MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY, MARCH 3, 1998 (2)
Canadian Oil Producers Cut 100,000 b/d
Cuts Are Concentrated In Higher-Cost Heavy Oil Sector
The Financial Post
Canadian oil producers have voluntarily reduced production by up to 100,000 barrels a day, or 5%, since the collapse in oil prices, industry analysts said yesterday.
The cuts have come off Canadian production of about two million b/d and are concentrated in the higher-cost heavy oil sector that has become uneconomic at today's prices.
They are in response to market realities - yet another consequence of the slump in oil prices that has been preoccupying the industry worldwide.
Yesterday, the Organization of Petroleum Exporting Countries held an emergency meeting in Vienna to finalize a plan to reduce production.
Worries the cuts won't be enough to decrease supplies pulled down oil prices once again yesterday.
The North American benchmark crude, West Texas intermediate, closed at US$16.21 a barrel on the New York Mercantile Exchange, off US55›.
Prices for Canadian oil and gas shares, which trade largely off commodity prices, also lost some of the ground gained in last week's short-lived recovery.
"A lot of positive sentiment has waned a bit since last week," said Greg Pardy, an oil and gas analyst in Calgary with Griffiths McBurney & Partners.
"Prices at this level are nothing to get excited about."
The Toronto Stock Exchange's oil and gas index closed the day at 6666.9, off 40 points.
Industry analysts estimate overall Canadian oil production has already been trimmed 50,000 b/d to 100,000 b/d.
Large new projects like Hibernia and the oilsands expansion are only marginally increasing overall production because conventional crude is declining.
And there will be more cuts if prices stay at current levels.
"If you are a heavy oil producer you are still feeling a lot of pain," said Pardy.
"You are going to ration your capital and shut in production in some cases."
If countries signing the OPEC agreement don't cheat, some relief will work through the system by the fourth quarter, said Scott Inglis, director of research at First Energy Capital Corp. in Calgary.
During the second and third quarter, many will continue to refocus on lighter oil production and natural gas.
"There is a fair amount of excess supply," Inglis said. "Demand is down with the warm winter and it's not driving season yet.
"There may not be enough cuts to create a lot of bullishness in the short term. But if maintained, by the fourth quarter, the prices can recover to the US$19 range," he added. e reducing their exposure to conventional exploration opportunities in Western Canada at an ever increasing pace.
Integrateds Taking Selective Approach To Canadian Investment
The Big Four integrated oil companies are becoming more selective in choosing their Canadian investment opportunities as the Western Canada Sedi- mentary Basin matures, as shown by a rising gap between cash flow and capital spending over the last five years.
Cash flow of major Canadian integrated oil companies outstripped capital expenditures by more than $5.3 billion over the 1992-1997 period. The numbers suggest the big integrated oil companies are reducing their exposure to conventional exploration opportunities in Western Canada at an ever-increasing pace.
Leading the way last year was Imperial Oil Limited, which took in $1.3 billion more than it spent in 1997, followed distantly by Shell Canada Limited at $375 million.
Of the Big Four integrateds, only Suncor Energy Inc. spent more last year, in keeping with plans to more than double production to 210,000 bbls per day by 2002 -- outstripping cash flow by $133 million. Suncor's capital and exploration spending rose to $847 million in 1997 from $563 million in 1996 and the company said it expects to spend more than $1 billion in 1998 and more than $4 billion in growth related capital programs over the next four years (DOB Jan. 19).
Petro-Canada, which had large capital investments in the East Coast offshore, took in $113 million more than it spent in 1997 however the company has not cut its large 1998 capital program and spent more than cash flow for three of the five year period.
In their 1997 annual reports, released this week, both Imperial and Petro-Canada indicate they will be looking to sell off conventional oil properties in Western Canada to focus on specific areas of development in other parts of the basin and the rest of the country in 1998.
"<b.Petro-Canada has decided it can best maximize shareholder value by reducing its interests in conventional oil fields in Western Canada and reinvesting the proceeds in natural gas development," the company said in its an- nual report.
Imperial, meanwhile, raised $968 million in 1997 from the sale of assets, including $876 million from the sale of 21 conventional oil properties representing 14,000 bbls of oil equivalent and NGL net daily production, compared with $152 million in 1996 and $102 million in 1995.
Of that total, it says it plans to invest $450 million in 1998 to develop the Sable Offshore Energy Project in Nova Scotia and in further expansion at Cold Lake and the Aurora mine at Syncrude.
Shell is tightening its focus as well. Of a $891-million capital spending program for 1998, only $71 million is earmarked for exploration activities. The bulk of the remainder is slated for Sable Island, Athabasca oil sands development work and other development projects.
