MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, APRIL 2, 1998 (3)
TOP STORIES
Oilpatch Nightmare Turns Into A Dream Machine - Petro-Canada Comes Of Age
Calgary Herald
It wasn't all that long ago that Petro-Canada was the dirtiest word in the oilpatch.
The company's landmark downtown office towers were unflatteringly referred to as Red Square. Its employees were reviled for their supposed non-competitive, public sector mind set.
And the firm's financial and emotional commitment to Hibernia, the offshore East Coast oil find, believed by many to be a politically motivated white elephant, was a source of constant disparagement.
Today, Petro-Canada is a horse of a different color.
The company Canadians loved-to-hate is beloved by investors, generally adored by market analysts and unabashedly revered by its competitors.
Most important, consumers who wouldn't have been caught dead buying their gas from a company created by a federal Liberal government -- Petro-Canada was created by an act of Parliament in 1975 -- now think nothing of filling up at a Petro-Canada station.
"I don't know anyone who wouldn't want to work with us," says chief executive Jim Stanford in what might pass for the understatement of the year. "And that makes me feel really good."
"It's true. Everybody has a tonne of respect for them," says analyst Martin Molyneaux of FirstEnergy Capital Corp.
"And not just because of their financials."
Which isn't to say Petro-Canada's numbers aren't worth noting. They are.
Any time a company can bump net earnings by $59 million (to $306 million) and hike cash flow by $400 million (to $1.26 billion) as Petro-Canada did last year, people are bound to take notice.
In fact, Petro-Canada's numbers were so impressive wannabe shareholders gobbled up more than a million shares a day on average throughout 1997, causing the company's shares to appreciate by more than 34 per cent.
That, in turn, caused the Calgary chapter of the Strategic Leadership Forum to name Stanford, a former roughneck and 39 year industry veteran who has spent the past five years piloting Petro-Canada through turbulent waters, as the winner of its prestigious President's Award.
"We looked at their performance over the last three years, what they did last year including the fact that they got Hibernia on stream, and we felt it was time they were given some recognition for their efforts," says Don Parker, past president of the leadership forum.
"They've come a long way."
While observers have been inclined to celebrate the flow of oil at Hibernia on Nov. 17, 1997 as the end of an era, Stanford begs to differ.
"It's just the beginning," he says with a laugh. "We did have a sense of relief that we had finally gotten the job done but there's still an awful lot for us to do on the East Coast and around the world."
Hibernia, which sits some 300 kilometres east of St. John's Nfld., is believed to hold approximately 615 barrels of crude oil and the field's first well has been producing at rates in excess of 40,000 barrels a day -- the highest single-well production in Canadian history.
Ultimately, the company expects production at Hibernia to reach 60,000 barrels per day.
Stanford points out that while Hibernia is busily pumping oil preparations are under way to bring the Terra Nova oil field, also on the Grand Banks, into production.
"My vision," he adds, "is to have a major project coming on stream every two years or so."
That vision would not have been possible five years ago, when Stanford, an avid sailor, took control of a company that had been drifting aimlessly under the stewardship of then chief executive, Bill Hopper.
The company was in every respect, a Crown corporation. The bulk of its capital budget was debilitatingly dedicated to frontier activities. Its debt load was prohibitive.
In short, Petro-Canada's business mandate was still reflective of its political roots.
"When Hopper left, and the federal government reduced its holdings to around 18 per cent, the psychological message to Canadians and the industry was huge," points out Scotia Macleod analyst Doug Monoghan.
Stanford's first task was to imbue the corporation with his personal operating philosophy.
"I subscribe totally to the idea of financial integrity. That means not having the corporation at risk to things that are beyond our control. And that includes not being too leveraged. When I took over, our financial situation was such that we didn't have any maneuvering room."
Molyneaux is more succinct.
"Stanford brought the idea of value-added management to the oilpatch. Until he showed how the idea of analyzing what you do and then doing what adds value to your shareholders, a lot of people didn't think that concept could be applied to the oil and gas industry."
With an executive team that was fervently in support of Stanford's financial mantra, Petro-Canada sold out its heavy oil interests and placed an unprecedented emphasis on conventional western Canadian gas.
"Those decisions were absolutely brilliant," says Molyneaux, who believes Petro-Canada could be the first Canadian company to produce a billion cubic feet of gas a year.
At the same time, a concerted effort to reduce the debt load has left Stanford ambivalent about recent fluctuations in the world price of oil.
