MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, FEBRUARY 12, 1998 (3)
FEATURE STORY
Tough Sledding Ahead For Gulf Resources
Eric Reguly Globe and Mail
J. P. Bryan's departure from Gulf Canada, where he was president and chief executive officer, has not exactly left Calgarians stricken with grief. The Texas oilman, known for his penchant for hostile takeovers, did not endear himself to the denizens of the cozy Petroleum Club. "He was too much of a cowboy, even for us," one said.
Shareholders, at least the ones who backed Mr. Bryan to the end, are not doubled over in grief either. The Texan's efforts to rebuild the ailing company in the post-Reichmann era sent the stock soaring from less than $5 in early 1995, when J.P. rode into town, to a high of $12.75 last fall. The shares have since collapsed, hitting a low of $6.60 in December. They closed yesterday at $7.75, down 5 cents, on the Toronto Stock Exchange, for a one-year loss of about 24 per cent.
The decline is not surprising. Mr. Bryan's acquisition binge loaded Gulf Canada with about $2.7-billion of debt at a time when petroleum prices were falling. The question now is whether the selloff is overdone. There are no easy answers, partly because of slumping energy prices and partly because Mr. Bryan's replacement, Richard Auchinleck, the former chief operating officer, has not set out his vision for the future.
Mr. Auchinleck is no cowboy. Under him, there is virtually no chance the takeover campaign will resume. The focus instead will shift to the existing portfolio, which will be reshaped on the assumption that low oil prices are here to stay. How this will be done is not known, although shareholders are in no mood for anything fancy.
"The company will have to wring more value from its assets and pay down debt," said Craig Langpap, an analyst in Calgary with Peters & Co.
Gulf Canada was the best show in town under Mr. Bryan. He turned the moribund company on its head by eliminating 40 per cent of the staff and embarking on a takeover campaign, often hostile and not always successful, that made him the terror of the industry. Among the takeovers were Mannville Oil & Gas, Britain's Clyde Petroleum and Stampeder Exploration, a heavy oil producer. Gulf Canada's Indonesian division was spun off to investors and Mr. Bryan moved the executive offices to Denver.
Analysts think the portfolio, which includes 9 per cent of <b.Syncrude, is well diversified, bot geographically and in terms of product mix, and has good development potential. The problem is that the debt is too high and oil prices too low. An equity issue is out of the question until prices recover, meaning that debt probably will rise somewhat to fund capital expenditures. Gulf Canada's debt is equivalent to more than five times cash flow; the industry average is half that.
The company has hinted that minor bits are headed for the auction block, such as its exploration acreage in Libya, Syria and Yemen. Natural gas assets, including gas plants and gathering systems, also could be sold. There also is a company jet and a lump of real estate in Nevada whose purpose is a mystery, even to company insiders.
The heavy oil assets are the key to tweaking the portfolio. Current production is about 24,000 barrels a day, equivalent to about 12 per cent of Gulf Canada's total oil production. Dee Parkinson-Marcoux, who was installed in October as president of the company's new heavy oil division, said the ultimate goal is to spin off that business.
The plan would be modelled on the successful spinoff of the Indonesian company, which raised $470-million (U.S.) while leaving Gulf Canada in control. The company's theory is that investors like a pure play and that the heavy oil division will be more fairly valued as astand alone operation.
It is not as simple as it sounds. For starters, heavy oil prices have taken a beating. They have fallen to between $10 and $11 (Canadian) a barrel from last year's $15. Light crude prices also are down, but by a lesser amount. The other problem is deciding on which technology to use to refine the heavy oil. Upgrading will add value to a low-margin commodity and give Gulf Canada greater pricing flexibility.
Ms. Parkinson-Marcoux said the technology issue will be settled within a few months, although spinning off the heavy oil division this year looks ambitious. A spokeswoman in Denver said the target date has strayed into 1999.
In the end, Gulf Canada looks like a slow burn. Two years may pass before assets are sold and the heavy oil business is spun off. In the meantime, debt will remain high and there is no indication that oil prices will recover soon. A takeover also is unlikely, although rumours surface now and again that Talisman Energy is a possible suitor. Gulf Canada's high debt effectively makes it takeover proof.
