MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, APRIL 8, 1998 (5)
TOP STORIES, Con't
Oil Trusts Ride Out Rocky Commodity Prices
The Financial Post
Despite weak oil prices and poor market psychology, payments to investors from energy royalty and income trusts are equal to or better than some cash generating alternatives, money managers and analysts say.
The annual cash yields for some trusts are now above 15%. But along with these healthy returns comes a great deal of uncertainty. And with oil price gyrations comes changes in the amount of money flowing to investors.
During the past six months, oil prices have plunged. As well, investors are becoming more aware that oil trusts have strengths and weaknesses - and risks.
The slippery slope for oil, despite recent efforts to cut global production to prop up prices, has been hard on conventional oil and gas trusts.
Brian Ector, an analyst with CIBC Wood Gundy Securities Inc. in Calgary, said in a recent report that the trusts fell an average of 5% in the first three weeks of March.
In a recent interview, he said it is no surprise the sector is out of favor.
"It's driving home the the risks of owning an oil and gas trust. The commodity risk is real."
Many trusts have seen their stock prices drop between 5% and 50% from Oct. 1 to March 31. In the same period, the Toronto Stock Exchange 300 composite index climbed 7.4% while the oil and gas index fell 14%. The oil index has recovered slightly this month, jumping 1.2% on April 3, before slipping again this week.
Trusts take cash flow from producing wells or assets, like pipelines or processing plants, and pump the money, along with a portion of the original capital, to unitholders.
About 15 pure oil and gas trusts exist, with others focused on pipelines, coal, propane and oilsands. At least two more are in the works as Petro-Canada intends to spin out its propane business into a trust, while Gulf Canada Resources Ltd. wants to make a similar move for its gas pipelines and processing plants.
Jake Roorda, vice-president, corporate of PrimeWest Energy Inc., which operates PrimeWest Energy Trust, agrees the past year has not been kind to the sector. PrimeWest, for example, came onto the market in October 1996 at $10 a unit and closed April 3 at $7.50. With the unit distribution forecast this year at $1.30, the cash yield stands above 17%.
"We do offer the potential for a higher return, higher than a bond or a T-bill," he says. "But to get that return you have to assume the risk of being associated with the oil and gas industry."
The rollover in unitholders, with some buyers turning to sellers, is not all bad, Roorda says. It is better to have investors, which he estimated as 80% retail in PrimeWest's case, who are prepared to ride out commodity fluctuations in hopes of higher returns.
Many of the oil and gas trusts came onto the market in 1996 and 1997. A number of buyers lost their initial enthusiasm once they realized their units were neither a bond nor a stock, says Leslie Lundquist, a portfolio manager with Bissett & Associates Investment Management Ltd. in Calgary.
She said there has been an over-reaction to the oil bad news.
"The fundamentals just don't support how weak they have been. There has to be some market psychology coming into play."
Royalty and income trusts best suit investors who want part of their portfolio to have an immediate return, Lundquist says. With fewer companies handing out dividends, the trusts are a competitive alternative to GICs and bonds.
Unless oil prices take another steep and prolonged dive, the worst is over, she said. "We do feel that if the bottom was going to drop out of the market, it would have already happened by now."
Even if oil prices average US$16 a barrel in 1998, the trusts should provide investors with cash yields of 12.9% - in line with the historical average, CIBC's Ector said in a report.
A worry for investors, Lundquist said, is that managers would not be able to replace reserves, and the value of the trusts will dwindle as reservoirs are exhausted.
Ector's analysis showed conventional oil and gas trusts replaced 469% of 1997 production through property acquisitions and 82% through development drilling and revisions.
Low oil prices are creating buying opportunities and this, combined with development drilling, has him anticipating 1998 will be another good year for replacing production.
"There is no question that for the trusts, in addition to producers, it's a tough haul right now," he says. "The saving grace could be natural gas prices."
TUSK Energy & PanAtlas Success At Meekwap
TUSK Energy Inc. announces that its well at Meekwap 04-21-66-15 W5M, within the Meekwap D-2A Unit #1 operated by TUSK, has commenced production from the Nisku Formation.
The Meekwap Unit well, drilled in March 1998, began production testing April 7 and is flowing light oil and gas at significant rates. The well has flowed, in a 17 hour period ending at 8:00am this morning, 1744 barrels of oil (277 m3) and 1.396 MMcf of gas (39 103m3) on a 28/64" choke, at a flowing pressure of 985 psig and 0 percent watercut.
TUSK's production for the year ended December 31, 1997 averaged 605 boepd. TUSK has approximately 9,735,000 common shares outstanding.
