MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY JULY 15, 1998 (3)
TOP STORIES
Canadian Occidental Petroleum Bonds Reveal Street's Weak Spot
July 14
Everyone assumes that outside investors can't beat the all-knowing, all-seeing pros guiding the investment dealers. A quick look at what has transpired with Canadian oil and gas bonds shows that's just not true.
In early June, Dominion Bond Rating Service cut its rating on Canadian Occidental Petroleum, citing the heavy debt load the company was shouldering in order to acquire Wascana Energy and the falling price of heavy oil.
CanOxy's long-term debt was knocked backed a notch, to triple-B from single-A, but for many Canadian fund managers, that meant a total fall from grace. Conservative standards guiding many pension fund managers' portfolios require that they only hold bonds with an A rating. Suddenly, there were all sorts of CanOxy sellers, and very few buyers.
In this sort of environment, an investment dealer cements its relationship with a fund manager by stepping up and taking the bonds into inventory. This sort of move rids a fund manager of a sticky problem with supervisors and wins long-term loyalty.
As the spread on CanOxy 10-year bonds widened against Government of Canada bonds by 30 basis points to 130 basis points, the dealers found themselves buying. For those who don't work on bond desks, there are 100 basis points in a percentage point, and CanOxy's move was a major slip -- the total spread between Canada bonds and well-regarded credit such as Bell Canada is only 41 basis points.
Investment dealers don't buy unpopular bonds as an act of charity. They hedge the position by short-selling similar types of bonds.
To neutralize their exposure to CanOxy, the Street has been selling other oil company bonds -- Crestar and Poco Petroleums -- that hadn't been downgraded. And as fast as you can say gusher, spreads across the entire oil and gas sector have widened.
To be sure, fundamental problems such as weak oil prices are going to continue to hold back performance of oil and gas company bonds.
CBRS Lowers Canadian Occidental Petroleum Credit Rating Outlook
July 15
Canadian Bond Rating Service said on Wednesday it reaffirmed its ratings on Canadian Occidental Petroleum Ltd.'s debt, but lowered its outlook on the securities to negative from stable.
CBRS has an A-1 (low) rating on Calgary-based CanOxy's C$500-million commercial paper program and an A (low) rating on its C$2.1 billion of long-term debt represented by debentures, senior unsecured notes and bank loans.
The service said the good quality ratings reflected CanOxy's enhanced land position and oil and gas reserve profile, as well as the diversity of its domestic and international production portfolio.
However, CBRS said it cut its outlook to negative because the company continued to be pressured by a high debt load and low crude oil prices.
"Given that CXY is not expected to significantly reduce its debt level until 2000, the company's credit outlook remains susceptible to fluctuations in commodity prices," CBRS said.
It added, however, that the company had the ability to improve its credit profile by selling such assets as its chemicals business, U.K. operations or Syncrude Canada Ltd. interest if it chooses to do so.
DBRS Downgrades Gulf Canada Resources Ratings
July 15
Dominion Bond Rating Service said on Wednesday it had cut the rating on Gulf Canada Resources Ltd. debentures and senior notes to BB (high) from BBB (low).
The agency also lowered the rating on Gulf Canada senior subordinated debentures to B (high) from BB (low) and the company's series 1 and 2 preference shares to Pfd-5 from Pfd-4.
All ratings were assigned a stable trend.
"Given the substantial decline in crude oil prices since late 1997, near- to medium-term cash flow generation is now projected to be much lower than the levels expected following the acquisition of Stampeder Exploration Ltd. in August 1997," DBRS said.
It said Gulf Canada's heavy oil strategy as of the Stampeder purchase is no longer economically feasible given the fall in heavy oil prices.
"The company has high debt levels and, despite the ongoing sale of non-core assets, relatively heavy future capital expenditure requirements will keep pressure on the balance sheet," the agency added.
DBRS said the company's debt-to-cash flow ratio had risen above five times as of March 31 and will probably stay above four times into next year. Ratios of coverage of fixed costs are weak compared with similar companies in the industry.
