CONFERENCE REVIEW / SEVENTH ANNUAL PACESETTERS ENERGY CONFERENCE
The following are the highlights of the first day at the 1998 Pacesetters Energy Conference:
Canadian Occidental's Graeme Phipps (Div. V.P., Corp. Planning & Development) kicked off opening day presentations by citing CXY's challenge in replicating its company making Yemen discovery on the Masila block (750 MMbbls discovered to date) in the early 1990's. CXY is looking to build on a strong five-year track record of production, cash flow and share price growth through its three core areas in Yemen, the Gulf of Mexico and western Canada, strengthened by its April 1997 acquisition of Wascana Energy. CXY's recent Hay River oil discovery (135 MMbbls in place - 21 MMbbls expected to be booked in 1998) in British Columbia indicates potential synergies from the Wascana deal. In the Gulf of Mexico, CXY's goal is to expand this core area equal in size to its Canadian and Yemen operations, a tall task indeed. To this end, CXY has specialized in shelf exploitation with an increasing focus on building its deepwater position (32 prospects identified to date from 75 blocks). Internationally, with the goal of developing 1-2 new core areas over the next five years, high potential growth areas for CXY include West Africa (partner with Elf on 5 exploration blocks), N.W. Australia (Buffalo field, 25 MMbbls recoverable), southern Colombia (1.3MM undeveloped acres) and Indonesia (2 exploration wells planned in 1999). Overall, CXY's high potential global portfolio represents net unrisked reserve potential of 1 billion BOE.
In his opening remarks, Andrew Shilston, Group Finance Director of Enterprise Oil plc, addressed the takeover buzz surrounding Enterprise by saying that he wasn't planning to "learn Italian" or the nuances of "American culture" anytime soon. The quip, which evoked a roar of laughter from the audience, referred to speculation that ENI or possibly a U.S.-based company is looking to buy Enterprise. Rather than consider itself a target, Shilston affirmed that his company is "here to grow, to survive and to prosper." Shilston built his case by saying that Enterprise answers "key questions" that oil companies face in today's hostile price environment. These include: Is the company financially strong? Is their asset base secure? What is the growth potential of its projects? Shilston described in detail Enterprise's strong balance sheet, quality asset base and the upside to several current projects. He concluded by saying that Enterprise was not in distress financially, that its assets are safe and profitable and that ample production/cashflow exists to fund existing projects.
Tim Dove (Executive V.P., Business Development) of Pioneer Natural Resources highlighted PXD's own "balanced scorecard" - a balanced long-life reserve base coupled with balanced production. Pioneer, following the late 1997 acquisition of Chauvco, has developed a pyramid of opportunities from low-risk development of its base assets in the U.S., Canada and Argentina; to medium-risk U.S. exploration prospects; culminating in higher-risk opportunities in South Africa, Gabon and the deepwater Gulf of Mexico. PXD's global net unrisked potential has grown from 225 MMBOE to some 1 billion BOE at the company's inception a year ago. Pioneer foresees significant consolidation in the industry in the near future and expects to participate fully, focusing on deals accretive to cash flow and net asset value, concentrating on those offering a balance of medium to high return projects with growth potential. Financially, the recent disposition of U.S. properties to Costilla representing 95% of PXD's domestic fields but only 10% of its reserve base stands to lower G&A and DD&A costs some $0.50/BOE in aggregate. In addition, an aggressive hedging program has provided downside protection on 75% of PXD's 1999 natural gas production below $2.30/MCF. Internationally, current prospects in South Africa provide 35 MMBOE of potential reserves with very favorable financial terms (0-2% royalty rates and 35% tax rate), while in Gabon, PXD controls 315,000 acres on the Olowi block. In its growing deepwater Gulf of Mexico portfolio, Pioneer plans to drill 2 prospects over the next twelve months. Pioneer believes its strong North American base and long-lived reserves provide stability, with considerable upside present in its international prospects.
