IN THE NEWS / Market Takes Note As Beau Canada Exploration Reinvents Itself
Claudia Cattaneo
Financial Post
One of the newest names among Canada's natural gas energy producers -- Beau Canada Exploration Ltd. -- is old hat in the sector.
But the firm, named after a history in the Beaufort Sea, is only just beginning to be recognized for a transformation that took three years to complete.
The mid-sized company has changed from a predominantly oil producer, with a large proportion of heavy oil, into a largely natural gas producer, or, as president and chief executive Thomas Bugg likes to put it, from a heavy "hippo" to a racing greyhound full of gas. The dog, he stresses, not the bus.
The change allowed it to survive as an independent company while most heavy oil peers were taken over in the sector's continuing consolidation frenzy.
It was accomplished by de-emphasizing heavy oil producing assets and acquiring and drilling for natural gas.
Beau's stock (BAU/TSE), which closed yesterday up 4¢ at $1.75, is trading at a discount relative to its new natural gas peer group, or about 3.3 to 3.4 times estimated cash flow per share for 1999. That is one full multiple below the value attributed to other natural gas producers such as Cypress Energy Inc., Compton Petroleum Corp., Merit Energy Ltd., which are trading around 4.3 times 1999 cash flow per share, say industry analysts.
The stock has gained about a third since hitting a recent low of $1.53 on Oct. 9., plunging from a high of $3.90 about a year ago, before the world oil price collapse.
Along with the market's lagging perception of Beau's new natural
gas riches, there have been concerns about the leverage on its balance sheet, which is contributing to the discount, analysts say.
For example, debt level increased with the $95-million acquisition last April of APL Oil and Gas Ltd.
"The market is pretty finicky right now in terms of what they will embrace and what they won't," said Tom Ebbern, oil and gas analyst in Calgary with Newcrest Capital Inc.
"The market is saying selling assets and changing to gas is interesting, but we want to see a gas producer that does more than just sell assets to become a gas producer," he said.
Recently, the company announced the sale of $56-million in assets, mostly heavy oil, that will bring down bank debt to $165-million by the end of the year, from $225-million.
Newcrest has a "buy" rating on on Beau Canada stock. It recently increased its 12-month target price to $3.25, from $2.75.
"I suspect that over the winter, as gas prices continue to remain strong, Beau will start to get that recognition that it's looking for," said Mr. Ebbern.
"I think they have turned the corner. I like the discount they were trading at through much of the fall and I think there is additional upside," agrees Robert Feick, oil and gas analyst with Merrill Lynch & Co. in Calgary. He, too, rates Beau a "buy", with a 12-month target of $3.
"The transition has really just occurred through 1998. Prior to that they were oil weighted, and much of that oil was penalized by the widening heavy-crude differential," said Mr. Feick.
Beau said the latest asset sale, which is larger than earlier planned, will reduce 1999 forecast production by 10% to an average of 120 million cubic feet a day of natural gas and 7,000 barrels a day of oil, of which 20% is heavy oil production. That has changed from 71 million cubic feet a day of natural gas in 1997, and 10,450 b/d of oil and natural gas liquids, of which about 40% was heavy production.
The new production mix, with 65% natural gas, is expected to result in higher cash flow of $68-million for 1999 (63¢ a share), up from $45-million (45¢) in 1998.
Natural gas prices have been strengthening in response to the opening of new U.S. export markets because of the addition of pipelines, while oil prices have been slumping for more than a year.
For 1999, Beau is assuming average oil prices of $15.50 (US) a barrel and natural gas prices of $2.35 mcf. About 55% of its natural gas production has been pre-sold at around $2.45 mcf.
In addition to its new focus, Beau's stock could move if there is upside from high impact prospects or hidden assets. They include any successful drilling results in Western Canada, a recent venture in Cuba, and the advantage of being a mid-sized company, one of the few mid-sized producers left in the industry.
Said Mr. Ebbern: "As you find the institutional market coming back and looking at oil and gas firms, there is limited product and Beau should become attractive."
The company is starting to drill exploratory wells in Cuba in January through its 65%-owned subsidiary, Genoil Inc. While Beau's exposure is only about $2-million to $3-million in capital spending, a significant find could double the value of the company.
The company would have an immediate buyer for the oil -- the Cuban government, which Beau says is prepared to pay world prices. The country now imports about 120,000 to 130,000 barrels a day.
Another hidden asset is heavy oil, which is being allowed to go into natural decline or being shut in while oil prices remain low. If that changes, Beau could bring back 1,000 barrels a day of production that is currently shut in.
"The market is now really stuck with looking at what's wrong with companies. As the market improves, you will see companies like Beau make up lost ground," said Mr. Ebbern. |
