CANADIAN OIL & GAS IN THE NEWS - 10/28/98 - PART 1
Oil and gas drilling to fall to 'average' levels
CALGARY (CP) - Western Canada's oilpatch will avoid disaster in 1999, but the once red-hot industry will continue to feel the chill from sluggish oil prices, says the Petroleum Services Association of Canada.
Roger Soucy, president of the association that represents oilfield service, supply and manufacturing sectors, said Tuesday that 1999 will be a year of retrenchment, mergers, layoffs and price wars among contractors.
"There have been some measure of layoffs, in our sector about 10 to 15 per cent (of the workforce)," he said at a news conference to release the association's annual outlook. "It's quite a reversal from the demands that were being placed on the industry.
"But I don't expect anything that could approach a catastrophe of the magnitude that we saw in the late '80s and early 90s."
At the association's forecast presentation last October, the industry was crying for skilled and unskilled labour to fill up to 5,000 job vacancies. In fact, exploration companies were complaining of the lack of available rigs for drilling and the resulting high costs for exploration.
"But I think it's important to note that what we're going to end up with in 1998 and what we're forecasting in 1999 is roughly the10-year average of activity for Western Canada," said Soucy.
"1997 and to a degree 1996 were anomalies in that they were record years of activity and the industry ratcheted up its capabilities to meet that demand, both in equipment and people.
"Now we have to scale back to meet the demand that's here."
The association had anticipated a record year of 16,300 oil and gas wells being drilled in 1998, but since world oil prices collapsed earlier this year the final tally will be around 10,500. Oil prices have declined to about $14 US a barrel from $20 US a year ago.
Many resource companies slashed drilling budgets over the summer as cash flows dried up and equity markets went sour, robbing them of exploration money.
Soucy said companies are being extremely slow to firm up new exploration budgets as the projected price for oil is expected to remain in the $15 US range - at least until the winter of 1999-2000.
Despite all that, the association anticipates about 9,900 oil and gas wells will be drilled in 1999 - with more than half of those being gas wells. In 1997, just one-third of the wells drilled were for natural gas.
Soucy also said service and manufacturing companies have learned their lessons from past slowdowns and are better prepared to handle the troughs.
Canada oil field service firms see slower 1999
CALGARY, Oct 27 - Canadian oil field service companies predicted on Tuesday that oil and gas drilling activity in 1999 will fall by six percent from this year as the energy industry continues to be pressured by weak oil prices.
The Petroleum Services Association of Canada, which represents 215 energy service and supply contractors, said it expected a total of 9,885 wells to be drilled in 1999, down from this year's anticipated total of 10,500.
Even this year's expected tally is a far cry from the association's original forecast for 1998, made last autumn, of 16,000 wells.
Association president Roger Soucy said the drop in activity was the direct result of weak oil prices, which have persisted for longer than what was anticipated by his group.
The low prices have not only cut producers' cash flow, which they use to reinvest into exploration and production, but have also made investors jittery, reducing the industry's ability to make up the shortfall in tight-fisted debt and equity markets, Soucy said.
The association's member firms depend on the producing sector, which buys their supplies and services for their livelihoods.
"With the 30-percent reduction in the price of oil, their cash flow has been hit significantly. There's been some softening of that with the price of gas being stronger than anticipated, but it doesn't come anywhere near the losses from the price of oil," he told reporters on Tuesday.
The 1999 forecast is based on assumptions of average West Texas Intermediate crude oil prices of US$14-US$15 a barrel and Canadian natural gas prices of C$2-C$2.25 per thousand cubic feet.
The oil service industry has been hit by the drop in demand for their services, a situation that has led to some layoffs already. But the association believes the situation is not as dire as it was in the late 1980s and early 1990s, when a host of companies went out of business and thousands of workers lost their jobs.
Soucy called 1998 and 1999 a "tread-water""time for his sector, which raced to keep up with industry demand for its services during the hot operating climate in 1996 and 1997.
"It's quite a reversal from the demands that were placed on the industry (last year)," he said. "It's important to note that what we're going to end up with in 1998 and what we're forecasting for in 1999 is roughly the 10-year average."
The association said it believed strong gas prices meant continued growth in the number of gas wells drilled compared to oil wells. It estimated 56 percent of wells drilled in 1999 would be targeting gas, compared with 51 percent in 1998 and 35 percent in 1997.
Soucy said the value to his industry from the forecast activity would be C$4.4 billion in 1998 and 3.9 billion in 1999.