JSH Analysts: Chris Sheehan, Steve Young, Michael Horsch
Panel 2 - Capital Sources in Today's Commodity Price Environment
"Friends, we got money to spend." Four leading suppliers of private capital were asked to give their views on the availability of funding for the oil industry and what changes could be expected as markets evolve. Between them, they hold more than $3 billion to be put to work, which makes their insights of interest. The group was unanimous in pointing out that new public equity or high yield debt is nearly unobtainable and that bank lending may be curtailed as price forecasts and borrowing bases are reduced. All agreed that fundamentals for North American natural gas were better than the outlook for crude, but since the private investor time frame is longer than for public markets, they did not appear predisposed toward either commodity. What they all demand are three traits - solid management, a clearly thought out strategy, and an attractive, relatively low-risk project. What they expect are rates of return starting at 15%, although in most cases the target is more like 25%, so the money, while available, is expensive.
Robert F. Semmens, a partner with The Beacon Group, LLCRobert L. Zorich of EnCap Investments sees a very active property sales market with generally declining prices. His firm will participate by continuing to offer its project debt and project equity financings, both of which are rate of return oriented, along with, possibly, a growing emphasis on equity linked securities such as convertible preferred shares.
Douglas Bradley Dunn of Enron Capital & Trade showed how his firm's offerings have shifted over the years from Volumetric Production Payments toward the current emphasis on convertible preferreds, which provided some insight into how capital flows to where returns are highest. He noted that the dramatic influx of new private capital over the last two years would be even greater if one included the equity deals that majors have done with independents.
Jonathan S. Linker of First Reserve Corp., which also invests solely in equities, had perhaps the longest time horizon, looking to buy into a venture and gradually add to the position over as many as seven years. Linker feels that we can expect to see a number of management buyouts of companies if the weakness in E&P shares continues.
JSH Analysts: Bob Gillon, Steve Young, Chris Foreman
Panel 3 - Venezuela - South America's Oil Juggernaut
Possessing the largest oil reserves outside the Middle East and a strategically favorable location near the U.S., Venezuela has been in the sights of many oil companies in recent years because of its tremendous growth potential. Despite near term political volatility and economic concerns within the country, the long-term outlook for Venezuela's oil business remains promising. This panel's participants discussed the current state of their operations and their plans for growth in Venezuela.
Steve Mut, President of ARCO Latin America, opened the discussion by stating that although ARCO is a relatively new player in Venezuela, it foresees a long-term relationship. ARCO has had operations in Ecuador and has growing presence in Venezuela, especially after the purchase of Union Texas Petroleum in early 1998. By 2001, South America should be a major producing area for ARCO. ARCO's Hamaca project in the Orinoco Belt of Venezuela will produce and upgrade heavy oil starting in 2001. ARCO and its partner Corpoven, each have a 30% WI in the project (Texaco and Phillips each have 20%). In Hamaca's first phase, it is expected to produce 100,000 b/d of 7 to 9 degree API crude which will then be upgraded to 25 degree crude. Here, ARCO's extensive experience in refinery coking technology will play a key role in project planning and execution. The production area is very large and contains over 30 billion bbls of oil in place. ARCO expects to book 350 MMbbls of oil reserves for this project in 1999, with potential for another 35 MMbbls of oil by 2005. In mid-1997, ARCO participated in Venezuela's Third Marginal Bid Round. With its partners, ARCO was awarded four blocks, including the offshore LL-652 oil block which is estimated to contain 2 to 3 billion bbls of oil in place, with remaining gross recoverable reserves of more than 500 MMbbls. Its development is expected to draw on ARCO's expertise in large oil field recovery processes, including waterflood and enhanced oil recovery. With the acquisition of UTH, ARCO picked up an interest in Boqueron contract. Overall, ARCO's position in a number of Venezuelan projects fits into its "built to last" strategy for this emerging core producing area for the company. When asked about the political risks in Venezuela, Mut replied that the company sees perhaps equal, if not greater, political uncertainty in their operations in Alaska and California.
Roger Tucker, LASMO's Vice President for Venezuela, sees tremendous opportunity to create a "foundation" or core producing asset very quickly with an alliance with PDVSA. LASMO's motivations are inspired by Venezuela's rich resources and low operating and development costs. LASMO jumped full force into Venezuela in 1997 with the winning bid of $453MM on the Dacion contract in the prolific Oficina Trend. In the first phase of this redevelopment venture LASMO expects to add some 500-550 MMbbls of oil reserves and plans to ramp up production from the current rate of 11,000 b/d to 140,000 b/d by 2003. Despite the current downturn in crude prices, LASMO stated that the profit margins are still attractive: at $13/bbl Brent, LASMO's net profit is about $2.30/bbl after royalties, taxes and PDVSA's share. LASMO views the Dacion project as a spring board to further opportunities in Venezuela through swaps, bidding rounds and purchases. When questioned about the possible impact of OPEC's production quotas, Tucker stated that they haven't been approached on this issue to this date. Furthermore if LASMO is asked to cut back the volumes, they do have contractual protection which would allow for the extension of the contract period to make up for the lost production. Tucker views PDVSA as a key to not only Venezuela but the oil industry as a whole.
