MARKET WRAP FOR DAY ENDING TUESDAY 12/29/98 / With Focus On Canada + Oil & Gas (Part 2 of 2)
Hot Stocks
Teklogix International Stages Remarkable Turnaround
Kim Hanson - Financial Post
Teklogix International Inc. is back on track and analysts anticipate the Toronto based company will blast through the new year as one of 1998's best performing stocks on the Toronto Stock Exchange.
The wireless data communications firm, whose stock (TKX/TSE) rose 20¢ to a 52-week high of $17.20 on Thursday, has also been pegged by some analysts as one of the top 10 picks for 1999. That's an incredible leap from where the company was a year ago, when investors were hit hard after its earnings collapsed. Its share price plunged to a 52-week low of $2.20 on Dec. 18, 1997.
"This is a remarkable turnaround story," said Barry Richards, an analyst with Sprott Securities Ltd. in Toronto. "We haven't even seen the stock get back to its historical high and I don't think it's too much of a stretch to say that it will return to $22 and then some."
Teklogix, which went public in 1995, provides wireless data communications technology that enables businesses with mobile workforces to store, move, and track goods. The Teklogix solution includes everything from a bar-code reader, hand-held computer or vehicle mounted terminal to repeater stations and network controllers.
The company has historically endured solid returns, with its shares climbing as high as $22 in February, 1997. However, a dip in European sales coupled by a failed acquisition and overspending caused the company's earnings to deteriorate through most of 1998.
But the launch of an aggressive earnings improvement program between June and September nursed the company back to health. By keeping its margins high and returning to its core market, analysts say Teklogix has regained the confidence of the investment community.
"The company got too fat," said Michael Van Aelst, an analyst with CIBC Wood Gundy Securities Inc. in Montreal, who recommends the stock as a "strong buy" with a $12-month target price of $15. Mr. Van Aelst anticipates Teklogix's revenue will grow by 20% in 1999 and 15% in 2000.
Key changes are fuelling the company's recovery. Teklogix streamlined its sales and marketing divisions, revamped inexperienced upper management, and eliminated inefficiencies caused by Badger Computers, a former division of U.S.-based Group Technologies Corp., which it acquired in March, 1996, and sold last May.
"Badger hurt Teklogix's performance, it was losing money and it distracted the company from its existing operations," said Kevin Binnie, an analyst with Pacific International Securities Inc.
Badger Computers, which specializes in manufacturing rugged laptop computers, cost the company $7.3-million in lost revenue, said Gord Wilde, Teklogix's chief financial officer and vice-president finance.
Following the tumultuous period, Teklogix stock climbed 31% in October after it posted earnings of $3.9 million, or 28¢ a share, for the second quarter ended Sept. 30, 1998, compared with a loss on continuing operations of $0.9 million (7¢) in the second quarter last year. The company reported record consolidated revenue of $42.3 million for the period, a 37% gain over the $30.8 million reported last year. For the first six months of fiscal 1999, Teklogix recorded revenue of $77.2 millionand net earnings of $6.2 million (45¢ a share). That compares with revenue of $56.6-million and a net loss of $0.7 million (5¢) for the same period last year.
It is expected that Teklogix will benefit from rapid growth in the global wireless data communications industry, which should exceed 20% a year, as demand for enterprise resource play and supply automated software increases. Already, the company has installed more than 5,000 systems in 45 countries around the globe for clients, which include more than 35% of all Fortune 500 companies, said an equity research report by CIBC Wood Gundy.
Despite the rave reviews, some analysts admit institutional investors are still a little gun-shy of Teklogix because "they got burned the previous year," and will take a wait-and-see approach with the company, said Mr. Richards. Teklogix could also boost its standing with shareholders if it listed on the Nasdaq stock market, he said.
Analysts have high hopes for industry veteran Ian McElroy, Teklogix's newly appointed president and chief executive officer, who replaced company founder Roderick Coutts earlier this month.
"The company had to bring in some people with a good operating background," said Louis Kates, an analyst with Credifinance Securities Ltd. "Ian has what it takes to take the company to the next level," said Mr. Van Aelst.
Mr. McElroy has held several senior executive positions at Bell Canada, including president and CEO of Bell Services and was previously president and CEO of BCE Mobile, the publicly traded company which operated under the Bell Mobility brand name. Previously, Mr. McElroy worked for 20 years at IBM Canada Ltd., most recently as vice-president.
Mr. Coutts will stay on as chairman but Cliff Bernard and Peter Halsall, the company's two other founders, have recently taken a less active role with the company.
Mr. Wilde, Teklogix's vice-president finance, confirmed widespread expectation on the Street "that each of the three partners will relinquish part of their holdings to less than 51%", making the possibility of a takeover much more imminent. "If the latter were to occur, we could see the share price reach $20," Mr. Van Aelst said.
