MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING TUESDAY JUNE 9 1998 (3)
TOP STORIES
Commodities battered
Markets worldwide take a turn for the worse as oil and gold prices fall sharply
Financial Post
Commodity markets took another turn for the worse yesterday, as both oil and gold prices fell sharply.
Indications that the new European Central Bank is planning to hold only 10% to 15% of its reserves in gold sparked a selloff in gold stocks, while forecasts of weak demand for oil led to a drop in the price of crude and oil company stocks.
The declines took a toll on the Toronto Stock Exchange's large contingent of resource stocks, most of which have been among the worst performers so far this year.
The gold and precious minerals subindex fell 2.14%, while the oil and gas subindex dropped 1.2%.
Some analysts had hoped to see the ECB commit to a target of as much as 30% of its reserves in gold.
Traders pounced on the news, bidding gold prices lower in anticipation that central banks may further liquidate their gold holdings before European monetary union next year. In New York, the spot price of gold fell US$2.80 an ounce, to close at US$293.20.
"We haven't made a precise decision yet," said Wim Duisenberg, president of the new European bank, which takes over responsibility for monetary policy from European Union members in January. "There is a consensus among central bank governors it will be around 10% to 15%."
A statement by the ECB on how much gold it will hold has been keenly awaited by investors. Last year, a series of highly publicized gold sales by countries in Europe and elsewhere pounded the price of bullion down to 18-year lows.
Martin Murenbeeld, a gold analyst in Victoria, said Duisenberg's estimate was "a disappointment" for investors hoping for a rally in gold.
The European Monetary Institute, predecessor of the ECB, held 20% of member countries' EMI reserves in gold, and Murenbeeld said he expected that level to be sustained at the ECB.
But while the size of the new bank's gold holdings is getting the most attention, a more important issue is how the ECB will co-ordinate gold sales by its member banks.
Many in the gold industry are hoping the bank will schedule members' sales so there's little chance of a flood to overwhelm the market.
Other than taking a hit from central bank selling, gold has suffered from a general weakness that has plagued commodities since last year's economic meltdown in Asia.
The energy-weighted Goldman Sachs commodity index lost 2.31 points yesterday, leaving it at 152.33, the lowest since 1986. The Commodity Research Bureau index, which includes energy prices but is weighted
to agricultural products, dropped 1.81 to 211.52, its lowest sinceJuly 1993.
"The downdraft in commodity prices in general is due to the fear that the Asian contagion is spreading," said John Ing, president of Maison Placements Canada Inc.
Yesterday, continuing weak demand in Asia was cited as a key drag on oil sales.
The Paris-based Energy Information Agency cut more than half a million barrels off its estimate of second-quarter oil consumption worldwide. Half the cut was attributed to slumping markets in Asia.
In New York, the price on the near-term contract for a barrel of West Texas intermediate crude fell US70› to US$13.85, the lowest since May 19 when prices hit a 10-year low.
Oil and gas stocks have been the worst performers on the TSE, with the index down 7.9% so far in 1998.
Traders said aggressive selling by large speculators began yesterday morning on the news from Paris, but paused after a fire at the Irving oil refinery in Saint John, N.B.
Even news of the fire at one of Canada's largest refineries -- and the prospect of disrupted supplies -- didn't halt the selloff. It resumed, aided by an announcement from the U.S. Department of Energy, which lowered expectations for summer gasoline consumption.
The EIA also forecast a 100,000 barrel a day drop in global demand. Lower consumption is expected mostly in Asian countries outside China and Japan. But signs of a further downturn in either of those two countries could darken the outlook further, cautioned Jay Bhutani, oil analyst with Donaldson Lufkin & Jenrette in New York.
Renaissance in $680M deal
Financial Post
Merger with Pinnacle Resources to create sixth-largest producer could be first indication of a hot summer of takeover activity in the Canadian oilpatch
Pinnacle Resources Ltd. became the latest victim of declining oil and gas prices yesterday with the announcement of a $680-million friendly takeover offer by Renaissance Energy Ltd.
Analysts said the low prices, combined with the low value of the C$, will spur more mergers and acquisition in the oilpatch in coming months.
