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OIL/ENERGY STATISTICS BULLETIN and Canadian Oil Reports
P.O. Box 189, Whitman, MA 02382.
1 year, 24 issues, $185.
Oil & Gas markets outlook provides
positive background for energy stocks
John McGilvray: "As we move toward the end of summer and the beginning of heating season, the outlook for natural gas markets, even if winter is less harsh than was the case last year, remains very positive. Thus the outlook for the companies that produce this increasingly popular fuel remains very bright. Where oil is concerned, prices have also remained very firm, a bit higher than we had been expecting. Where we have been projecting that crude would remain within the $26 to $30 a barrel range, it has tended to trade a bit beyond the high side of that range, remaining in the $32 a barrel area lately. That is mainly attributable to continuing tight inventories and a much slower than expected recovery in production from Iraq. On the gasoline front, a late surge in summer demand, coming at the same time that inventories are declining, is putting upward pressure on prices and enhancing the profits of those with downstream operations. All of these things considered, it still looks like the second half of 2003 will be every bit as prosperous for oil and gas companies as were the first six months.
Current Buys include: Devon Energy (Amex DVN), Cimarex Energy (NYSE XEC) Southwestern Energy (NYSE SWN), Unit Corporation (NYSE UNT) and Tidewater, Inc. (NYSE TDW).
From Canada's Oil Patch
The flow of second quarter profit reports from Canadian oil companies accelerated this past fortnight and it made for some pretty good reading. In general, the principal positive trends were high natural gas prices, continuing strong oil markets and, in many cases growing production. For the integrated companies, refining and marketing results also improved. And, with all of these positive trends still firmly in place, it still looks like the coming quarters will bring more prosperity for Canadian oil companies.
A good example of the progress being made by the larger, integrated Canadian oils comes from Petro-Canada (NYSE PCZ 40.32) which recently reported solid profit gains for the second quarter and first half. For the June quarter, the company netted C$1.36 a share before special items (currency translation and property sale gains brought the total to C$2.22 a share), up from C$1.05 a year earlier. Through six months, Petro-Canada had net income of C$3.57 a share, up from the C$1.39 earned in the first half of 2002.
As has been the trend generally, earnings from production were very strong, coming to C$382 million in the second quarter vs C$232 million a year earlier. The lion's share of that advance was contributed by Petro-Canada's substantial North American natural gas operation, which had earnings for the three months of C$180 million, considerably more than the C$57 million netted in the June quarter of last year. Canadian natural gas prices for the quarter averaged C$6.55 per thousand cubic feet, up considerably from the year ago average of C$4.13 per Mcf. Western Canadian gas production declined, due to planned maintenance and the sale of some non-core producing properties, to 680 MMcf/d from 736 MMcf/d in the same period last year. Western Canadian gas aside, Petro-Canada saw substantial growth in its production for the second quarter. Overall, the company's output of oil, natural gas and gas liquids averaged 468,000 barrels of oil equivalent per day (a barrel of oil taken as being equal to 6 thousand cubic feet of gas) vs. 375,000 boe/d a year ago. Most of the gains were attributed to added production from Veba Oil & Gas, which was acquired during the second quarter last year, and strong gains from the Terra Nova and Hibernia fields off the East Coast.
Petro-Canada also had strong gains in refining and marketing earnings for the second quarter, which came to C$124 million vs. C$73 million a year earlier. Petro-Canada is right on course toward achieving our 2003 price goal of 44 and the shares remain a good, highquality, investment.
Follow-up to a Past Recommendation
Canadian Natural Resources (NYSE CNQ 41.20) Canadian Natural Resources has long been one of our favorites among the larger Canadian producing companies and the firm's strong recent progress shows why. For the quarter that ended with June, Canadian Natural reported record cash flow of C$762 million, up from C$475 million in the same 2002 quarter. This generated net income for the quarter of C$525 million (C$3.91 a share), a solid gain over the 2002 figures of C$145 million (C$1.18 per share). During the quarter, C$201 million in long term debt was repaid, bringing the total that has been repaid through the first half of this year to C$578 million.