First of new Alberta natural gas tolls unveiled
CALGARY, Oct 26 - TransCanada PipeLines Ltd. and Canadian natural gas producers unveiled the beginnings of a landmark new toll system for Alberta's main pipeline on Monday, aimed at replacing an 18 year-old single-price structure with one that matches rates with service costs.
Under the negotiated framework, agreed upon by Calgary-based TransCanada and the major producer lobby groups, shippers would pay various prices to move their gas to the province's border, depending on where it is produced. Different rates would also be offered for varying contract terms.
The new "receipt-point""pricing deal -- which follows about two years of contentious on-again, off-again talks -- would replace the "postage stamp""system of tolling.
That is where producers pay the same amount to ship gas on TransCanada's NOVA Gas Transmission system, regardless of where in Alberta it originates.
"It's a watershed transaction. It's great for TransCanada, it's great for the customers and we have an answer here without fighting with each other," TransCanada Chief Executive George Watson told reporters on Monday.
Watson has been credited with shepherding the process along with his personal involvement over the past five months.
NOVA Gas Transmission, which TransCanada acquired in its takeover over NOVA Corp.'s pipeline business this summer, transports about 18 percent of the gas produced in North America.
Its postage stamp toll system -- in which producers with operations close to export pipelines at the Alberta border essentially subsidize far-flung gas development -- has been lauded for its role in allowing companies to open up gas fields in remote, mostly northern, areas.
However, the death knell for the structure sounded about two years ago when some firms operating close to the border threatened to build their own pipeline to cut transport costs.
Under the deal announced on Monday by TransCanada, the Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada, shippers would pay C$0.18-C$0.34 per thousand cubic feet to move gas on the pipeline, depending on receipt point and contract length.
The structure provides for a four-year phase-in that will allow producers in northern areas to adapt to higher costs.
Producers balked at the absence of transition funds contained in a similar, but ill-fated, structure proposed by NOVA earlier this year.
"There are transition costs that are shared, in large measure equally, between by the producers and by ourselves," Watson said.
TransCanada would contribute C$25 million in pre-tax dollars annually out of Nova Gas Transmission's cost-efficiency agreement, a pool of money generated by pipeline cost cuts, over the next two years to help implement the new system. Producers, meanwhile, will contribute C$20 million a year over the same time frame.
"It's a little revenue-negative to us. We did pay a little bit of a price to buy peace in the valley," Watson said. The players hope to submit the new deal to Alberta's energy regulator before the end of this year.
Alberta Energy profit fueled by gas sales
CALGARY, Oct 27- Alberta Energy Co. Ltd. , one of Canada's biggest oil and gas companies, on Tuesday posted improved third-quarter results, thanks to its emphasis on natural gas instead of cheaply priced crude oil.
Calgary-based Alberta Energy, which this week inched closer to completing a C$445-million friendly takeover of rival Amber Energy Inc. , reported third-quarter earnings of C$9 million or C$0.08 a share. That compares with C$8.9 million or C$0.08 a share during the same period last year.
Cash flow, a key measure of an oil company's ability to fund upcoming development, rose 4 percent to C$111 million or C$0.94 a share from C$107 million or C$0.92 a share in the third quarter of 1997.
Revenues totalled C$467 million, up from C$417 million.
Alberta Energy was Canada's 10th largest energy company by production at the end of 1997. It produces oil and gas and owns pipelines in western Canada and operates the country's main gas storage facility in southeastern Alberta.
The company also has a stake in the Syncrude Canada Ltd. oil sands mining, extraction and synthetic oil operation in northeast Alberta.
Craig Langpap, analyst with Calgary-based brokerage Peters & Co. Ltd., said Alberta Energy's third-quarter results would shine compared with most Canadian oil and gas producers.
"Cash flow is not only higher than the second quarter, but it's actually up slightly from the third quarter of last year, and that is going to be rare," Langpap said.
Alberta Energy Chief Executive Gwyn Morgan said a big jump in his company's natural gas sales and stronger gas prices were key reasons for the improved results.
Its emphasis on gas this year has served to bolster its stock price while those of many of its peers have suffered because of investor jitters of stubbornly weak oil prices.
"World oil prices are likely to remain depressed for some time to come. We have executed our strategy of being in the strongest gas production, reserves, storage and exploration land position in the industry," Morgan said in a statement.
