MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING THURS, MAY 28 1998 (3)
TOP STORIES
Gas Price Fall 'Temporary'
High storage levels in the U.S. and Eastern Canada have pushed down spot prices for natural gas, but the condition is temporary, industry analysts said yesterday.
The Alberta spot price for natural gas has dipped to about $1.80 per thousand cubic feet in recent days, down from $2.50 four weeks ago.
The weakness goes against oil and gas industry expectations natural gas prices will strengthen because of the addition of new pipeline capacity from Nov. 1.
Most Canadian producers that have the ability are switching capital spending to natural gas away from oil to weather the weakness in oil prices, which is partly caused by high inventory levels.
"We believe this is temporary and from July both U.S. and Canadian gas prices should be rising," said oil and gas analyst Peter Linder of CIBC Wood Gundy Inc. in Calgary.
Prices should strengthen in the U.S. with the retreat of the warm weather trend and the coming of the hurricane season, he said.
In Alberta, prices are headed higher because there won't be enough gas initially to fill the new pipeline space, Linder said.
Despite weakness with spot prices, forward prices in Alberta continue to be strong, remaining in the $2.70 to $2.90 range for winter delivery, he said.
"I think it's a short-term blip," said Patricia Mohr, vice-president, economics, commodity markets, with Scotia Capital Markets.
Alberta prices should increase by the fall to link up with higher U.S. prices, while allowing for a differential of about 60› to cover transportation costs, she said.
Canadian Oils to pump out poor second-quarter results
With more than a month to go in the second quarter, analysts are already bracing for poor financial results from Canadian oil and gas companies, which have been hit hard by continuing low world oil prices.
A spate of firms clawed back drilling budgets at the start of the year, when crude prices began their downturn, and this has already translated into lower production growth, observers said. The oil that is being pumped has been fetching low prices and this has resulted in a cut in corporate cash flow.
''We have another five weeks, but even if there's some oil price recovery, the second-quarter numbers will be very weak,'' said CIBC Wood Gundy analyst Peter Linder.
July West Texas Intermediate crude oil on the New York Mercantile Exchange, which closed on Friday at US$14.78 a barrel, has averaged US$15.24 a barrel since the quarter started on April 1. That is down 24 percent from the second quarter of 1997, when NYMEX oil averaged US$19.94 a barrel.
Depressed prices have lingered despite efforts by major oil producing countries, led by Mexico, Saudi Arabia and Venezuela, to cut output to meet lower-than-expected world demand.
As was the case in the first three months of this year, firms producing high proportions of Canadian heavy crude oil face the most pressure because the tar-like substance is still being slapped with deep price discounts, compared with light oil, because refinery capacity to process it is limited.
Ranger Oil Ltd. (RGO.TO), Imperial Oil Ltd. (IMO.TO), PanCanadian Petroleum Ltd. (PCP.TO) and Gulf Canada Resources Ltd. (GOU.TO) are among dozens of firms that have shelved plans to drill for heavy crude and have left wells unmaintained and shut in because returns have been too low to justify expenditures.
Meanwhile, after a strong April, average second-quarter Canadian natural gas prices are now about flat with those in the first quarter, when El Nino-related weather conditions in North America reduced winter heating demand.
A stronger outlook for gas prices, combined with lower drilling budgets and new pipeline capacity to rich U.S. markets slated to be in service in November, has led many firms to shift emphasis to gas from oil.
Firms such as Poco Petroleums Ltd. (POC.TO), Anderson Exploration Ltd. (AXL.TO) and Alberta Energy Co. Ltd. (AEC.TO), whose production is already weighted to gas, were expected to report stronger results than their more oily peers.
For those companies who have only recently announced a shift to gas, however, higher output was not expected to show up in second quarter results.
''We're continuing to see budget cuts and estimate cuts,'' said Wilf Gobert, analyst at brokerage Peters & Co. Ltd. ''Even companies that have already reported their first-quarter results as the annual meetings have come and gone have lowered their numbers further.''
Analysts and many oil-patch executives are counting on depleted corporate fortunes to force a series of asset sales at prices not seen during the past few years of red-hot activity. That should mean good buying opportunities for firms with strong balance sheets.
''A lot of companies are facing very high debt levels and the banks are telling them they have to cut their spending,'' Linder said. ''They are cutting bank lines (of credit) and forcing companies to sell assets, and in many cases, quality assets.''
Canadian Natural Resources Ltd. (CNQ.TO), for example, has earmarked about C$300 million in cash to take advantage of asset deals offered by companies stung by low oil prices, its chairman, Allan Markin, said two weeks ago.