Of course, strong oil and especially natural gas prices had major roles in fueling these fine results for Canadian Natural. As is the case with most of the top notch producers, however, production gains also contributed. In fact, the company had record natural gas sales for the quarter averaging 1.3 billion cubic feet a day. It also achieved record oil and natural gas liquids output averaging over 240,000 barrels a day. The company's production representing 48% of overall output, on an energy equivalent basis, for the second quarter.
Canadian Natural Resources has made strong progress in recent weeks toward our 2003 price target of 44 and it now appears that this goal will be achieved with relative ease. We would buy the shares with that, and the potential for considerably higher prices in the long term, in mind."
ECONOMIC ADVICE
3910 NE 26th Ave., Lighthouse Point, FL 33064.
Monthly, 1 year, $99.
Excessive borrowing by the Federal
Government reason for rise in gold stocks
James Rapholz: "My many gold and silver stocks have had a better run in August than they had in the past three years combined. But gold hasn't gone up much it's only about $360 and the dollar hasn't fallen much against the Euro either. Gold stocks are rising in anticipation that the value of the dollar is going to fall and force gold up into the universe. The dollar can't fall much more against the Euro because the European Union is sick or perhaps better put "very sick." The real rise in gold stocks (the XAU Philadelphia Gold and Silver Stock Exchange is at a five year high of over 90) is being caused by the excessive borrowing by our federal government. They are borrowing 500 billion this year, a new record high and to expect to borrow 750 billion next year."
Editor's Note: How would you like to invest in a resource stock that pays 17% yield? The answer to that question is published in Economic Advice. Special 3-Month Trial for Bull & Bear readers is $9.
INVESTOR'S DIGEST of Canada
133 Richmond St., W., Toronto, Ontario M5H 3M8.
1 year, 24 issues, $137.
Analysts dig Teck, roll
Alcan into second place
A valuable section in this award-winning investment service is Investor's Digest Morning Call. Editor Michael Popovich offers Buy, Sell and Hold advice, plus earnings estimates, on more than 1,000 Canadian companies. The Strongest Recommendations this month are as follows:
"With better-than-expected results from a recent acquisition, as well as a bigger chunk of the North American can market, you'd think Alcan Inc. (TSX AL, $48.74, 514-848-8000, www.alcan.com) would want to take a breather.
But it hasn't. Early last month, the Montreal-based aluminum giant launched an unsolicited takeover bid for PechineySA, a Paris-based competitor.
And even though Pechiney says it might accept a sweeter offer from Alcan, the Canadian company says it has no immediate plans to change its bid. It does, however, say it's ready to open a dialogue with the French aluminum maker.
Alcan's unsettled state of affairs may account for its second-place showing-down from first place-in our list of top-10 buys this month.
Of the 10 analysts we surveyed, four rated Alcan a buy; three, a buy/hold and three, a hold.
Although some analysts favor a merger of the two rivals, they caution that such a linkup might not fully prove itself until regulatory and employee issues are settled.
An Alcan-Pechiney combination would not only create the world's largest aluminum smelting company, but the world's second-largest bauxite and alumina producer as well.
Meanwhile, Alcan can boast a low debt-to-capital ratio (30 per cent), as well as pension assumptions that will probably save it from having to raise its book pension expense.
And although Alcan's shares have taken a hit from both a rising loonie and a falloff in aircraft manufacturing, it's a good bet the stock will eventually rebound, says Sunil Vidyarthi, a portfolio manager based in Oakville, ON.
For one thing, he says, the loonie is eventually bound to come down. And people, regardless of what they now say, will most likely get over their fear of flying.
Moreover, Alcan, by virtue of being part of the world aluminum cartel, inevitably benefits from a cartel's pricing power, Mr. Vidyarthi says.
For the three months ended June 30, Alcan swung to a net loss of US$90 million, or $0.28 a share, from net earnings of $70 million, or $0.22 a share, for the similar period in 2002. (The poorer performance reflects results from discontinued operations).
Alcan's sales and operating revenue, however, were higher, rising 9.7 per cent to $3.4 billion from $3.1 billion.
