MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, FEBRUARY 20, 1998 (2)
TOP STORY
Gulf Crisis Keeping Oil Prices From Sliding Even Further
Oil prices are at their lowest level in years and talk of war in the Persian Gulf has done little more than prevent a further slide.
Oil supplies are so plentiful, analysts say, that even a U.S. air strike against Iraq is expected to have little impact at the pump unless the war spreads to other countries.
"It's not going to hurt anyone's pocketbook," said Jeff Kerr, an analyst in New York with Petroleum Intelligence Weekly, an industry publication.
Crude oil futures for delivery in March fell one cent Friday to $16.15 US on the New York Mercantile Exchange.
A mild winter in the United States and Europe and faltering economies in Asia have forced prices down. In November, the Organization of Petroleum Exporting Countries contributed to the decline by raising its ceiling for production. Supplies now are extremely high, and U.S. gasoline prices at the pump are the lowest they've been since May 1994.
"Normally a political crisis would have pushed prices up," said Leo Drollas, deputy director of the Centre for Global Energy Studies in London. "What this has probably done is keep prices from falling even lower."
During the five-month military buildup that followed Iraq's 1990 invasion of Kuwait, oil prices shot up about 50 per cent amid worries that Iraq's army could threaten supplies from other Gulf countries, which supply much of the world's oil.
Since then, however, the oil market has changed dramatically. Iraq has been unable to sell its oil on the open market since U.N. sanctions were imposed after the invasion of Kuwait. Saudi Arabia boosted its production from some five million barrels a day to more than eight million barrels a day. Also, companies stepped up drilling in regions including the North Sea and Gulf of Mexico.
"Even if there is a war we are not going to see that increase in oil prices," said Graham Knight, an analyst with Arab Oil and Gas, an industry bulletin based in Paris.
Iraq is now producing some $2 billion in oil every six months under a U.N. oil-for-food agreement, which allows the nation to use the proceeds to buy food and medicine for its 22 million people, suffering under the sanctions. The United Nations Security Council approved a resolution Friday to raise the limit to $5.2 billion over six months.
Meanwhile, Iraq said its weakened oil industry may not even be capable of meeting the new cap unless it spends at least $600 million to repair its pipelines and oilfields.
If the sanctions are lifted, analysts fear oil prices will collapse unless major producers like Saudi Arabia and Kuwait sharply cut production, potentially devastating their economies.
But even a big drop in the price of crude oil wouldn't mean more than a few cents saved at gasoline stations in Canada and the United States.
In the U.S. prices are already extremely low, noted Mike Morrissey, spokesman for the American Automobile Association. The average cost of self-service regular unleaded is now $1.11 a gallon, 4.5 cents cheaper than in January and 17.3 cents less than in February 1997.
Oil prices are merely the most volatile of several factors influencing the price of gas, Morrissey said. Taxes and costs of production and marketing also determine pump prices, and those are stable. Morrissey said the industry is watching Iraq closely, but does not expect dramatic shifts in prices.
"It will depend on the scope of the conflict," he said. "Will prices change by a penny, or will it be a longer conflict and will it change a little bit more?"
FEATURE STORY
Gulf Unloads Bryan legacy
Firm Attacks Former President's Acquisition Debts By Selling $850 Million In Assets
The Financial Post
Gulf Canada Resources Ltd. launched an $850-million attack Friday on debt that will unravel much of the acquisition strategy of recently departed president J.P. Bryan.
The asset selloff, at least twice as ambitious as envisioned only last week, puts on the block British North Sea assets valued at $500 million and acquired by Bryan only a year ago; natural gas processing plants and pipelines in Western Canada; plus a ranch and an executive jet.
"We plan to be aggressive in terms of bringing our debt down," said Richard Auchinleck, who replaced Bryan as president and chief executive officer only 12 days ago.
"It's important we get the financial flexibility we require in this company. We don't have it right now with the debt levels being where they are."
Under Bryan, Gulf's debt more than doubled to $2.78 billion from $1.19 billion in 1996. Last year's $1.9-billion acquisition spree included the purchase of British-based Clyde Petroleum PLC and Calgary-based Stampeder Exploration Ltd.
"We are going to be looking at 15% growth in terms of production and cash generation in the next year," Auchinleck said. "Nobody should think we are going to be idling."
