MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 16, 1998 (8)
BUY - HOLD - SELL
Bissett & Associates' Buy & Sell
Opportunities Among Overlooked Small Caps
Sonita Horvitch - The Financial Post
Opportunities remain in the small-cap sector with a number of companies generating good earnings or cash flow growth that the market is not giving them full credit for, said Gene Vollendorf, portfolio manager at Calgary-based Bissett & Associates.
"The stock market is often inefficient in pricing these companies, many of which are 'under-followed' by the investment community," he said. Vollendorf co-manages the Bissett Microcap Fund ($6 million) and the Bissett Small Cap Fund ($118 million) with chief executive David Bissett. For the microcap fund, made up of companies with market caps under $75 million,
Included among his top stock picks:
Stellarton Energy Corp. (SRTa/aSE) $4.50 ($6-$2.50). The Calgary based company is in oil and gas production and in oilfield services. Bissett & Associates particularly likes the company for its ability to make innovativeequipment that enhances the recovery of oil reserves, said Vollendorf. Stellarton has "been very successful in its operations and acquisitions as an energy producer." He estimates that the company should earn 15› a share for 1997, 30› for 1998 and 40› for 1999.
Reserve Royalty Corp. (ROI/TSE) $4.15 ($5.35-$1.85). The Calgary based company is a source of financing for junior exploration and producing companies. It has royalty interests in Canada and the U.S. Vollendorf's cash flow per share estimates are 18› for 1997, 57› for 1998 and 77› for 1999.
Bissett & Associates continues to like Kelman Technologies Inc. (KTI/TSE) $1.70 ($3.25-$1.10), which was a pick in this column Dec. 4 at $2.15. The Calgary-based company provides seismic data processing and data storage and retrieval services.
GORDAN CAPITAL MORNING NOTES JAN 16
Amber Energy*
(AMB-T:$17.00) BUY Reserves Up 500% In 1997
Amber has released its 1997 operating results. Total boe reserves (proven + probable) increased 500%during 1997, to a total of 251 million boe's. Since mid-1997, proven oil reserves have doubled from 28 million bbls to 59 million bbls, and proven + probable oil reserves are up from 125 million bbls to 222 million bbls. The company estimates its 1997 F&D costs at $4.59/boe proven, $2.00/boe for proven +50% probable, or $1.28/boe for proven + probable. The drilling success rate was 93%. Our preliminary net asset value estimate is $14.00, in today's low oil price environment. To date this winter, 53 of 100 horizontal wells planned for Pelican Lake have been drilled, and the program is on track. We expect oil production to increase from 7,940 bbls/d in 1997 to 27,000 bbls/d in 1998, and gas production to increase from 93 mmcf/d to 120 mmcf/d. Our CFPS forecasts are $1.15 for 1997 and $2.40 in 1998. Even with weak current oil prices, the Pelican Lake project offers potentially very low operating costs (below $2.50/bbl), low royalties (only 1%), and netbacks exceeding $10.00/bbl. Current stock price weakness provides investors an excellent opportunity to BUY. David Stenason
Canadian 88 Energy*
(EEE-T: $4.26) HOLD Waterton - 4th Well Drilling, 5th Well To Spud
Canadian 88 Energy has followed the successful testing of its 3rd well at Waterton (which tested commercial quantities of low sulphur gas from the Livingston formation) with the currently completed drilling of its 4th well. This well will be tested soon. The 5th well is currently drilling. We currently recommend that Canadian 88 shareholders hold their positions, despite currently weak markets for Canadian energy stocks. David Stenason
Rigel Energy
(RJL-T:$10.75) BUY Burmis @ 3,100 Meters, Moray Firth Goes "Tight"
Rigel is operating a deep gas exploration well in the southern Alberta foothills at Burmis, with a 33% interest. The well is currently drilled to a depth of 3,100 meters, and should reach its targeted depth within three weeks. This propsect lies directly north of Canadian 88's recent Waterton discovery. In the North Sea, at Moray Firth, Rigel has a 20% interest in an appraisal well which is following up the discovery announced in mid-1997. This well was spud in late December. The play, which has been named "Busby", is being operated by BG Exploration. The well has gone on "tight" status until about April. David Stenason
Amber Energy*
(AMB-T: $17.00) BUY
Berkley Petroleum
(BKP-T: $14.10) BUY
Petro-Canada
(PCA-T: $23.50) BUY Patry Prospect To Test Soon
At Patry, in northeast B.C., a deep gas exploration well has been drilled to a depth of 3,600 meters. According to the well logs, the well has potentially encountered five separate zones. These zones could begin to be tested by the beginning of February. Petro-Canada is the operator of the well, with a 50% interest, while each of Amber Energy and Berkley Petroleum have 25%. This group of companies successfully acquired all of the additional lands on the prospect that were bid on at yesterday's land sale. We currently recommend BUYS on all three companies involved in this play. David Stenason
*Gordon Capital Corporation has participated in an underwriting or acted as financial advisor for these issuers within the past 12 months.