Carlos Alberto Olivieri, YPF's CFO and Vice President, stated that Venezuela is now only a minor part of YPF's upstream portfolio but sees this asset growing in the years ahead with lots of opportunity. YPF has a 53% interest in and operates the Quiriquire Reactivation Unit, located in eastern Venezuela. In 1997, gross production in the unit rose 65% to 2,800 b/d from approximately 1,700 b/d in 1996. Thirty wells were re-completed, and two new wells were drilled in the shallow Quiriquire field. In addition, a shallow exploration well was successfully completed and is currently producing 700 b/d. To date, results in this program have exceeded expectations. One deep delineation well commenced drilling in the deep Quiriquire field in late 1997 and was successfully completed in January 1998 with initial production of 1,700 b/d. A second deep appraisal well is also in progress in the deep Viboral prospect. In the eastern part of the country, YPF has 25% interest in the 1,971 sq. km. Guarapiche exploration block, where a 310 sq. km. 3-D seismic program was completed during 1997. Outside of Venezuela, Olivieri also commented on the growth outlook for its vast Argentinean gas reserves. Company is targeting Brazil and Chile and the domestic petrochemical industry to bolster gas production volumes.
JSH Analysts: Lysle Brinker, Ivana Vrankova, Dan Pratt
Panel 4 - Focused Growth in the Lower 48
One way to dramatically increase reserves via the drill bit in the "mature" lower 48 is to enter the high risk deep Gulf of Mexico. More typically the domain of deep pocketed majors, independents EEX (current reserves 400 BCFE) and Vastar (reserves of 525 MMbbls) are looking to the deep Gulf of Mexico as a means of obtaining super independent status. In EEX's case, their inaugural deep GOM well "Llano" appears to be a discovery with sufficient gross reserves of at least 100 - 200 MMbbls (30% EEX) to think development, utilizing their nearby Cooper producing facility. Here, phased production is possible by late 1999/early 2000, even at today's oil prices. In Vastar's case its "King" prospect, with partners BP and Shell, that looks like a 50 - 150 MMBOE potential with initial production by 2000 using a subsea tie-back. These discoveries could prove to be the tip of the iceberg for both companies based on at least 40 identified deepwater prospects for each. Each also plan to drill up to six exploratory wells annually which in EEX's case will be funded by co-partner Enterprise Oil - at least into 1999.
By contrast Range Resources is focusing on four diverse businesses (Appalachia, Mid-Continent, Permian, and Shelf GOM) to enhance their 1 TCFE reserve base and 13 year reserve life. Range outlined a 5+ year proven development inventory aggregating some 1,720 projects. It was further noted that a handful of significant onshore exploration prospects offered the potential to double or triple their existing reserve base. Thus, the common theme expressed by each panelist seems to suggest that in-hand initiatives focused in the U.S. are underway which, even under current economics, offer potential significant enhancement to shareholder value via the drillbit.
JSH Analysts: John B. Parry, LJ Tyler, Matti Teittinen
Panel 5 - Oil Service - Wither the Cycle?
This year's oil service panel represented an about-face of the prevailing attitude of the 1997 presentations. In 1997 the oil service industry was running at full capacity with a shortage of rigs and service personnel. In 1998 the industry has come full circle with dramatically declining dayrates and companies faced with the prospect of cutting personnel.
Nabors Industries Inc.'s chairman and CEO Eugene Isenberg explained how his company is dealing with the current industry fundamentals. Nabors pointed out that it has been the industry leader in terms of economic value added over the past 10 years, based on analysis provided by Stern Stewart. Company's strong balance sheet has allowed it to maintain an investment credit rating. In addition, Company's capital expenditures have been focused on allowing the company the potential to grow substantially in the future.