Analyst Coverage
Deutsche Bank Securities analyst John Clarke said Wednesday he changed ratings on five petroleum companies.
-- cut Ranger Oil Ltd <RGO.N> to an accumulate from a buy rating.
-- raised Gulf Indonesia Resources Ltd <GRL.N>, Gulf Canada Resources Ltd <GOU.TO> and Canadian Occidential Petroleum Ltd<CXY.TO> to accumulate from hold rating.
-- raised Bitech Petroleum Corp <BPU.N> to hold from a sell rating.
-- shares of Ranger Oil closed at 4, Gulf Indonesia closed at 6, Gulf Canada closed at 2-3/8. (U.S. $)
Canadian Dollar Ends Softer In Dead-Calm Trade
The Canadian dollar closed slightly softer at C$1.5518 ($0.6444) in extremely quiet trade on Tuesday, with many dealers opting out of currency markets ahead of Friday's New Year's day holiday.
"We barely saw any trades go by today," a foreign-exchange trader in Montreal said.
"The (Canadian) dollar has been sitting at about C$1.5512 ($0.6447) to C$1.5525 ($0.6441) all day doing basically nothing," he added.
Canadian financial markets were closed on Monday for the Boxing Day holiday, creating a truncated and very quiet trading week.
Traders said a continued decline in commodity prices and year-end corporate demands for U.S. dollars have softened the the Canadian dollar in recent sessions.
On the crosses, the dollar was softer against the German mark at 1.0773 from the morning's 1.0811. The dollar was little changed against the Japanese yen at 74.36 from 74.38.
Canadian Bonds End Sharply Firmer As U.S. Recovers
Canadian government bonds ended sharply firmer on Tuesday in the absence of active sellers in subdued year-end trading and boosted by a recovery in U.S. bond prices.
Traders returning from a four-day weekend found Canadian bonds rebounding from last week's losses and defying initial weakness in U.S. treasuries. U.S. bonds later cut losses on safe-haven flows and attracted some buying on the back of better-than-expected two-year U.S. note auction.
A recovery in the U.S. market, despite strong New York stocks, added fuel to gains in Canadian bonds.
"There are a couple of guys who were long and maybe wanted to sell some bonds, but they don't want to push the market down for the year-end mark," a Toronto bond trader said.
Canada's benchmark 30-year bond due June 1, 2027 extended gains throughout the day, ending C$1.31 higher at C$140.19, pushing the yield down to 5.259 percent.
The U.S. 30-year bond reversed selling and rose 24/32 to yield 5.104 percent. The Canada-U.S. yield spread widened back to 16 basis points from 11 points at the previous close here on Thursday.
The Canada-U.S. spread on long bonds has been on a general shrinking trend in recent sessions as perceived risks of holding Canadian assets have been reduced after the peak of global market jitters in August to September. But Canada's outperformance has been exaggerated by thin trading volumes.
Trading is expected to remain light this week ahead of another long weekend. Key global markets will be closed on Friday for the New Year's holiday, and Canadian bonds will trade only half day on New Year's Eve.
Financial markets were closed in Canada on Friday for Christmas and on Monday for Boxing Day.
In the morning, further declines in Japanese government bond prices spilled over to U.S. bonds, which had been firmer on Monday after slumping in the face of a rally in stock prices and signs of steady U.S. economic growth last week.
In Canada, the 2-30 year yield spread was 48 basis points, up from 45 basis points on Thursday. The yield curve had flattened last week as the front end was hurt. The two-year bond was up C$0.17 to C$100.39, yielding 4.782 percent.
The money market was little changed in quiet trading. Trading was seen mostly driven by client orders.
"The short end of the bill market has continued to rally and to get very expensive, and we are looking for that to continue," a money trader said. "People get out of overnight and put their money into bills for year-end window dressing."
Canada's three-month when-issued T-bill yielded 4.68 percent a bit firmer than 4.69 percent at the previous close here.
The Bank of Canada said on Tuesday it would sell a total of C$6.6 billion of treasury bills at its January 5 auction.
Top Stories
East Coast Oil Projects Off Fast Track
Brent Jang - The Globe & Mail
Depressed commodity prices have pushed Newfoundland oil projects off the fast track, forcing ambitious ventures such as Terra Nova and White Rose to take a cautious approach in 1999.
When oil prices hovered around $26 (U.S.) a barrel in early 1997, company officials and industry observers thought that Terra Nova could be pumping oil by late 1999, and White Rose could be completed by the end of 2002.