Kansans coming to oil sands
Billionaire Kochs plan $1-billion project on old Solv-Ex site
Globe & Mail
Friday, May 29, 1998
Koch Canada Ltd., armed with a huge war chest, is drawing up plans to build a $1-billion heavy oil megaproject by 2004 in northern Alberta's oil sands.
To kick things off, the privately owned company will announce today that it has completed the purchase of land in the oil sands from financially troubled Solv-Ex Corp.
Koch's parent company, owned by two of the wealthy Koch brothers of Kansas, is the second-largest private company in the United States.
If its planned investment pans out, Koch would become the fifth-most-important oil player in the Athabasca mining and extraction game now dominated by two long-time producers, Syncrude Canada Ltd. and Suncor Energy Inc. Two newcomers to the region, Shell Canada Ltd. and Mobil Oil Canada Ltd., unveiled their own multibillion-dollar proposals last year to develop land holdings by 2003 in the Athabasca region, near Fort McMurray.
Koch executives confirmed in interviews this week that they plan to spend the next year studying how best to proceed with oil extraction on oil sands leases acquired for $30-million from Solv-Ex.
Oil patch observers say Koch has raised $700-million for its war chest in the past year by selling part of its Western Canadian oil pipeline system and non-core heavy oil assets in Alberta.
As well, Calgary-based Koch has created a new division, Koch Oil Sands LP, to spearhead the oil sands endeavour and is considering issuing publicly traded limited partnership units in the division within a few years.
Koch will have a 78-per-cent stake in the planned oil sands venture, while United Tri-Star Resources Ltd. of Toronto will be a 22-per-cent partner.
Koch president Randolph Aldridge said in an interview yesterday that the oil sands megaproject is at the top of his agenda for long-term growth in Western Canada.
"We've got the financial strength. We're a big ol' company," said Mr. Aldridge, a Texan with a degree in chemical engineering.
Koch is a wholly owned subsidiary of Koch Industries Inc. of Wichita, Kan., an oil and chemicals giant with $30-billion (U.S.) of annual revenue, making it the second-largest private corporation in the United States after grain trader Cargill Inc. of Minnetonka, Minn.
Two billionaire brothers, Charles and David Koch, own and preside over Koch Industries. They are locked in an intense legal battle against their two brothers, William and Frederick, who sold their stakes in the Koch empire in 1983 for about $1-billion total.
After 15 years of legal jousting between the two sets of brothers, a jury began hearing evidence last month in Topeka, Kan., into whether William and Frederick were short-changed to the tune of $1-billion. The trial will enter its ninth week on Monday.
Industry observers say Koch is determined to forge ahead in northern Alberta's oil sands, undaunted by the family feud.
Solv-Ex, based in Albuquerque, N.M., ran out of money last summer and sought protection under the Companies' Creditors Arrangement Act after sinking more than $100-million (Canadian) into an oil sands operation that failed to go into production.
"You need deep pockets to develop the tar sands," said Thomas Ebbern, an analyst with Newcrest Capital Inc. in Calgary. "Anyone playing the tar sands also definitely has to take a long-term perspective" because of volatile commodity prices.
Koch recently submitted its ambitious development plan to Alberta's Energy Department, proposing to tap into the former Solv-Ex land holdings, which are estimated to contain 1.4 billion barrels of oil reserves.
The Alberta government stands to rake in royalties of 1 per cent of revenue initially from Koch's oil sands production.
Government spokesman David May said he couldn't comment on Koch's strategy because "details of any development like this one are confidential under the province's Mines and Minerals Act. It's proprietary information."
Koch doesn't intend to use Solv-Ex's technology to extract oil, but it is confident that the Athabasca properties contain enormous amounts of heavy oil buried deep beneath the surface on two leases totalling 55,874 acres.
"We're very excited because we're sitting on a resource which we believe has a great deal of potential," said David Park, Koch's chief financial officer.
Koch expects to use methods similar to the new processes at Syncrude and Suncor, which have vastly improved the technology in recent years for mining oil-laden sand and converting it into synthetic light crude.
"Syncrude and Suncor and now Shell and Mobil are all advancing projects fairly aggressively," said Martin Molyneaux, an analyst with FirstEnergy Capital Corp. in Calgary. "Koch is also very smart, but a whole series of ducks have to be lined up."
Koch, which employs 600 people in Western Canada, will need to hire hundreds of new workers if it pushes ahead with its oil sands strategy.
Initially, Koch envisages producing up to 90,000 barrels a day of a type of tar-like heavy oil called bitumen by building an open-pit mine and extraction plant on its newly acquired properties.
Besides the open-pit mine and extraction plant, Koch is examining the merits of opening a $1-billion upgrader, either in Alberta or the U.S. Midwest, to convert the heavy oil from northern Alberta into synthetic light crude, which in turn would be processed into gasoline.
