MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY JULY 13, 1998 (5)
TOP STORIES
Oil Bosses Turn To Debt Financing, Become Less Hopeful Of Price Rise
The Financial Post
Oilpatch executives are more pessimistic about oil prices, less willing to count on equity financing and concerned about the federal government's position on greenhouse gas emissions, a new survey indicates.
While 80% of oil and natural gas companies expect to increase their spending as a result of higher exploration and development activity, 43% of top managers expect reduced availability to capital for the remainder of the 1990s, Arthur Andersen & Co. concluded after surveying about 60 companies.
The survey, which covered firms accounting for most of Canada's oil and natural gas production, found a shift by executives to view debt as a primary source of capital.
Harry English, a Calgary partner in the consultancy, said the position might have changed for a couple of reasons. Executives may not like current prices when it comes to issuing shares, or they may fear there is no appetite for energy stocks in the wake of low oil prices.
He said producers were much less bullish this time than they were 14 months ago. "Relative to the bar talk where it's all doom and gloom, I don't think all executives would agree. But no question, all is not rosy in the garden."
About 70% of respondents said the trend of falling share values will continue for the remainder of this year. Over a three-year horizon, however, almost all predicted stock prices will climb.
Some 58% of participants pared spending plans for this year because of lower oil prices. The executives pegged the average price for oil at US$15.21, down from US$20.30 expected in the 1997 survey.
Some respondents were concerned about the government's approach to greenhouse gas emissions. Managers said they wanted to be actively involved with the government on the issue.
Canadian Oil Baron Optimism Falls With Crude Price
Canadian oil barons, which last year giddily reaped the rewards of a buoyant energy sector, are far less optimistic about the short-term outlook, and its all because of depressed oil prices, a study released on Monday showed.
The survey of more than 200 oil company presidents and chief executives compiled by consulting group Arthur Andersen & Co. revealed that few expected a big recovery in crude prices this year.
Most have reduced their company's capital spending budget as a result of low prices and the lion's share expect merger and acquisition activity to increase from already-high levels experienced by the beginning of June.
''The mood is quite a lot more cautious than was the case one year ago,'' Harry English, partner with Arthur Andersen in Calgary, told reporters at a press briefing.
''But equally, you need to know that one year ago was absolutely the most upbeat that we've ever had -- everything was extraordinarily rosy a year ago, prices were high and everything was wonderful.''
What a difference a year makes.
On average, industry leaders expect benchmark West Texas Intermediate crude oil to average US$15.21 a barrel this year, down from expectations of more than US$20 last year.
Of the total, 37 percent of respondents said they anticipated shutting in oil production if commodity prices remained at current levels.
Expectations were a little brighter for natural gas. The average Canadian wellhead gas price expected by chief executives for 1998 was C$1.82 per thousand cubic feet, which Arthur Andersen said was slightly more optimistic than last year.
Expectations for continuing weak oil prices led 39 percent of respondents to focus their Canadian exploration spending on gas, up from 29 percent last year.
For 1998, only two percent said they would target mostly oil and 55 percent said they would employ a balanced oil-gas drilling program.
Still, 58 percent of oil patch leaders said their companies had reduced their total capital spending budgets this year.
The uncertain industry conditions led nine out of 10 chief executives to say they expected merger and acquisition activity to accelerate, with a similar percentage reckoning the deals would be friendly, as opposed to hostile.
For financing activities, far more industry leaders than last year expected debt to be the primary source until the end of the decade. Last year, 27 percent believed debt would be the main capital source and 51 percent were banking on equity.
This year, however, the two were equal at 39 percent.
The stock market's current view of energy companies may be a factor behind the shift.
About 70 percent of chief executives said they believed their firms' stock prices would continue to decline during the remainder of the year.
But nearly all of them believed stock prices would increase over the next three years.
Petroleum Industry Sees Current Industry Sag As Short-Term
Petroleum industry sees current industry sag as short-term
Depressed world oil prices have tempered the but most remain optimistic about the industry's long-term future, an industry survey suggested Monday.
The survey of senior executives by Arthur Andersen, an international business consultancy, indicated less optimism for 1998 and early 1999. But it still found optimism in the industry, especially in the area of natural gas exploration and development.
Industry executives were also bullish about the Canadian offshore with 50 per cent of respondents saying it holds the greatest potential for new crude oil discoveries.
"The number of executives predicting increased exploration activity remains high and there is an expectation of higher gas prices over the next few years," said the survey.
"Executives expect the level of employment to stablize or increase over the next three years, and expect share prices to rebound over the same period." Alberta Premier Ralph Klein also continued to be upbeat about the province's economic prospects in the face of low oil prices.
"The economy is much more diversified now," said Klein. "We're getting more money now from the taxation of manufacturing than we do from the energy industry.
"We've diversified in high-tech, agriculture and also in oil and gas in terms of petrochemical development."
He acknowledged that there is not a lot of confidence in heavy oil and conventional oil producing areas.