Such speedy scheduling has turned out to be overly optimistic. Major energy companies on the East Coast now have to carefully watch their spending as cash flow plummets amid oil prices of less than $12 a barrel.
The Hibernia platform, which began pumping oil in November, 1997, will be the only oil-producing project in the Grand Banks until late 2000, when Terra Nova is slated to start operations under its "regular" timetable.
It's unclear which project will follow. For now, White Rose is forecast to come on stream in 2004 -- a slower pace than what East Coast boosters had dreamed about. Another promising oil venture, Hebron, has experienced delays in its preliminary drilling program.
Although low oil prices have created uncertainty, "this is still going to be a major, multifaceted oil region," said Newfoundland Energy Minister Roger Grimes.
Fortunately, petroleum companies are taking the long-term view of Newfoundland's oil prospects, assuaging the "fear and sense of nervousness about whether the major players would back off," Mr. Grimes said from St. John's.
"We have steady commitments and steady involvement from players like Petro-Canada. It's just that the fast tracking scenario understandably has been downplayed."
Today's prognosis contrasts sharply with the rosy outlook 18 months to two years ago, when project timetables seemed destined to be shortened and there was bold talk about a possible East Coast oil boom.
"Newfoundland's getting a lesson very quickly about the cyclical nature of the oil industry -- it can go from boom to bust fairly quickly," said Duncan Mathieson, an analyst with Scotia Capital Markets in Toronto.
Still, Mr. Mathieson doesn't believe the East Coast oil sector will go bust because Mobil Oil Canada Ltd., Chevron Canada Resources Ltd., Petro-Canada and Husky Oil Ltd. remain committed to Newfoundland.
Those four big players -- all based in Calgary -- will provide basic funding to meet project targets and deadlines on their original timetables. Petrocan, for instance, plans to spend $400-million (Canadian) on its East Coast oil ventures in 1999.
Mr. Mathieson said the $5.8-billion Hibernia offshore platform isn't in any danger of turning into a white elephant, and new drilling programs are still in the cards for 1999.
Within six months, three rigs are expected to be in the North Atlantic on preliminary drilling missions in three fields that have yet to produce a drop of oil commercially: Terra Nova, White Rose and Hebron.
"The whole economics and excitement of the Newfoundland projects are waning a bit," said Richard Roberge, an analyst with PricewaterhouseCoopers in Calgary.
Still, the region has too much potential for companies to abandon their investments, analysts say.
In Hibernia's case, "it's built now. They're not going to shut it down or stop it," Mr. Roberge said.
Ian Doig, publisher of Calgary-based energy newsletter Doig's Digest, said too many tax dollars have been pumped into Newfoundland to develop its fledging oil industry.
Although Terra Nova, White Rose and Hebron are being designed to operate without subsidies, Hibernia received $1-billion in grants from Ottawa.
"The Newfoundland play doesn't have any appeal for me. It's too high cost," Mr. Doig said. Ottawa owns 8.5 per cent of Hibernia and 18.2 per cent of Petrocan.
Hibernia president Harvey Smith counters that the Newfoundland megaprojects remain economically viable because offshore fields have huge reserves and 25-year life spans.
Offshore technology is constantly improving, and Hibernia will be implementing various cost-saving measures in 1999, which will pay off once oil prices rebound, Mr. Smith said.
Hibernia initially calculated its break-even point at $12.95 (U.S.) a barrel, but that figure could be shaved by $2 within a few years.
"We're very concerned about the low oil prices, but all we can do is look at our operation and see how we can be cost effective and work on our cost per barrel," Mr. Smith said.
Ed Peplinski, an analyst with ARC Financial Corp. in Calgary, predicts that oil prices will average $14.50 a barrel in 1999, roughly the same as in 1998.
With the long lead times required for Terra Nova, White Rose and Hebron, the key for Newfoundland will be where oil prices are in the next two to five years, Mr. Peplinski said.
The Hebron project, with Mobil and Chevron as the lead partners, is expected to begin drilling in earnest in January to appraise recent engineering studies that peg the Hebron field's recoverable reserves at 600 million barrels.
And Husky spokeswoman Laurel Nichol said the Husky-led White Rose project is moving ahead despite short term concerns over weak oil prices.
Husky holds a 71.2-per-cent stake in White Rose, but is looking for new partners to diversify the ownership group. "We're open to discussions with interested parties with strong technical capabilities," Ms. Nichol said.
The White Rose consortium plans to start drilling by March in a so-called delineation program to give its owners more information about the oil field that engineers believe contains 250 million barrels of recoverable oil.
By contrast, the Hibernia field holds an estimated 750 million barrels of recoverable reserves. Mobil is the lead partner in the Hibernia project with a 33.1-per-cent interest, followed by Chevron at 26.9 per cent and Petrocan at 20 per cent.
