MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 28, 1998 (5)
WEEK'S TOP STORIES
CANADIAN INDUSTRY
Slumping Prices Prompt Well Shutdowns
Canadian Press
Slumping oil prices have forced oil companies to shut down hundreds of heavy oil wells in Alberta. "It's very negative," David Wolf of the Small Explorers and Producers Association of Canada said Tuesday. "The industry is in for a little rough weather here."
Husky Oil and Gulf Canada have shut down more than 200 heavy oil wells since the beginning of 1998, with more closures to come if oil prices continue to slump.
The price of oil has plummeted about 30 per cent over the past year, dropping to a four-year-low of $15.31 Tuesday.
The Alberta government based its revenue projections on an oil price of $17.50 a barrel US, but it believes this downturn is just temporary.
"We always expected there would be some pull back in some of the programs," said Alberta Energy Minister Steve West.
The slumping prices are not expected to affect production or expansion plans in Alberta's oilsands industry.
Low oil prices have hit the heavy oil sector the hardest, as heavy oil prices in the past year have averaged $8.50 less than the refined oil price - a margin of more than 50 per cent. High supply and low demand of heavy oil has been the culprit of low prices.
The Canadian Association of Petroleum Producers believe several factors have sent oil prices in a downward spiral - an over-supply in Venezuela, off-shore oil coming on the market, and the Asian crisis.
And like a wolf licking its chops, large American oil companies are poised to gobble up vulnerable cash-strapped Canadian companies, said David Manning, president of the association.
Large American companies will take advantage of low oil prices, the weak Canadian dollar, and a tough market to raise capital, Manning said.
"Put all those together and you are an America firm, Canada is looking pretty tasty," he said.
Financial companies are predicting these soft prices to effect all oil sectors.
"Everyday we are talking to a different company who is trimming their spending budget and their cash-flow estimates," said Wilf Gobert of Peters and Company, a Calgary-based investment dealer.
"We think there are more cuts coming," Gobert added.
Low oil prices are forcing Alberta energy companies to switch its focus from oil to gas.
"It will be a total turnaround," said Dale Tremblay, senior vice-president of Precision Drilling, the largest drilling company in Canada.
Last year, Precision drilled 51 per cent oil wells and 30 per cent gas wells. It expects to drill 50 per cent gas wells and 30 per cent oil wells in 1998.
As gas prices have risen in the past year, so has production. And with two Canadian gas pipelines expanding, gas prices will increase, Tremblay said.
Klein Concerned About Oil Plunge And Impact On Alberta
Calgary Herald
Encouraging signs for peace in Iraq have produced an uneasy calm in Alberta's oilpatch with plummeting oil prices.
The cost of light crude on the New York Mercantile Exchange plunged 87 cents US to $15.31 US a barrel Tuesday -- its lowest level since April 1994. Share prices also declined for many of Canada's big oil producers.
"It's potentially a financial crisis for the oilpatch. It depends on how long these prices last," said Wilf Gobert, an oil industry analyst at Peter's & Co. in Calgary.
Some analysts predicted oil prices could drop another $2 US a barrel if the tension between Iraq and the U.S. continues to ease following news of a tentative deal to allow UN weapons inspectors access to Iraq's sensitive sites.
Premier Ralph Klein said Alberta's energy revenues could be in for a shock if Iraqi oil exports double under a proposed UN deal. Klein was set to travel to New York this week where he will meet financial analysts. Klein said he's concerned about the potential impact extra Iraqi exports could have on Alberta's oil royalty revenue.
"There are these global incidents that could create a bit of a shock," Klein said. "I'd like to get as good a handle as I possibly can (from the analysts) on the trends and these global incidents, what impact they might have on our bottom line."
Alberta expects to take in nearly $700 million in royalties from crude and synthetic oil in the 1998-99 fiscal year. It also anticipates another $1.8 billion from natural gas sales, coal and Crown land leases.
Those forecasts are based on oil averaging $17.50 US per barrel and natural gas at $1.70 Cdn per thousand cubic feet. A $1 US decline in the price of oil over the year would cut $152 million from Alberta's revenues while a 10-cent Cdn drop in the price of gas would pinch $209 million.
Oil prices have fallen 30 per cent this year.
The UN "oil-for-food" deal to meet humanitarian needs of Iraqis has been increased from $2 billion every 180 days to $5.256 billion. But there are concerns whether Iraq can produce that much oil.
Alberta Energy Minister Steve West predicted Iraqi exports would double under the UN deal to three million barrels a day -- twice Alberta's daily output.