Both Imperial and Shell returned nearly a billion dollars each to their shareholders in 1997 in the form of dividends and stock buy backs. Shell paid $976 million to buy back 14% of its shares last June while Imperial returned over $4 billion in regular dividends and stock buy backs since 1995.
Integrateds are being selective on investment in Canada because Cana- dian netbacks have averaged 70% below that for non-North American production between 1992 and 1996, said Andrew Byrne, a researcher for John S. Herold Inc. of Stamford, Connecticut and author of a study on spending activity.
International integrated oil companies have been steadily reallocating financial resources to overseas operations, as shown by declining conventional production and reserve assets and lower levels of exploration, he said.
" Light oil is in short supply and the remaining fields on land are too small for the majors," Byrne said. "The big companies are increasingly looking overseas for the big elephants (large oil discoveries) and conventional oil is being less emphasized."
He noted the scenario has an upside allowing smaller players to get in on the higher-profit light oil game, especially small- to mid-sized companies.
"It creates a tremendous opportunity for Albertans, really ... the majors leaving is a good thing for the local market and smaller companies," Byrne said.
"All the big prospects in Western Canada are gas," he said. "There are good reasons for optimism because we're looking for a gas price turnabout."
Byrne predicted there will be a "re-entry phase" in which major players seek to buy their way back into the Canadian market based on the strength of gas prices and the strong American dollar.
An example cited was Texaco Canada Inc., which, he said, is rumoured to be looking to strengthen its presence in Canada.
A source at Texaco, who declined to be quoted, confirmed the company is looking to diversify its portfolio through acquisitions, particularly in gas, but refused to offer further details.
Service Sector Consolidation Taking Place
Ensign Resource Service Group To Buy Artisan Corp.To Become #2 Driller In Canada Badger Daylighting Inc. to buy D&K Drilling Ltd Double R Drilling Company Ltd.To Be Taken Over By Destiny Resource Services Corp.
Canadian energy service firms became bigger yesterday as companies announced acquisitions that will increase their market share.
Ensign Resource Service Group Inc. is acquiring Artisan Corp. for $155-million in a deal designed to strengthen Ensign's position as Canada's second largest oil and gas drilling company.
Ensign, controlled by Calgary financier Murray Edwards, said yesterday that it will pay $70-million in cash and swap stock valued at $85-million to buy Artisan.
The combined company would have a stock market value exceeding $765-million, second to Calgary based Precision Drilling Corp.'s capitalization of $1.26-billion, based on their closes yesterday on the Toronto Stock Exchange.
Ensign, which has 3,200 employees, plans to keep Artisan's 1,000 workers.
"Being part of a larger organization will be better for all stakeholders -- we'll provide better customer service, more opportunity for employment growth and better operating efficiencies," said Mr. Edwards, Ensign's 37-year-old chairman and one of the oil patch's new wave of entrepreneurs.
Glenn Dagenais, Ensign's vice-president of finance and chief financial officer, said the merger is good for both sides.
"We see some synergies between the companies," he said. "They are involved in some areas we think could be stepping stones to future growth."
Precision and Ensign are well ahead of the pack in the drilling sector, with Precision running 207 of 575 rigs across Western Canada. Ensign is poised to add Artisan's 33 rigs to its current Canadian fleet of 103.
The Ensign-Artisan merger is slated to be completed in May, and would result in Ensign holding a 24-per-cent share of the drilling fleets in Canada, just behind Precision's 36-per-cent share. Ensign also operates 46 rigs in the United States.
Despite industry forecasts that 2,500 fewer wells could be drilled across Western Canada this year, compared with last year's record 16,500, "long term, there will be a need for lots of wells to meet the increased demand for natural gas and, ultimately, oil," Mr. Edwards said.
Oil patch veteran Donald Seaman owns 22 per cent of Artisan and has agreed to tender his stake to Ensign's offer of $10.50 a share or 0.3415 of an Ensign share for each Artisan share. The cash offer, though, is limited to a total of $70-million.
Mr. Seaman, 72, and his older brothers, B.J. and Daryl (Doc) Seaman, are legendary figures in Calgary for building up oil and gas producer Bow Valley Energy Inc., which was taken over in 1994 for $1.8-billion by Talisman Energy Inc.
Howard Dixon, Artisan's president and chief executive officer, described the Ensign-Artisan deal as a "natural fit." He said Mr. Edwards' friendship with the Seaman brothers didn't provide Ensign with any advantage over rival drillers seeking to expand.
Mr. Edwards holds a 20-per-cent interest in Ensign. He is also one of the co-owners of the National Hockey League's Calgary Flames, along with B.J. and Doc Seaman. Donald isn't a member of the Flames ownership group.
