CANADIAN STORIES IN THE NEWS - SATURDAY A.M. 10/17/98
Suncor profit weaker, likely still tops in Canada
Suncor Energy Inc. <SU.TO> reported lower third-quarter profits on Friday, but results from the smallest of Canada's major integrated oil companies were still expected to lead an industry that is struggling with low crude prices.
Suncor operates one of two big Canadian oil sands plants, produces conventional oil and gas and sells gasoline in Ontario.
It posted third-quarter earnings of C$49 million or C$0.44 a share, down 22 percent from C$63 million or C$0.58 a share in the same period of 1997.
Cash flow from operations, a key indicator of an oil company's ability to finance upcoming projects, rose to C$170 million or C$1.55 a share during the period from C$161 million or C$1.47 a share last year. Revenues were off slightly at C$531 million against C$535 million a year earlier.
Suncor said its results, like those of the rest of the energy sector, were stung by stubbornly low crude oil prices as well as weak refining and marketing returns. But record synthetic crude production at its oil sands mining and extraction operation and a C$7-million income tax refund are likely to help keep the company at the top of the earnings pack.
Suncor also continued to reap rewards from last year's move to lock in a sales price of US$20 a barrel for a third of its 1998 oil output, a level 40 percent higher than the current benchmark West Texas Intermediate price.
Suncor Chief Executive Rick George said the company's expansion plans, which include a C$2.2-billion expansion of its oil sands operation aimed at boosting production by 150 percent by 2002, remained on track despite the industry's downturn.
"Low crude oil prices and refining margins have affected our earnings growth for the short term, but we remain as committed as ever to our expansion plans," George said in a statement.
Synthetic crude production from the oil sands plant climbed by more than 12 percent from last year's third quarter to 96,900 barrels a day, Suncor said.
"The oil sands production growth goes hand in hand with unit cost reduction, so that has a pretty favorable impact on financial results," said Wilf Gobert, analyst with Calgary-based brokerage Peters & Co. Ltd.
Suncor opened its new Steepbank oil sands mine north of Fort McMurray in northeastern Alberta during the period after completing a new plant that upgrades the extra-heavy oil into light crude the previous quarter.
Conventional oil and gas production grew by six percent to 42,100 barrels of oil equivalent a day, although the company cut its estimate of average 1998 output by 2,000 barrels a day to 43,000 because of delays in bringing new wells onto production and expectations of some oilfield sales this year.
Its "downstream" division, which operates one refinery in Ontario and sells gasoline in that province under the Sunoco banner, suffered a 53 percent decline in third-quarter earnings to C$8 million. It blamed the drop on slow growth in demand, high inventory levels and an unplanned refinery outage.
Gobert said Suncor, whose stock was off C$0.60 to C$48.50 in Toronto on Friday, would post the best earnings of Canada's big integrated oil firms this quarter.
Among rivals, Petro-Canada <PCA.TO> is slated to release its results Tuesday, Imperial Oil Ltd. <IMO.TO> Wednesday and Shell Canada Ltd. <SHC.TO> the following Wednesday.
Moody's confirms ratings on Canadian Occidental Petroleum
On Friday, Moody's Investors Service confirmed the senior unsecured Baa2 ratings of Canadian Occidental Petroleum Ltd.
Moody's also revised the rating outlook from stable to negative. The Baa2 rating reflects the company's position as one of the largest Canadian exploration and production companies, with a large oil and gas reserve base and significant development opportunities.
However, the change in rating outlook is based on concerns that the company's financial and business position is likely to face continued pressure from weak oil prices.
At current oil prices, the company's internally generated funds from operations is sufficient to fund only about three-quarters of budgeted 1998 capital spending. Continued low prices are likely to result in a reduction of capital spending or the sale of assets, actions which may have a longer term impact on the growth of production and reserves.
Ratings affected: (P) Baa2 shelf registration for senior unsecured debt securities, Baa2 senior unsecured notes.
The Baa2 rating for Canadian Occidental is supported by its rising profile for production (excluding possible asset sales), improving efficiency in finding and developing reserves at competitive costs, and significant geographic diversification. The acquisition of Wascana Energy Inc. increased the company's historically short reserve life to about 8 years for proved reserves, which is more in line with its peer companies.