GOEPEL SHIELDS MORNING NOTE JAN 15
Oil & Gas - Gordon Gee
Gordon is working on a research note looking at producers and their 1998 cash flow per share sensitivity to oil prices. At $18 WTI, the average 1998 cash flow is 4% lower than in 1997, $17 WTI drops cash flow by 11% and $16 WTI lowers cash flow by 20%. Companies with greater exposure to oil (vs. gas), particularly medium to heavy oil, are affected more. The least affected seniors are Alberta Energy (AEC, $27.70) due to its significant pipeline business and Anderson (AXL, $13.05) which is primarily light oil. The most affected are Canadian Natural (CNQ, $26.20) producing heavy oil and Crestar (CRS, $19.30) producing mainly medium oil. The least affected intermediates are Rio Alto (RAX, $10.80), primarily a gas producer and Remington (REL, $19.00), a light oil producer. The most affected is Amber (AMB, $16.20), primarily a heavy oil producer, where a $1 change in WTI impacts CFPS by 16%. Gordon believes we are in an NAV market as companies are not spending multiples of their cash flow and therefore have little growth prospects.
Newport Petroleum (NPP,$4.60) BUY
Should Move Back Up to the $6 Level - Ken Faircloth Newport, primarily a gas producer, has yet to decide what sort of spending cutbacks it will undertake in reaction to commodity prices but the Company has five potentially exciting plays this winter. Two of those plays are the Cutbank gas discovery and Raven River. Newport has a second well down at Cutbank and has been drilling a third for a month. The Company purchased 25 additional sections of property in the area with an average interest of 70% and the play has the potential for up to a trillion cubic feet. Raven River, located near Edson, is a 50/50 venture with Petro-Canada ($23.50) which could result in another trillion cubic feet. Ken likes Newport at current levels and sees the share price rising back to the $6.00 level.
SCOTIA MCLEOD
Avoid 'Knee-Jerk' Market Reaction, Say Investors 1/17/98
The best advice for investors today is to stay conservative, says a senior investment adviser with ScotiaMcLeod.
"Investors should continue to look for good companies for equity investment and hold on to it for the long term," said James Mountain, managing director of the transactional business group for private client financial services with ScotiaMcLeod.
"Equities are outperforming bonds and treasury bills by a big margin," Mountain told The Evening Telegram. "We expect that to continue."
Mountain was in St. John's to address a meeting of the company's clients during which he reviewed the forces driving interest rates lower in North America and the implications for conservative investors.
Mountain, who has been with ScotiaMcLeod for close to 15 years, provides daily advice to the company's 750 investment executives on market strategy and equity trading opportunities.
"The best advice I can give people is to invest conservatively but continue to invest," Mountain said.
He also said it is important to "make sure you are investing wisely and not speculating because the two are very different."
Mountain said he believes oil companies will continue to do well despite current low prices for oil because they look more to the longer term.
He suggested there is a certain amount of "knee-jerk reaction" to short-term low prices.
He referred in particular to Petro-Canada, the lead partner in the Terra Nova consortium.
"Petro-Canada is a good success story," Mountain said.
With regard to the outlook for this province, Will Small, director of ScotiaMcLeod's private client financial services in St. John's, said there appears to be an upbeat feeling on the part of clients.
"There is a very optimistic mood as people appear to be looking more to the long term," Small said.
U.S. RESEARCH / ANALYST COMMENTS
Research Alert - Morgan Stanley on Friday said it initiated coverage on shares of Snyder Oil Corp (NYSE:SNY). Snyder Oil started with outperform. Shares closed at 16-4/16 Thursday.
Research Alert - CIBC Oppenheimer raised its rating on shares of Abraxas Petroleum Corp to strong buy from buy.
Research Alert - Global Marine upgraded
Lehman Brothers said on Friday it raised its rating on shares of Global Marine Inc to buy after the company reported fourth quarter operating earnings of $0.49 per share versus $0.23 per share in last year's quarter.
- Average day rates for firm's fleet were up 48 percentyear-over-year with rig utilization at effectively 100 percent, analyst Paul Chambers said in research note.
- Global Marine has targeted earnings growth of 33 percent despite tripling its tax rate in 1998 and had a year-end backlog of $1.2 billion, half of which should be completed in 1998, Chambers said.