Weatherford International, Inc. (formerly EVI Weatherford) pointed out how twelve months ago there was a shortage of key oil service personnel. At the time, there was industry focus on expanding recruitment and enhancing training/education. Current conditions dictate a workforce reduction of as much as 15-20% of personnel. Primary factors driving the decline in oil service conditions are the decline of customers' cash flow (in the order of 30-35%), the decline in Asian GDP and 1998 OPEC revenues that will be approximately 32% less than for 1997 (lowest in constant dollars since 1972). Although all oil service companies have faced stock market declines in sympathy with crude oil and natural gas prices, Weatherford noted some of the segments have bottomed out, specifically Canadian operations and tubulars. Meanwhile, some sectors may have the potential for further declines, namely rig equipment, Gulf of Mexico players, and subsea equipment providers. What is the extent of the damage? In addition to the aforementioned workforce reductions, service companies capital spending is expected to be down 25%-50% from 1997 levels. As a result, the flight of capital has created a liquidity/equity squeeze. Weatherford plans to take advantage of this transition period by maintaining its research and development capital expenditures and looking for opportunistic acquisitions. Weatherford maintained its balance sheet is still strong and liquid enough to withstand the current industry conditions.
Not surprisingly, a somewhat optimistic outlook came from offshore driller Global Marine. In part, this was based on their sharp stepup in deepwater floater rig investment over the past four years which quadrupled the net book value of their rig investments to $1.35 billion. Global noted the sharp decline in market day rates since year end 1997 which showed a 60% plunge to $20,000/day for 250 ft. jackups in the GOM, a 50% drop to $40,000/day for 300 ft. jackups in West Africa and a 30% slide to $120,000/day for North Sea semisubmersibles (3rd generation). Although Global will not be immune from this downcycle, its pretax contract cash margin backlog remains quite positive aggregating $1.1 billion to the year 2003. This includes some $480,000/day of cash contribution from three new rigs entering its fleet between now and January 2000. It was noted that this incremental addition exceeds the combined daily contribution by its current 9 GOM and 10 West Africa jackups and compares to the $930,000 daily contribution for the company as a whole in 1997. Global also noted that operating income from its drilling management services has increased five-fold since 1994 reaching $50MM in 1997 and should remain a healthy contributor.
JSH Analysts: John B. Parry, Tom Wilson, Sven Del Pozzo
Panel 6 - Leading Energy Fund Managers - Identifying Tomorrow's Pacesetters
The oil and gas sector is a tough place to make money. But through careful investing, and an eye on value, oil and gas stocks can post solid returns, according to Michael Kerr of Capital Research Group. In the past five years, the S&P 500 was up 20.8%, while the energy group underperformed with a 18.7% return. Kerr believes the oil and gas industry is a different animal compared with other sectors. Typically, companies strengthen their balance sheets when times are good, so they can leverage up during a downturn. However, E&P companies tend to take on more debt in a strong market, which was the case last year. As such, the E&P sector in 1998 is greatly overextended in need of an equity window. Kerr says he is generally optimistic about the overall oil and gas environment. His advice to fellow oil and gas investors is to take a value approach during the next cycle, which he says is coming soon, rather than focusing too much on cash flow.
In spite of the large correction in energy related stocks, James Murchie of Lawhill Capital Partners does not view the group as cheap or undervalued. Non-energy commodities look more attractive on valuation and industry dynamics. The poor performance of energy stocks is almost indistinguishable from other commodity industries and emerging markets as they all have been driven by the Asian crisis. Murchie pointed out that while commodities are usually lumped together into an index and viewed as a window into macro-economic events, most of the time they move independently and are driven by their own internal fundamentals.
Stanley H. Harbison's exposure is largely related to integrated oils, approximately 70 - 80% of the portfolio. Over the last twelve years the foreign gas market has experienced the greatest growth of 4% between 1988 - 1997. Scudder Kemper Investments' Harbison is not optimistic regarding a near term recovery in oil prices. First demand goes followed by price. Production is shut-in and eventually price recovers. Positives for the industry include new acreage, previously unavailable (i.e. state-owned, Venezuela) and new technologies which provide an engine of growth and cost reduction.
JSH Analysts: Aliza Fan, Ed Sullivan, Olga Kovalenko |