"Significant improvement in these financial measures will be dependent on substantially improved light and heavy crude oil prices, in addition to debt reduction from asset sale proceeds," DBRS said.
Positives include Gulf Canada's planned oil and natural gas production increases driven by growth in Indonesia, increased geographic diversification and increasing emphasis on natural gas.
Canadian Listing Unlikely For Camberly Energy
The Financial Post
Problem plagued Camberly Energy Ltd., suspended three weeks ago from the Toronto Stock Exchange, is unlikely to trade on the Canadian Dealing Network, CDN director John Griffith said yesterday.
"I don't care how much money they have in the bank. If they don't have a business plan I don't see how they are going to get a listing."
Announcing the suspension on June 25, the TSE said it "doesn't list inactive companies."
Camberly, founded in 1993 to produce oil and gas from Alberta wells, has sold or written off all drilling assets, including failed ventures in China and Israel, leaving it with about $7 million in cash and receivables.
Kevin Oriold, director of investor relations, said this week the company had applied for a CDN listing. "The ball is in [CDN]'s court."
But Griffith hasn't heard from it. "We don't have one bit of information to do the due diligence to ascertain whether we should list them."
Listing requirements for the CDN are less stringent than the TSE's. Still, firms must submit an application with a full business case and demonstrate they have financing available to move forward.
Griffith said a brokerage firm that is a TSE member, which he would not name, has applied to the CDN to be market-maker for Camberly.
Camberly stock can trade over the counter, provided the trades are reported, Griffith said.
Oriold said 15 to 20 shareholders attended the firm's annual meeting on June 30, voting to slash the strike price of president Michael Duggan's 949,442 options to 50›.
Camberly shares (CEL/TSE) last traded on June 24, closing at 40›.
Duggan had complained that, because of a stock price slide, his options, at $1.25 to $1.90, were "not much of an incentive because [they are] too far out of the money."
Shareholders also voted to reprice the options of other directors, including Duggan's son, Richard, named to the Camberly board in April after three of four board members resigned.
Also appointed to the board in April was Pierre Sevigny, the Diefenbaker-era associate minister of defence investigated for his affair with German spy and prostitute Gerda Munsinger.
Sevigny, reached yesterday in Montreal, refused to comment on Camberly, accused a reporter of "yellow journalism," and hung up.
Oilsands Fuel Growth
Syncrude, Suncor Ventures Show No Signs Of Slowing Down
Calgary Herald
Alberta's oilsands producers fueled major growth in the province's energy sector last year and don't plan on slowing down through 1998, despite bottom-of-the-barrel oil prices.
Total hydrocarbon sales topped $26.8 billion last year, led by an upturn in oilsands and bitumen activity, according to a report released Wednesday by the Alberta Energy and Utilities Board (EUB).
Bitumen and synthetic crude production jumped a whopping19.5 per cent last year to 30.6 million cubic metres.
More significantly, synthetic crude from oilsands projects and bitumen made up 33 per cent of total oil produced in the province last year, compared to 28 per cent in1996.
"That's music to my ears,'' said Peter Marshall of Syncrude Canada Ltd. "It's a big number.''
Some analysts expect conventional oil production will tumble by an estimated120,000 barrels a day this year, driven down by a 30-per-cent drop in oil prices since last fall. Oil prices climbed 32 cents to $14.87 US a barrel on the New York Mercantile Exchange Wednesday.
But big-dollar oilsands ventures such as Syncrude Canada Ltd. and Suncor Energy Inc. at Fort McMurray show no signs of slowing down.
In fact, both companies vow they'll boost production through the year to maximize fixed operating costs -- and both have billions of dollars of future investment on the books.
"Our best hedge against low oil prices is to expand our business,'' Suncor spokesman Ron Shewchuk said Wednesday. "The more we produce, the more we reduce per unit costs.''
Suncor, which will release its second-quarter financial numbers today, churned out 79,400 barrels a day in 1997 and hopes to exit this year at 105,000 barrels.