"Pinnacle is a company with an excellent track record that acquired good quality assets," said Clayton Woitas, Renaissance's president and chief executive officer. "They just hit a little curve here with the [low] commodity prices."
The value of the transaction exceeds $1.06 billion when Pinnacle's $380 million in debt is taken into consideration.
Under the terms of the deal, Renaissance is offering shareholders 0.66 of a Renaissance share for each Pinnacle share, or $16.76 -- a 28% premium over Friday's close and a 36% premium over the average price during the past 20 days.
The offer expires three weeks after mailing, which is scheduled to begin June 12.
"We are very happy with the value we are receiving," said Pinnacle president and chief executive Matthew Brister.
"Following a review of our strategic alternatives, we have concluded that this transaction is in the best interests of our shareholders, employees and other stakeholders."
Renaissance shares (RES/TSE) declined $1.80 on the news to close at $23.60 yesterday, while Pinnacle (PNN/TSE) shares gained $2.30 to close at $15.40.
Once the acquisition is completed, Renaissance will be the sixth-largest oil producer in Canada. Its daily production will increase by a third to 170,000 barrels of oil equivalent, of which 65% is oil and 35% natural gas. Its proven reserves will swell to 458.7 million barrels of oil and 2.25 trillion cubic feet of natural gas.
Renaissance said it plans to sell some natural gas assets in the fall, when gas prices tend to be at their highest, to reduce its debt of $1.4 billion.
An oil industry star until last year, Renaissance tripped up in the middle of 1997 when it missed its own production targets. The stock tumbled and continued to slide with the rest of the sector because of its large oil weighting.
The Pinnacle deal marks a departure from Renaissance's past style of growing by drilling rather than acquisition.
But Woitas said he sees the purchase as a way of acquiring complementary properties that will result in many efficiencies, rather than a corporate takeover.
"We indicated for some time that we would pursue appropriate acquisitions that reflect our counter-cyclical strategy and will create value for shareholders," he said.
Pinnacle and Renaissance have complementary assets in areas like oilfields in southwest Saskatchewan and natural gasfields in Alberta's Athabasca region.
While low commodity prices have caused others to cut spending, Woitas said Renaissance, in keeping with its anti-cyclicalmstrategy, sees them as an opportunity to buy.
Merger and acquisition activity in the sector slowed during the first part of the year, but is expected to pick up over the summer to match last year's high levels.
It's fuelled by a continuing "urge to merge" on the part of strong companies to support growth and competitive positions, along with the presence of U.S. corporate buyers encouraged by a low C$, said Mike Tims, president of Peters & Co. Ltd. in Calgary.
They're preying on companies weakened by high debt levels in a low price environment and by missed production targets, he said.
A long-time market favorite, Pinnacle found itself with high debt relative to cash flow after last year's ambitious growth, which included the $308-million purchase of oil assets in southwestern Saskatchewan from Canadian Occidental Petroleum Ltd. and the $278-million takeover of HCO Energy Ltd.
Renaissance bids for Pinnacle
Globe & Mail
Firm's first takeover attempt could mark busy summer of mergers in oil patch, analysts say
Renaissance Energy Ltd. plans to buy Pinnacle Resources Ltd. in a friendly stock swap worth $684-million, marking Renaissance's first takeover bid in its 16-year history and prompting predictions of a busy summer for deal making in the oil patch.
Calgary-based Renaissance said yesterday that it is offering 0.66 of a Renaissance share for each Pinnacle share in a transaction that would boost its Western Canadian land base by 22 per cent. The suitor also stands to inherit Pinnacle's $376-million debt.
Clayton Woitas, Renaissance's president and chief executive officer, said the Renaissance-Pinnacle deal makes sense for the long term, but there's no quick fix for the industry during this "painful environment" of low oil prices. "You can't turn things around in a day, a week or a month."
Still, Mr. Woitas said he's excited by Pinnacle's portfolio because he believes Renaissance is better positioned to aggressively explore for and produce oil and gas from Pinnacle's land holdings.
Renaissance, a senior producer that is already Canada's No. 1 oil and gas driller, estimates that its undeveloped land holdings will rise to 13.2 million acres from 10.8 million acres by acquiring Pinnacle, also based in Calgary.