TUSK's interest in the Meekwap D-2A Unit #1 is a working interest of 16.73 percent and a net profits interest of 0.875 percent.
PanAtlas (PA/TSE) has a 16.73 percent working interest and 0.875 percent netprofits interest in the Meekwap D-2A Unit, which includes this well.
The company noted that results of this well are significant as the well is strategically located in a stratigraphic and structural high position in a previously undrilled area of this 11 square mile unit. Several downdip wells in the surrounding area have individually produced over 2.5 million barrels of oil.
Colt Energy Inc. and Ultra Petroleum Corp.Updates Activity In Green River Basin
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Initial completion of the lower sands in the North Lizard Head 11-8 well has commenced with a service rig currently being on site. Perforating is scheduled for late this week with hydraulic fracturing stimulation scheduled for next week. Test rate should be available approximately 7-10 days after the stimulation work iscompleted.
The first two intervals to be stimulated are located below the deepest completion interval in the Western Gas Resources (WGR) Lizard Head 13-28 well located approximately 3.5 miles south of the North Lizard Head 11-8. Based on data released the WGR Lizard Head 13-28 well initially tested at rates in excess of 5.0 MMCF/D.
WGR is currently awaiting final pipeline permit from the regulatory authorities (which is expected to be issued by month's end) to construct a pipeline to the North Lizard head acreage. Construction should take approximately 3 weeks after issuance of the permit. Completion work on the upper sands in the North Lizard Head 11-8 will be deferred until the WGR pipeline is completed.
Real Resources Acquires Property From Reserve Royalty
Real Resources Inc. (RER/TSE) has entered into an agreement, subject to usual due diligence procedures, to purchase varying interests in three prospects located in southeast Saskatchewan from Reserve Royalty Corporation.
The prospects are located in Rocanville, Alida West and Cantal with a combined production of approximately 280 barrels of oil per day of light gravity crude.
Lowell Jackson, President & C.E.O. of Real Resources Inc. said ''the acquisition supplements our existing interest in the Alida West prospect and gives us additional production and exciting upside in one of our core areas''.
Total consideration for the acquisition is $2,000,000 cash, 1,600,000 Real common shares and 200,000 warrants (exercisable at $1.25 per Real common share) and the reservation by Reserve Royalty Corporation of a 3% gross overriding royalty on production from the properties.
INTERNATIONAL
Malaysia Dismisses U.S. Sanctions Threat
KUALA LUMPUR, April 9 - Malaysia's state oil company Petroliam Nasional Bhd (Petronas) and other firms will continue to invest in Iran and Libya despite the threat of U.S. sanctions, the Foreign Ministry said on Thursday.
The ministry said in a statement that Kuala Lumpur did not accept a U.S. law that provides for possible sanctions against foreign firms that invest in Iran or Libya.
Washington is considering sanctions against Petronas because of the company's planned $2 billion natural gas venture with French and Russian partners in Iran.
"Petronas and other Malaysian companies will continue to invest abroad wherever economic opportunities exist, including in Iran and Libya," the Foreign Ministry said.
John Tenewi Nuek, undersecretary for the Americas division in the Foreign Ministry, read the statement to reporters after a 1-1/2 hour meeting with visiting U.S. Deputy Assistant Secretary of State for Energy, Sanctions and Commodities William Ramsay.
The Foreign Ministry said the U.S. government was seeking to apply the Iran and Libya Sanctions Act of 1996 beyond its borders.
"Malaysia does not accept this extraterritorial application," it said.
"Notwithstanding the difference between the two countries on the interpretations regarding the applicability of the stated U.S. legislation, both sides agreed that the foundations of Malaysia-U.S. relations remained strong," the Foreign Ministry said.
Earlier on Thursday, Ramsay, on his second visit to Kuala Lumpur since last November, said the two sides would continue their dialogue on the issue.
"This is a continuing dialogue. Same topic as the last time. Nothing has changed. But we will continue our dialogue with Malaysia," he told reporters after the meeting at the Foreign Ministry.
Washington says the gas deal involving Petronas, France's Total SA and Russia's Gazprom and signed last September violates the 1996 law.
The law requires the U.S. president to impose sanctions on any foreign company that invests $20 million or more a year in Iran's oil and gas sector. But the U.S. administration has not yet decided whether to impose sanctions.
Asked if he was confident Washington could convince Malaysia to change its position, Ramsay said: "The Malaysian government and Petronas will make their own decisions."
"I think Malaysia and Petronas understand their interests very well," he added.
On Wednesday, Petronas president Mohamed Hassan Marican said the state oil firm would go ahead with the Iran gas project.