The Terra Nova project, led by Petrocan's 29-per-cent interest, expects to drill some development wells by September as part of preliminary work before Terra Nova's floating production vessel arrives in late 2000.
Between 370 million and 470 million barrels of oil could be recovered from the Terra Nova property, according to geological studies.
FTC Approves BP-Amoco Merger
The Federal Trade Commission today approved the $53 billion merger of British Petroleum Co. and Amoco Corp. after the companies agreed to sell 134 gasoline stations and nine petroleum terminals.
To appease antitrust concerns, the companies also agreed to give owners of more than 1,600 gasoline stations in 30 cities permission to end their contracts.
FTC Chairman Robert Pitofsky said the agency was satisified that "the operations of these two companies rarely overlap in a way that threatens competition."
The FTC voted 4-0 to approve the companies' offer, and its approval becomes final after a 60-day comment period.
The stock merger, announced Aug. 11, is among the largest in history. Chicago-based Amoco is the nation's fifth-largest oil company with roughly 9,300 gasoline stations.
London-based British Petroleum, the world's third-largest oil company, sells its products through a network of about 17,900 stations.
The deal is largely eclipsed by the pending $77.2 merger of Exxon and Mobil, which would combine the biggest U.S. oil companies. Analysts said Exxon and Mobil also probably will have to sell off gas stations and refineries in regions where, together, they would dominate the market.
The FTC said it looked at business areas where British Petroleum and Amoco's operations might overlap and found few reasons for concern.
"Where they do overlap, mainly in wholesale and retail sale of gasoline in local markets in this country, the commission with the cooperation of the companies has achieved substantial divestitures and other relief," Pitofsky said in a statement.
The companies offered to divest 134 gas stations in eight markets and nine light petroleum products terminals, and they will make it easier for independent retail dealers to swtich their gasoline stations to other brands. The sales of those stations must take place within six months.
The FTC said the companies will sell the nine terminals -- all located in the Midwest and Southeast -- to The Williams Cos. or to another company approved by the FTC.
That sale must take place no later than 10 days after the merger is completed or within the next 30 days, whichever is later.
Conoco Cutting Nearly 1,000 Jobs Next Year
Conoco Inc., the latest energy company hit hard by plunging oil prices, said Tuesday it will eliminate 975 jobs next year as part of an effort to slash expenses by $500 million US.
"We are expediting these plans to position the company to deal with the lingering problem of low crude oil prices," Conoco president Archie Dunham said. "Regrettably, these actions will result in fewer jobs."
The cost-cutting program, which would reduce Conoco's spending by 22 per cent, will result in a charge of $50 million US against the U.S. company's fourth quarter earnings.
Conoco has about 16,000 regular employees and more than 27,000 full-time contractors worldwide. Company spokesman Carlton Adams would not disclose which employees face layoffs or in what cities they will be made.
"More detailed information will be available after the first of the year," he said. "I don't think any door is closed at this point."
Conoco's Canadian subsidiary, Conoco Canada Ltd., employs about 70 people, divided between its head office in Calgary and a field office near the company's main oil and gas properties at Edson, Alta, west of Edmonton.
"At this time we are not aware of what is going to be happening with our local staff," said Conoco Canada spokesman Jack Doyle. "Unfortuately, we're wondering . . . where we're going to be at."
The sharp drop in world crude oil prices to 12-year lows has been wreaking havoc on the oil industry, resulting in widespread layoffs and mergers as companies attempt to keep costs down.
On Tuesday, crude prices rose in London on fresh U.S.-Iraq tension, but the gains looked brittle amid signs of deepening disarray within the producer club OPEC.
International benchmark Brent crude from the North Sea traded 50 cents higher at $10.61 US a barrel, more than a dollar above a 12-year low of $9.55 US hit before Christmas.
Last month, Texaco Inc. announced plans to cut 1,000 jobs in exploration and production in a restructuring that will save $200 million US a year. The slump also helped lead to the marriage of Exxon Corp. and Mobil Corp., which expect $2.8 billion in cost savings by merging.
In another sign of trouble, Dallas-based oil service provider Halliburton Co. announced plans Monday to lay off another 2,750 employees. The company had already announced 8,100 layoffs.
Conoco's reorganization calls for about $1.3 billion US of the company's 1999 budget to be directed toward worldwide exploration, production and natural gas activities, $500 million US less than in 1998.
Worldwide refining, marketing and transportation expenditures will be about $500 million, similar to 1998 spending.
To further cut costs, Conoco will combine some U.S. functions. The combined efforts are expected to save the company about $60 million US a year.
Conoco, the ninth-largest U.S. oil company, was spun off by DuPont Co. earlier this year. |