Pinnacle's oil properties in southwestern Saskatchewan are the key to the deal because they would blend in nicely with Renaissance's holdings in the region, the companies say.
Across the West, Renaissance's oil and gas output would rise 33 per cent to roughly 166,000 barrels of oil equivalent a day through its Pinnacle purchase.
Pinnacle has agreed to not seek any rival bids and must pay a breakup fee of $21-million to Renaissance if the transaction falls through or if a higher, unsolicited offer emerges.
A rival, all-cash bid could potentially knock Renaissance out of the picture, but the early betting is that Renaissance and Pinnacle will get hitched, said Craig Langpap, an analyst with Peters & Co. Ltd. in Calgary.
Renaissance and Pinnacle have much in common. Their production profile consists of two-thirds oil and one-third natural gas. (Heavier grades of oil account for less than 20 per cent of their total production.)
If oil prices recover, Renaissance will be in good shape, Mr. Langpap said.
Pinnacle president and CEO Matthew Brister said his company's board is recommending the bid because it offers fair value for all of Pinnacle's 40.83 million shares currently outstanding.
Even though Renaissance's share price dipped 7.6 per cent yesterday, there's the chance to participate in the potential climb in the years ahead of Renaissance shares, said Mr. Brister, who worked as a geologist at Renaissance from 1984 to 1987. He joined Pinnacle in 1987 as its exploration manager.
Both companies struggled in the first quarter of 1998 because of sharply lower oil prices and slightly lower natural gas prices, compared with a year ago.
Pinnacle lost $6.4-million in the first three months, compared with a $4.1-million profit a year earlier. Renaissance posted a $4-million profit, compared with $44-million in the three months ended March 31,
1997.
"We aren't particularly under the gun from a financial standpoint. But having said that, with commodity prices where they are, we had limited financial flexibility for growth," Mr. Brister said.
Thomas Ebbern, an analyst with Newcrest Capital Inc. in Calgary, described the offer as an attractive one for Pinnacle shareholders, but warned that it remains to be seen how it will turn out for Renaissance shareholders.
Mr. Ebbern questioned whether cost savings from the merged operations in southwestern Saskatchewan will be significant enough to justify the purchase price in the short term. "You're not going to get that much more juice out."
The bid is the latest big takeover offer in the oil patch, following on the heels of Houston-based USX Marathon Group's $1.04-billion bid on May 29 for Calgary-based Tarragon Oil and Gas Ltd.
Industry analysts predict that a hectic summer for mergers and acquisitions could be in the cards if depressed commodity prices continue to eat away at profits and drive down share prices, leaving some cash-starved companies vulnerable to being swallowed.
Takeover targets commonly listed by analysts include Ranger Oil Ltd., Rigel Energy Corp., Anderson Exploration Ltd., Cabre Exploration Ltd. and Crestar Energy Inc.
Companies looking to fill their shopping carts include Apache Corp., Amoco Canada Petroleum Co. Ltd., Coastal Corp. and Devon Energy Canada Corp., industry observers say.
Renaissance is an unlikely suitor because it made its name over the past 16 years by finding and pumping oil and gas internally, growing from a junior explorer to become one of Canada's top eight oil and gas producers.
It has gained a reputation in the oil industry as the company with the most millionaires on staff, ranging from Mr. Woitas to dozens of geophysicists, geologists and engineers.
Mr. Woitas said that even though his company didn't enter the corporate takeover game until now, it spent $1-billion from 1993 to 1997 on land purchases and other properties.
Pinnacle, founded in 1986, went on a spending spree last year before commodity prices nose-dived. It acquired HCO Energy Ltd. last August for $247-million and scooped up some Saskatchewan holdings for $308-million in October from Canadian Occidental Petroleum Ltd.
Renaissance, with a payroll of 719 employees, is expected to cut some of the 273 jobs at Pinnacle after further review of what duplication there would be.
The $684-million value of the stock swap is based on Renaissance's close of $25.40 on Friday, or the equivalent of $16.76 for each Pinnacle share.
