MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, FEBRUARY 13, 1998 (6)
RESEARCH - ANALYSTS - FUND MGR.'S - BUY/HOLD/SELL - ETC.
Morrison Middlefield Resources Limited*
(MM-T:$9.25) BUY
Increased Total Reserves By 64% to 33 Million Boe 1997
MM replaced its reserves in 1997 by 4.5X, at a finding and development cost of $4.76/boe (proven plus half probable). Year-over-year production growth for oil and liquids was 21%, to an average of 6,514 bbls/d and natural gas volumes increased by 38% to 14 mmcf/d. Based on this new reserve data our preliminary new NAVPS is $12.00, we are still waiting on more detailed reserve data. The Company also announced a 200 bbls/d on-shore U.K exploration test was drilled and completed at Keddington. Financial results for the year ended December 31, 1997 are expected out in late March. We are forecasting fully diluted CFPS of $2.20 in 1997, $1.95 in 1998 and $3.35 in 1999. Our 12-month stock price target for MM is $13.50. BUY
Ulster Petroleums
(ULP-T$12.15) BUY
New Gas Discovery At Wapiti
Ulster has discovered a new gas pool in its Wapiti core area, on the peace River Arch of northwest Alberta. The discovery well has flow tested at 25 mmcf/d. Ulster has a 50% interest in the discovery, with Canadian Hunter owning the other 50%. Elsewhere, Ulster will bring its recent gas liquids discovery at Gold Creek onstream on February 17th. This well had flowed 1,000 boe/d during an extended flow test. Ulster has 50% of this discovery, with Beau Canada and Petro-Canada owning the other 30% and 20%, respectively. We are forecasting fully diluted CFPS of $2.20 in 1997, $2.30 in 1998 and $3.10 in 1999. We currently recommend a BUY on Ulster with a $15.00 stock price target.
Canadian 88 Energy Corp.*
(EEE-T:$5.05) HOLD
Sells Forward 100 mmcf/d of Gas at Welhead Price of C$2.14
Commencing in November 1998, Canadian 88 has sold forward 100 mmcf/d of gas for one year at a Chicago plant gate price of C$3.51/mcf --this will translate into a Canadian wellhead price of C$2.14/mcf. This contract size exceeds Canadian 88's current production, however management is confident that the Waterton field will be tied-in in time.
Management is hoping to receive AEUB approval and begin construction of the Waterton pipeline within two-three weeks. If approved as proposed, we would expect construction and testing of this 14 mile (100 mmcf/d) pipeline to take three-four months to complete. Currently, Canadian 88 has more than 50 mmcf/d of shut-in capacity at Waterton.
On the Exploration Front
Canadian 88 expects to spud (within the next 30 days) an exploratory test at Yara Creek (located to the west of the recent Caroline discovery). This well will target a Mississippian thrust sheet which management believes to be analogous to that of the recent discovery at Caroline. Management estimates that the reserve potential for this prospect is 100-500 bcf. Canadian 88 recently completed a successful oil well at Ricinus production testing is currently underway. A development well has just been spud at Chederville, two additional wells are drilling at Waterton and in-fill drilling continues on the Olds/Crossfield block.
Olds/Crossfield Plant Expansion
A regulatory hearing regarding the proposed expansion of the Olds/Crossfield plant originally scheduled for February 12, 1998 was rescheduled to March 3, 1998. If approved, this expansion would increase the inlet capacity from 70 mmcf/d to 140 mmcf/d -the net incremental sales gas from the plant expansion after processing sweetening and liquid extraction is expected to be over 40 mmcf/d. We estimate it would take four to five months to complete the proposed expansion. Currently, Canadian 88 has over 20 mmcf/d of gas shut-in at Olds/Crossfield.
We are currently forecasting fully diluted CFPS of $0.40 in 1997, $0.65 in 1998 and $1.05 in 1999. Our 12-month stock price target is $6.00.
IPSCO
(IPS-T:$61.00) BUY
Highlights From Management Presentation
We hosted Roger Phillips, President and CEO in Toronto yesterday. Management remains very optimistic about the outlook for 1998. Any weakness on the OCTG side of the business will be made up with stronger shipments of large diameter project pipe. IPSCO is booked out through mid-year on its large diameter pipe mills and if the Alliance pipeline proceeds, it will be full through mid 1999. Returns on the Blytheville pipe mill and Toronto plate processing center are expected to be 15-20% after tax. A large diameter pipe mill at Montpelier is now far less likely. Management continues to evaluate building a second US plate mill (estimated hard costs of US$325 MM), and is in the process of looking at sites. High cost competition, recent plate import quotas and the likely shuttering of Bethlehem's Sparrow's Point mill make this an attractive proposition. Nucor is also proposing to build a facility, but we suspect that only one of the two projects will ultimately proceed. We continue to forecast EPS of $5.00 in 1998 and $6.25 in 1999. These numbers are predicated on a 25% drop in Canadian drilling in 1998 from 1997 levels. We continue to rate IPSCO a BUY with a 12-month target price of $70
*Gordon Capital Corporation has participated in an underwriting or acted as financial advisor for these issuers within the past 12 months.