Research Alert - Gruntal & Co said Friday it changed its 1998 estimates on shares of Teco Energy(NYSE:TE). Teco Energy 1998 estimate lowered to $1.82/shr from $1.85/shr. Shares stood unchanged at 26-9/16.
Research Alert - Merrill Lynch [NYSE:DJM] said Friday it raised its near-term rating on shares of Coastal Corp to buy from accumulate but kept its long-term buy rating on the stock.
PIPELINES
Lakehead Pipe Line Partners, L.P. Announces 1997 Earnings and Cash
Distribution
Lakehead Pipe Line Partners, L.P. (NYSE: LHP) today reported net income for the year ended December 31, 1997 of $78.3 million, or $3.02 per unit, compared with $52.4 million, or $2.11 per unit in 1996. The per unit amount for 1997 reflects the impact of the Partnership's issuance of an additional 2.2 million Class A Common Units during October 1997. The impact of the additional units on earnings per unit is expected to be temporary since the Partnership's expansion programs are anticipated to have a favorable impact on the net income and cash flow of the Partnership after 1998.
Net Income for 1996 includes the provision for prior years' rate refunds and interest accrued as a result of a 1996 negotiated tariff rate agreement between the Partnership and customer representatives. Excluding this provision, recalculated net income for 1996 was $75.5 million, or $3.06 per unit.
A cash distribution of $0.78 per unit was declared today for the quarter ended December 31, 1997, payable February 13, 1998 to unitholders of record January 30, 1998. This is the same distribution as the previous two quarters.
Stephen J. Wuori, President of Lakehead Pipe Line Company, Inc., the General Partner, said, ''The Partnership continues to set record levels of deliveries while achieving operational efficiencies that keep it a leading low cost provider of transportation for petroleum producers. As a result, the U.S. Midwest and eastern Canadian refiners are ensured of a secure and economical supply of North American crude oil and other feedstock. The Partnership is continuing to expand the capacity of the pipeline system to meet the growing needs of its customers.''
Deliveries for 1997 averaged a record 1,512,000 barrels per day, up 4% from 1,451,000 barrels per day averaged in 1996.
Operating revenues totaled $282.1 million in 1997, a $7.6 million increase over 1996, primarily due to increased deliveries and the transportation of a greater proportion of heavy oil. Total operating expenses for 1997 were $13.1 million lower as 1996 expenses included a $20.1 million provision for rate refunds applicable to prior years. Power, operating and administrative and depreciation costs increased during 1997 primarily due to the transportation of a greater proportion of heavy oil, increased property taxes and increased investment in plant, respectively.
Fourth quarter net income for 1997 was $22.0 million, or $0.80 per unit, versus $21.8 million, or $0.88 per unit for 1996. Per unit amounts decreased primarily due to an increase in the number of weighted average common units outstanding during the fourth quarter of 1997. Fourth quarter deliveries averaged 1,561,000 barrels per day versus 1,540,000 barrels per day during the fourth quarter of 1996.
Construction began during the fourth quarter on the new 24-inch, 450-mile pipeline from Superior, Wis. to Chicago, Ill. To date, expenditures of $92.0 million have been incurred for the acquisition of materials, rights-of-way and construction installation for the new line and other projects related to the 1997/1998 System Expansion Program. The Partnership is using its best efforts to complete the project by December 31, 1998, despite the Illinois Commerce Commission's decision to deny the right of condemnation authority, making the acquisition of rights-of-way more costly and challenging.
In conjunction with its Canadian affiliate, IPL Energy Inc., the Partnership announced in November 1997 that it is accelerating its Terrace Expansion Program, which will provide an additional 270,000 barrels per day to system capacity. Pending regulatory approval, this project is to be completed by September 1999 and includes the construction of a new 36-inch pipeline from Kerrobert, Saskatchewan, to Clearbrook, Minn. The Partnership's portion of this project is estimated to cost $138 million, with the Canadian portion of the project cost, Cdn. $640 million, to be incurred by Interprovincial Pipe Line Inc., a wholly owned subsidiary of IPL Energy Inc.
Lakehead Pipe Line Partners, L.P. owns the United States portion of the world's longest liquid petroleum pipeline. Lakehead Pipe Line Company, Inc., an indirect wholly owned subsidiary of IPL Energy Inc. of Calgary, Alberta, holds a 17% interest in the Partnership and serves as General Partner. The Partnership's Class A Common Units are traded on the New York Stock Exchange under the symbol ''LHP.'' IPL Energy Inc. common shares are traded on the Toronto and Montreal stock exchanges under the symbol ''IPL'' and on the Nasdaq under the symbol ''IPPIF.''
MISC.
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