"Even if oil averages $17.50 a barrel we won' take much of a hit on our after-tax profits," says Stanford.
In 1998, Petro-Canada will spend almost $1 billion growing its respective businesses. Included in that amount is $375 million earmarked for western Canadian gas exploration and development.
However, down the road Stanford believes Petro-Canada will become increasingly active "beyond the borders of Canada" as it seeks to become the country's foremost integrated oil and gas company.
"We will be able to do that because we will have strong cash generators at Hibernia and Terra Nova and in our western Canadian gas positions."
The only downside -- for Stanford at least -- is that as his company becomes ever-more expansive, finding the time to slip off to the West Coast for much needed sailing get-aways will become even more of a challenge than is now the case.
"Of course the older I get," says Stanford, "the more philosophical I become."
MARKET ACTIVITY
In New York, the Dow Jones industrial average staged a blitz Thursday, surging nearly 120 points to a yet another record high and coming within a whisker of its latest historic touchdown: 9,000.
Save for oil drillers, all major sector groups were higher.
Oil prices rose in a rebound from two days of losses.
On the New York Mercantile Exchange, oil prices recovered from two days of losses. Purvin & Gertz Inc. analyst Dave Bellman said the increases were an indication that confidence was building among traders that crude production would indeed be cut as agreed in a pact among oil producing countries.
Crude for May delivery settled at $15.74 a barrel, up 20 cents. May heating oil rose 0.40 cent to 43.22 cents a gallon and gasoline for prompt delivery fell 0.10 cent to 51.17 cents a gallon.
Dow oil components Exxon (XON) and Chevron (CHV) both rose 15/16, while Mobil (MOB) gained 1 7/16 to 79 7/8 to send the AMEX Oil Index (XOI) up 4.26 to 486.51. But oil service-and-drilling stocks were in retreat, as the Philadelphia Oil Service Index (OSX) slid 1.80 to 112.94. Among individual names, Cooper Cameron (RON) slid 2 to 61 3/4 and Smith International (SII) fell 1 3/4 to 57 1/4.
In Toronto, the Oil & Gas Composite Index gained 0.4% or 27.43 to 6605.31. Among the sub-components, the Integrated Oil gained 0.0% or 0.87 to 8799.59. The Oil & Gas Producers rose 0.3% or 18.86 to 5815.91 and the Oil & Gas Services gained 2.2% or 68.54 to 3144.74.
Renaissance Energy, Ranger Oil, Poco Petroleums and Carmanah Resources were among the 50 most active traded issues on the TSE.
No oil and gas producers were among the top net gainers.
TriGas Exploration gained 8.3% to $1.30, Westfort Energy 7.1% to $1.97, Courage Energy 7.0% to $2.00 and Bellator Exploration 6.9% to $1.09.
On the downside, Imperial Oil fell $1,00 to $79.50, Remington Energy $0.90 to $15.30, Denbury Resources $0.70 to $24.30, Rigel Energy $0.55 to $11.70 and Tri Link Resources $0.50 to $15.00.
Percentage losers included Petrobank 7.7% to $2.40, OGY Petroleum 7.4% to $1.25, Torex Resources 6.1% to $1.08, Purcell Energy 5.7% to $1.00, Remington Energy 5.6% to $15.30, Tethys Energy 5.0% to $2.85, Abacan Resources 4.9% to $1.95, Rigel Energy 4.5% to $11.70 and Gulfstream Resources 4.4% to $6.50.
Oil service companies advanced on anticipation that higher crude prices will prompt large oil firms to increase exploration, raising profits of companies that supply equipment and other services. Dreco Energy Services Ltd. rose $3.00 to $50.00, Canadian Fracmaster Ltd. climbed $1.20 to $22.75 and Precision Drilling Corp. gained $0.75 to $31.65. American ECO fell $0.55 to 11.70.
Percentage gainers included Inter-Tech Drilling 8.3% to $1.30, Trican Well Services 8.2% to $5.25, McCoy Brothers 8.% to $3.24, Tetonka Drilling 7.7% to $2.10 and Dreco Energy 6.0% to $50.00.
Over on the Alberta Stock Exchange, Bearcat Explorations, Raptor Capital, Green River Petroleum, AltaPacific Capital, Hyduke Capital Resources, Oxbow Exploration, Parkcrest Exploration and J&L Cap Venture were among the top 25 most active traded issues.
AltaQuest Energy gained $0.45 to $3.25, Destiny Resource Services $0.15 to $3.20 and Wolverine Energy $0.14 to $1.05.