Gulf has budgeted $1 billion for capital spending this year.
The ambitious debt attack, driven by Auchinleck and his management team, was approved by Gulf's board Thursday. The board also gave the go-ahead to a shareholders' rights plan, which will be voted on at the annual meeting April 30.
The planned asset sales won applause from analysts, who have been urging the company to come to grips with its heavy debt, arguing that the burden has placed it at a disadvantage to major competitors.
"It's certainly a big step in the right direction," said analyst Martin Molyneaux of Calgary-based FirstEnergy Capital Corp. "It clearly alleviates some of the pressure . . . and gives them more flexibility to manoeuvre."
"It's quite positive," concurred Robert Hinckley, who follows Gulf for Merrill Lynch Global Securities in New York.
Mr. Hinckley also did not quarrel with the company's estimates of the likely proceeds from the planned North Sea sale and the gas pipeline and processing spinoff.
"It's about the best thing I have heard in three years," said oil and gas analyst Craig Langpap with Peters & Co. in Calgary. "Selling non-operated assets in the North Sea is about the smartest thing you could do to raise cash.
"Commodity prices have changed so much in the past six months, any management - whether in concert with their board or with the board suggesting it outright - should make changes to increase their flexibility."
The stock market, too, reacted positively. Gulf's shares finished yesterday at $7.65 on the Toronto Stock Exchange, up 55 cents from Thursday's close and 95 cents above the 52-week low they hit last month. Trading was heavy, with more than three million shares traded, nearly triple Thursday's volume.
However, Gulf may have to wait a while before it persuades some major credit rating agencies to raise its debt to investment grade, which Mr. Glick identified as a key goal.
John Tysall of the Toronto office of New York-based Standard & Poor's Corp. said he first wants to see more details of Gulf's plans. The new plan is good from a long-term financial perspective and from a debt-rating perspective, he said.
"The key thing about it is that it's a significant change in financial philosophy," Tysall said. S&P rates Gulf's long-term debt BB+, a step below investment grade.
"We would certainly be looking upon these moves positively. I couldn't say at this point if this translates into an upgrade or not."
He said it may be difficult for the company to generate the $850 million in proceeds it is anticipating in the current environment, which, he said, is not as robust as 1997.
However, he welcomed what he called a "change in financial philosophy" at Gulf under Mr. Auchinleck.
"It's a much stronger commitment to debt reduction than was there before . . . which is encouraging from a ratings point of view."
Gulf said it has hired RBC Dominion Securities Inc. to help create and market the royalty trust it is setting up for the gas pipeline and processing operations, which account for one billion cubic feet of sour-gas processing capacity in Western Alberta.
Gulf wants to sell the assets by the middle of this year.
Proceeds of $850 million, if applied entirely to debt repayment, would reduce long-term debt to about $2 billion, or 35% relative to equity, which is closer to the levels of its peers. Its debt to equity ratio now stands at about 50/50.
Gulf's target may be aggressive given today's weak commodity prices. Demand for royalty trusts is not as strong as it was last year. And its assets may be competing with those of other companies looking for cash through such sales because of a soft market for new equity.
Auchinleck said North Sea properties are up for sale because Gulf did not have a dominant role in that area. It would have had to invest significantly more to have control. The properties are expected to produce 19,000 barrels of oil a day this year.
In the infrastructure trust, Gulf would sell half the income stream received from third parties for its gas transmission and processing plants in Western Canada. It will continue to operate and own the facilities.
The corporate jet, used to commute between operations in Calgary and executive offices in Denver, to investment presentations and to facilitate acquisitions, is no longer as crucial, Auchinleck said.
Gulf reported a $204-million profit for 1997 (62› a share), up from $37 million (3›) in 1996, helped by the partial sale of its Indonesian subsidiary. Cash flow increased to $592 million, from $440 million a year earlier. Revenue surged to $1.68 billion, up from $909 million in 1996.
FEATURE STORY
New Gulf CEO Starts Paying The Bills
Canadian Press
The man who got stuck with the tab for the three-year spending spree at Gulf Canada Resources Ltd. said Friday it's time to start paying the bills. Gulf is selling or spinning off up to $850-million worth of assets and operations to slash its $2.8-billion debtload, said chief executive Dick Auchinleck, who replaced flamboyant Texas dealmaker J.P. Bryan last week.