Third-quarter gas sales averaged 575 million cubic feet a day, up from 468 million during the year-ago period. The higher production was achieved amid an average price that rose nearly 10 percent from last year to C$1.93 per thousand cubic feet.
Alberta Energy has set a target to produce an average of 700 million cubic feet a day in 1998 and 900 million in 1999, a forecast that includes Amber's projected output.
Conventional oil and gas liquids production, meanwhile, declined by 18 percent to 26,849 barrels a day from 32,844 during the third quarter of 1997. Alberta Energy said much of the decline was the result of its shutting off production from some heavy oil wells to cope with a 21 percent drop in prices.
Its share of Syncrude synthetic oil output was off by 12 percent to 27,937 barrels a day because of the shutdown for repairs of one of the plant's major processing units during the quarter.
The company said this week it had acquired most of the shares of Amber, a company known for its prolific Pelican Lake heavy oil field in northern Alberta, under its cash-and-stock offer. It extended the bid deadline to November 4.
Alberta Energy shares on the Toronto Stock Exchange closed down C$0.35 on Tuesday to C$35.10.
Canada's Numac Energy posts big loss after writedown
CALGARY, Oct 27 - Mid-sized Canadian oil company Numac Energy Inc. <NMC.TO>, which is in the midst of a big restructuring, pumped out a lot of quarterly red ink on Tuesday after weak oil prices led it to write down the value of its assets.
Calgary-based Numac is a chronic underperformer in Canada's oil patch and recently installed a new chief executive. It reported a third-quarter net loss of C$115 million or C$1.20 a share, down from a restated profit of C$365,000 or nil a share during the same period last year.
Cash flow, a key indicator of an oil company's ability to fund upcoming drilling projects, was down nearly 46 percent to C$16 million or C$0.17 a share from C$29 million or C$0.30 a share in the third quarter of 1997. Revenues totalled C$45 million, down from 60 million.
The sharp declines were the result of a 33 percent drop in its average oil sales price and a slate of property sales, which cut production, Numac said. Numac, 52-percent owned by a consortium of Hong Kong-based investors, also said it took its second major writedown on the value of its oil and gas reserves in three years.
Numac wrote down the carrying value of its oil and gas assets by C$191 million as a result of the low crude prices and its steep investment in Alberta heavy oil projects over the past two years. Deep discounts have been slapped on tar-like Canadian heavy oil compared with light crude because it is more expensive to refine into gasoline and other products.
The company took a major writedown in 1995, a year in which it reported a C$179 million net loss.
Despite today's financial woes, one analyst said he believed Numac would emerge a stronger firm from the current restructuring, which has included asset sales to hone its operating focus into three main regions and the layoff of 20 percent of its head-office staff.
The changes were implemented by Chief Executive Douglas Palmer, a former Norcen Energy executive who was named to Numac's helm early this summer.
"I don't think they've ever had as capable a leader as they do now," said Peter Linder, analyst with CIBC Wood Gundy in Calgary. "The jury's still out, of course, but he's shedding non-core assets, he's paying down debt, he's taking his hits now and he's transforming the company into a new entity."
The company produced an average of 17,931 barrels of oil and 144 million cubic feet of natural gas a day during the third quarter. That compares with production of 20,966 barrels of oil and 152 million cubic feet of gas a day last year.
After the completion of its asset sales, output was expected to be cut further to 14,000 barrels of oil and 110 million cubic feet of gas a day.
Numac said it sold 100 oil and gas properties producing 3,400 barrels of oil equivalent a day in the third quarter for proceeds of C$20 million. Another C$62 million worth of assets was expected to be jettisoned by the end of this year.
Numac shares on the Toronto Stock Exchange were unchanged on Tuesday at C$3.10.
Husky plans new projects to extract heavy oil in Alberta
Globe & Mail
Calgary -- Husky Oil Ltd. plans to launch major projects in northern Alberta's oil sands to extract tar-like bitumen buried deep beneath the surface, according to newly released documents.
The Calgary-based company, controlled by Hong Kong billionaire Li Ka-shing, is focusing its attention on 33,600 hectares of undeveloped land leases in the Cold Lake and Athabasca regions.
"Husky believes that these areas contain extensive bitumen deposits," said a 167-page prospectus sent to investors who bought Husky's recent offering of debt securities totalling $225-million (U.S.).
In the prospectus, privately owned Husky said technology breakthroughs to steam out bitumen have prompted the company to re-evaluate pilot projects shelved in the early 1990s because recovery costs were too high.
