MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, FEBRUARY 17, 1998 (3)
FEATURE STORY
Oilpatch Mergers Don't Always Add Value: Study Finds
The Financial Post
Investors in the Canadian energy sector are rewarding takeovers and punishing mergers, says a new study by accounting firm Price Waterhouse.
Regardless of method, management needs to have a growth strategy and not merely rely on size for market appeal, Rick Roberge, head of Price Waterhouse's oil and gas group and an author of the report, said in an interview yesterday.
"Once you're bigger, the ability to grow is smaller and the market wants to hear that the growth is still there," the Calgary consultant said.
Roberge's finance group studied the 65 largest mergers and acquisitions in the Canadian oilpatch between 1995 and 1997, worth a total of $13.5 billion. The study measured the share price of the surviving, or acquiring, company against the Toronto Stock Exchange's oil and gas producers index.
When firms of nearly equal size merged, eight out of of nine underperformed the index. All transactions structured as "poolings" -- the two firms had market capitalization within 5% of one another -- trailed the index.
For example, Baytex Energy Ltd. and Northstar Energy Corp. have both lagged the broader standard since they used the pooling method to buy first Dorset Exploration Ltd. then Morrison Petroleums Ltd.
Concerns about which management team and strategy will win likely explains investor distaste for poolings, Roberge said. "To think you can create value through the use of accounting methods is just, in my opinion, nonsense."
Institutional and retail buyers especially like takeovers by firms with higher trading multiples. Confidence in the purchaser's ability to implement proved value-adding strategies lies behind this trend, Roberge said. Canadian Natural Resources Ltd., for instance, has remained a high flyer since taking over Sceptre Resources Ltd. several years ago.
Also popular with investors were smaller firms' high impact reverse takeovers of bigger companies.
Frank Sayer of Sayer Securities Ltd. agreed with Roberge that simply being larger, while enhancing liquidity, is not enough to justify a merger. The key is "whether the people doing the deal know what they're doing. It can't just be for size."
The distractions of dealing with personnel, tax and accounting issues can cause firms to lose sight of increasing production and adding reserves at reasonable prices, he said.
FEATURE STORY
Chieftain International Sets Records On Higher Gas Production And Prices
The Financial Post
Higher gas prices combined with increased production to lift Chieftain International Inc. to record financial and operating results in 1997.
Net profit, after preferred share dividends, rose 8% to US$5.2 million (US38› a share) on revenue of US$86.6 million, up from profit of US $4.8 million (US37›) on revenue of US$75.3 million in 1996.
Cash flow for the Edmonton-based firm, which operates mainly in the U.S. and has no Canadian production, jumped 18% to US$49.5 million (US$3.63) from US$41.8 million (US$3.20).
Stephen Smith, analyst with Dain Rauscher Inc. in Houston, said fourth quarter production was below his expectations, as were costs, so quarterly cash flow was slightly higher than forecast.
He has a "buy" call on the stock, with a 12-month target of $39. The shares (CID/TSE) closed yesterday at $32, off 25›.
Daily gas production was 8% higher and prices were up 11% from 1996 levels.
In 1998, the company expects gas volumes to climb 9% and oil production to surge 20% as new finds in the Gulf of Mexico come on stream, a company official said.
Capital spending for this year has been set at US$85 million, up from US$69.5 million in 1997.
FEATURE STORY
Diesel Prices Hit Four Year Low
Publication Date: Feb 17, 1998
Article provided courtesy of T-Chek Systems LLC
Diesel fuel prices are the lowest they've been in more than four years and show no signs of heightening in the near future. Market prices, on all levels, are unseasonably low under pressure from a multitude of factors that include extremely warm weather across the Northeast and Midwest, diminishing consumer demand and low cost crude oil. Domestic and international distillate supply levels are normal (to above-normal), with ample inventories to last the remainder of the Winter season. U.S. refineries have pulled back operations to just over 93 percent of capacity, due to a lack of interest in distillate product.