Industry analysts say Renaissance should be able to complete the deal, although its share price came under selling pressure yesterday. Renaissance fell $1.80 to $23.60 as 1.4 million shares changed hands on the Toronto Stock Exchange, while Pinnacle rose $2.30 to $15.40 on volume of 6.7 million shares.
The price swings were attributed to the dilution of Renaissance shares, lower share profit of the combined entity and arbitragers scooping up Pinnacle shares.
Both companies are trading well off their 52-week highs of $42.45 for Renaissance and $24.10 for Pinnacle.
Assuming the deal is completed, Renaissance will have 143.5 million common shares outstanding, giving it a stock market value of $3.4-billion, based on the company's share price yesterday on the TSE. It will also carry $1.4-billion of debt.
Renaissance Energy
CEO: Clayton Woltas
TSE symbol: RES
Head office: Calgary
Activities: Acquires petroleum and natural gas rights and explores for, develops, produces and markets crude oil and gas.
................................1997 1996
Revenue, million.......$948 $953
Cash flow, million.....$530 $573
Profit, million............$115 $180
Pinnacle Resources
CEO: Matthew Brister
TSE symbol: PNN
Head office: Calgary
Activities: Explores for and develops oil and natural gas prospects mainly in Alberta and Saskatchewan.
................................1997 1996
Revenue, million.......$172 $127
Cash flow, million.....$88 $68
Profit, million............$13 $11
Gordon Capital Comments
Pinnacle Resources
(PNN-T: $15.40) BUY
Renaissance Offer Not Guaranteed To Succeed
Renaissance Energy has offered to take-over Pinnacle Resources for a share exchange ratio of 0.66 Renaissance shares for each Pinnacle share. The offer will be mailed Friday June 12th, and will expire 21 days later at midnight on July 3rd. In our opinion, Renaissance is attempting to acquire Pinnacle at a low price. Despite the tight time frame, we believe that there is room for a superior offer to be made to Pinnacle's shareholders. Renaissance are offering to pay only $21,435 per boe/d, compared to an average of over $25,000 per boe/d in friendly transactions in recent years. On a proven + half probable reserve basis, Renaissance are proposing to pay $5.79/boe, again low when compared to an average of $7.07/boe in recent years. The "break-fee" of $21 million is only $0.50 per Pinnacle share, not a significant impediment to another offer.
We are strong believers in the growth potential offered by the outstanding quality of Pinnacle's asset base. Despite the fact that the company's debt currently stands at 3.5x this year's cash flow, and that it is 70% levered to oil production where prices are currently weak, it has no "broken fundamentals" in terms of its operations in the field or its upside exploitation and exploration potential. This is why we have been recommending a strong buy on Pinnacle with a stock price target of $18.00. We believe that on a take-over basis, this company should sell for a range of $18.00 - $20.00 per share. Renaissance has strategic advantages in this transaction. First, the deal is friendly, and hence, on a very short time fuse. It will now be challenging for a competing bidder to properly assess Pinnacle's asset base and enter the fray with an offer before July 4th. Second, Renaissance knows and understands Pinnacle's asset base better than any of its competitors, as it operates in the same areas and manages in much the same manner. The weakness in the offer is that it is "all paper", and can be exceeded by a partial or all cash offer.
Should Renaissance succeed, it will be a very beneficial transaction. Pinnacle's upside potential will offset Renaissance's own recent difficulties with declining crude oil production and very high natural gas production decline rates for at least two years, and maybe more. We see no accretive impact on 1998 CFPS, as it would remain flat with our earlier forecast of $3.15. However, the transaction would increase our 1999 CFPS forecast from $3.75 to $4.00. Renaissance has the balance sheet strength to absorb and handle Pinnacle's current debt level. With no asset sales, the 1999 debt/cash flow ratio would be 1.5x. Should this low offer by Renaissance succeed, its will cause us to upgrade our research opinion from what has been, in most of the recent year, a sell. Our recommendation is to play this transaction through the ownership of Pinnacle. Should the Renaissance deal succeed, we believe that it will be very beneficial for Renaissance shareholders, which will include former Pinnacle shareholders. Should a superior offer appear within this tight time frame, then Pinnacle holders would be more immediate beneficiaries.
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