And ironically, the company Bryan transformed into one of the most feare predators in the Canadian oilpatch has adopted a shareholder rights plan to stave off unfriendly takeovers. But just because Gulf is paying off the debt from Bryan's multitude of deals doesn't mean it won't invest in its more valuable operations or again set off down the acquisition trail, Auchinleck said.
"I think I can bring a lot more focus on the operations side and extract the value from the assets that we
have, there's no doubt about that," he said in an interview.
"But in terms of the acquisitions capability of the company, it's still here, and we will, on a selective basis, still be an acquirer. It's really not a fundamental reversal at all - it's a slight course correction."
Gulf also announced 1997 profits Friday of $204 million or 62 cents a share, up from $37 million or three cents for the previous year.
"I would say it's probably the most positive news I've seen on the company in three years," said Craig Langpap, an energy analyst with Peters & Co. in Calgary.
"I had a real problem with the balance sheet. We all loved the (oil) prices while they were there, but having been involved with the oil business since 1976, I also know they don't stay there very long." Gulf's share price climbed Friday to $7.65 on the Toronto Stock Exchange, up 55 cents on the day but still well back of their 52-week high of $13.75.
RBC Dominion Securities will help set up an energy trust to sell a chunk of the company's gas transmission and processing plants in west-central Alberta.
Gulf's debtload, which was $1.4 billion when Bryan arrived in 1994, hasn't been helped by takeovers like last year's $1.1-billion hostile bid for British-based Clyde Petroleum PLC.
That was the most costly of the seven high-profile deals Bryan brokered during his tumultuous three years at the company's helm.
"Gulf had a fairly high debt level when (Bryan) got there, and his attitude was that there's absolutely nothing wrong with that," said one analyst who spoke on condition of anonymity.
"He comes from a slightly different perspective, because in the U.S. a lot of oil companies have higher leverage (debt) than Canadian producers do." American companies measure their value based on the ratio of debt to equity, while Canadian operations tend to use the more conservative measurement of debt to cash flow.
Langpap said he wasn't surprised to see Gulf adopt a poison pill, given the low Canadian dollar, Gulf's low share price and the company's tempting stable of international assets.
As for the poison pill, Gulf investor relations manager Dennis Martin would provide few details, saying only that it will give the company longer to respond to any unsolicited takeover bid that might emerge.
The company has decided to adopt the pill because "we feel we're undervalued," he said.
Analysts have mixed views on whether Gulf could become a takeover target.
Mr. Hinckley at Merrill Lynch considers it unlikely. "I don't think they're very vulnerable," he said, adding that the poison pill likely is "just a precaution."
Last month's sale of Noranda Inc's Norcen Energy unit to U.S. company Union Pacific Resources Group Inc. for $1.8 billion US raised a lot of eyebrows in Canada's oil and gas industry, he added.
"Canadian assets look pretty cheap to some people with deeper pockets south of the border," said Langpap. "You see an awful lot of (poison pills) in place in Canada already."
Other under-producing international assets are also up for sale in a bid to help inject some value into Gulf's share price, said Auchinleck.
"Our company is significantly undervalued from what it should be in the market," he said. "We're getting hardly any value for our assets at all." The plan is to capture that unrealized value and reduce debt to about $1.5 billion, or 2.5 times cash flow, within a year, he added.
The shareholder rights plan will give investors time to properly consider any takeover bids and solicit 'white knight' suitors to seek out the highest values.
Among other moves to improve its finances, Gulf said it will:
- Sell its interest in four oilfields in the British region of the North Sea. The fields produce about 19,000 barrels a day, less than nine per cent of Gulf's total production. Other assets for sale include two projects under development, and onshore and offshore exploration licenses totaling 500,000 undeveloped acres.
Gulf will not divest its Netherlands North Sea assets.
- Sell approximately $100 million of non-oil and gas assets including its Mount Klappan coal deposit, an exploration acreage near Reno, Nev., and about $50 million of non-producing Canadian assets.
The company reported "sizable" discoveries in Indonesia plus success in new international areas including Australia, the Netherlands and Yemen.
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