Warmer temperatures and El Nino are greatly effectingproduct demand and lowly market values. Average temperatures across the Northeast and Midwest are in the mid-30s to low 40's, with an extended forecast of equally mild temperatures. This seasonal effect is keeping demand down, depressing prices, and harboring buying interest and market volatility. West Coast prices are under siege by El Nino, where damaging weather has had a significant effect on consumer demand and falling market prices. L.A. Basin cash/spot product is available around 51 cents per gallon; a mere 150 points over the national wholesale diesel average at 49.50 cents per gallon (Source AXXIS Petroleum, Inc.). The retail diesel average in PADD 5 is $1.1316 per gallon, down more than 29 cents from this time last year; PADD V diesel average for week of February 17, 1997 was $1.4220 (Source DOE).
The warm weather combined with a lack of fresh fundamental news is keeping downward pressure on commodity values. NYMEX crude oil contract continues it's depressed pattern, supporting a $15.50 bbl bottom and resisting a $16.25 bbl top. Over the last four weeks, traders have reported transactions under $14.00 bbl. Several analysts believe the "Iraqi" factor is built intothe current price of crude oil. If there is a military attack on Iraq, crude values could present short-term volatility, but many speculate product prices could fall lower than they are today. A combination of low cost crude, warm weather and lack of demand have NYMEX heating oil available below 45 cents per gallon. HEAT is a major indicator and driving factor in price movement for rack and spot markets. The national spot average is 46.97 cents per gallon, with the lowest-priced product available in the Gulf Coast. Currently, product prices show an almost zero (0) basis against today's NYMEX postings.
Inexpensive diesel is also obtainable at the truck stop level. Retail diesel prices have hit four year lows and pose no threat of increase against depressed complex conditions. The national retail average is $1.0642 per gallon, with the bottom-most product available throughout the Midwest and Gulf Coast; are you seeing a pattern here? As long as wholesale and spot markets remain steady-to-downward trending, truck stop diesel will continue to be a bargain. When and if the oil complex moves upward, you'll see retail prices rebound, in which they will increase much faster then they decreased.
Watch for prices to remain steady over the next week Factors influencing market volatility will include international fundamentals (Iraq situation), end-of-month NYMEX contracts (trading short positions) and refinery response to ample supply, low demand, narrow margins and operating capacities.
OIL & GAS REVIEW
Crude Oil
Crude oil prices fell to their lowest levels in nearly four years Tuesday as the possibility of a shooting war between Iraq and U.S.-led forces hung in the balance.
Crude oil for March delivery at the New York Mercantile Exchange closed 36 cents lower at $15.66 a barrel after dipping as far as $15.52, the lowest price for crude oil seen since the week of April 15, 1994.
In Washington, President Bill Clinton continued to press for Iraqi President Saddam Hussein to bow to United Nations resolutions calling for open inspections of sites alleged to have the capability of producing weapons of mass destruction.
"Let there be no doubt, we are prepared to act. But Saddam Hussein could end this crisis tomorrow, simply by letting the weapons inspectors complete their mission," Clinton said.
To back up its threat of military action, the United States in recent months has built up its largest naval and air force in the Middle East Gulf since the end of the 1991 Gulf War.
But Clinton's position was not shared by many Arab leaders or by three of the five permanent members of the U.N. Security Council. Russia and China said in a joint statement Tuesday that they did not accept the use of force in the crisis.
As diplomatic hands hastened efforts to prevent an armed conflict, oil traders' sentiment generally veered toward bearish, though some thought the market might pause initially.
"We could enter a holding pattern with a downward bias, not necessarily a free-fall," said John Saucer, a Salomon Smith Barney analyst in Houston.
"People pushed crude up to $18.06 when they first heard of a possible Iraqi strike, but they have since focused on the bearish supply situation in crude," he said.
The Organization of Petroleum Exporting Countries said in November it was raising production targets by 10 percent, while demand has suffered from the Asian economic crisis and from a warmer than expected winter in the northern hemisphere.
March heating oil closed at 43.74 cents a gallon, down 0.98 cent, and March gasoline fell 0.09 cent a gallon to 49.47 cents. Both set life-of-contract lows during the day.
Natural Gas
Natureal gas futures ended lower across the board Tuesday in a light session, pressured all day by bearish technicals after Friday's weak close and mild weather that continues to undermine the cash.