KERM'S TOP 21 - SPEC 15 - SERV 9 COMPANIES IN THE NEWS
Tarragon Oil and Gas Limited (TN/TSE) announced that it has reached an agreement with Unocal Canada Limited whereby Unocal will contribute substantially all of its petroleum and natural gas assets in Alberta and British Columbia to Tarragon in exchange for 21 million Tarragon common shares issued from treasury and a C$100 million subordinated debenture.
Based on a share price of $9.90, representing the closing price of Tarragon shares on February 11, 1998, this transaction is valued at C$308 million, of which $266 million is allocated to reserves and $42 million to undeveloped lands totaling 365,000 net acres, seismic data, and tax pools. Unocal's share position will make it a 27 percent owner of Tarragon on a fully diluted basis.
The transaction has the unanimous support of the boards of directors of both companies and is scheduled to close on April 15, 1998. It is subject to regulatory approvals and shareholders' approval as the transaction involves the issuance of more than 25 percent of Tarragon's outstanding shares. Morgan Stanley & Co. Incorporated represented Tarragon in connection with the transaction and will be providing a fairness opinion.
Tarragon's President and Chief Executive Officer Ed Chwyl said, ''This is a great business deal that makes strategic and financial sense and furthers the growth of our company at a fair price. It expands our holdings in selected areas of western Canada. It strengthens our conventional oil and natural gas asset portfolio. It involves a large equity injection which improves our balance sheet and adds production at a price which makes the deal accretive to cash flow and earnings. It brings us an important and supportive shareholder while enabling us to remain in control of our own destiny. Most important, it will create substantial long term value for our shareholders.''
Established reserves (proved plus 50 percent probable) of 43.7 million barrels equivalent are being acquired at $6.09 per barrel equivalent. These reserves consist of 23.1 million barrels of light sweet crude oil, 5.0 million barrels of natural gas liquids, and 156 billion cubic feet of liquids rich natural gas. Tarragon's pro forma reserves become 25 percent conventional oil and liquids, 35 percent heavy oil, and 40 percent natural gas.
Production is very concentrated, with six properties accounting for 98.7 percent of the total. Two properties (Red Earth and Slave) are on the Peace River Arch, where Tarragon has wanted to establish a core area for some time. The remaining four properties (Kakwa, Kaybob, Sturgeon Lake and Virginia Hills) are all in west central Alberta and will supplement Tarragon's existing holdings in that area. Most of the properties contain significant exploitation potential.
The properties produced an average of 14,200 barrels of oil equivalent per day in 1997, consisting of 8,900 barrels of light sweet crude oil, 1,500 barrels of liquids, and 38.0 million cubic feet of natural gas. Tarragon expects to increase production to nearly 20,000 barrels of oil equivalent per day over the next three years.
Preliminary 1998 pro forma production estimates are 16,500 barrels per day of conventional oil, 8,000 barrels per day of heavy oil, and 215 million cubic feet of natural gas, including Unocal production commencing April 15, 1998. Giving account for a full year's contribution from the Unocal properties, Tarragon's 1998 production profile becomes 40 percent conventional oil, 15 percent heavy oil, and 45 percent natural gas. Although capital programs will not be finalized until after the closing of this transaction, Tarragon expects to spend in the range of $200 million on the combined properties.
"Tarragon is a strong growth company with a record of low operating and finding and developing costs,'' said Charles R. Williamson, Unocal group vice president for International Operations. ''Joining with an aggressive company like Tarragon will enable us to realize the full value of these Canadian assets for our stockholders and participate in the growth potential of Tarragon's other operations, while allowing our management team to focus on Unocal's strategic, long-term oil and gas growth opportunities.''
Mr. Chwyl said, ''We have taken the necessary steps to maintain the independent and entrepreneurial spirit which has guided Tarragon from its beginning. A shareholders' agreement between Tarragon and Unocal formalizes those steps.''
Under that agreement, Unocal has agreed to vote its shareholdings exceeding 20 percent in the same ratio as the other shareholders on certain fundamental issues; cap its ownership in Tarragon at its initial percentage; hold its shares for a minimum of two years, subject to certain conditions; and have proportional board representation. The Tarragon board will be expanded to eleven members to accommodate the three Unocal nominees, of which at least one will be an independent director.
Tarragon has agreed to pay a non-completion fee of $37.2 million under certain conditions. Both parties have agreed not to solicit other transaction proposals and to disclose to each other the terms of any unsolicited approaches.
Mr. Chwyl concluded, ''We are delighted with this transaction. It adds substantial exploitation opportunities in conventional oil and gas. It deleverages our balance sheet to the extent that we can again pursue our aggressive growth strategy. It is accretive to cash flow and to earnings. In addition, Unocal has aligned itself with Tarragon's other shareholders in a unique way. We look forward to a long and mutually beneficial relationship in the years ahead.''
Tarragon Oil and Gas Limited is a Canadian-owned exploration and production company whose mission is to build assets and cash flow through exploration, development, and selective asset purchases in western Canada. Its common shares trade on the Toronto and Montreal stock exchanges under the symbol TN.
Advisory
Earlier today, Mr. Ed Chwyl, President and CEO of Tarragon Oil and Gas Limited, hosted a telephone briefing for analysts in order to discuss today's announcement of a strategic initiative with Unocal Canada Limited.
A taped rebroadcast of the call will be available for 48 hours (Fri&Sat) by dialing 1-800-558-5253 and providing the operator with reservation number 3867147.
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