Extra Iraqi oil would worsen a world oil glut, he predicted.
The glut has been caused by rising output from countries inside and outside the Organization of Petroleum Exporting Countries, sagging Asian demand growth due to economic problems and a warmer-than-usual winter.
"Ultimately, low prices will induce OPEC to take remedial action," said a New York-based analyst. Others predict OPEC will need to meet soon on production cuts.
Gobert cautioned Alberta oil companies are somewhat insulated from the volatility in world oil markets. "In the international community it's much more relevant to talk about oil only," he said.
"In North America, Canada especially, you have to look at oil and natural gas. One thing that is significantly better than it was in (the oil price slumps) 1986, 1988 or 1995 is that at least right now natural gas prices are much stronger."
Alberta natural gas was up three cents to $1.63 Monday.
After record-breaking results in 1997, the Alberta energy sector has been showing signs of retrenching this year. PanCanadian Petroleum Ltd. is laying off 200 workers and several companies have said they will shut in production at some high-cost wells.
Gobert said the real impact of lower oil prices likely won't be felt until later this year.
Patricia Mohr, vice-president of economics at the Bank of Nova Scotia noted the price of some grades of heavy oil is about $13 a barrel in Alberta and that price persists it could cause companies to rethink some announced projects.
Others are more optimistic. Alberta Energy Co. spokesman Dick Wilson said this could be a time to seek out new opportunities.
Deep Feelings
Petroleum Producers Take Long Term View
Calgary Sun
When 70 of our nation's most aggressive and visionary oil and gas companies presented their assessments and sketched their plans yesterday before the Canadian Association of Petroleum Producers investment symposium, they had reason for their optimism.
After rising $1.55 US on the spot market on Monday to $13.38, oil prices rose another $1.05 US on the spot market yesterday to close at $14.43.
But while that was heartening news for Calgary's oilpatch -- and for the more than 100 oil and gas companies making their presentations to some 300 oil and gas analysts and investment fund managers from around the world -- the seminar would still have been buoyant even if a possible oil price recovery hadn't started.
And no one is yet betting it will continue.
The entire focus of the industry is on the long term -- and that's whether we are talking about smaller operations, such as Scarlet, Cypress or Ulster, or larger companies such as Suncor, Talisman or Alberta Energy Company. Rick George, president of Suncor, certainly had a lot to boast about.
True, earnings were down 17% to $50 million in the first quarter, but oil prices had fallen 30%.
How did Suncor stop its earnings falling under the floor? Well, for one thing, its on-going campaign to increase efficiencies paid off with a 11% decline in production costs.
George offered one word of caution, and that was that while Suncor has a five-year track record of increased production, cash flow and earnings it might not be able to make that record stick for a six straight year.
But its huge $2.2-billion Project Millennium oilsands plant is right on target to go into full production in the year 2002.
Talisman Energy president Bill Buckee said that very day, the $6-billion company has issued update reports on its successes in Canada, the North Sea, Indonesia and Algeria. And as Buckee pointed out, while oil prices are down 30% Talisman's cash flow is down just 18%.
Another example of cost-efficiencies.
Despite the past year being a "gloomy environment for oil prices" Talisman is investing for the future and expects strong sustained growth to the year 2000 and beyond.
Talisman's cash flow actually increased in 1997 to $797 million from $697 million in 1996. What can you say about the Alberta Energy Company (AEC) that hasn't already been said?
Well, president Gwynn Morgan took a stab at saying it.
AEC surely has a superior asset mix of 55% gas, 24% light oil, 5% heavy oil and 16% in pipeline assets. It also has one of the largest exploration land bases in Western Canada and an enviable knack of being able to produce the right product at the right time.
To add credibility to Morgan's assessments, any number of top-ranked brokerage houses have issued "buy" recommendations for AEC.
They include: CIBC Wood Gundy, First Marathon, FirstEnergy, ScotiaMcLeod and Bunting Warburg. And their one-year targets for share prices are pretty consistent -- from $39 a share to $41 a share.
Slowdown Feared In Once-Booming Oilpatch
Alaska Highway News
The once booming oilpatch in northeastern B.C. is slowing down. The June sale of oil and gas rights brought $5.1 million in revenue to the province, a drop of about 76 per cent during the same period a year ago.
Last month, oil and gas rights sales plummeted 72 per cent as just $7.7 million in revenue went to the province.
In May 1997 the province garnered $26.7 million from the sale of oil and gas sales.