March slipped 4.2 cents to close at $2.166 per million British thermal units, below important chart support points in the $2.17-2.18 area. April settled four cents lower at $2.207. Other months ended down 0.9 to 3.2 cents.
"We closed on a weak note Friday and followed through today. March settled below the 40 day moving average, so I think we'll see lower numbers," said one Texas-based trader, adding $2.15 was setting up as near support in March.
Traders said weather and storage remained the focus, with balmy forecasts offering little hope for any improvement in demand, while the year-on-year stock surplus was poised to grow.
Forecasts this week still call for mostly above-normal U.S. temperatures, with levels in the Midwest climbing to as much as 25 degrees F above normal at midweek before cooling to 10-15 above normal by the weekend. Eastern temperatures should average five to 15 degrees F above normal through the week.
Early withdrawal estimates for Wednesday's AGA report range from 70 bcf to 120 bcf. For the same week last year, stocks declined 147 bcf.
Chart traders agreed March's failure Friday to penetrate key resistance at the $2.32-2.35 gap sent a bearish signal that today drove the spot contract through important support at $2.18. Traders noted that the $2.17-2.18 area also coincides with the 34- and 40-day moving averages, closely watched by funds and others for buy and sell signals. Most agreed today's close will likely lead to a test of next support at $2.03.
Above the gap, major selling should emerge at the prominent high of $2.435 and then in the $2.50 area.
In the cash Tuesday, Gulf Coast quotes slipped four cents to the mid-teens. Midcon pipes were down about the same to the $2.06-2.11 range. Chicago city gate gas lost more than five cents to the high-teens, while New York was a couple of cents softer in the high-$2.30s.
The NYMEX 12-month Henry Hub strip fell 2.6 cents to $2.354. NYMEX said an estimated 41,159 Hub contracts traded, down from Friday's revised tally of 55,356.
CANADA SPOT GAS
Canadian spot natural gas prices held relatively steady Tuesday in Alberta, but values in Niagara lost ground, pressured by forecasts for more mild eastern weather this week, market sources said.
Spot gas at the AECO storage hub in Alberta was still mostly quoted in the low-C$1.60s per gigajoule (GJ) range, little changed from Friday.
"Prices haven't changed much, but there's not a whole lot of demand," said one cash trader, noting Calgary forecasts this week call for temperatures five to 10 degrees F above normal.
In the export market, Sumas, Wash., prices also remained fairly steady in the low-US$1.20s per million British thermal units (mmBtu), but in eastern Canada, mild forecasts this week calling for temperatures five to 15 degrees F above normal helped undermine the Niagara export market.
Niagara was quoted 10 cents lower at about the US$2.30 level, but gas at the New York city gate slipped only a couple of cents to the high-US$2.30s.
U.S. SPOT GAS
U.S. spot natural gas prices slipped Tuesday in moderate activity, undermined by forecasts this week for more mild weather and concerns about a growing storage overhang, industry sources said.
"Cash is down but not that much. I'm surprised we've seen the buying we have today with these (mild) forecasts," said one Midwest trader, noting some players may have come into the month short and spreads still favored injections.
Swing gas at Henry Hub, the NYMEX delivery point in Louisiana, was quoted four to five cents lower in the $2.15-20 per mmBtu range, still almost 15 cents over index.
While cash was not cratering, few expected any upside near-term, with storage in good shape and more mild weather this week likely to limit demand.
Forecasts this week still call for mostly above-normal U.S. temperatures, with levels in the Midwest climbing to as much as 25 degrees F above normal at midweek before cooling to 10-15 above normal by the weekend. Eastern temperatures should average five to 15 degrees F above normal through the week.
In the Midcontinent, prices slipped about four cents to the $2.06-2.11 area, also about 15 cents over Feb indices. Chicago city-gate gas was talked mostly in the high-teens, off more than a nickel.
South Texas gas was three cents lower at $2.05-2.10. And in west Texas, Permian prices also shed three cents to about the $2 level.
In the East, New York city gate gas was pegged a couple of cents softer in the high-$2.30s, while Appalachian prices on Columbia lost four cents to the mid-to-high $2.20s.
OIL & GAS REFERENCES
Charts:
oilworld.com
oilworld.com
NYMEX Reference:
quotewatch.com
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