Operating costs at Suncor should dip to $10 or $11 Cdn per barrel by the year 2002 from about $13.25 in 1998, once it cranks up production to 210,000 barrels a day, Shewchuk said.
Meanwhile, Syncrude set its own production record in June.
Average daily shipments for the second quarter were 235,000 barrels, up from 169,000 barrels during the same time last year.
In June, operating costs fell below $12 a barrel from $13.78 last year. Poor commodity prices won't help the bottom line of any companies chasing oil, but expanding oilsands mining will take the sting out of a rough market, said Marshall.
"Obviously, we're paying attention to operating costs and looking for every incremental barrel we can find,'' he added.
Other companies such as Mobil Oil Canada Ltd., Imperial Oil Ltd. and Shell Canada Ltd. also have big plans for the bitumen and oilsands business. With future investment in the works, Canada's oilsands producers will continue to gain prominence, said analyst Robert Plexman of CIBC Wood Gundy Securities.
"It certainly gives you a view of the future,'' he said from Toronto. "You will see increasing supplies of oil from oilsands operations, because this is among the lowest-cost oil you'll find anywhere in the world.''
The EUB report also shows Alberta retained its longstanding position as the country's main energy producer, generating 58 per cent of all conventional oil, 80 per cent of the natural gas and 51 per cent of coal production.
Total hydrocarbon sales rose two per cent due to consistent oil and gas prices last year, and a record 13,212 wells were drilled in the province.
Production of marketable natural gas set another record at 132.7 billion cubic metres, up 1.3 per cent from 1996.
The province's coal mines stayed flat, producing 41.9 million tonnes, while sulphur sales increased eight per cent.
Weak Oil Prices Hurt Chieftain International
Edmonton Sun
Weak oil and gas prices stung Chieftain International Inc. in its second quarter, resulting in a $1.17-million loss for the first half of1998.
The Edmonton-based oil and gas producer earned $3.4 million in the same period last year.
"The obvious reason for the loss in this quarter is the dramatic decline in prices," said Chieftain energy consultant Tom Campbell. "We indicated that for the first half that prices for oil were down some 37%. That's a significant hit."
Gas pricing has improved, said Campbell.
"As we've sold gas for this third quarter, we're getting significantly better prices than we did this time last year," said Campbell. "But for oil, you know the story. It's very grim."
Chieftain reported $33.5 million in gross revenue up to June 30, compared to $37.3 million in the same half last year. Cash flow from operations was $20.2 million this half year, against $28.2 million in the same period of 1997.
Chieftain's major operations are in the U.S., the Gulf of Mexico and the North Sea.
Ipsco Reports Strong Second Quarter Results
Prairie steelmaker Ipsco Inc. continued its strong performance in the second quarter of the year with an after-tax profit of $28.4 million, the company reported today.
The Regina-based mini-mill said it was the best second quarter ever, with the exception of last year when it raked in $30.5 million. Net income for the first half of the year stands at $63.5 million, up from $60.7 million in the same period last year.
The company said the results show "a return to a more typical seasonal pattern of profitability that is driven by traditionally lower second quarter demand for oil country tubular goods."
Earnings per share on the 40.7 million shares outstanding for the quarter and the six months to date were 70 cents and $1.56 respectively.
The latest profits were earned on sales of $286.9 million in the second quarter and $570.5 million for the six months.
Despite its strong performance, Ipsco stock has dropped recently from a high of $46 on the Toronto Stock Exchange. It closed Wednesday at $37.70
Ipsco's income up almost 5%
The Financial Post
Strong demand in the U.S. offset weakness in Canada to boost first-half earnings for Ipsco Inc., even though the Regina-based steel maker posted a slight drop in second quarter profit.
Ipsco said yesterday net income for the quarter ended June 30 was $28.4 million (70› a share) on revenue of $288.3 million, down from a profit of $30.2 million (74›) on revenue of $227.7 million a year earlier.