Our market mavens may have been cool when it came to Alcan. But they were definitely hot when it came to Teck Cominco Ltd. (TSX TEK, $13.70, 604-687-1117, www.teckcominco.com).
Of the 10 analysts we surveyed, five rated Teck a buy; three, a buy/hold and two, a hold, putting the Vancouver-based mining giant into first place in our list of top-10 buys.
Our analysts' enthusiasm may reflect the belief that zinc and copper two of the metals that Teck mines are in for a modest recovery over the next 12 months.
Meanwhile, the company is making money, having posted second-quarter net earnings of $12 million, or $0.06 a share a 50 per cent rise over the similar period in 2002. Revenue, however, was lower, slipping to $502 million from $521 million.
Besides having both the first and third-largest zinc mines in the world, Teck can also lay claim to managing the second-largest metallurgical coal business on the globe.
Our analysts tossed a steelmaker Stelco, Inc. (TSX STE, $1.30, 800-263-9305, www.stelco.ca) onto the slag heap, tagging it as this month's top sell.
Of the six market mavens we canvassed regarding the Ontario-based company, all six came up with a rating of hold/sell.
It's easy to see why. For the three months ended June 30, Stelco swung to a net loss of $82 million, or $0.83 a share, from net earnings of $6 million, or $0.03 a share, for the similar period in 2002.
For the six months ended June 30, the picture was even bleaker, with the company's net loss deepening to $126 million from $25 million.
Moreover, with the recent resignation of president Jim Alfano, Stelco must contend with the uncertainty that accompanies any change at the top.
Indeed, Fred Telmer, Mr. Alfano's successor, has indicated he will quickly move to slash costs.
"There are some dramatic things that we are considering," said Mr. Telmer. "They will come out in time and they won't take long."
Stelco, meanwhile, may be facing a liquidity crunch, although at least one debt rating agency sees no problem for the company as long as the market for steel remains reasonably sound.
Editor's Note: Investor's Digest of Canada was voted the World's Best Investment Advisory by the Washington-based Newsletter and Electronic Publishers Foundation in 2003 for the fourth time.
FREEMARKET GOLD & MONEY REPORT
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 issues, $260. Includes Interim Bulletins.
Be prepared for a quick jump in
the Gold price. Silver looks stronger
James Turk: "Start the countdown. Gold is nearly ready to jump higher, a move that I expect will result in gold taking out $400.
Take a close look at the accompanying chart. We can see that since the last letter, gold's action has been positive. Not only has it stayed within the confines of the pennant pattern formed to consolidate the gains from its big run-up early in the year, but it has stayed near the top of the pennant. i.e., near the down trendline in the pennant. This action is a sign of strength.
Gold is trading very `tight', meaning that it is being very well bought on the dips in price. I like this kind of action a lot. Not only that, but the pennant itself is a very bullish-looking pattern. These factors bode well for gold.
I have been saying that the breakout from this pennant will occur "in September, or October at the latest, but it could happen at any time". I continue to stick with that projection.
I've looked closely at my short-term trading models that I use for gold. My best guess is that gold will break above $366 within the next eight trading sessions. It will then grind for another week or two under $374, as the shorts try to defend their positions and keep gold from going higher.
The shorts will lose though, if not this battle, then at some time in the future. But my guess is that they will have their head handed to them by the third week of September, at which time I expect gold will close above $374. Once $374 is broken, then gold will rocket higher as the shorts run for cover.
I have noted in my newsletter how everything is coming together here at the same time. To repeat my view as stated in the last letter, "I expect that gold's 8-month consolidation will end with an upside breakout from the pennant, which will send gold to at least $435, and possibly much higher, within two or three weeks from the day of the breakout. Therefore, be prepared for a very quick $60-$70 jump in the gold price."
In other words, once gold clears $374 (not $366), then we have a reasonable degree of likelihood that the pennant pattern has indeed been broken. A close above $374 is what will ignite the gold rocket.
Again, there is one piece of advice from the last letter that I would like to repeat: "This chart pattern is of course no guarantee that gold is headed higher from here. But it does provide every reason to continue giving gold the benefit of any doubt about its bull trend."