On the downside, Derrick Energy fell $0.20 to $1.30, Bearcat Explorations $.14 to $0.50, Arrival Energy A $0.10 to $1.40, Draig Energy $0.10 to $1.30, Granger Energy A $0.10 to $0.90, Red Sea Oil $0.10 to $2.95 and Stellarton Energy $0.10 to $3.90.
RESEARCH NOTES
Gordon Capital
Beau Canada Exploration Ltd. (BAU-T: $2.50) BUY
Acquires APL Energy for $70 million
Privately owned, APL Energy has current production of 19 mmcf/d of gas, 700 bbls/d of NGL's and 400 bbls/d of 36 degree API oil. This production is 95% operated and is concentrated in two core areas. Almost half of APL's production comes from Gilby/ Gull Lake, this is already a core area for Beau Canada. APL's second core area is at Niton/Shiningbank. Both of these areas offer multi-zone potential with year-round drilling access. Beau has already identified 18 potential locations and drilling is expected to begin in Q3. Included in the acquisition are over 20,000 net acres of undeveloped land, four gas plants (net capacity in excess of 40 mmcf/d), pipelines and other related infrastructure.
APL Provides Some Much Needed Balance to Gas Drilling Program
Given the abundance of infrastructure already in place and the year round access on the APL land base, management expects to be able to rapidly tie-in new wells. This has been a problem in the past for Beau particularly in its high impact winter access areas. For example, this winter only three of the five successful Jean Marie gas wells drilled at Helmet/Peggo will be tied in as a result of a late start to the winter drilling season and an early spring break-up. Also, a shorter than expected drilling window forced Beau to defer the drilling of two Slave Point tests at Helmet/Peggo to next year. We believe that over the short term the APL acquisition makes up for some recent setbacks related to a shorter winter drilling season; while over the longer term it allows Beau more flexibility to balance its gas drilling program throughout the year.
Will Rising Debt Become an Issue?
While management is still reviewing its exploration and development budget in light of the acquisition, we expect the budget will be reduced from the $85 million previously targeted. Assuming no change to the capital budget, we estimate 1998 year-end debt could reach 3X our forecasted 1998 cash flow. Therefore, we believe it is quite likely that Beau Canada could attempt to issue equity, markets allowing.
Forecasts Remain Unchanged
In spite of the acquisition, we have maintained our production forecast of 9,000 bbls/d and 100 mmcf/d. This is due primarily to setbacks (mostly weather related) in Beau's winter drilling program and to the fact that Beau currently has more than 1,300 bbls/d of heavy oil capacity shut-in as a result of lower oil prices. Our 1998 forecast fully diluted remains CFPS $0.60 - with higher interest costs being offset by higher netbacks. In 1999, we are forecasting fully diluted CFPS of $0.80. We are maintaining our BUY recommendation on Beau Canada with a 12-month target price of $3.25, this represents a 30% return from the current stock price.
Salomon Downgrades Three E&P Companies
Salomon Smith Barney said analyst Thomas Driscoll downgraded three oil exploration and production companies to neutral from outperform.
-- said cut Apache Corp (APA), Enron Oil & Gas Co (EOG) and Union Pacific Resources Group Inc (UPR).
-- said in summary report that E&P shares ''expensive at oil prices below $20.''
-- said sees ''a downside risk of as much as 30-40 percent on some of these shares if the crude price expectations do not improve.''
Salomon Initiates Coverage Of Houston Exploration
Salomon Smith Barney said Thursday it started coverage on shares of Houston Exploration with an outperform rating and a 12-month $26.50 per share price target on the stock.
-- Company provides good exposure to gas prices, analyst Jeffrey Robertson said.
-- ''A $0.10 increase in 1998 gas prices would add $0.25 per share to our $4.07 discretionary cash flow estimate,'' he said in research note.
-- Its exploration program will test a number of high-potential prospects in the next 12 to 18 months.
Elf Aquitaine Cut To "Underweight"
Brokerage Transbourse on Tuesday cut its recommendation for Elf Aquitaine (NYSE:ELF; ELFP.PA) to ''underweight'' (3) from ''accumulate' (2) because it fears an OPEC output deal would not lead to stable oil prices.
The Transbourse analyst was not immediately available to comment on the changed opinion, confirmed by a salesman at the house.
According to Transbourse, Elf will be hit harder by low oil prices than the other leading French oil company Total (TOTF.PA).
