Spring in the oil patch and new growth for investors
After a long, hard winter in the oil patch, this energy industry insider sees some opportunities popping up in takeovers and even a bailout.
“Springtime in Calgary is a lot like the stock market. One minute you’re tiptoeing through the tulips and the next you’re buried under a foot of snow. And if you live in C-town, it’s more likely to be accompanied by five-foot drifts over what used to be the petunia patch.”
In fact, it’s blossomed into tulip weather in Calgary just now, with fairly balmy temperatures (higher than those in that cold metropolis to the east known as Toronto).
But while the weather may be a bottomless source of conversation in Canada, that’s not really what we’re here to talk about. Oil is our subject.
The opening quote comes from an anonymous denizen of the oil patch who is known only by the name of Wildcat Willie. He gives an insider’s view of the energy industry to readers of Investor's Digest of Canada.
And his discussion of spring really hinges on this — when you turn the soil over, you should be able to see some oil stocks start to grow.
His report covers four companies as he expounds on bailouts, failed takeovers and takeovers yet to come.
Bailout with a drawl
Willie begins his report by casting a glance at an unusual turn of events — the Alberta government becoming a proprietor in the oil patch.
Surely this Conservative government isn’t about to start elbowing its way into the boardrooms of Calgary.
Yet it is now the controlling shareholder in Precision Drilling Trust (TSX-PD.UN). As Willie puts it, “it used its pension and endowment fund — think Ontario Teachers with a drawl — to make a $300 million private placement in Canada’s largest oilfield-services outfit.”
It’s easy to dismiss this as an ill-conceived bailout, adds our expert. “To wit, there’s Precision’s unfortunate $2 billion entry into the U.S. drilling market, paying far too much for Texas-based Grey Wolf at the height of the credit crash — it took a 17 per cent bridge loan to close the deal.”
And then U.S. demand for drilling services promptly went south. Thud.
It ain’t General Motors
The Alberta government had already punished the local market with its royalties, so maybe it was only matter of time before it got into the bailout business, Willie reflects.
“But Precision ain’t General Motors or Chrysler,” he adds. “And even an Alberta cabinet minister has too much pride than to throw money at lost causes unless there’s a good buck to be made.”
Indeed, under the terms of the agreement, taxpayers effectively scored a “double-double” by acquiring units at $3 when they were already trading around $5.50.
And with Grey Wolf pretty much scrubbed off the balance sheet, the units should rally even more.
“Like bell bottoms, it’s only a matter of time before drilling comes back.” Given natural gas prices and the slow summer season, it may not be until fall or even next year.
“But for less than the price of a beer at the bar,” says Willie, “you’re getting a pretty good brand name that was still profitable as of the first quarter.” The units closed yesterday at $5.70.
Opportunistic tendencies
A failed takeover may spell opportunity for investors, says Willie. French oil giant Total chased UTS Energy (TSX-UTS), trying to get a couple of billion barrels for pennies on the dollar at $1.75 a share. “That barely covered the cost of the stamps to mail the offer from gay Pa-ree,” he sniffs.
Willie regrets not picking up some shares at the bottom of the market meltdown. Like many others, he assumed no one would want a “cash-short, credit-poor lightweight with no production and a partner in Petro-Canada (look where they are now).”
The lesson, he says, is to “never underestimate the opportunistic tendencies of majors with money to burn in a down cycle.” They lie in wait for opportunities like these that only come along once in a decade.
The UTS shareholders said no to Total and the stock fell. But the company is shopping for better offers, maybe in the neighbourhood of $5, which is where it traded last fall. It’s now at $1.50.
Small guys in the tar sands
Keep an eye out for two more takeover targets, says our insider. One is Connacher Oil & Gas Ltd. (TSX-CLL). This is a good little company,” he says, “with all the attendant issues of small guys in the tar sands — limited access to cash and huge capital requirements.”
But unlike UTS, it has real production and even a refinery in Montana. “More important, it’s sitting on enough oil to keep a major multi-national like Total, Shell or even Exxon swimming in crude for a long, long time.” It opened today at $1.04.
The other is Oilsands Quest (AMEX-BQI), which controls an area in Saskatchewan that’s the size of Switzerland. The rumour mill has been working overtime on this one, says our expert.
First it was the Taiwan state oil company and then the government of India. Can China be far behind, he wonders? It trades at $1.01.
You may or may not be ready to start plucking stocks like these from an oil patch that’s just turning over a new leaf. But we’ll revert to Investor's Digest of Canada and leave the last word to Willie.
“It’s probably safe to say the days of the small independent oil sands producer are numbered. And so are your chances of making a steal.”
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