Industry insiders say Houston-based Enron Corp. is likewise interested in building an upgrader in Alberta or the Midwest, possibly through a joint venture with potential partners such as Koch.
By securing heavy oil supplies from various producers in Western Canada, Koch currently pipes about 235,000 barrels a day of heavy oil to its massive Pine Bend refinery in Minnesota, accounting for more than one-third of Canada's heavy oil exports.
The Pine Bend operation is one of the most sophisticated refineries in North America, specializing in processing heavier grades of oil all the way into retail products such as gasoline.
Koch has shown good timing in the past year in selling off portions of its Canadian holdings, taking advantage of a feeding frenzy for heavy oil assets last year when commodity prices were at lofty levels.
For instance, Koch sold an estimated $325-million in heavy oil reserves and producing assets last year, before oil prices began plunging in October. And it raised $375-million by spinning off 51.2 per cent of its pipeline assets through Koch Pipelines Canada LP last November, before energy stocks got hammered.
Colombia's embattled oil sector still has fans as Seven Seas Petroleum and Harken Energy fill void left by major's
Colombia's highest-profile foreign oil companies have been beating a retreat as political violence escalates, but a couple of small independent U.S. firms have been filling the gap in what is still considered one of the best oil frontiers in the world.
While big operators, such as British Petroleum Co. PLC (UK & Ireland: BP.L) and Occidental Petroleum Corp. (OXY), have abandoned or scaled back key projects, Seven Seas (SEV) and Harken Energy (HEC), both based in Texas, have been raising funds for major expansions of their Colombian oil interests over the next few years.
For investors looking for ''a pure Colombia play'' in the oil sector, these two companies are the obvious choices, according to analysts.
''Both companies have what I see as the critical elements of the oil business,'' said Victor Hughes, international exploration sector analyst at CIBC Oppenheimer in Houston. ''They have solid management, great land positions and a great street address, that is in an area where there is a lot of oil.'' Hughes has ''Strong Buy'' recommendations out on both companies, which have the bulk of their assest in Colombia.
''Some countries have better fiscal terms and better terrorist risks, but the bottom line is that there is still a lot of oil to be found in Colombia,'' he says.
Nevertheless, the list of companies heading for the exit hasn't inspired confidence.
Royal Dutch/Shell (RD.AS)(UK & Ireland: SHEL.L) earlier this year put a ''for sale'' sign on its onshore interests; Triton Energy Corp. (OIL ), which discovered the giant Cusiana/Cupiagua oil complex in the 1980s, also has its Colombia interests on the auction block, as does London-based LASMO ( UK & Ireland: LSMR.L); BP said it will not proceed with plans to develop the Piedmonte field; Occidental said this week it would scale back plans to exploit the Samore block in northeast Colombia.
Though contract terms have been a factor for some, BP cited ''security reasons'' as a reason to abandon its Piedmonte West contract in the eastern part of the country, and Shell's motive for concentrating offshore was driven partly by the reduced vulnerability to guerrilla attacks.
''Obviously security is an issue,'' said Fadel Gheit, an energy analyst at Fahnestock & Co in New York. ''That makes people think twice and has nothing to do with your capital risk.''
But Harken and Seven Seas say it is not widely understood that security risks vary considerably between different regions in the country.
''There are really two Colombias,'' said Herb Williamson, chief financial officer for Seven Seas. While the more dangerous and, hence, less business-friendly areas lie east of the Andes, Seven Seas' operations lie in well-populated parts of the country, only 60 miles away from Bogota.
''We're in the same department as Bogota. It has one-third of the population and 50 percent of the army,'' Williamson said. ''It's farmland, not jungle,'' he added, explaining that guerrilla attacks are usually in thinly populated areas.
''There are security problems in the oilfields primarily in the northeast,'' agrees Mikel Faulkner, chairman of Harken Energy. ''We're not in those parts,'' he added.
''The independents will always do better in Colombia than the majors, because they don't attract the attention of the guerrillas and the kidnappers,'' says Fahnestock's Gheit.
Seven Seas has ambitious plans to explore its Emerald Mountain project, in which it has a 57.7 percent stake. Emerald Mountain has proved crude reserves of 132 million barrels and probable reserves estimated at 594 million barrels.
Harken recently announced plans to spend $1 billion in capital investment in Colombia from 1998 through 2001, and Faulkner said his company intended to drill about 12 exploration wells in Colombia this year. Harken operates five contract agreement areas, including the Cambulos area adjacent to the Seven Seas' Emerald Mountain discovery.
Hughes of CIBC Oppenheimer said the two companies ''are in very different stages of development.''
The question for Seven Seas, with a confirmed major discovery, ''is how big is the structure. The company now has the financial wherewithall to persue the delineation and is very well positioned. Harken is more of an exploration play.''
|