"The company expects that the earliest point at which production would commence from these areas would occur after the year 2000."
Husky doesn't disclose how much it is prepared to invest in new oil wells, field facilities and pipelines in northern Alberta, but some industry observers say capital costs could reach $1-billion (Canadian) over 10 years.
In an interview, Husky spokeswoman Laurel Nichol cautioned that the company has been re-examining the "production feasibility" of extracting northern Alberta bitumen for the past couple of years, and no decision has been made to proceed.
Bitumen is a type of heavy oil that sells at a discount to lighter grades of oil, but it is a valuable commodity to Husky, which uses the raw material to meet the growing appetite of its heavy oil upgrader at Lloydminster, Sask., 250 kilometres east of Edmonton.
The $1.6-billion upgrader, which transforms heavy oil into synthetic light crude, is undergoing a $500-million expansion to be completed by late 2001. The plant produced 52,400 barrels a day of synthetic light crude last year, and is scheduled to almost double its output to 100,000 b/d within three years.
Husky is also studying new mining techniques to extract bitumen from the Cold Lake region, 300 kilometres northeast of Edmonton, and from the Athabasca region, 440 kilometres northeast of Edmonton.
The company already is a major heavy oil producer in the Lloydminster area, where it operates a network of pipelines that feed into the upgrader.
Husky's expansion mode contrasts sharply with its austerity program during tough times in the early 1990s. It has slashed debt, cut costs, sold non-core assets, boosted output, expanded pipelines and improved exploration techniques.
After racking up $932-million in losses from 1991 through 1995, Husky posted a $34.9-million profit in 1996 and earned $72.5-million last year.
In its prospectus, the company cautions that the oil and natural gas sectors are volatile, so a long-term view is needed when planning for new projects.
Husky fetched just $5.01 a barrel for heavy oil in the first quarter of 1998, compared with $15.89 a year earlier. It has also been hurt by soft markets for light and medium crude oil, getting $17.72 a barrel in the first quarter, compared with $25.90 a year earlier.
Still, the company managed to improve its bottom line. In the first three months of this year, Husky earned $24-million, compared with $18-million a year earlier.
And, a recent internal report reveals that the company posted a $40-million profit in the first half of 1998, compared with $37-million a year earlier. Cash flow rose to $254-million from $203 million.
Despite sagging oil prices, "we remain confident in and fully committed to our long-term goals and major capital investments," Husky chief executive officer John Lau said in the report dated Sept. 28.
Analysts say Husky is positioning itself to attract new financing through an initial public offering in Canada, possibly as early as 2000. Its recent debt issue of $225-million (U.S.) marks its second trip to the bond markets since 1996, when it raised $500-million.
Hutchison Whampoa Ltd., a publicly traded Hong Kong conglomerate whose major shareholder is the Li family, owns 49 per cent of Husky. Mr. Li -- one of Hong Kong's most powerful businessmen -- and his family own another 46 per cent while Canadian Imperial Bank of Commerce holds a 5-per-cent stake.
Husky's board of directors is led by Li Ka-shing's eldest son, Hong Kong-based executive Victor Li, who is Husky's co-chairman with Canning Fok, group managing director of Hutchison Whampoa.
Besides absorbing $932-million (Canadian) in losses, Husky's owners have paid more than $1-billion over the years to acquire control of the company. They bought a majority interest in Husky in 1987, and picked up a large stake from Calgary-based Nova Corp. in late 1991.
Husky now oversees a wide array of assets, including a chain of 626 gasoline stations from Vancouver Island to Ontario, and has heavy oil production in several parts of Alberta and Saskatchewan.
The integrated oil company also has extensive holdings outside Western Canada. It is the lead partner in the $1.5-billion White Rose oil project off Newfoundland, holding a 71.2-per-cent stake, and owns a 17.5-per-cent piece of the $2-billion Terra Nova oil development headed by Petro-Canada.
Ian Doig, publisher of Calgary-based energy newsletter Doig's Digest, figures Husky is well on its way to increasing its assets to $6-billion within five years, compared with $3.6-billion today.
Mr. Doig expressed doubts about the wisdom of Husky's pricy offshore Newfoundland ventures, but he praised Mr. Lau for generally turning things around. "He's really changed the whole tenor of the company."
For instance, Husky's cash flow jumped to $453-million while revenue topped $1.36-billion last year, compared with cash flow of $170-million and revenue of $820-million in 1993, when Mr. Lau took over as CEO.