Sales in April dropped 77 per cent.
So far this year, the province has netted $58.3 million from sales of oil and gas rights, compared to $237 million after six months in 1997.
Energy and Mines Minister Dan Miller said in a news release that "revenues from the oil and gas sector are important to the B.C. economy. "We are continuing to work on initiatives to enhance conditions for more investment and job creation in this sector."
The June sale offered six drilling licences, all of which were sold, covering13,003 hectares.
The top price of $529 a hectare was paid for a 2,903-hectare parcel 45 kilometres southwest of Fort St. John. The total bid was $1.54 million.
In June 1997 24 licences were sold, covering 55,624 hectares.
Twenty-eight of 35 drilling leases were sold in June, covering 7,582 hectares. That compares with 50 leases that covered 13,101 hectares in June of 1997.
Oilpatch Optimism Investment Soaring, Earnings Up
Calgary Sun
They are men with their feet firmly on the ground, but their eyes on the horizon.
The men who run some of Canada's largest -- and most successful oil and gas companies -- were at the Canadian Association of Petroleum Producers investment symposium at the Westin Hotel yesterday.
The stories they had to tell showed they were not quaking in their shoes over low oil prices.
No perspiration on the brows of the likes of Ray Woods of Shell Canada Ltd., D.D. Baldwin of Imperial Oil, or Syncrude Canada's Eric Newell.
Not even when they stand before some 300 senior oil and gas analysts and institutional investment managers from around the world.
Woods, senior resources operating officer for Shell, pointed out his company's 1997 earnings were $523 million compared to $200 million in 1993.
OK, you might say, that's the past performance, but what about the future performance.
Well, this year Shell will invest some $900 million in upgrades or expansions in everything from developing its reserves to revamping its retail outlets.
Its East Coast Sable Island project -- which is being built with other partners -- will get a $294-million cash injection, and its Athabasca oilsands project, with partner Broken Hill Proprietary Company, will get $74 million in development costs.
These two projects together will top $6 billion to get on stream. Baldwin, Imperial's senior vice-president, talked about how the company had achieved a five-fold earnings growth over the past decade.
Some $2-billion worth of divestments had upgraded its asset base, and efficiencies had brought about operating cost reductions of $800 million. That's perhaps why dividends had increased 11% in 1995, 10% in 1996, and 1% last year.
Newell's Syncrude -- which once had doubters shaking their heads -- last year set a production record for the 16th time in 19 years of operation.
In 1997, it shipped almost 80 million barrels of oil, and for the second consecutive year revenues exceeded $2 billion.
Of note, Syncrude's one billionth barrel of oil was produced on April 16.
That's five years ahead of schedule.
Other presentations from the majors were just as buoyant, and so were those from the juniors.
When you have your feet firmly on the ground, and your eyes on the horizon, the odd squall or two in oil prices doesn't ruffle you one bit.
Energy Executives Pumped Up About The Future
Calgary Sun
Pengrowth Management Ltd. president Jim Kinnear wasn't crying the blues when he told the Canadian Association of Petroleum Producers' investment symposium his energy trust units had fallen from $22 to $14 within the past year.
But then, he had no reason to.
Pengrowth Energy Trust is still the largest energy trust in Canada, still pays the best dividends, and just months ago, Kinnear engineered a $500-million takeover of Imperial Oil's Judy Creek and Swan Hills properties.
Indeed, its gross oil and gas revenue for the first quarter of this year was almost $50 million, compared to just about $25 million in 1997, and distributable income climbed from $14 million to $21 million.
"It's a buying opportunity," explained Kinnear, "and it would be hard to doubt that."
Kinnear's optimistic attitude was shared by officials of many junior oil and gas company officials as they extolled their companies' track records and plans to some 300 brokerage house and institutional investors from around the world.
Fred Woods, president of Ulster Petroleum Ltd., pointed out his company has had a solid growth rate for some 30 years, and though oil prices have dropped about 40% in the past year, the future holds promise.
Over the past five years, Ulster has had an annual compounded growth in earnings of 50%.
How can anyone be grim about that?
Woods -- and I know he wasn't exaggerating -- kept talking about new projects Ulster Petroleums had under way and about "exciting drilling results" and "exciting high impact potential" expected from many of Ulster's endeavors.
Why, one has to ask, is all this going on if the industry's future is bleak or uncertain?
Obviously, to the experts, it's neither.
A final word from Pengrowth's Kinnear.