Investors who like turnaround plays in the oil sector might want to place their bets elsewhere. Northstar Energy, Pinnacle Resources and Crestar Energy do not have onerous debt loads and are trading near their breakup value. Among the healthier companies, Alberta Energy remains a top pick.
Under J.P. Bryan, Gulf Canada was a whirlwind of deals. The excitement is over. The company now faces a hard slog before it becomes a stock market star again.
FEATURE STORY
Time For Gulf Resources To Get Boring
Mathew Ingram Globe and Mail
What will happen to Gulf Canada now that J.P. Bryan is gone? The short answer is that things are going to be a lot less exciting, and that's probably a good thing. Companies -- not to mention shareholders -- can only take so much of J.P.'s brand of excitement, which consisted of taking a run at anything that moved acquisition-wise, and showing as much concern for debt as a Wall Street investment banker with a platinum credit card.
Gulf's board of directors, and its new CEO, Richard Auchinleck, have made it clear they intend to execute an about-face when it comes to corporate strategy. That means the executive suite will no longer be driven by a desire for deals, and to hell with the impact on debt-to-cash-flow ratios. It means a boring old focus on operations, costs and other picayune matters that drive the bottom line, and that is undoubtedly a good thing.
Fast times and healthy markets can support a go-for-broke strategy, but the oil patch is no longer basking in that kind of atmosphere. Gulf has wisely decided to pick someone with less flair and more operational expertise, whatever the cost to its image. In a similar kind of case in 1991, Ranger Oil decided after the death of colourful founder Jack Pierce to give Fred Dyment the helm. Oil patch types may snicker at Mr. Dyment's lack of personality, but it takes more than personality to run a company.
"We're going to focus on our assets. We're not going to be transaction-driven," said Mr. Auchinleck, a 22-year Gulf veteran. He said investors had been having trouble understanding the company (in other words, trying to guess what J.P. would go after next) and that he planned to focus on debt reduction and exploration and production operations.
Everyone gets a kick out of personalities like J.P. Bryan -- and no one, it must be said, more than the media. A tough-talking Texan strides into the oil patch shooting his mouth off, firing people left and right, with the financial legerdemain and suspenders of a Wall Street banker to boot. What could be better than that? "J.P. slashes 700 employees, then goes duck hunting" -- you can't buy those kinds of headlines.
But a CEO like J.P. Bryan is not a manager for all seasons, and to his credit he accepted this when the board finally raised the issue. "The board really wants somebody to lead it from here on who has more of an operational and internal focus. . . . I don't disagree with that," Mr. Bryan said. However, he told Reuters: "I don't get excited about that kind of thing."
If nothing else, Mr. Bryan has shown an impressive grasp of timing in his career with Gulf, and his timely departure is further evidence. He got into the company at exactly the right time to pursue his strategy of leveraged takeover-driven growth. After restructuring Gulf's debt, J.P. proceeded to pile on even more, almost tripling the company's already sizable obligations between early 1996 and mid-1997, to about $3-billion.
At that point, the market didn't particularly care, since stocks were climbing and commodity prices were at their peak. Shareholders were happy, and creative deals like the royalty trust spinoff of Gulf's Syncrude stake had financiers tripping over themselves to provide Mr. Bryan with cash. A billion or so for Clyde Petroleum? No sweat. Another half a billion for Stampeder Explorations? Back the truck up to the loading dock, J.P.
A lot has changed in the past six months, however. While $2.7-billion in debt may not seem like much to carry when crude oil is at $22 (U.S.) a barrel, it becomes exponentially heavier when crude falls to $16.50. Last year, Gulf said that for each $1 drop in the crude price, its cash flow would drop by about $27-million (Canadian). That's a $175-million haircut in cash flow from last year, although hedging contracts may have softened the blow.