Junior gas firm fights bankruptcy with lawsuit
The Financial Post
A junior energy company is suing a subsidiary of TransCanada PipeLines Ltd. for almost $2.4 million as part of a defensive legal strategy to fend off bankruptcy proceedings.
Tiny Harbour Petroleum Co. Ltd. is locked in a legal battle with TransCanada Energy Ltd., the energy marketing arm of TCPL, the largest transporter of natural gas in Canada.
The two sides are fighting over a gas sales contract scheduled to expire Oct. 31, 2000.
The producer defaulted on its daily commitment of 10 million cubic feet of gas on Sept. 26. After 10 days of non-delivery, TCEL exercised its right to terminate the agreement. The marketer then petitioned to appoint KPMG as interim receiver and to have Harbour pushed into bankruptcy.
In court documents, TCEL said Harbour's failure to honor its obligation created a liability of about $7.8 million. It also alleged that Harbour was trying to treat it less favorably than other creditors.
The legal manoeuvres caught Harbour by surprise and were additional blows to a firm already buffeted by low oil prices and weak equity markets. The company announced earlier this year it was on the block and was looking for a buyer or merger partner.
As a result of TCEL's actions, any such discussions have ended and arranging any other financing is impossible, Harbour said its affidavit.
TCEL was accused of improperly using the bankruptcy process to "bring extreme pressure against the [company] to negotiate some form of compromise advantageous to the petitioner."
The two sides traded numerous barbs in their respective filings. Harbour was slammed for inaccurately portraying its financial and legal affairs, while TCEL was reviled for its high-handed methods and KPMG's was criticized for refusing to issue some cheques.
Harbour is suing TCEL for $380,000, the value of gas delivered before the shipments ceased, plus $2 million in general and punitive damages for loss of reputation and business opportunity.
The junior is trying to block both the interim receiver appointment and the bankruptcy petition. A hearing before a Court of Queen's Bench justice has been set for Dec. 14 in Calgary.
Flow-through issues attract oilpatch
The Financial Post
Tough times finding financing are causing smaller energy firms to issue flow-through shares to attract funds to a sector out of favor with most investors.
Several Calgary-based oil and gas producers have gone this route in recent weeks, signs that tight-fisted bankers, low oil prices and apathetic equity markets are prompting alternative ways of raising money.
"In more normal times, firms don't need the flow-through market to sell equity," said Frank Sayer, president of Sayer Securities Ltd. in Calgary. "In bad times, this may be the only way."
The issues are attractive to investors looking to reduce their taxable income, but who also want upside potential. The shares are priced at a premium to the value of the firm's stock. The money raised is spent on qualified exploration and development activities and the tax benefits of the expenditures flow back to investors. In addition to a reduced tax bite, investors win if the shares appreciate above the purchase price.
Thunder Energy Inc. has just raised $1 million selling 500,000 flow-through shares at $2 each, a 25% premium to recent trading levels. Doug Dafoe, president and chief executive, said savvy investors realize an illiquid market for small firms has brought their share prices below their underlying value, one reason for their willingness to pay a premium. However, a company must be well run and offer growth potential to catch the eye of investors.
"They see good fundamental value in a company in the first place and they get the tax benefit. It gives [portfolio managers] another vehicle to put investors into the stock."
Canada Dominion Resources Ltd. Partnership is one firm stocking up on the fundraising option. It has invested in flow-through shares of Berkley Petroleum Corp., Canadian 88 Energy Corp., Remington Energy Ltd. and Highridge Exploration Ltd.
Norm Lamarche, managing partner at Tuscarora Capital Inc., which guides Canada Dominion's portfolio, said it is a buyer's market, with the average premium coming in at less than 10%. "The majority of companies we've bought are gas oriented and conservatively leveraged so they're still growing next year."
Tuscarora, which plans to launch another fund focusing on flow-throughs soon, sees opportunities for the next couple of years as long as oil prices stay below US$16 a barrel.
According to figures compiled by Sayer Securities, which tracks oilpatch financings and acquisitions, flow-through shares accounted for $143.7 million of the $1.03 billion energy firms raised in equity in the first half.
Stumbling equity markets, reducing the need for wealthy individuals to find ways to reduce their tax load, are likely to depress demand for flow-through shares in the second half.
In the second half of 1997, this financing method raised $216.8 million of the $1.92 billion of equity poured into the petroleum industry.
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