The State Department has also been reviewing whether a separate $180 million deal in Iran's energy sector between Indonesia's Bakrie Minorak Petroleum and Canada's Bow Valley Energy Ltd violates the law.
The State Department said last week that the administration was reviewing whether the Asian economic crisis could cause Petronas and Bakrie Minorak Petroleum to abandon their plans to invest in Iran.
The Washington Post said last month that some U.S. officials believed Malaysia might be re-evaluating Petronas's commitment because of a desire to "keep its dollars at home."
China Aims to Create Global Petrochemical Giants
BEIJING, April 9 - The new Chinese minister responsible for energy has given broad details of a top to bottom reorganisation of the oil industry that he said would create two global Fortune 500 companies.
Sheng Huaren, appointed last month to head the revamped State Economic and Trade Commission, confirmed that the industry would be carved up along regional lines, the China Daily said on Thursday.
China National Petroleum Corp (CNPC), the country's biggest oil explorer, would be responsible for prospecting and developing petroleum and natural gas in the north and west.
"The corporation may also develop some petrochemical products," the paper reported.
China National Petrochemical Corp (SINOPEC), which dominates refining, would build its operations in eastern and coastal areas.
SINOPEC is expected to merge with China Eastern United Petrochemical (Group) Co, itself the product of a merger of five petrochemical companies last year, the paper said.
Energy industry analysts have generally welcomed earlier reports of a restructuring of CNPC and SINOPEC that would create two vertically integrated industry giants.
Sheng was quoted as saying each of the transformed companies would have annual sales of more than $9 billion, vaulting them into the ranks of the world's top 500 companies.
China is merging state-owned enterprises to form a core of multinational firms able to compete internationally. The energy sector is a priority in that effort.
Details of the reorganisation were still under discussion, Sheng said. But the first stage of the plan would be completed this month and the whole plan by the end of June.
The State Economic and Trade Commission absorbed the regulatory functions of a number of ministries under a radical government streamlining approved by parliament last month. It looks after coal, petroleum, chemicals as well as trade, textiles and other sectors.
China's oil industry is facing severe challenges. Refineries are suffering from a huge glut of diesel as a result of excess imports and rampant smuggling. Several of the largest ones have suspended production.
Refineries are facing competition from Asian countries, such as South Korea, able to export petroleum and petrochemical products more cheaply because their currencies have fallen heavily.
Meanwhile, it is becoming more difficult to extract oil from ageing wells in the north and northeast.
Potential new oil fields in the northwest are in inhospitable terrain and the costs of extraction and laying pipelines would be immense.
Both CNPC and SINOPEC suffer from a bloated workforce, low efficiency and poor management. CNPC employs 1.5 million people and SINOPEC,
through the 38 refineries it manages, has 700,000 people on its books.
Officials have said the diesel glut has forced crude production cuts of around four million barrels per day in the first three months of this year.
The Daqing and Jilin oil fields in the northeast and the Tarim oilfield in northwestern Xinjiang had shut down more than 1,000 wells, a state newspaper reported last month.
Chinese Oil Producer Battles to Meet Target
BEIJING (April 9) XINHUA - China Offshore Oil Nan Hai East Corp (Conhe) pumped out a total of 3.374 million tons of crude oil in the first quarter of this year, compared with 3.51 million tons for the same period last year, today's "China Daily" reported.
However, the Beijing-based newspaper quoted a company official as saying that Conhe's oil output in the first three months met only 86.8 percent of the company's target. Conhe had planned to produce 3.885 million tons of crude oil during the first three months this year.
The sales volume of crude oil also witnessed a decline in the first quarter this year because of the dropping price in the international market, the official said.
Conhe still has an output target for this year of 12.6 million tons of crude oil. To this end, Conhe will continue to introduce technological advances and equipment in exploration and production in the months ahead.
Also, Conhe will continue to invite overseas oil groups to join it in exploring for oil in the east district of the South China Sea, which is believed to have five billion tons of reserves. The east district covers 131,000 square kilometers.
Conhe, a subsidiary of the China Offshore Oil Corp, is China's major oil exploration company in the South China Sea. It accounted for 80 percent of the country's total offshore output last year.
Conhe, which has nine oilfields in operation, pumped out more than 11 million tons of crude in the past two years and is China's biggest offshore production base.
Conhe is now the fourth largest petroleum producer in China. Daqing, which has an annual oil output of more than 50 million tons, is China's biggest oil producer, followed by the Shengli Oilfield company in Shandong Province and Liaohe in Liaoning Province, the paper said.
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