Although oil comprises over 70% of Canadian Occidental's production mix, which is higher than the average oil dependency of peer companies, the company's oil price sensitivity is somewhat muted by the cost recovery mechanism under the production sharing contract for its substantial operations in Yemen. Reflecting the company's size and diversity of assets, Canadian Occidental has a large portfolio of assets which could be divested to reduce debt or fund a healthy level of on-going capital expenditures.
Assuming a continuation of relatively low oil prices, Moody's expects that the company will moderately reduce debt through planned dispositions of non-strategic assets, and will also substantially reduce its capital program. Revising prior expectations of significant production growth downward for a lower level of capital spending and modest asset sales, Moody's estimates that the company's production is likely to be flat in 1999.
Vandalism campaign has Canadian oil companies on edge
An organized campaign of increasingly violent vandalism targeting forestry and oil and gas companies in Canada has raised fears that serious injuries or deaths may occur if it continues.
In the latest incident, vandals blew up with dynamite a remote, unmanned well site in northwestern Alberta owned by Alberta Energy Co. Ltd. <AEC.TO> in early October, destroying the shed that housed the well.
"It's of great concern to the industry," said David Manning, president of the Canadian Association of Petroleum Producers, on Friday.
The latest blast was the fourth bombing since July 31, when a natural gas well site owned by Alberta Energy was destroyed, followed by an explosion at an Alberta Energy-owned sour gas pipeline on Aug. 2.
Another explosion damaged a Suncor Energy Inc. <SU.TO> oil well site on Aug. 24.
Alberta Energy, which has over 200 wells in the region, has been a primary target. Over the past two years, more than C$2 million worth of damage has been caused to the company's facilities, including one incident where a bullet was fired into the company's office building in Hythe, Alberta.
"Most companies have experienced minor vandalism in the area," Alberta Energy spokesman Ed McGillivray told Reuters. "It really escalated about 20 months ago, when we started getting more damage to our facilities, and it got really serious around the end of July, when the two sites were dynamited. "What really concerned us there was both were marked as sour gas sites. We lost some sour gas into the atmosphere, and that's a real health hazard, and people were evacuated from the surrounding area."
Natural gas with high concentrations of deadly hydrogen sulfide is classified as sour.
The local detachment of the Royal Canadian Mounted Police, in Beaverlodge, Alberta, confirmed the incidents appear to be part of an organized campaign in which oil patch sites and forestry equipment were sabotaged, causing millions of dollars worth of damage.
But the Mounties do not support widespread speculation that the damage is the work of eco-terrorists.
"We do not have any indication that environmentalists are the ones we can take to court," Sergeant Dave MacKay said.
The Mounties have called on local residents to report anything suspicious, and Alberta Energy has posted a reward for information leading to the arrest and conviction of those responsible.
A security firm has been hired to monitor Alberta Energy's facilities in the area, McGillivray said.
Tension among oil and gas producers was further heightened by the murder this month of Calgary oil executive Patrick Kent, even though police said his death was not directly linked to the vandalism.
Kent, vice-president of KB Resources Inc., was shot dead while working near an oil well on a farmer's ranch.
More From Financial Post - Eco-terrorism costs Alberta Energy $2M
Alberta Energy Co. says vandalism, including gas well bombings, have caused more than $2 million in damage and related expenses
Residents and environmental groups say frustration over pollution caused by sour gas flaring have led to the incidents
Ed McGillivray, AEC's director of environment, health and safety, said there have been more than 160 instances of vandalism in the Grand Prairie area, about 500 kilometres northwest of Edmonton. More than half have been directed at AEC and they have escalated in frequency over the past 20 months.
Incidents range from slashed tires, nails thrown on the road, broken windshields and damaged equipment. More recently, shots were fired at some facilities and there have been several explosions set off with home-made bombs. This week a bomb exploded at a remote gas well near Beaverlodge, just west of Grand Prairie.
No one has been injured in any of the incidents.
"My main concern is for the employees, the people who live up there, and the neighbors," McGillivray said. "So far nobody's been hurt or killed. But that is a grave concern of mine."
The RCMP is investigating the latest incident and the company has posted a $1,000 reward.
"It's out and out terrorism," McGillivray said. "People call it eco-terrorism. I call it terrorism."
Gord Currie, an analyst with Calgary-based Canaccord Capital Corp., said the incidents are not a major concern in the oilpatch.
"From an investor's standpoint, it's not a big deal. Surface rights issues are there and always will be there. It's just kind of an irritant at this point."
