MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 23, 1998 (6)
KERM'S TOP 21 - SPEC 15 - SERV 9 COMPANIES IN THE NEWS
PETRO-CANADA is nearing a decision on their potential oilsands project. Officials say they'll know by June whether or not they'll proceed with construction of a 20,000 barrel-per-day in-situ oilsands plant north of Fort McMurray.
The company is currently evaluating the commercial viability of the McKay River Oil Sands Development. That evaluation includes a 100-well drilling program with 110-kilometres of seismic, worth about $6-million. The drilling work will wrap up this winter and then officials will decide whether to grant the go-ahead. If given the green light by provincial regulators, Petro-Canada expects to spend approximately $220 million to bring the development into production, said project manager Sue MacKenzie. The plant is anticipated to have a production life of about 25 years.
"We are at well 57 (with the drilling) and they are right on track," said MacKenzie, a guest speaker at Thursday's Fort McMurray Chamber of Commerce luncheon. "We need to find the resource and be satisfied we can accept the risks in developing it," she said in an interview following a 20-minute presentation.
Two oilsands leases which make up the McKay River project total 22,300 hectares. While near Syncrude Canada and Suncor Energy which mine oilsands from the surface, the McKay River oilsands are 150 metres below ground.
The oil will be retrieved using steam-assisted gravity drainage (SAGD) technology. The SAGD process uses a pair of closely-spaced horizontal wells drilled into oilsand. Steam is injected into the upper well, causing the molasses-like bitumen to loosen and flow with gravity down to a lower producing well which pumps the oil to the surface for processing. SAGD is used at the Underground Test Facility (UTF) north of McMurray and adjacent to where the McKay River project plant will be located.
Petro-Canada has been a participant in the UTF project since its inception in the late 1980s. MacKenzie said Petro-Canada would like to see first drilling in July 1999 with first steam into the wells in May 2000. First production is aimed for June 2000.
As for job projections, she said about 30 tradespeople will be needed when construction begins in the second quarter of 1999. Preliminary numbers see construction jobs peaking at 400 in about January 2000. During the production phase, MacKenzie said they'll need about 35 plant operations personnel and about 10 full-time contract employees.
Petro-Canada first filed a public disclosure document about the project in December. Excluding its 100% interest in the McKay River holdings, Petro-Canada is the largest holder of in-situ oilsands leases in the Athabasca region. It owns 25 per cent of the Hangingstone oilsands lease which it shares with Japan Canada Oil Sands, Imperial Oil and Canadian Occidental (Wascana Energy). Petro-Canada also holds a 12-per-cent interest in Syncrude.
Other information on Petro-Canada can be found in the feature stories and Analyst sections of this mornings column.
KERM'S WATCHLIST OF COMPANIES IN THE NEWS
STARTECH ENERGY INC. (TSE/SEH'), announced that, as a result of the adverse conditions currently facing the Canadian oil and gas industry, the Company is reducing its $53 million 1998 capital expenditure program to $30 million.
The significant drop in world crude oil prices and North American natural gas prices, the general uncertainty surrounding the ongoing equity market correction, and the continued devaluation of Asian currencies (and resultant loss of demand for world oil), has resulted in an extremely large sell off of Canadian oil and gas equity stocks. Consequently, Startech does not believe that it is prudent to presume that continued access to attractive equity capital markets is a realistic expectation in the near to medium term. Management has therefore reduced 1998 capital spending to match expected 1998 cash flow using US$17.75 WTI per barrel pricing.
In 1998, even with the above referenced reduction in capital expenditures, Startech will still deliver 45% growth in average daily production, 45% growth in cash flow (at US$17.75 WTI), and 12% growth in cash flow per share over 1997.
As a result of reducing the Company's 1998 capital expenditure program, Startech will now drill approximately 105 wells in 1998 - down from the Company's original estimate of 175 wells. Startech's revised 1998 capital expenditure program will now be focused on developmental drilling for light oil and long life natural gas, together with approximately 8 high impact exploration wells.
Accordingly, Startech has reduced the Company's 1998 average daily production estimate by approximately 13% from 11,000 BOED to 9,600 BOED.
As a result, assuming crude oil prices of US$17.75 WTI per barrel in 1998, Startech's cash flow is now expected to be approximately $28.5 million - as compared to the Company's original projection of $40.5 million. Cash flow per share in 1998 is now expected to be approximately $1.58 basic, and $1.50 fully diluted, as compared to the Company's original projection of $2.14 basic and $2.04 fully diluted. Startech has 18.2 million basic shares outstanding.
Pursuant to the Company's ongoing hedging strategy, Startech has locked in approximately 50% of the Company's expected 1998 crude oil production at US$19.60 WTI per barrel.
