico rig count fell by two to 126.
The number of rigs searching for gas fell by 13 to 633, the number of rigs searching for oil rose by nine to 366, while the number of miscellaneous drilling projects remained at four.
There were 235 rigs drilling directionally, 58 drilling horizontally and 710 drilling vertically.
In Canada, the number of working rigs fell by 125 to 368 versus 358 one year ago.
The weekly rig count reflects the number of rigs exploring for oil and gas, not those producing oil and gas.
Reference: bakerhughes.com
FEATURE STORY
Analysts At Odds Over Where Weakness Will Dwell In Oil and Gas
Claudia Cattaneo - The Financial Post
Go for the gas, stay light in the heavy, and stay tuned on conventional -- happier days are likely on the horizon for the sweetest of crudes.
That sums up the outlook of informed industry watchers for Canada's oil and gas sector this year.
They widely hold that those who sell the sector short will be disappointed. While not every company will rise with the tide, Canada's oil and gas industry is expected to slow only marginally from last year's spectacular growth levels.
"Barring a real decline in commodity prices, I don't see much of a pullback in [1998]," said Michael Tims, president of Peters & Co. Ltd. in Calgary.
"To the extent that perhaps some companies decide they don't want to pursue their full capital spending program, there will be lots of others that fill the gap -- there is sort of a pent-up demand now."
Of the industry's three major commodities -- oil, heavy oil and natural gas -- the brightest outlook is for natural gas.
Natural gas prices softened considerably during the fourth quarter of 1997 because of climatic warming associated with El Nino, which reduced heating needs and consequently demand for the commodity. However, a boost is likely to occur in the second half of this year as new pipeline capacity is added, demand continues to increase and production grows moderately.
Those factors will result in a dramatic erosion of the price differential between Alberta and U.S. natural gas prices, says First Energy Capital Corp. in Calgary. Natural gas prices are lower close to the wellhead than in the U.S. because there isn't enough pipeline capacity to carry all the natural gas that's being produced.
First Energy is recommending overweighting portfolios in companies that have natural gas leverage, or natural gas leverage potential.
"In 1998, you put away the shotgun and you take out the rifle, and you really target value creators. We think it's going to be a lot easier to create value on the natural gas side than pretty much anywhere else," said Martin Molyneaux, First Energy's managing director of institutional research.
First Energy picks Petro-Canada, Anderson Exploration Ltd., Poco Petroleums Ltd., Rio Alto Exploration Ltd., Northrock Resources Ltd., Berkley Petroleum Corp., Petromet Resources Ltd., Penn West Petroleums Ltd. and Ulster Petroleums Ltd. as being poised to outperform.
Heavy oil, which motivated much of last year's record levels of merger and acquisition campaigns, will fall out of favor as heavy oil differentials -- the discount applied to heavy oil relative to lighter varieties because it requires more refining -- stay in the high range seen at the end of 1997.
The industry is at least two years away from building new upgraders. There is a glut of heavy oil on the market, which has prompted producers to start shutting in their higher cost production.
One heavy oil producer unlikely to be affected by the glut is Amber Energy Inc., based in Calgary. Amber is involved in the hot Pelican Lake oil play in northern Alberta. The company can produce heavy oil at a $2.50 operating cost per barrel, which means it was still turning a significant profit even at the low prices seen at the end of December.
Investors wanting to identify pure heavy oil producers will have a tougher challenge than in the past -- all Canadian independents were taken over by bigger companies last year.
Canadian Occidental Petroleum Ltd. took over Wascana Energy Inc.; PanCanadian Petroleum Ltd. acquired CS Resources Ltd.; Gulf Canada Resources Ltd. took over Stampeder Exploration Ltd.; and Ranger Oil Ltd. took over Elan Energy Inc. There are differing views on whether the new companies with a large heavy oil exposure will suffer from the commodity's weakness.
A heavy oil bear, oil and gas analyst Gord Currie at Canaccord Capital Corp. in Calgary, says the new heavy oil companies have such diverse portfolios and are so large they will easily weather any softness on commodity prices.
Despite its heavy oil presence through the Elan acquisition, Ranger will see a disproportionate improvement in production and earnings by the middle of 1999, when two new oil fields in the North Sea start producing, says Peters' analyst Craig Langpap. Ranger stock (RGO/TSE) most recently traded at $9.75, up 25›.
Gulf, a big heavy oil player because of its Stampeder acquisition, could benefit significantly from plans to spin off this year a new heavy oil company comprising its 9.03% interest in the Syncrude oil sands consortium, and a $1.2-billion bitumen project that could include an upgrader.
Heavy oil producers are also among the best capitalized companies, Tims says.
"If you work on the assumption that we are going to have a slower period in the first quarter, in terms of stock market performance, picking up at year end as the expanded gas market becomes more visible with new pipelines, the advantage probably goes to the best capitalized companies, which in general means the large producers and those that have strong land positions already," he said.
In the best-capitalized group, Tims also likes Alberta Energy Company Ltd., Canadian Natural Resources Ltd., Renaissance Energy Ltd., Talisman Energy Inc., Crestar Energy Inc., Canadian Oxy and Ranger.
Thomas Budd, managing partner of corporate finance at Griffiths McBurney Partners, is cool on both heavy oil and senior players.
"Wanting to control heavy oil assets to me is the right strategic move," he said. "But unfortunately, the market always reacts to short-term cash flow, and because of that a lot of the senior producers will be affected."
Light oil producers are poised to gain, whether by default or because of rising demand that could push up prices.
One senior producer that bucked the trend and went lighter this year is Talisman, following its acquisition of Pembina Resources Ltd. Talisman stock (TLM/TSE) closed the year at $43.75. Renaissance (RES/TSE) closed at $29.50.
Oil prices tanked in late 1997 because of expectations that demand from Asia would soften, and of higher output from OPEC. West Texas Intermediate closed at $17.64 for the year, down from the end of 1996.
The outlook for the supply-demand balance is good and will support prices in the US$21 to US$21.50 range in 1998, predicts Bob Hinckley, an analyst in New York with Merrill Lynch & Co.
Because of buoyant economies, particularly in North America, demand has been outstripping expectations. "The long-term view is quite positive because there is dwindling surplus production capacity, particularly within OPEC," he said.
Company size will play a role in stock market valuation, Budd says. The micro-cap end of the market is unlikely to get the level of financing it enjoyed last year. Mid-market companies, with $50 million to $100 million in market capitalization, willbtrade at higher multiples because investors are moving up-market and because the companies are more likely to outperform, hebsaid.
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