MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUES., JANUARY 13, 1998 (2)
FEATURE STORY
Renaissance Enrgy To Win Back Investors' Hearts
The Financial Post
Contrarian investors looking for a value-priced oil stock should look no further than Renaissance Energy Ltd.
The Calgary-based firm is the envy of the oilpatch. Its consistent success during the past 15 years, where production and financial gains led to repeated splits, has made it the darling of investors and analysts.
Between 1987 and 1996, its compound growth rate for cash flow was 43%, earnings jumped 47% while oil and gas production climbed more than 30%.
However, the love affair soured in the second half of last year after president Clayton Woitas said in July the company would not meet its second quarter production targets.
In a market that rewards winners and scourges sinners, the judgment was swift and harsh.
From around $39 at the time of the news, Renaissance stock tumbled to end the year at $29.50.
While the Toronto Stock Exchange's oil and gas producers subindex fell 10.8% in 1997, Renaissance's equity took a 17.1% hit.
The stock (RES/TSE), which has a has a 52-week trading range of $50 to $24.25, has continued to slide in the new year. It closed yesterday up 15› at $26.
However, despite recent price weakness, the stock is still rated a a "buy" by a number of analysts who like its prospects.
Firms that recently issued "buy" ratings include Toronto Dominion Securities Ltd. and Petroleum Research Group, Inc. The latter, a New York-based research firm, has a target price of $30-$33 for Renaissance stock by the end of December.
Scott Inglis, of FirstEnergy Capital Corp., is looking for a yearend price of $38. He estimates Renaissance has a net asset value of $35 a share and is now trading at about six times cash flow, down from its historic range of 6 1/2 to nine times.
Renaissance's strengths include the largest land spread in Western Canada, a portfolio of gas contracts yielding attractive prices and a skilled staff experienced in drilling thousands of shallow wells cheaply and quickly.
It weaknesses encompass a large exposure to medium crude oil, less experience with deeper targets in Western Canada and no international plays.
The company's price-earnings ratio of 21.9 is close to peers, like Anderson Exploration Ltd. (18.1), Canadian Natural Resources Ltd. (20.5), Crestar Energy Inc. (21.4), Poco Petroleums Ltd. (23.9) and
Talisman Energy Inc. (45.1).
However, Renaissance has a larger market capitalization than most of its rivals and a different asset mix from Talisman.
Apart from its stock price woes, the company has seen the departure of a number of employees, including some managers.
One of Renaissance's competitive strengths has been its ability to retain staff by rewarding workers with stock options. In the former ever increasing price environment, it was a strong incentive to stay with the firm.
However, the departures are raising some concern, says Gord Currie, an analyst with Canaccord Capital Corp.
"It shows there are some people who see more opportunity outside the company," he says.
Defenders of the Renaissance faith, and there are many in the investment community, say the firm is only experiencing normal turnover in an industry where experienced professionals are at a premium.
The make-up of senior management has not changed. These executives have not altered their key strategies - assembling large contiguous land blocks, owning properties entirely and maintaining operational control - that made it the blueprint for countless oilpatch imitators in the late 1980s and '90s.
Renaissance is now looking at making an acquisition, several industry sources say. While it has made large property purchases in the past, it has never taken over a public company. And with last week's savaging of oil stocks, now could be a good time for Renaissance to lose its virginity.
"I anticipate this is a buyers' market and I believe they are one of the best positioned by having abstained from the acquisition market in 1997," says FirstEnergy's Inglis.
The company has pursued a counter-cyclical acquisition strategy in the past.
A gas-oriented deal that gives Renaissance technical expertise as well as exposure to the high-risk, high-reward plays in the deeper part of the Western Canadian sedimentary basin would help revive the firm's fortune, Inglis says.
But Canaccord's Currie was less sanguine about the impact of a possible takeover. He says it would signal the company has abandoned one of its key strategies.
Without an international focus to raise the chance of making a huge discovery abroad, Renaissance may be able to keep growing its production by 15% annually, he says. That level of performance will help the stock recover, especially when higher commodity prices return, but it would not fuel a big run-up in price.
Renaissance is rated as a "hold" by Currie, who has a 12-month target price of $32 on the stock.
However, Peter Linder, of CIBC Wood Gundy Inc. in Calgary, this week downgraded the stock to "underperform" with a 12-month target price of $23.
He says reduced capital spending, smaller production growth and estimated yearend debt 2.2 times higher than cash flow were the basis for his lowered expectations.
A large Canadian mutual fund recently increased its holdings in Renaissance.
Trimark Financial Corp., through Trimark Investment Management Inc., late last month bought an additional 115,000 common shares of the company. The purchase gave it 17 million shares, or 14.7% of Renaissance's shares outstanding.