INTERNATIONAL
Businesses Get export Update
Northern Alberta businessmen got updated on the state of Canadian export markets yesterday.
Export Development Corporation chief economist Jim Olts told a group of about 40 exporters that the Japanese economic situation poses more of a threat to Canadian exporters this year, rather than East Asia.
"The big message out of the Asian crisis for Alberta is that exports to that area of the world are less than 2% of provincial exports," said Olts. "It won't have that much of an effect."
He said the B.C. market would have a much tougher time because of their primary exports of lumber products and coal to the East Asian marketplace.
"It looks as if Japan will enter into a recession for the second time in five years, so the dismal conditions exporters faced in 1997 will not improve in 1998. This will have a greater impact on Canadian exports than all of Southeast Asia."
Patricia Piironen of Kos International was at the meeting to network and get a handle on international markets which could be tapped by the Drayton Valley oil rig transportation outfit.
"We're looking at setting up active operations in Venezuela, Algeria and Chad," she said. "Coming to a meeting like this gives us good market intelligence."
"Right now we're developing markets in Latin America so we want to know what the long-term export market looks like."
Cardium Tool Services international marketing manager Chris Stewart recently returned from Indonesia where the company has been supplying downhole equipment since 1989.
"It's a tight market to get into and you need strong local partners," he said. "We're at the workshop today to learn about new markets and the type of credit financing and banking rules potential markets might have."
The workshop broke down the economic indicators of specific countries to give participants a better understanding of the risks and rewards associated with doing business there.
Olt gave the U.S., Western Europe, and Asia positive growth rates for Canadian exports this year. Increases are also expected in Latin America, the Middle East, Eastern Europe and Russia. Exports to Japan are predicted to decline 1.6%.
Both Piironen and Stewart are eyeing Russia because of its vast oil and gas supplies, but it's not a country they immediately want to invest in.
"We're waiting on Russia to see what happens over there," said Piironen. "It has such huge potential, but we'll wait two to three years until their internal problems sort themselves out." Stewart agreed.
"We won't go near Russia unless it's with an established Canadian company we've worked with before. You don't go over there unless you know you're going to get paid."
Suriname: Workers Say No To Foreign Investment In Oil Sector,
PARAMARIBO, IPS - The government of Suriname is now in negotiations with foreign companies interested in investing in the country's oil reserves, but workers are far from happy with this move, which they say is not in their best interest.
"With foreign investments we might be able to increase the off-and- on shore oil production," says Natural Resources Minister Errol Alibux. "We need their knowledge and finances."
Not so, say the workers who fear that their jobs, and the State Oil Company could become a thing of the past once the foreign investors begin to take a foothold here.
Petroleum was first discovered in the Saramaca district in 1981 by the Gulf Oil Corporation. Following that the State Oil company was formed to exploit these reserves.
The country then exported small quantities of crude petroleum and imported refined petroleum products as it lacked refining capacity.
In 1988, 99 out of a total of 112 wells were in operation with an annual production of 3,888 barrels per day.
In the early 1990s, 23 percent of production was exported, 76 percent sold to Suralco, a wholly owned subsidiary of the Aluminum Company of America (ALCOA), the world's largest aluminum manufacturing company, and the rest was reserved for the domestic market.
At that time 4.6 percent of the country's labor force was employed in this sector. That figure has grown significantly since then.
Today observers say the State Oil Company is one of the most successful state-owned entities. In 1997 it produced 10,000 barrels of oil per day and just last year opened its own refinery. Government revenue from this venture amounted to $26 million.
The workers say they are at a loss to understand this latest move by the government, given the fact that the idea was for the company to double production this year and plans were already in place to finance this locally. "The government (is playing) a completely different tune now," says one worker.
And the workers at the oil company fear that allowing multinational companies like the Asian Daewoo to gain a foothold here means selling to foreigners what belongs to the Surinamese people.
Daewoo is represented in Suriname by Dilep Sardjoe, a millionaire who has strong ties with the government they say, confirming beliefs that the proposed deal is only in the interest of the government and not the workers.
But government has responded by saying it does not possess the resources to tap the vast reserves of oil that are in the country, and it needs the expertise and technology that come with foreign investors.
Alibux says although estimates now show that off shore reserves consist of at least one billion barrels of oil he is sure that when drilling starts in earnest, it could be considerably higher.
"These perspectives drove the government to initiate negotiations with the multinationals," he says.
"In the last 18 years, billions of dollars have been invested in the company. It's time we start earning them back," he adds.
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