In other words, gold's risk/reward ratio at present is very favorable to us gold bulls. Therefore, we should be playing this opportunity aggressively, and continue to build up our positions, while watching for our stop-out points to protect our trading capital just in case I'm wrong.
Our long-term chart is useful because it shows silver's potential, which is a price of over $6. When silver eventually achieves a successful breakout above $5.10-$5.12, it will be off to the races, with my $6.50 target as the first stop.
The short-term pattern for silver is bullish, though it is not too easy to see its recent day-to-day action on this long-term chart. Silver took one stab into the $4.80's, juts to test support. We added to our position on that day, and it is clear others did too because silver snapped right back, confirming a successful test of support. Subsequently, silver has held above $4.92, another positive sign.
On a short-term basis, silver looks even stronger than gold. Therefore, I think it is likely that silver will trade above $5.10 this week, while gold is still building support under $366. This observation brings up an important point- markets often cascade.
`Cascading' means that some markets lead and other markets follow. In other words, there is almost a waterfall effect. Here's how this cascading normally appears in the metals markets, which is exactly what is happening so far.
The gold mining stocks have been leading the price of gold, but the cascading even applies to the stocks themselves. Stocks like Freeport and Newmont were breaking into new high ground back in May and June, they were leading the sector, and have continued to perform well. Even though the XAU Index of mining stocks was lagging these two leading stocks, the XAU itself was leading the gold price.
Silver is leading gold, which is exactly what one would expect in a precious metals bull market. For this reason, we have been selling the gold/silver ratio, taking advantage of silver's relative out-performance of gold."
THE MONEYCHANGER
P.O. Box 178, Westpoint, TN 38486.
Monthly, 1 year, 10 silver dollars or $18 in U.S. 90% silver coin, or other gold or silver equivalents.
Gold has shown astonishing strength
Franklin Sanders: "What is the ideal gold market?
First, gold is rising against the dollar, the yen, and the Euro. Second, silver is rising faster than gold (the gold/silver ration is falling). Third, the dollar's real rate of return, dollar interest rate less inflation rate, is negative. Third, bonds and stocks are headed nowhere or down. Fourth, premiums on physical gold ought to be relatively strong. That's the ideal gold market.
Right now, not quite all are that clearly in gold's favour, but they're moving that way.
Gold has shown astonishing strength in the course of this correction, which may very well have ended.
However, this strength has not yet shown up in premiums on gold coins, which remain about where they have been. That could also mean that the retail public isn't yet jumping in.
My outlook hasn't changed since last month; gold's recent action has only solidified it. It appears now that both gold and silver have put in their seasonal lows. And when the dollar finishes it present countertrend rally and stocks head back down, probably by September or early October, we can expect gold to pass forever the $400 milestone. A customer recently reminded me of an old proverb. "You can loose dollars to the upside trying to save pennies on the downside." That's what the gold market looks like now. Buy gold.
Buy more silver than gold
Silver has gotten hot as it tries to break through that 5.13 5.19 resistance. We saw the touchback to the breakout that I expected, dropping as low as 485.8. Then today silver jumped up to 502.6! Yes, we could see another plunge down, but 500 has become the line in the sand. As with gold, we still haven't sent the premium on physical silver, primarily bags, appreciate.
The ratio still has a lot of work to do on the downside. It needs to move on down and break through 68, where it bounced, then penetrate 60. That will take it out of the channel extending back to 1998.
In physical silver I still prefer 90% silver coin for the cheapest price per ounce and greatest liquidity and divisibility. And yes, I would still buy more silver than gold, until you get your portfolio balance to 70% silver, 30% gold."
T. ROWE PRICE REPORT
100 East Pratt St., Baltimore, MD 21202.
Published for T. Rowe Price shareholders.
Energy geopolitics and
Natural resource investing
In this discussion Charles Ober, manager of the T. Rowe Price New Era Fund, (PRNEX) provides his perspective on how global political and economic issues are affecting the outlook for energy and other natural resource sectors. Mr. Ober joined T. Rowe Price in 1980 as an energy analyst and has managed the fund for six years. The fund invests in a wide range of natural resource-related industries.