Trimark officials would not comment on the reason for increasing its stake.
Inglis says production growth this year from exploration efforts yet to be announced will give a boost to the stock's performance.
Currie also is not discounting the possibility of a renaissance in the fortunes of the stock.
"You still have the same senior management in place and I think that's a good thing," he says.
"They've been through the wars and prospered. If there's anyone that's going to make the company get up and go again, it's going to be that group."
For statistical tables, go here techstocks.com
FEATURE STORY
Chesapeake Delves Deeper Into Canada
The Financial Post
Chesapeake Energy Corp. increased its exposure in Canada yesterday with the announcement of its second investment in the past six months - and company officials say their shopping spree isn't over yet.
The U.S. firm said it has struck an alliance with Ranger Oil Ltd. of Calgary covering the Helmet area of northeastern British Columbia.
The large independent firm paid US$50 million for a 40% interest in Ranger's properties at Helmet, excluding the July Lake pool.
Chesapeake entered the Canadian energy scene last fall through a $20-million partnership with junior Pan East Petroleum Corp.
Tom Price Jr., vice-president of corporate development, said Chesapeake likes the long-term economics of Canadian natural gas.
"I wouldn't say we're through if we can find opportunities that make economic sense," Price said.
The move into Canada stemmed from a wish to get out of the high-production, high-decline wells from the Austin Chalk play in eastern Texas, said John S. Herold Inc. analyst Andrew Byrne.
He said disappointing drilling results last year helped push down the former high flyer's shares.
"They were looking to diversify away from the Austin Chalk and to get some long-lived reserves."
Ranger may have wanted the deal, Byrne said, because of heat from investors about its debt.
Price said the Oklahoma City-based firm has taken a gradual approach to become familiar with Canadian geology and operating practices. It eventually plans to operate its own wells rather than rely on partners.
FEATURE STORY
-Time Record Set In 1997 With Over 21,000 Licences
In what may well turn out to be an all-time peak for the Canadian petroleum industry, operators licensed over 21,000 new wells in 1997, setting records in Alberta, Saskatchewan and British Columbia.
The frenetic pace pushed governments hard to keep up with operators who had cash to spend -- following two years of stronger oil and natural gas prices and pipeline expansions -- and targets to reach in order to keep investors happy.
The year-over-year growth alone -- 5,103 more licences were issued last year than in 1996 -- was about equal with the total annual licence count at the bottom of the current cycle in 1991 and 1992.
And despite a good start to the new year with over 97% of Canada's rig fleet at work last week, lower oil and natural gas prices will slow the pace in 1998.
In total, governments approved 21,115 new wells last year of which 26% were either directional or horizontal. Daily Oil Bulletin records show 3,452 of last year's new licences were for directional wells, up from 2,321 in 1996, while 2,107 new horizontal wells were approved for drilling, up from 1,461 in the previous year.
Deep drilling also continued to grow with 265 wells licensed to reach more than 3 050 metres. That compares to 182 in 1996 and 140 in 1995.
The busiest operators of 1997, measured by well licences approved, were: PanCanadian Petroleum Limited with 1,948 licences, including those of CS Resources Linited; Renaissance Energy Ltd. with 1,809; and Canadian Natural Resources Limited with its subsidiary Cannat Resources Inc. at 985.
Operators in Alberta had 15,420 permits to drill approved in 1997, up 29% from 1996, setting a record for the second year in a row. December was the busiest month with the Alberta Energy And Utilities Board approving 1,851 new licences. Prior to 1996, the peak year in Alberta was 1985, just before world oil prices crashed, when the former Energy Resources Conservation Board granted 8,759 new permits.
In Saskatchewan, the government authorized 4,646 new wells last year, up 38% from 1996. The previous record year was 1985 when 3,971 licences were approved. The Estevan region was the most popular last year with 1,447 licences, according to government records. Canadian Occidental Petroleum Ltd. licensed the most wells in the province (658, including those of Wascana Energy Inc.) followed by Renaissance.
B.C. also set a record with 893 new licences, according to Daily Oil Bulletin records, thanks in part to a tremendous surge in the last quarter which included 239 in November alone. The previous record year was 1994 when 714 new wells were approved for drilling.
Manitoba activity also rose last year but not to record levels. The province authorized 129 new wells, up from 82 in 1996. Between 1982 and 1985, the province issued well over 200 licences a year.
A further 15 wells were approved for northern Canada in 1997 along with nine for eastern Canada, bringing the total Canada count to 21,115 for the year, a number that will stand out when historians look back at the fossil fuel age in Canada.
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