"Most of the influential guys around town know each other," Mr. Dixon said.
The friendly transaction between Ensign and Artisan is the latest deal in a trend of consolidation in the industry. For instance, Precision acquired Enserv Corp. for $220-million in 1996 and took over Kenting Energy Services Inc. for $440-million last year.
The number of drillers -- including small, privately owned outfits -- will soon drop to 37 pending the Artisan sale, compared with about 65 companies in the 1980s.
"It has always been a belief of mine that being part of a bigger, better whole is an attractive thing," Mr. Dixon said.
Ensign, which has 96 well servicing rigs, also stands to inherit Artisan's fleet of 19 servicing rigs as well as other equipment in the field.
Glenn Dagenais, Ensign's chief financial officer, said Ensign doesn't plan any further big acquisitions this year because "we've got our plate full here" with the pending purchase of Artisan. "Combining the people and assets of both companies is going to create a dynamic entity," Mr. Dagenais said yesterday.
After Precision and the expanded Ensign, the next largest drilling companies in Western Canada are: Calgary based Akita Drilling Ltd. (30 rigs) and Nabors Drilling Ltd. (28 rigs), a unit of Houston based Nabors Industries Inc.
Ronald Southern, one of Alberta's most powerful businessmen, owns 15 per cent of Akita's class A non-voting shares and 86 per cent of the class B voting shares. His daughters, Nancy and Linda, serve on Akita's board.
Last October, Ensign hit a 52-week high of $57 while Artisan reached a yearly high of $21 and Precision peaked at $49.50.
Don Herring, managing director of the Canadian Association of Oilwell Drilling Contractors, said that even though the number of wells drilled this year will likely drop from last year's record pace, the industry remains healthy.
In particular, expansions of natural gas pipelines into the United States will keep drilling rigs busy, because more gas supplies will be required to fill the new export lines, Mr. Herring said.
Ensign-Artisan combination would:
* Cost Ensign $155-million in cash and stock;
* Have a stock market value of more than $765-million;
* Capture 24 per cent of the drilling rigs in Canada;
* Employ 4,200;
* Have 182 oil and gas drilling rigs in Canada and the Untied States, and another 115 well servicing rigs. Drilling rigs punch down the bit when a well is drilled. Service rigs are used to install production
equipment and overhaul existing wells.
* Be headquartered in Calgary.
Analyst Carl Hoyt of Goepel Shields & Partners Inc. in Vancouver said the deal works out to Ensign paying about $3 million a rig while replacement costs are about $4 million.
"Anytime you can buy market share at a discount to replacement value, then it's a reasonable deal," Hoyt said. While dynamics between the two leading firms won't change, the deal will add to Ensign's liquidity and enhance its appeal to some investors, Hoyt said.
The combined firm will have a market capitalization of $725 million, long-term debt of $100 million and working capital of $50 million.
Michele Weise, analyst with Canaccord Capital Corp. in Vancouver, said the deal will expand the geographic reach of Ensign's drilling fleet and increase its service fleet's exposure to gas. Paying less than 10 times her estimate of Artisan's 1998 earnings of $1.08 per share makes it an attractive price for Ensign, Weise said.
Also unveiled yesterday was a deal by Badger Daylighting Inc., a diversified Red Deer, Alta.-based service company, to buy D&K Drilling Ltd., a trenchless directional driller. The company bores under rivers, highways or environmentally sensitive areas, then pulls a pipeline through the hole, minimizing environmental upheaval.
Ken Rose, president and chief executive officer of Badger, said final details of the cash and share bid are still being negotiated. Privately held D&K is expected to generate $12 million in revenue this year, putting Badger's 1998 total at about $85 million.
Record drilling in the past couple of years is one reason for the agreement, Rose said.
"We believe there are two or three years of heavy construction for our industry because of the drilling that's already been done."
FirstEnergy Capital Corp. recently released a report on the service industry, which recommended Badger as a "buy." It gave a 12-month target price of $8.75. The firm's shares (BAD/TSE) closed at $7.75, up 45›.
Double R Drilling Company Ltd., a privately held seismic contractor, will be taken over by Destiny Resource Services Corp. in a $6.5-million deal set to close May 31.
"What we see happening is the Double R people will be used not only to service our domestic market, but should we require people internationally, they'll be moved into that market," said John Newman, chief financial officer for Destiny. "They'll be staying on. There will be no job losses." The Spruce Grove outfit has between 50 and 110 staff, depending on requirements throughout the year. In the 10 months ending in January, Double R had about $12 million in revenue and after-tax income of about $1.4 million.
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