But Klein said unconventional oil development -- like the oilsands of northeastern Alberta -- which has committed about $20 billion to new projects and the expansion of existing plants takes a much longer view of oil pricing.
"They are concerned about the day-to-day operating with respect to the price of oil, but they're still making money, just not as much as they were," he said. "But they're looking 50 years down the road and those projects aren't being put on hold.
"They're going ahead with those projects in anticipation of the long-term, so that's keeping the economy strong."
Klein said he understands the concerns of conventional oil producers, but pointed to the robust price for natural gas as also helping to keep Alberta's economy chugging.
"Natural gas closed Friday at $2.30 per million cubic feet and we've budgeted as a province at a $1.70," said the premier, adding new pipeline construction will also keep employment high.
"There are a number of variables that exist today that didn't exist in the heady days of the early 1980s."
Alberta's economy nearly collapsed in the early and mid 1980s with introduction of the National Energy Program and the collapse of world oil prices.
Klein said the Alberta government expects its oil and gas royalty revenues to remain about what it had projected despite the slump in world crude prices.
"Like all the oil companies we based our budget on a price of $17.50 US (a barrel), that's not realistic," he said. "But it'll probably come out a wash because we budgeted gas at $1.70 and it's now $2.30 and we budgeted oil at $17.50 and it's at $13.80.
"So in terms of our overall revenue projections and our surplus we're right on target."
Alberta's Klein Sees Cut In Oil Price Projection
CALGARY, July 13 - Alberta Premier Ralph Klein said on Monday the Canadian province would likely cut its 1998 forecast for crude oil prices but strong natural gas prices would make up revenue shortfalls resulting from crude's decline.
In its February budget, Alberta made its financial projections based on average West Texas Intermediate oil prices of US$17.50 a barrel, well above the current US$13.91.
"We've got to make (the projections) realistic. We budgeted, like all the oil companies, on the basis of about US$17.50. That's not realistic," Klein told reporters after a speech to a federal and provincial energy ministers' meeting.
Klein said, however, wellhead natural gas prices remained higher than the C$1.70 per thousand cubic feet Alberta had forecast in its budget.
"So, right now, in terms of our overall revenue projections and our surplus, it's a wash -- we're right on target."
Alberta in February forecast a 1998/99 budget surplus of C$165 million, but the figure did not include a C$420 million legislated financial "cushion""designed to shield it from oil and gas price shocks.
Klein's made his statements against the backdrop of a survey of oil industry chief executives released on Monday that showed Canadian oil barons predicting an average WTI crude price of US$15.21 a barrel in 1998.
The survey, compiled by consulting group Arthur Andersen, also showed oil patch CEOs from more than 200 Calgary-based companies expecting wellhead gas prices to average C$1.82 per thousand cubic feet.
Klein said the royalties Alberta takes in from natural gas production are 2.5 times those taken in from oil production.
He agreed with numerous analysts in saying increased pipeline capacity to rich U.S. gas markets would provide a further lift for Alberta amid low crude prices.
"We're talking about billions of dollars of new pipeline construction and that's going to keep a lot of people working, and once completed is going to allow us to expand dramatically our markets for natural gas," Klein said.
Diversity Helps Alberta Weather Low Oil Prices
Alberta has found a vital prescription to ward off the effects of ailing oil prices - diversification.
Greater reliance on other industries and services has helped Alberta nurse its economy into a healthy and stable state after a near-collapse a decade ago caused by plummeting oil prices.
"The Alberta economy is much less dependent upon oil than it ever used to be," said Ron Kneebone, a University of Calgary economist.
The diversification extends to such industries as manufacturing, natural gas, tourism, petrochemicals, construction, computers and transportation.
"They add up and it's been going gangbusters," said Robert Mansell, head of the University of Calgary economics department.
"It's quite a different environment. Drilling is not the major investment in Alberta now."
Natural gas - once considered a worthless oilfield byproduct - has become a mainstay of the provincial economy.
The Alberta government has forecast $1.3 billion in natural gas royalties in the current fiscal year. Oil revenues are expected to be just half that amount.
"What you have is a volatile oil market, but underlying that is a larger, more stable natural gas market," said Roger Gibbins, president of the Canada West Foundation, a Calgary-based think-tank.
With world oil prices bouncing between $12 and $15 US a barrel in recent months - down from a prediction of $17.50 US in February's provincial budget - the province continues to boast impressive economic growth.
Alberta's economic growth rate is predicted to fall to 3.5 per cent this year from 7.5 per cent in 1997. But experts agree its still moving at a robust clip.
"That's good growth at a decent rate," Kneebone said.
The province led the country with the lowest unemployment rate in June at 5.5 per cent.
Between 1987 and 1997, some 270,000 jobs were created in Alberta, despite a drop of 6,000 workers in the oil and gas sector, according to Statistics Canada.
Manufacturing alone accounts for 30 per cent of all new jobs over the last two years. The total value of manufactured products, such as electronics, machinery and plastics, shipped from Alberta last year was $34.3 billion.