Air quality is a persistent issue because of the sour gas, Currie said. "It's never been conclusively demonstrated to be a health hazard, but that doesn't keep people from worrying about it."
Sour gas is natural gas with a large amount of sulphur dioxide and hydrogen sulphide, which are poisonous and are disposed of by flaring or burning the gases off at the head of a well.
Residents have complained about livestock deaths and crop damage as a result of sour gas emissions. A study by Morgan Scott of the department of public health at the University of Alberta did not find a link.
Mike Sawyer, executive director of Calgary-based Rocky Mountain Ecosystem Coalition, said there is no doubt sour gas is a health hazard.
"There is no debate, except here in Alberta," he said. "Just because he couldn't find the causal link does not mean there is no problem. There are literally dozens of other chemicals that are known toxins, that are known carcinogens, such as benzine, mercury. All of those are in there."
McGillivray said AEC meets or exceeds all flaring regulations.
"It's a necessary part of the business and we're trying to reduce it as much as possible. It sure beats the alternative of venting the gas into the atmosphere."
Homecoming in the oilpatch
The alumni group of Dome Petroleum Ltd. employees that gathers for a reunion in Calgary next weekend will include some of the brightest stars of today's energy industry
In the decade after the first OPEC crisis of 1973, the Canadian oilpatch threw up a whole firmament of new business stars. Two men, and one company, outshone and outgrew all others. The company was Dome Petroleum; the men were its chairman, 'Smilin' Jack Gallagher, and its president, Bill Richards.
Like a supernova, the spectacular explosion that lights up the night long after the death of a star, Dome Petroleum Ltd. continues to illuminate the Canadian oilpatch more than a decade after it fell from the celestial heights.
The company is gone, but certainly not forgotten. In fact, organizers are hoping that up to 1,500 people will attend the company's reunion on Oct. 24 in Calgary.
Besides catching up with former work chums and the inevitable revising of history through rose-tinted glasses, participants will be able to toast the remarkable success of numerous colleagues. There will be generous comments about Gallagher, the one-time giant of the oilpatch who now resides in a Calgary hospice. Proceeds from the event will go to help fund the hospice.
Besides the donation on Gallagher's behalf, the most visible legacy of Dome is the large number of executive and management positions in Calgary occupied by its alumni. Junior, intermediate and major producers are replete with senior staff who graduated from Dome's unofficial finishing school. The gamut of executives with Dome experience literally runs from A to Z, stretching from Burl Aycock to Vic Zaleschuk. The former is the president of junior Maxx Petroleum Ltd., while the latter is president and chief executive officer of Canadian Occidental Petroleum Ltd.
The influence is felt in sectors other than exploration and production. George Watson, head of TransCanada Pipelines Ltd., cut his teeth at Dome, as did Michael Grandin, executive vice-president and chief financial officer of Canadian Pacific Ltd. Jim Dinning, former treasurer of Alberta and now a vice-president with TransAlta Corp., had a brief stint at Dome.
"There are just some companies that are pivotal to an industry. Dome was one of them," says former employee David Annesley as he tries to explain Fortune's smile on former Dome employees.
But it wasn't just about good luck. Dome offered the chance to take charge of projects without tight scrutiny by senior managers. That attracted aggressive risk-takers who were willing to put in long hours, says Colin Ogilvy, who is now president of Ogy Petroleums Ltd. It's no surprise that those traits and talents enabled many to be successful in their life after Dome.
The defunct company's management style, with its easy access to senior executives and the premium put on quick decisions, also helped shape its employees' subsequent careers, Ogilvy says. "Dome was very entrepreneurial minded and rarely said no.
If you came in with an idea, they just wouldn't reject it and leave you crushed like some companies. They'd bounce it around and give you a dozen things to think about when you left so you could come back with an idea that did work," he says.
The company's reputation as an exciting place where there was more than enough work to go around, plus a collaborative environment, created an esprit de corps that helped recruit quality staff, recalls Grandin.
"It was willing to try any good idea suggested by somebody in the company, or even [suggested] from outside the company. It was that can-do attitude and a high level of activity that attracted a lot of good people," he says.
The emphasis on creative thinking gave Dome's workers a lot of faith in themselves, says Zaleschuk, the boss of Canadian Occidental.
With domestic, international and chemical operations plus a recent large acquisition all under one roof, forging CanOxy into a cohesive culture is high on Zaleschuk's agenda. Getting close to Dome's tight-knit sense of team would be a real achievement, he says.