Q: The major oil companies have posted much better earnings comparisons in recent months. How do you see the earnings picture shaping up for this sector?
A: The major oils did particularly well in the first quarter and probably the second quarter as well because energy price comparisons are up sharply year over year. Those comparisons will be less favorable in the third and fourth quarters. Refining margins were very high also in the first quarter because the companies kept low inventories. They were concerned that the minute the war with Iraq was over and the problems in Venezuela were over, the oil price would correct. Low inventories led to high refining profitability. I think that will abate as an influence through the rest of the year.
Q: Oil prices have fallen from about $39 a barrel before the war in Iraq to the high $20s recently. What are your expectations for oil prices over the intermediate and longer term?
A: Over the intermediate term, I think oil prices will weaken further, perhaps reaching the mid-to-low $20 area. Inventories will start to rebuild. They have been fairly low and tight. So, with that fundamental factor plus Venezuela and Nigeria coming back, and Iraq's gradual return to the market, a lot of pressure is taken off. Historically, the band of expectations for oil prices was about $18 to $22 a barrel. I think going forward it is going to be higher for geopolitical reasons and because cost pressures have risen for the industry.
Q: How long will it take Iraq to reach full production capacity?
A: Iraq is the second largest country in terms of reserves, so there is great potential. It will probably take another year to get production back to, say, 2.5 million barrels a day. It is going to take a more stable regime for western oil companies to invest there, but an additional three million barrels a day of capacity may be developed over the next eight years.
Q: Is Russia becoming a bigger factor in the global oil markets?
A: Russia and more important the entire former Soviet Union are major factors in the market these days and perhaps the biggest risk facing OPEC. They have been ramping up production as the oil companies in that country have seen the benefits of higher cash flow from higher oil prices and have been able to reinvest this cash at good rates of return in their existing fields. So production in Russia will continue to increase.
Q: Some experts today are saying that the global oil industry and markets are more volatile and unpredictable than in a decade. Do you agree?
A: I agree. You can certainly see that in the range of oil and natural gas prices over the last couple of years. The recent spike was a confluence of factors in three countries Nigeria (ethnic conflicts), Venezuela (labor strikes), and Iraq. Going forward, as incremental production comes from less stable regions in the world, we will continue to see geopolitical problems and disruptions. If you look at the last decade, most of the incremental supply growth came out of Norway, the U.K. and Canada. For the next 10 years it will come out of Russia, Azerbaijan, Kazakhstan, Chad and Angola not the most stable regions of the world.
Q: How do you see OPEC's influence evolving in the future?
A: Twenty years ago when I started following the industry, you could almost bet on OPEC not succeeding because the members would quarrel and not adhere to an agreement. But they have actually been pretty successful as a cartel in the last five years, maintaining production close to what the market needs. A lot of that has been Saudi Arabia's influence. The spare capacity is in Saudi Arabia, Kuwait, and the United Arab Emirates. They are the critical OPEC members and the important spigot in terms of releasing oil exports. The other countries are generally close to their production capability so they could not expand if they wanted to. That may change a little as Nigeria expands its productive capacity. But, in general, OPEC continues to control the pricing situation.
However, OPEC's market share of global oil production has declined over the last three years. They are at a relatively low level, so it will be increasingly difficult for them to cut back if needed to maintain the market, especially as Russia increases its production over the next few years.
Q: Congress is considering the first possible overhaul in national energy policy in a decade. What do you think the U.S. ought to be doing in terms of energy policy?
A: The one thing that I would like to see the U.S. do is to open up some of the areas of the country to exploration that have been closed The East and West Coasts, around Florida, and ANWR (Artic National Wildlife Refuge) in Alaska. Yes, there should be very good oversight in terms of watching the companies, making sure that they develop the resources with minimal environmental impact. But at the same time there is opportunity to develop more resources. This country is very heavily explored, especially in the areas that the government has let the industry explore. Old fields are starting to decline. That causes the industry to look overseas.
Q: Let's discuss your investment strategy. The fund has over half of its assets in companies involved in energy exploration, production, and services. What's your approach to the energy sector?
