MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 19, 1998 (3)
FEATURE STORY
Frenzy Of Gas Drilling Forecast To Fill Pipes
Analysts are predicting a major round of gas drilling to meet export commitments brought on by new pipelines proposing to come on stream by the end of 1999, two speakers told a seminar in Calgary Wednesday.
The Canadian Institute of Energy heard that between 4,700-7,300 new well completions per year will be required by 2000 to fill expanded capacity from pipeline projects that could be coming on stream, including the Northern Border and Alliance, to the Mid-West United States.
Paul Mortensen of the Canadian Energy Research Institute and David Street of Research Capital Corporation said the net effect is going to be a transformation of the continental natural gas market which will create winners and losers in both the short and long term.
"The industry is going to have to find as much gas in the next 10 months as has been found in the past two years," said Street. "It's going to be a pretty tall task to reverse decline rates and fill those pipes." And the need for increased drilling activity is going to have to come on top of record levels in the past several years, he noted.
Mortensen agreed the numbers "suggest unprecedented levels of activity in the basin" and further indicated the recent drop in world oil prices has created a situation where the focus of activity can be shifted from oil to gas, freeing up excess drilling capacity.
In addition, Mortensen suggested the economics will become favourable for increased exploration away from lower-yield, shallower plays in the eastern part of the basin to higher-risk, higher-yield plays in the foothills and into British Columbia.
He is particularly "bullish" on B.C. gas, which he said could see a production increase rate of over four per cent per year. Although Mortensen agreed it will be difficult to drill all the wells required to fill the extra pipeline capacity, he was "confident" it could be accomplished.
Both said the volume of gas required to fill new pipelines, estimated at 1.3 bcf per day, will result in an over-supply in export markets and the potential for shortages in domestic markets. This would create downward pressure on New York Mercantile Exchange prices while strengthening Canadian spot prices.
Canadian capacity expansion will come on top of a further 10 bcf per day expansion in interstate capacity from U.S. pipelines, all scheduled to come on line at roughly the same time. This will create a situation parallel to that which existed in California in the mid-1980s when an oversupply of pipeline capacity ended up subsidizing exports to that state, Mortensen and Street said.
Presently the reverse situation exists, where a glut of supply in Alberta has created a large differential between domestic and export prices, made worse by a lack of pipeline capacity to the U.S. and the effects of an El Nino winter in the west.
Street predicted the NYMEX price could drop by as much as 25 cents in the next two years and pipeline capacity could be discounted by as much as 55%. This would create an unfavourable situation for producers who counted on strong demand from the U.S. for committing to the new pipeline projects in the first place, he said.
Street said supply to the Midwest market will jump to 4.6 bcf per day by 2001 from 2.5 bcf per day before increased demand picks up the slack.
Street and Mortensen suggested that market forces would be able to correct imbalances over the longer term.
Both agreed there is ample supply of gas within the basin, but "it's going to get worse before it gets better," said Street. "Producers can't come up with a bcf of gas with the flick of a switch, which is the way pipelines come on stream when they turn on those compressors."
FEATURE STORY
Oil Sands Propel Suncor Profit Surge
Rise Feeds Rally Of Integrated Oil Stocks
Tuesday, January 20, 1998
Brent Jang - The Globe & Mail
Record output at Suncor Energy Inc.'s oil sands plant in northern Alberta helped lift the company's fourth quarter profit 53 per cent and its full-year profit by 19 per cent.
The plant near Fort McMurray produced 94,300 barrels a day of synthetic light crude in the quarter, compared with 82,700 b/d a year earlier.
Suncor said yesterday that it also got a boost from an $11-million tax refund from Revenue Canada, which added 10 cents a share to Suncor's bottom line in the latest quarter.
The Calgary-based integrated oil company earned $72-million or 66 cents a share in the quarter, compared with $47-million or 43 cents a year earlier. A survey of six analysts by First Call Corp. had forecast profit of 53 cents a share for the latest quarter.
With profit exceeding expectations and Suncor forecasting continued financial strength in 1998, its shares rose 65 cents to $46.15 on the Toronto Stock Exchange yesterday.
Canada's other three major, publicly traded integrated oil companies also rallied yesterday as investors looked for Suncor's results to set a trend of robust annual earnings in 1997 for the Big Four companies that produce crude oil and also own refineries and gasoline stations.
Petro-Canada jumped 85 cents to $25, Imperial Oil Ltd. gained $1 to $85.80 and Shell Canada Ltd. increased 80 cents to $24.10. Petrocan will release its earnings today, followed by Imperial Oil tomorrow and Shell on Jan. 28.