Startech currently has more than 325 development drilling locations in the Company which will allow for low risk growth from development drilling into the year 2000. Startech entered 1997 with 18.3 million barrels of reserves. Startech now has more than 43 million barrels of reserves in the Company (independently engineered) representing a 9 year proven, and an 11 year proven plus probable reserve life.
Startech's reserve and production mix is all light and medium gravity crude oil and long life natural gas. The Company has no heavy oil.
In 1997, for a fifth consecutive year, Startech exceeded the Company's reserve growth target (more than 95% growth over 1996), and met the Company's production growth target (65% growth over 1996). Startech exited 1997 with long term debt of $62 million. The Company will incur an incremental $20 million of debt pursuant to the January 12, 1998 take-over of Laurasia Resources Limited. The Laurasia acquisition adds long life, high net back reserves and significantly increases Startech's exposure to natural gas reserves and production. In addition, Startech has identified numerous development drilling locations on Laurasia lands for both natural gas and crude oil.
Due to Startech's long reserve life, the Company's ongoing low risk development drilling program, and management's track record of meeting reserve and production growth estimates, Startech continues to have bank lines of Cdn. $100 million.
Management believes that, in light of the adverse business conditions presently facing the Canadian oil and gas industry, reducing 1998 capital expenditures to match expected cash flow is essential to preserving shareholder value. Startech can and will adapt to this difficult business environment by generating substantial growth in production, cash flow and cash flow per share into the year 2000 by reinvesting internally generated cash flow into development drilling projects and selected, high impact, exploration opportunities. In the event that the business environment for the Canadian oil and gas industry improves, management will reassess the economic advisability and merit of expanding Startech's capital expenditure program and growth estimates in 1998 and beyond.
GULF CANADA RESOURCES LTD. and Roc Oil Company Limited announced the purchase of all of the assets of Nescor Energy Company. The assets purchased include approximately 6 million barrels of proved oil reserves, existing infrastructure and 6.5 million highly prospective acres in the East Gobi Basin, southeastern Mongolia. The purchase cost is US$14.25 million.
The acreage acquired is covered by two production sharing contracts for blocks 13 and 14. Additionally, the companies have executed contracts for two contiguous blocks, 15 and 10-North, that will increase the total area under lease to 16 million acres. Government approval for the additional blocks is expected later this quarter.
Existing reserves are confirmed by Ryder Scott engineers and are contained in the Tsagaan Els oil field. The companies expect to begin production from existing wells during the first quarter and will begin drilling additional appraisal and development wells in the second quarter. Infrastructure purchased will support drilling, production and transportation. Oil will be transported via an existing rail system that connects the property to the China border and sold under a purchase agreement negotiated with Sinochem International Oil of China. Based on initial evaluation of seismic data, Gulf and Roc have identified upside potential within the Tsagaan Els field and in nearby fault blocks.
Mongolia's production sharing contract terms, regional geology similar to China's productive Erlian Basin and access to China's growing demand for petroleum make this an exciting new area. Adds J.P. Bryan, President and Chief Executive Officer of Gulf Canada Resources, ''This project contains existing productive capability, significant upside by way of both exploration and exploitation, and there is a short time between investment and ultimate sales. This is an ideal profile of the worldwide projects that Gulf has been assembling over the past three years, and we think it holds the potential for adding significantly to shareholder value.''
''Because the global market for oil properties has been hot, not to say overheated, it is particularly exciting to acquire 16 million acres in a virtually unexplored, petroliferous basin with a level of infrastructure that can only be described as surprisingly good; all in a country with a wonderfully supportive Government'', said John Doran, Chief Executive Officer of Roc Oil Company.
Gulf Canada Resources Limited holds 75% of the joint venture and Roc Oil Company, an unlisted Australian oil company, holds 25%.
DENBURY RESOURCES INC. filed an amendment to its registration statement covering the proposed sale of $87.6 million of common shares and $125 million of Senior Subordinated Notes due 2008. In connection with the amendment, the Company updated its estimates of proved reserves to December 31, 1997. Total proved reserves were 52.0 million barrels of oil and 77.2 Bcf of gas, or 64.9 million BOEs on an equivalent basis, including 27.6 million BOEs relating to the properties recently acquired from Chevron. This compares to a total of 27.4 million BOEs as of December 31, 1996.
The present value of these proved reserves at December 31, 1997 is $361 million, calculated in accordance with SEC requirements on an unescalated basis using year-end 1997 prices and a 10 percent discount rate ("PV10 Value"). The 1997 reserve report was based on a West Texas Intermediate oil price of $16.18 per Bbl and a NYMEX Henry Hub price of $2.58 per MMBtu, a price decline of 31 percent and 34 percent for oil and gas respectively,from the prior year-end prices. Using consistent oil and gas pricing, the PV10 Value would have increased 35 percent (excluding the properties acquired from Chevron) between December 31, 1996 and December 31, 1997. The reserves were estimated by Netherland, Sewell and Associates, an independent engineering firm located in Dallas, Texas.
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