A decade ago, oil made up 50 per cent of the province's revenues. It now makes up 17 per cent.
During the 1980s, corporate income tax averaged $700 million, compared to the $1.7 billion projected for 1998-99.
Despite all the ups and downs in the sector, there hasn't been an exodus of jobs out of the oilpatch, noted Gibbins.
"Over the last decade, the Alberta energy industry went through a pretty radical downsizing," he said.
"The industry has become quite lean. There isn't the same kind of slack that you can throw overboard when short-term economic conditions change."
Cutting the fat has allowed oil companies to manage a profit, even when oil hovers at $14 a barrel, said Brian Pawluck, financial advisor at Price WaterhouseCoopers.
Oil prices would have to sit at about $11 for almost a year before the Alberta economy is adversely affected, Pawluck said.
Gulf Canada Ressources Takes First Step Toward Selling Indonesian Gas
The Financial Post
Gulf Canada Resources Ltd. and several other firms took the first step yesterday toward selling Indonesian natural gas internationally.
The group, which includes Conoco Indonesia Inc., Premier Oil Natuna Sea Ltd. and state oil company Pertamina, has finalized a gas sales agreement with a consortium led by Sembawang Engineering & Construction Pte. Ltd.
The agreement accelerates a long-term plan to deliver gas from Indonesia's West Natuna Sea fields to Singapore. The firms aim to ship 325 million cubic feet of gas a day by 2001 through a 465-kilometre sub-sea pipeline. The gas will be used for power generation and petrochemicals.
Gulf's interest comes from its 72% ownership of Gulf Indonesia Resources Ltd., which in turn owns 31% of Gulf Resources (Kakap) Ltd. The Kakap stake resulted from Gulf Canada's acquisition of Clyde Petroleum PLC in early 1997.
The block produced 6,600 barrels of oil a day from eight fields in the first quarter. Its proved gas reserves, estimated at 79 billion cubic feet, were discovered in the hunt for oil.
The Asian crisis and Indonesia's falling currency have not delayed the project, spokeswoman Jennifer Martin said. "It's been on schedule as far as we're concerned because we had been talking about mid-1998" to get the deal signed, she said.
Gulf Indonesia expects its participation will cost US$50 million.
It owns two other West Natuna concessions and the agreement may open doors to their development, Martin said.
Andrew Byrne, an analyst with John S. Herold Inc. in Connecticut, said the project is too distant to have much impact on Gulf Canada's situation or its appeal to investors. The company is selling up to $850 million in assets to pay off debt accumulated during a buying binge under former president and chief executive J.P. Bryan, who left earlier this year.
COUNTRIES IN THE NEWS
Enron Oil & Gas Company Announces Largest Exploration Discovery in EOG's History
''We are excited about our continued success in the international arena where we are pleased to announce the largest exploration discovery in EOG's history,'' said Forrest E. Hoglund, chairman and CEO. ''Our first well drilled on the U(a) block, in which EOG has a 100 percent working interest, is commercially significant and is located near the company's successful SECC Block development program in the Atlantic Ocean off the southeast coast of Trinidad in water depths of 230 feet.''
The Omega discovery encountered approximately 400 feet of pay in multiple zones. The well flow tested at restricted rates of 32 million cubic feet per day (MMcf/d) of natural gas and 875 barrels per day of condensate. Based upon initial estimates, the discovery is expected to contain gross 600 billion cubic feet equivalent to one trillion cubic feet equivalent of primarily natural gas reserves. Additional reserve potential is present in multiple prospects in the block and will be delineated over time. The company has begun marketing discussions regarding the new production from the Omega well.
''Given the continued major success of the international program in Trinidad and India and with initial drilling to take place in high potential areas of China and Venezuela, we expect, over time, to continue shifting capital to the international arena,'' Hoglund said.
''Overall, we are targeting global production growth that should average 10 percent or more on a compound annual basis at least through 2002. International growth should lead the production increase with continued positive growth in North America.''
Indonesia Block B Gas Agreement
HOUSTON, July 12 /PRNewswire/ -- Conoco Indonesia Inc., other West Natuna Sea operators, and Pertamina, the Indonesian state oil company, have finalized a Gas Sales Agreement with a consortium led by Sembawang Engineering and Construction Pte. Ltd. for the first international sale of pipeline natural gas from Indonesia.
The Gas Sales Agreement is the initial step in the long-term plan to sell and deliver natural gas from Indonesia's West Natuna Sea gas fields to Singapore. The fields are operated by Conoco Indonesia Inc. (Block B), Gulf Resources (Kakap) Ltd (Kakap Block) and Premier Oil Natuna Sea Limited (Block A) under Production Sharing Contracts.
By 2001 the companies plan to deliver 325 million cubic feet of gas per day to Pulau Sakra in Singapore through a 30-inch, 290-mile sub-sea pipeline. Details of the pipeline system are expected to be finalized by the end of the year.
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