OilPatch Heating up for InvestorsOilpatch Seen Heating Up for Investors After Chilling Q4
By Dina O'Meara
06 Apr 2007 at 07:04 AM GMT-04:00
CALGARY (CP) -- A warm North American winter and dismal fourth-quarter results may have set the stage for canny investors to make good in the oilpatch by picking up deals in a down market which appears set for a gradual rebound.
Rising fuel demand, forecasts of an active hurricane season disrupting Gulf of Mexico production and dwindling reserves point to stronger prices later in 2007, experts say.
So now could be a good time to fuel up some portfolios, but what makes some companies more attractive than others?
Analysts say finding an experienced executive suite with a history of strong results is a good start. Then add on a quality asset base, efficient operations and a solid balance sheet.
''High commodity prices cover a lot of mistakes,'' says Tim Nakaska, an analyst with PricewaterhouseCoopers in Calgary.
''The key strategy for an investor at this point is investing in strong management teams,'' Nakaska said. He favours executives who ran their businesses effectively through the last downturn.
''The difficulty of a lot of current management teams is that managing when you have a downward cycle is an entirely different ball game than when things are robust.''
Lots of supply and low demand in the second half of last year saw commodity prices plummet, particularly in the natural gas sector.
Then boggy weather delayed 2007 drilling programs, resulting in Western Canada rig counts down more than 10% from a year ago.
The shadow of low prices will likely be cast into the third quarter of 2007, but the future looks brighter on rising demand for oil in the U.S. and Asia.
And some foresee a supply crunch for natural gas, as gas-powered utility plants increase in number while production plays catch up.
''From a longer-term perspective, the opportunities within the energy sector are still fairly good,'' said Chris Holden, with Winnipeg-based Investors Group.
Many oil and gas companies are undervalued when taking into account their resource base, in particular oilsands players, Holden said.
These companies have access to billions of barrels of bitumen nestled in the democratic soil of Canada, rather than the turbulent Middle East or Africa.
That feature alone has made Alberta's oilsands pretty sexy to oil-guzzling nations like the United States and China.
And if you're a U.S. company with refineries, plump Canadian oilsands players start looking pretty tasty, or in analyst speak, they make compelling strategic targets.
''In a cyclical downturn, we've seen a traditional flight to quality where investors look for better management teams and better business models, specifically in the larger companies,'' said Jeff Fetterly, an analyst with CIBC World Markets in Calgary.
The smaller oilsands players have good assets but need cash to bring the sticky stuff into production, so expect some marriages of convenience.
Natural gas is starting to shake off the lingering chill of an almost 45% drop in price last year.
Demand in the United States, recipient of 60% of Canada's natural gas production, and in the energy-voracious oilsands already is climbing against a backdrop of flat production.
But the rebound is likely to be slow, with drillers and other service companies joining the mergers and acquisitions game.
''Overall, it's a fair comment to say there is a potential for some of the smaller companies to be taken out, but there is historical precedent for M&A activity between larger companies as well,'' Fetterly said.
''In Canada we think it will take several more months for the natural gas equation to correct itself or reset itself, and that's the principal reason behind our belief the current cycle will be drawing to a close in the latter part of 2007.''
© The Canadian Press 2007