A: We are emphasizing the energy service industry. We think these companies will be prime beneficiaries of what is going on in Iraq and some of the field work needed in Venezuela. They also will be big beneficiaries in Russia as it continues to build production. In the oil majors we have more or less a neutral weight.
The exploration/production business, unfortunately, is a bad business model We have been reducing our emphasis in that sector. Some companies see increasing cash flows and earnings as commodity prices rise, but they don't necessarily redeploy them in the best way for the investor. They often overspend and waste those dollars. The return on capital for that industry sector is rather low, so we are deemphasizing it.
Q: What stocks do you think are well positioned in the energy services sector?
A: I think the major diversified companies that can provide a wide range of services are going to be the key beneficiaries of what is going on in Russia, Iraq, and Venezuela along with the increase in domestic drilling for natural gas. These would include Baker Hughes (BHI), Halliburton (HAL), and Schlumberger (SLB). Some companies within the context of higher gas drilling in the U.S. could benefit, such as BJ Services (BJS). There is a trend to drill more in deeper waters, and companies that could benefit include Diamond Offshore (DO), TransOcean (RIG), and Cooper Cameron (CAM).
Q: Exxon Mobil (XOM) is among the fund's largest holdings. How do you view its prospects?
A: I think from a fundamental standpoint the prospects are great. In my opinion, this is the best-managed major oil company in the world. They have the capital discipline to know when to invest in their own business, when to buy back shares, or when to make an acquisition, as in the case of buying Mobil with highly valued stock. They have a 3% production growth rate, which is pretty good for them, and nice dividend yield, but they are at a premium valuation to the rest of the group. So, at the moment, we are not increasing our investment in Exxon.
Q: With the U.S. attempting to reduce reliance on imports, are there opportunities outside of oil, such as natural gas, coal, and other alternative resources?
A: Natural gas is in the exploration and production category, which, as I noted, is currently not a great business model. Some companies are extraordinarily good at finding new gas resources; we have a handful in the fund that I think can do that successfully.
As far as coal is concerned, given the higher natural gas price, most of the electric utilities, rather than expanding by building new gas-fired power plants, are trying to increase the use of their base load coal plants. So, that boosts incremental demand for coal and we have investments in three of the coal producers Arch Coal (ACI), Massey Energy (MEE), and Peabody Energy (BTU).
Q: Which sectors within natural resources do you think may offer the best performance going forward?
A: I think the outlook for base metals is very good since no meaningful capacity has been added in years and there will be growing demand if the global economy strengthens. With regard to copper, we own Phelps Dodge (PD) and we also own Inco Ltd. (N), a major producer of nickel. What is critical at the moment is China. It is a major factor in the metals market worldwide as one of the strongest areas of growing demand. So, we are watching the impact of SARS on China very closely.
Pulp and paper and energy services should also perform well in the environment we foresee. We also see opportunities among fertilizer companies, such as Agrium Inc. (AGU) and Potash Corp Saskatchewan (POT), with the idea that, given the drought of last summer and low grain inventories, corn prices are going to rise. That is an incentive for farmers to plant and use fertilizer.
Q: What are the key issues that will affect performance for natural resource stocks over the balance of the year?
A: Seeing some steady progress in economic recovery in the Organization for Economic Cooperation and Development (OECD) nations Europe, Japan, and the U.S. will be key. It should cause some snapback in demand for base metals, paper, etc. More important will be to see some of the emerging economies start back on the growth path. That is critical because their use of natural resources per unit of GDP is greater than in the U.S., which is mostly a service economy. So, we have to keep our eyes on South Korea, Brazil, Argentina, India, China, etc., to gauge the strength of their recoveries. We are seeing decent growth in South Korea, and great growth in China. We also expect good growth from India. Argentina is starting to recover; Brazil is critical.
Editor's Note: Charles Ober's view of the attractiveness of a company may change, and the fund could sell the holding at any time. For more information on the T. Rowe Price New Era Fund or any of the other T. Rowe Price funds call 1-800-225-5132 or visit the Web site at troweprice.com.
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