While Kinnear believes this is a good time for companies to make new acquisitions, and quality assets are available at favorable prices, there is no fire sale.
This industry is too strong -- and too optimistic -- for that.
Offbeat News From NOIA '98
St. John's Evening Telegram
The 14th NOIA conference in St. John's lacked a knock-out punch of the type delivered by the inimitable John Crosbie at this event in 1996, but as one speaker put it Wednesday "we're talking about what we're doing, not what we're planning to do."
Here's a brief look at what else transpired at NOIA `98.
PanCanadian's Larry Leblanc announced the company plans to drill a well at Shoal Point on the west coast as soon as they secure a partner, but warned the region lacked an infrastructure.
"We have to mobilize and demobilize drilling equipment every time we put a well up there and we don't believe this is good business," he said.
Whiterose will be drilled twice by this time next year and the smaller Cape Race property could be drilled "as early as late in 1999," Husky vice-president Jamie Blair said.
"We have initiated preliminary engineering feasibility studies in search of development facilities which would allow for exploitation of fields of (the Cape race) order of magnitiute of 50-100 million barrel reserve potential," he said.
Norsk Hydro Canada president Ivar Ramberg told the audience the company's horizontal drilling technology allowed it to drill a hole nearly three kilometres in a straight line. He won the unofficial "best slide of the conference award," with an image of two geologists wearing 3-D goggles and walking around inside a virtual reservoir, discussing drilling plans as they felt their way around the oil field at a new facility in Bergen.
Petro-Canada's Gary Bruce couldn't dodge the engineers-in-Leatherhead issue but won some reprieve thanks to a Halliburton Company announcement that its Shawmont/Brown and Root team of Terra Nova engineers will grow to 100 and will bid on international contracts when Terra Nova work winds down.
"They're going to have a sustainable job here, and that's what the Terra Nova alliance has been trying to do. We're not interested in you're-here-for-three-months-and-you're-gone-again, there's no value in that," Bruce said.
Minister of Energy Chuck Furey appeared resigned to the fact the 250 Terra Nova engineering jobs would remain in Leatherhead for the summer, despite a CNOPB requirement that Petro-Canada move the jobs here "as soon as practicable."
"The wording in the recommendation (sic) by CNOPB was vague and weak," Furey said in an interview Wednesday. "We will have to look at that. I discussed it with board this morning."
The prospect of tapping all that natural gas from Hibernia and other Grand Banks fields was brought up twice. Mobil's Miller said liquid natural gas conversion appeared a good option and suggested they could begin looking at planning a Hibernia gas strategy in four to five years.
Husky's Jamie Blair appeared to lean more toward a pipeline.
"We also envision gas opportunities in the medium to long term," Blair said. "Natural gas exploitation will require substantial pipeline and related infrastructure development. We believe it is timely to put significant effort to project planning now."
Finally, questions from the floor were few and far between at NOIA `98 but organizers stuck to their guns and maintained the so-called Gavin Will rule, which was spelled out in a press release that stated the question period was reserved for delegates only. Offshore Oil Canada reporter Gavin Will was spotted raising his hand after Dick Lyon's address, but organizers politely declined.
Hibernia Crude Better Oil
The Evening Telegram
Tests have confirmed that Hibernia crude oil is of a better quality than had originally been expected, says Harvey Smith, president of Hibernia Management and Development Co. (HMDC).
Smith provided a review and update of the Hibernia project Tuesday at the opening session of the 124th annual International Petroleum Conference in St. John's. The two-day conference is being presented by the Newfoundland Ocean Industries Association.
Smith told the 450 delegates the Hibernia crude is approximately 12.5 per cent lighter than was originally thought. That means the oil will burn cleaner and will brings a better price in the marketplace.
Today, Hibernia is producing approximately 95,000 barrels of oil a day from three wells, he said.
That will be reduced to 60,000 barrels a day when one of the wells is shut in later this week. However, that well is expected to produce significant volumes when a water injector has been completed in its fault block in late August or early September.
"To date, we've produced more than seven million barrels of oil and we've shipped eight cargos of oil to market," Smith said. "A ninth cargo will be loaded later this week."
He added, "These initial cargos go directly to market until the fourth quarter of this year when the transshipment terminal at Whiffen Head is completed and operational."
Harvey Mott, president of Newfoundland Transshipment Ltd., told the delegates that project is moving ahead on schedule and the terminal will be operational by Oct. 1.
Smith also said five wells - four oil producers and one water injector - have been completed at Hibernia and an additional six wells are scheduled for completion by year end. Two of those will be oil producers, one a water injector and one a gas injector.