Second-quarter tonnage shipments were up 45% from a year ago, due largely to increased sales in the U.S. The healthy U.S. economy, plus the startup in May of a new mill at Montpelier, Iowa, boosted demand for steel plate, tubulars and cut-to-length steel.
Canadian shipments dropped 10%, partly because of reduced demand from the cash-strapped oil industry. Ipsco said oilpatch sales returned to more normal levels after surging during last year's drilling boom.
Net income for the first six months rose almost 5% to $63.5 million ($1.56) from $60.7 million ($1.49) a year ago. Revenue climbed 25% to $573.9 million from $459.7 million. Total shipments in the latest half rose 46% to 913,100 tons.
Jay Gordon, an analyst with Maison Placements Inc., said Ipsco has increased earnings from its steel business in the first half, but higher amortization and interest charges reduced net income. This was achieved despite the startup of the Montpelier plant. "I think it's super. I didn't think it could be done." While Gordon likes Ipsco's prospects for the second half, he has a "sell" recommendation on the stock (IPS/TSE), which closed up 20› at $37.70 yesterday.
Ipsco and rival Nucor Corp. plan to build more plate-making plants in the U.S. in the next couple of years, and doubts about the continued health of the U.S. economy have Gordon concerned about excess capacity swamping the market.
Peter von Ond of Midland Walwyn Capital Inc. predicted the second half will be stronger, with Montpelier contributing for six months, oilpatch demand recovering from a second quarter swoon and more orders for big inch pipeline sections. He has a "buy" recommendation on the stock, with a 12-month target of $60.
Jitters Not Necessary in The Oilpatch
Calgary Sun
I wasn't at all surprised the prestigious Arthur Anderson & Co.'s 1998 oil and gas survey released this week was optimistic rather than pessimistic.
That's even though oil prices are off about 40% within the past year.
Here's why.
Last month, I spent about a week covering the National
Petroleum Show in Calgary, and a followup week at the Canadian Association of Petroleum Producers (CAPP) investment seminar a handful of days later.
It was better than a four-year course at university.
In Alberta, we think we know just what the oil and gas industry is all about, but the petroleum show and investment seminars were eye-openers.
There was about $1 billion worth of equipment on show, and Canadian companies were talking about their activities not only in Canada, the U.S. and Europe, but of astonishing opportunities and endeavors in the former Soviet Union and South America. Asia, too.
This is not an industry that has the shakes.
It's an industry that is on the move in just about every corner of the world.
So no one in the oilpatch seems to have the jitters.
This is not at all like the days of the National Energy Program when oil and gas companies were shutting their doors, laying off thousands and people were losing their homes.
All courtesy of Pierre Trudeau, Marc Lalonde, Jean Chretien and the other socialists in the Liberal party.
No, probing through the Arthur Anderson survey, the most pessimistic description seems to be there is "less optimism" in responses for the next two to three years than came from the energy sector in last year's survey.
No one is talking disaster.
Assessments compiled from companies -- ranging from majors such as Gulf Canada, Imperial Oil and Shell Canada to lesser known but very entrepreneurial companies such as Neutrino Resources, Ulster Petroleum and Remington Energy -- all echoed the same confident mood.
Looking behind the obvious that companies are reviewing investment plans because of low oil prices, there are many answers that speak far more of optimism than pessimism.
Some 80% of respondents said the need for capital for the remainder of the 1990s will continue to increase.
When asked whether companies had difficulty recruiting rigs and crews in the past year, 63% of respondents said they did.
That's about the same as last year.
Asked whether there are significant reserves of natural gas to be discovered in Canada, 95% of respondents spoke in the affirmative.
Some 40% thought the best place to discover these new reserves is in Alberta.
Despite current low prices, 56% believe there are significant oil reserves yet to be discovered in Canada, and they hope to discover them.
Not surprisingly, about 70% of companies expected their share prices to decrease in future months, but they tended to regard that as a temporary situation.
When profits go down, share prices go down.
But the mood throughout this survey was refreshing.
We're still on a roll, though the roll may have slowed slightly.
|