Zaleschuk fondly remembers the near-mystical tie that many workers had with the company. "It borders on some of the stuff you see on television from the deep south, but it was genuine."
Especially in its early days, Dome used psychological profiling to recruit ambitious and capable staffers. Steve Savidant, a key player during Dome's financial crises in the early 1980s, says the need to mix personality types was a major lesson for him.
"You need people with an entrepreneurial spirit, but you also need many high quality people who can stay at home and mind the store," Savidant says. "If you get out of balance with too many of one type, you can run into trouble."
The president and CEO of Canadian Hunter Exploration Ltd., Savidant dislikes the term "Dome mafia", as ex-employees are sometimes called in Calgary, and its implicit meaning of preferred treatment. While strong friendships were forged in the corporate crucible, there were also some rough rides.
"I think for all of us it was an extraordinarily intense experience. The intensity taught a lot of lessons about the fundamentals of business, finance and human dynamics and because of the intensity we learned from it," he says.
Zaleschuk, Savidant, Ogilvy and others try to draw on Dome's lessons, even the painful ones, as they steer their firms through the troubling times currently besetting the oil and gas industry.
And it's here where Dome -- and all of its could-have, should-have and would-have beens -- serves as an object lesson of the folly in pursuing vision without regard for business realities.
"Even if the prices hadn't crashed, we probably would have had problems because we were walking too close to the cliff's edge," Zaleschuk says.
CP's Grandin says that having the flexibility to change quickly if business fundamentals alter is a guiding principle for him after enduring Dome's trials and tribulations.
The excitement, high morale and momentum that can be generated by keeping staff busy with a variety of challenges is another Dome example that the executive draws upon as he influences CP's strategy.
In the seven years he spent at Dome until 1986, Grandin went through the frustrations of trying to deal with creditors, rescheduled loan payments and working with unhappy partners. "It was one of those great curses, as it were, of a good learning experience that you hope you never would have to apply again," he says wryly.
It's been just over 10 years since Dome was swallowed by Amoco Canada Petroleum Ltd. for $5.5 billion, in what was then one of the biggest takeovers in Canadian corporate history.
Dome glittered brightly but briefly because its ambitious staff pursued a large number of projects. Those projects were financed through debt which generated fat fees, so Dome had easy access to the panjandrums of the Canadian banking industry. The firm's audacious schemes intoxicated the media, and its adroit ability to shift with political winds made it popular with powerful bureaucrats and elected officials, especially in Ottawa.
But like a juggler with too many balls in the air, Dome was brought down by a staggering debt load of $7 billion, punishing interest payments and the oil price crash of 1986. The company limped on for two more years, trying to survive by cutting staff and selling assets, but its light had failed.
Some, and not just former employees, mourn the loss Dome represented to develop the oil and gas reserves of Canada's North.
Ian Doig, publisher of the independent monthly oilpatch newsletter, Doig's Digest, shakes his head ruefully at the lost technical and people skills caused by Dome's withdrawal from the Beaufort Sea. He thinks it will take at least five years to update the information and rebuild the skills and technical ability to tap the large pools of oil and gas that exist in the Arctic.
Zaleschuk of CanOxy disagrees, saying technology and staff can be brought up to snuff rapidly if prices make Arctic exploration and production rewarding.
The financial flameout of Dome, combined with the pain of the oil crash of 1986, when the price of crude dropped from US$30 a barrel to US$10 in less than six months, caused everyone in the oilpatch to keep debt under control, says Gord Currie, a veteran analyst with Canaccord Capital Corp. For years, producers kept debt to less than two times cash flow, but the discipline slipped in 1997 and the ratios started to climb. A number of debt-ridden companies, most recently Amber Energy Inc., found themselves imitating Dome, albeit on a much smaller scale, and disappearing.
Looking at the events of the past 12 months, Currie wonders if Dome's lessons have been heeded by oilpatch players who weren't actually present at the destruction. "I'm not so sure that the guys who learned the lessons are making the decisions on loans or analysing stocks."
While Dome's money problems attracted a lot of criticism at the time, many other companies in the last 10 years have also foundered in financial quagmires. Grandin believes history has been fair to what was once the most exciting company in the Canadian energy industry. "On balance I think the company is remembered reasonably accurately. Dome did some big things and it also made some big mistakes."
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