Wilfred Gobert, an analyst with investment dealer Peters & Co. Ltd. in Calgary, said investors have been slowly getting back into oil and gas stocks after a punishing three-month ride in which commodity prices plunged.
From early October until Jan. 9, the TSE oil and gas index dropped 30 per cent to 5,682.55 before staging a recovery, rising 8 per cent over the past six trading sessions to close yesterday at 6,136.99.
The TSE integrated oil subindex, which consists of the Big Four, hasn't suffered as much pain. It fell 17.5 per cent from early October until Jan. 9 but since then has gained 6.5 per cent to close yesterday at 8,552.92.
While the exploration and production divisions of integrated oil companies get hurt during periods of falling oil prices, their refining and retailing operations prosper because of lower-priced crude oil supplies that feed refineries which convert oil into gasoline.
By contrast, the TSE subindex for oil and gas producers plummeted 34 per cent from early October to Jan. 9, but has gained 9 per cent since then to reach 5,392.60.
The producers are expected to report disappointing fourth-quarter results, and their first quarters are also forecast to be weak because of depressed oil and natural gas prices.
Mr. Gobert said investors "have discounted the negative comparisons. Now it's a question of how much commodity prices bounce, and that will determine how much the stocks recover."
He cautioned that oil prices need to rise to at least $18 (U.S.) a barrel to trigger a sustained rally for producers. Benchmark West Texas intermediate oil prices have been at about $16.50 recently.
Richard George, Suncor's president and chief executive officer, said yesterday that his company could improve its financial results in 1998, in part because Suncor has a price-hedging program to soften the blow of depressed oil prices.
The company has presold 30 per cent of its 1998 oil production at $28.35 (Canadian) a barrel, which is well above benchmark oil prices.
Suncor is also benefiting from sending some of its natural gas to export markets in California that offer higher prices than in Alberta.
For the full 12 months of 1997, the company earned $223-million or $2.04 a share, compared with $187-million or $1.71 in 1996. Last year's revenue increased 2.5 per cent to $2.15-billion, despite fourth-quarter sales slipping to $565-million from $573-million a year earlier.
During 1997, the oil sands venture averaged 79,400 b/d of production, compared with 77,600 b/d in 1996.
The northern Alberta plant, which is undergoing a major expansion, reduced its cash costs to $14.75 a barrel in 1997, compared with $15.75 in 1996. Mr. George hopes to reduce those expenses to $13.25 a barrel this year while increasing output to more than 90,000 b/d.
The income tax refund of $11-million includes claims by Suncor involving certain issues from 1983 to 1992 that are related to tax deductions called resource allowances for the petroleum and mining sectors. While Suncor's oil sands business accounted for about three-quarters of last year's profit, Mr. George pointed out that his company's conventional oil and natural gas division remains in good shape despite rising costs for exploration and development.
MARKET ACTIVITY
US markets were closed yesterday. The oils performed strongly with the Integrated Oils and Senior Producers leading the group upward.. The oil and gas service sector also performed very well with drillers leading the way.
INDEXES
The Toronto Stock Exchange 300 Composite Index finished up 0.9% or 56.93 to 6475.61.
In comparison, the Oil & Gas Composite Index closed up 2.0% or 118.75 to 6136.99. Among the sub components, the Integrated Oil Index gained 2.3% or 196.36 to 6136.99. The Oil & Gas Producers Index gained 1.6% or 84.13 to 5392.60. The Oil & G Services Index gained 4.0% or 100.08 to 2574.64.
INDEX CHARTS
TSE 300.......... canoe.quote.com
O&G Composite. chart.canada-stockwatch.com
Integrated Oil's.... chart.canada-stockwatch.com
O&G Producers.. chart.canada-stockwatch.com
O&G Services..... chart.canada-stockwatch.com
HOT STOCKS
International Petroleum Corp. (IRP/TSE), up 45› to $6.80, on volume of 8,000 shares. Gulf Canada Resources Ltd. (GOU/TSE), up 5› to $8.70, on volume of 59,129 shares. The two oil companies will benefit from agreements signed between the Albanian National Hydrocarbons Agency and two international consortia. International Petroleum will have a 20% stake in Occidental Petroleum Corp.'s control of three onshore exploration and production sharing contracts.
Suncor Energy Inc. (SU/TSE) climbed 65› to $46.15 after it reported better than expected fourth quarter earnings of 66› a share, up from 43› a share a year ago. Five analysts surveyed by IBES International Inc. had expected earnings of 56› a share.
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