Outlook For Natural Gas Markets Has Seldom Been Brighter
By John McGilvray, editor
Oil/Energy Statistics Bulletin
In
sympathy with the considerable turmoil in oil markets recently,
the Canadian oil group came under some profit taking pressure
this past fortnight. The Canadian oils as a group have held on
to the lion's share of the gains posted during the latter portion
of 2002 and early 2003, and we do not expect them to falter much
further. In fact, they have recovered a bit this week. In time,
the price of oil should stabilize in profitable ranges and the
outlook for natural gas markets, extremely important to the Canadian
oils, has seldom been brighter.
One good example of
the steadfast market performance of the Canadian oils is our
featured company, Canadian Natural Resources (NYSE TSE
CNQ, www.cnri.com), which remains within hailing distance of
its twelve month high despite the recent profit taking. The chief
reason for the enthusiasm among investors is the firm's strong
recent production gains and the probability that more advances
are in the offing.
Canadian Natural Resources
has long been one of our favorite independent energy concerns.
The company's recent results, and its 2003 outlook, do nothing
to diminish our high opinion. Last year was an especially productive
one for CNQ as it marked strong gains in virtually every important
category. Production, reserves and cash flow all reached peaks,
aided by some timely acquisitions, and the company got a foothold
in one of Canada's high potential natural gas areas. Regarding
natural gas, Canadian Natural's moves in 2002 brought it in much
better balance regarding gas vs. oil reserves and production
and placed the firm on solid ground when it comes to benefiting
from the expected continuing strength in Canadian natural gas
markets over the long-term. Last year's output gains are expected
to be followed by additional advances in 2002 and this looks
like another year of strong gains in cash flow, to be accompanied
by profit recovery and ongoing debt reduction. All things considered,
CNQ remains a very solid choice for intermediate and longer-term
investment.
North American Exploration and Production
Thanks
mainly to its acquisition of gas-rich Rio Alto Exploration Co.,
Canadian Natural had a banner year as a gas producer in 2002
and more gains are expected this year. The company's largest
single energy product by far is natural gas, comprising nearly
one-half of its mix. The mid-year acquisition of Rio Alto enabled
CNQ to post a strong 34% advance over 2001's gas production volumes
and also played a major role in the firm's achievement of an
overall reserve replacement ratio of 301% for the year despite
a 17% gain in total production.
One of the principal
sources of gas production gains for Canadian Natural during the
first half of 2002 was the Ladyfern field in Northeast British
Columbia. Ladyfern is a very unusual gas field in that production
was able to be accelerated quickly and payback was rapid. Conversely,
this large pool's output, once it began to decline, dropped quickly.
For example, Ladyfern's contribution to gas production during
the third quarter of 2002 averaged 178 million cubic feet a day,
but, by the final quarter it was down to only 127 MMcf/d and
it is headed lower.
In order to offset
this decline and to help meet its expectation of a 2003 gain
of 10% in overall production, the company has mounted an aggressive
natural gas exploratory program on some of the high potential
lands in Northwest Alberta acquired with Rio Alto. These holdings,
we should note, were accompanied by a solid inventory of seismic
information as well as by pipeline facilities and other natural
gas infrastructure. The firm began drilling there during the
first quarter and will drill a total of up to 65 wells this year.
All told, Canadian Natural plans to increase its gas drilling
in2003 to about 580 wells, 240 of them in the current quarter.
As a North American
oil producer Canadian Natural relies on a combination of conventional
light oil production, enhanced oil recovery and a substantial
interest in heavy oil. Drilling for oil in the western provinces
has been successful and that, combined with Pelican Lake enhanced
oil recovery and heavy oil output, generated a moderate gain
in domestic production for 2002. For the very long run, the company's
interest in the Horizon Oil Sands Project should have a major
positive impact. This project sits on leases covering over 6
billion barrels of mineable reserves that could support production
of 232,000 barrels a day of light crude for over 40 years. Right
now, it appears that initial production could be realized some
time in 2008.
International Exploration And Production
The
better part of Canadian Natural's growth in oil production recently
has come from its activities in two key areas the U.K. North
Sea and offshore West Africa. During the fourth quarter of 2002,
CNQ became the operator of the Ninian, Murcheson and Lyell fields
in the North Sea and it also has interests in other major fields,
such as Banff, where a new well was brought on stream in December
and is yielding 5,500 b/d oil net to the company. December also
saw the beginning of output from a new well in the Columbia B
field at a net rate of 6,500 b/d. This year, Canadian Natural
is devoting a total of C$283 million to U.K. exploration, and
it expects to drill an additional 18 wells.
Offshore Cote d'lvoir,
Canadian Natural is the 59% owner and operator of the Espoir
field where a water injection program is expected to enhance
production by about 5,000 b/d this summer. Further down the road,
the company expects production from the Baobab filed here to
begin some time in 2005 at a rate of 45,000 b/d and rise to about
60,000 b/d. The company's operations have not been impacted by
political unrest in Cote d'lvoire, but it has established back-up
facilities in neighboring country just in case.
Canadian Natural
Resources remains an excellent Buy with 2003 price targets of
38 and 48 (Canadian) and the potential for much higher prices
than that over the longer run.
Petro-Canada (NYSE
PCZ 33.21; TSE PCA 49.00) is another top-notch Canadian oil company
whose shares have done very well over the past year or so and
have also consistently resisted profit taking pressures. Again,
the reason is production growth, in this case among the best
in the entire group with this year expected to bring especially
pronounced gains. Key to the firm's continuing growth in output
is a combination of domestic frontier drilling, exemplified by
the East Coast offshore play, and deft acquisition, specifically
last year's purchase of Veba Oil & Gas. The latter move gave
Petro-Canada a very strong international presence and greatly
enhanced its long-range production growth potential. Petro-Canada
remains a solid Buy.
Editor's Note: John
McGilvray is editor of Oil/Energy Statistics Bulletin and Canadian
Oil Reports, P.O. Box 189, Whitman, MA 02382. 1 year, 24 issues,
$185.