Gulf's debt, although fairly long term, is also largely in U.S. dollars, which means that as the Canadian dollar has sunk, interest costs have become more onerous (although Gulf employs a variety of arcane hedging mechanisms, befitting a company run by a former investment banker). In 1996 alone, Gulf's carrying charges were more than $100-million, and the company's debt is more than 2.5 times what it was then. In the nine months to September, 1997, Gulf's financing costs were about $150-million.
The upshot of all this is that Gulf has had to run faster and faster just to stay in the same place financially. Mr. Auchinleck has said he plans $400-million or so in asset sales, including some international properties and a trust offering of Gulf's "midstream" operations (such as gas processing plants), which could bring in about $200-million.
But that will only reduce the debt to $2.3-billion, and even if Gulf meets its cash flow target of $570-million for 1997, that will amount to a debt-to-cash-flow ratio of almost four times. That's considerably higher than many of Gulf's peers, and a hefty ratio to carry given the uncertainty about oil prices. Make no mistake, Mr. Auchinleck has his work cut out for him, and no rootin' tootin' persona to take the market's mind off it.
FEATURE STORY
How Low Can Oil Go?
Apache Corp.'s CEO talks about the outlook for the oil and gas industry
CNNfn
Apache Corp. (APA/NYSE) is a large oil and gas company that is active in many parts o the world, including the Middle East and Asia. Raymond Plank, Apache's chairman and chief executive officer, joined anchor Lauren Thierry on CNNfn's "In Play."
The two discussed Plank's outlook for his company and the industry as a whole.
Here is a transcript of that interview.
THIERRY: Overall, last fall oil was $20, now it's $16. A year ago it was even higher, surely this has to be of concern to you.
RAYMOND PLANK, CEO, APACHE CORPORATION: Yes, oil is a very volatile commodity, and at the present time it's actually selling about $6 per barrel below what it was a year ago.
THIERRY: And you fund your expenditures from your cash flow?
PLANK: We fund most of our activity from cash flow, and this year it's our intention to fund it entirely from cash flow.
THIERRY: Actually, you're building an international asset portfolio for shareholders, right?
PLANK: We do operate internationally. We set our strategy about a decade ago, and in our best year to date in 1997, when earnings were $1.71 a share and cash flow was $5 -- $6.74 a share. Two of our international core areas crossed the $100 million a year mark in revenues. That was Egypt as well as --
THIERRY: Let's talk a little about Egypt. What are your gross prospects for Egypt short-and long-term?
PLANK: Our growth prospects are excellent, Lauren. We have there about 25 million acres primarily on the western desert of Egypt. We will be drilling probably 25 exploratory wells there. Our results to date have been very satisfactory to us. We will also be drilling a number of developmental wells. We will be seeing our first natural gas come to market under long-term contracts in the year 1999.
THIERRY: Let me just ask you right there. You're talking about 1999. You're talking about a market that behaves in such a short- term fashion, everything is short term, short term, and yet in your line of work, it's got to take you two years to build an oil rig. How do you reconcile the short-term necessities of the market with your long-term prospects?
PLANK: Reconciling the time difference is a difficult problem, but in the same token that's part of what makes the industry fun. Because you're dealing with a number of variables, we have to respect primarily the long-term investor and set our focus on those things that will make this company more valuable over time. And to that end, in the last 10 years we've multiplied our reserves 600 percent. And in the last 5 years, we've more than doubled.
THIERRY: Let me then just ask. I can't let you go without asking this. If the Iraqi situation does not become a military conflict, if OPEC (Organization of Petroleum Exporting Countries) is pumping, how low can oil prices go and how can you sustain them?
PLANK: We really don't know how low they can go. We would think that there would be a number of measures taken in whether OPEC would choose to be in aggregate the swing producer I think is somewhat questionable. I think it's possible that oil prices could go lower, but historically, the world and OPEC seem to have been most comfortable over the period of the last few years, at a price varying between $18 and $20 per barrel.
So, we see oil at the present time below the historic trading range. Yet for this year, we are making our capital expenditures decisions on a price close to the present market, which will cause us to husband our capital, and should prices improve or get stronger from the producer's standpoint, we would ramp up our budgets.
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