'Armageddon' in the oil patch

'Armageddon' in the oil patch

NORVAL SCOTT
Wednesday, October 08, 2008
CALGARY — Jeffery Tonken has lost a fortune over the past six weeks.
“It's Armageddon out there,” Mr. Tonken, the chief executive officer of junior oil and gas company Birchcliff Energy Ltd., said Wednesday.
“I've lost millions. Everyone has.”

The value of Canada's energy companies has been devastated since oil plunged from record levels in the summer. Among the 58 companies in the S&P/TSX capped energy index, about $110-billion in market value has been wiped out in the past six weeks, calculations show.
Despite being one of the success stories of 2008 – Birchcliff has capitalized on the B.C. gas rush – the company's shares have plunged from almost $16 in July to just over $6 today.

Mr. Tonken is far from alone. While the price of oil has fallen from $147 (U.S.) a barrel in July to below $90, the value of Canada's energy firms has been hit disproportionately as hedge funds and other investors liquidate their positions in sectors in which they had bought heavily, such as energy.

“There's some chaos and panic selling, and people have lost sense of the fundamentals,” said Harvest Energy Trust CEO John Zahary.

Harvest's unit price has fallen from $26 in June to below $11, also a hit for Mr. Zahary, who said he owns about 100,000 units.

“Clearly I've participated in the downturn – there's a reduction in my net worth, and that of other employees and shareholders,” he said.

“It's a substantial sum of money that is no longer there,” Mr. Zahary said.
Given the financial climate, Harvest is now unlikely to proceed with a $2-billion project to expand its refinery in Newfoundland unless it finds a partner, because that would consume too much of the company's capital, he added.

Since Labour Day, the value of the S&P/TSX capped energy index has been cut almost in half, in comparison with the 25-per-cent loss made on the S&P/TSX composite index in the same period.

The precipitous drop isn't just affecting trusts and juniors; oil sands giant Suncor Inc., for example, has seen its market capitalization fall from just under $70-billion in May to just over $27-billion.

“Hedge funds are selling anything off their shelves that they can,” said Bill Andrew, CEO of Penn West Energy Trust. The valuation of the trust – one of Canada's largest – has been halved since June, and is now just over double its annual cash flow.

But fundamentally, and despite the panic, oil and gas prices are still strong enough for companies to make profits, Mr. Andrew said. “It changes nothing at our operations.”
One concern for investors – especially in the junior side – is that banks will reduce or even refuse to renew revolving lines of credit, stymieing the ability of companies to expand, Birchcliff's Mr. Tonken said.

While Birchcliff doesn't have any debt to pay back in the short term, the company, like other juniors, will likely just spend its cash flow or even less in 2009, he added. Juniors often spend up to five times their cash flow as they chase rapid growth.

Calgary's analysts, many of whom maintained that companies were comparatively undervalued when oil was at $140 a barrel, say there is little by rational explanation for the collapse, which means Canadian oil patch assets now appear to be hugely underpriced.
“Buy some ammunition, go to the hills and hide,” said William Lacey, an analyst at FirstEnergy Capital Corp.

“We've gone beyond doomsday scenarios. There's no logic any more and this is an outright capitulation. Investors are simply throwing up their hands and saying ‘I'm out,'” he said.
According to Mr. Lacey, the drop means that companies will be re-evaluating their future strategies, and will now increasingly buy back their own shares because “those are the cheapest barrels out there right now.”

Nexen Inc., which historically hasn't bought many of its own shares, has snapped up stock worth $300-million since the beginning of August.

Analysts are also watching plans by EnCana Corp., Canada's largest energy company, to split itself into two separate entities, one focused on gas, the other on oil sands.
Floating an oil company in the current climate means EnCana's oil sands assets, rated among the highest quality in Alberta, could be quickly poached by a larger oil company at a very low price, Mr. Lacey said.

EnCana spokesman Alan Boras said that while the company is watching the situation, it's still moving towards completing its split early next year.
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