He said Hibernia is on track to meet its business plan target of 25 million barrels for 1998.
Smith said in order to increase production, HMDC plans to "look for bottlenecks in the production train and remove them, thereby increasing their production rate over the design capacity."
He added, "If we can increase our production levels by only 10 per cent, it will translate into an estimated $80 million increase in annual after tax cash flow."
Smith also talked about increasing the business use of infrastructure facilities.
"As other operators come on stream, they will require the same support services as Hibernia," he said. "The effective utilization of existing infrastructure is especially crucial given the low price crude oil scenario that we are now facing for the next few years."
Meanwhile, Bob Dunsmore, project manager for the Terra Nova project, told delegates about the importance of bringing in the project on time and on budget.
"In fact, it is probably the most important factor that will determine the pace of future developments in the area."
Dunsmore noted the conference theme is Energizing our Future.
"With the help of all participants and stakeholders, Terra Nova is on track to play its part in delivering this bright and exciting future."
Dunsmore outlined the project's schedule of activities over the coming months.
He said fabrication of subsea components will begin in the fourth quarter of this year.
"Terra Nova is currently exploring how to effectively facilitate a transfer of subsea fabrication technology to Newfoundland to support the development of a subsea industry here in the province," he said.
"We are confident that this can be done and expect to be able to make a positive announcement on this in the near future."
The drilling of Terra Nova's wells will begin in June 1999, Dunsmore said.
"The total cost of the project up to first oil is estimated at $2 billion," he said. "This is a competitive development cost in the offshore industry today."
Atlantic Canadians Told Not To Worry About Prices
The Evening Telegram
Atlantic Canadians should not be as worried as Albertans about the world's distressed oil prices, the president of a financial company specializing in the energy industry said in St. John's Tuesday.
But major projects on the Grand Banks are still likely to be deferred if oil prices do not rebound back above the $17 level, Kevin Brown, president of ARC Financial Corp. of Calgary, said at the 14th Newfoundland Ocean Industries Association conference.
The next major projects after Hibernia and Terra Nova will likely be the 195-to-600 million barrel Hebron field and the estimated 250-million-barrel Whiterose field.
Both are in the early stages of development with more exploration under way.
"I think if expectations start to slip to 16-17 (dollars a barrel) you'd be hard-pressed to sustain a very vigorous industry up here," Brown told about 400 delegates at the conference. "You certainly would see exploration activity beginning to get deferred and certain projects we think could also get deferred."
Brown added, however, ARC financial, which manages a $195-million strategic energy fund and $300-million energy trust, does not think it likely oil prices will remain depressed for much longer.
The company is cautiously forecasting oil prices to average $16 this year, $17.50 in 1999 and $19 in 2000.
The price of a barrel of oil jumped about $1.60 Monday on news OPEC countries were considering additional production cuts.
That's probably not enough to save Alberta from an economic downturn in the oilpatch, however.
"Our view is that the oil price slump that we're in right now is going to have a much more immediate impact on Western Canada (than Eastern Canada)," Brown said. "Access to capital is drying up, cash flow is off sharply, debt levels are high and access to equity is becoming much more challenging.
"It's, in our view, going to force some very significant spending reductions over the second half of the year, possibly into 1999 for Western Canada," he said.
It's a much different picture in the East Coast offshore, where oil quality is superior and large, deep-pocket corporations have the balance sheets to stay for the long-term, he said.
The president of Halliburton Company - the world's largest energy services company with 70,000 employees and $10 billion in annual revenues - was even more bullish on the East Coast offshore.
"I would be very surprised if a sustained low oil price in the range that we're at today would derail any of these projects," Lesar said in an interview after his official conference address. "It's going to derail a lot of other projects around the world but with the reservoir capability here, my guess is that's not going to be the case."
Rough seas and icebergs are not the barriers they once were, he said.
"I think that if you look at where capital is going today, it's going offshore and it's going to deeper water, it's going to harsher environments," Lesar said. "If you look at the expected producibility of these reservoirs, my guess is that they can stand fairly low oil prices for a longer period."
The next few months are expected to be tough for the industry, however, as the world's oil storage facilities fill up and global production remains at about two to three million barrels above consumption.
The positive news for the industry, as Brown sees it, is that over the long term the world's thirst for oil expected to increase "at something like one to two million barrels per day over the term."
If it doesn't, producers and analysts may have to rethink the entire industry.
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