Canadian Oil & Gas Industry
Analysis & Recommendations
Featuring :
Suncor, Talisman & EnCana
Presenters & Topics
Linda Holmes: Industry Overview Eric Song: Suncor Energy Daniel Lee: EnCana Tolek Strukoff: Talisman Energy
Industry Overview Agenda
Industry Synopsis Economic summary Crude Oil Highlights Natural Gas Highlights SWOT Industry Forecasts
Industry Synopsis…
Sub-sector of Energy Oil & Gas Industry encompasses
Petroleum exploration (upstream) Refining (midstream) Distribution & Sale to consumers
(downstream) Products / Benefits
Synthetics/ Pharmaceuticals/ Plastics Transportation / Heat / Employment
Everyone uses energy Demand virtually endless
2001: Canada's primary energy production :~39% natural gas~25% oil~20% hydropower~11% coal~5% nuclear power
Industry Synopsis
Oil & Gas is the largest industry in the world Tends to parallel boom & bust in economy
Recession: less products, less commuting…less energy use.
Demand: reasonably stable (except recession) Supply: can experience shocks
OPEC meetings
Net exporter of energy 2001: 31% of energy production exported
Canada and the Upstream Oil & Gas Sector
3rd largest producer of natural gas 9th largest producer of crude oil 6% of Canada’s GDP Grown more than 250% since 1990 Overhead: 6 years of stats
Economic Highlights…
2002: Canada’s real GDP grew ~3.3% Compared to 1.5% in 2001 Signals economic recovery
Canadian economy influenced by US economy Largest trading partner ~85% Cdn exports to US (2002)
Economic Growth Forecast (Canada) Lowered for 2003
Continued weak US growth Strengthening of Cdn dollar SARS outbreak Canadian beef export ban (Mad Cow)
Still growing but slower than last year’s forecasts
Situational Analysis
Demand looks positive (CAPP)Increasing with economic growth
OPEC estimates demand will grow From ~75MM bbl/d to more than 100MM bbl/d by
2020 Investment needed to support this demand
• >$100 Billion in exploration & development
Overhead:International Petroleum Supply & Demand
• Base Case• Provided by Energy Information Association
Situational Analysis …
OIL: world’s largest source of energy NATURAL GAS: role increasing
US gas supply < US gas demand• Analysts estimate this will continue well into 2025
World Market:• Demand forecasted to double by 2030
(~4.8TCM/yr)• Reserves increasingly remote from major markets
Energy (Cdn) Production Trends
2001: Canada's primary energy production :~39% natural gas~25% oil~20% hydropower~11% coal~5% nuclear power
Crude Oil Highlights ~ Canada Reserves:
180 billion barrels (2003)• Alberta Oil sands (174.8)• Conventional (5.2)
Production 2002 Average 2.9MM bbl/d
Consumption 2002 Average 2.0MM bbl/d
Exports 1.5MM bbl/d crude to US
Crude Oil Highlights…cont’d
AlbertaLeading oil producing regionConventional oil reserves are
decliningHuge oil sands deposits
TrendsProjects shifting focus to eastern &
northern provinces
OIL: Production & Consumption
Natural Gas Outlook Demand increasing Canada is the lead supplier to US Mackenzie Delta has potential for piping to
south Resources are limited Shift in focus from WCSB to BC, Atlantic &
Artic New Sources:
liquefied natural gas & coalbed methane
Natural Gas …
Issues:Technology development (lower costs)Gaining access to resourcesRegulatory restrictions (timeliness)
New sources:Coalbed & methane gasCoalbed: potential industry for Canada
Natural Gas Exploration Projects Mackenzie Delta
Gauge potential reserves Challenges
Temperature: down to –33 degreesCost: $30 MM/well
• 60 times more than in AB
Politics: NWT & Federal gov’t Potential:
Increased capacity
Gas: Production & Consumption
Natural Gas in Canada (2001)
Reserves at Year End: 60.1 trillion cubic feet
Production: 17.4 billion cubic feet per day
Prices: $4.40 (US$/MM btu)
Exports: 10.6 billion cubic feet per day
Strengths
Size of the market Size of the industry Alberta Oil Sands One of the largest sectors in Cdn
economyIncreasing economies of the less industrial
provincesHuge undeveloped energy, including major
natural gas deposits in offshore areas
Weaknesses
Limited natural gas reserves (TCF)
Natural Gas Productive Capacity
Weaknesses Cont’d
Higher costs for major supply basins than others
Opportunities
Developing world US supply < US demand Exploration & pipeline projects in
Yukon & NWT Oil sands (bitumen)
Oil Production Forecast
Power of Suppliers within Industry
Dominated by a few powerful companiesLarge capital investment required
• Discourages smaller investors
Proximity to largest energy market Technological Developments
3-D seismic & steam –assisted gravity drainage
Threats
Capital investment more internationally mobileGoal: projects that offer
• Best potential ROI• Least geological, ecological, & political risk
High development costs High natural gas prices Growing environmental concerns
Kyoto requirements
Threat of New Entrants into Industry Barriers to Entry ~ HIGH
High fixed costs• Pumping trucks > $1MM
Specialized Skills• To operate equipment & determine drilling
decisions
Cash on hand• Need ample $$ to compete
Scarcity of resourcesGovernment restriction or legislation
Regulatory Approval Timeline
Reserve Comparison
Availability of Substitutes
Alternative Fuels: Coal, solar, wind, hydro, nuclear
Uses of Oil:Plastics & other materials
Specialized ServicesSeismic drilling or directional drilling
can better withstand
Competitive Rivalry
Slow Industry growth ratesSince 1990 Cdn oil production has
climbed 42% & natural gas 76% High costs for major supply basins Capital tends toward projects with
higher ROI & lower risk
Price History: 10 Year
Parallel Dips ~ 1998CRUDE OIL (sweet)CRUDE OIL (sweet)
NATURAL GASNATURAL GAS
Opposite Moves ~ 2000 -2002
Price History: 5 Year
Market Crash
Price History: Year-to-Date
Summary: Canadian Oil & Gas Stats…
Canadian Oil & Gas Overview
Source CAPP,April 2003
2001 2002 2003F
Production
Crude Oil (mmbl/d) 2.2 2.4 2.7
Natural Gas (tcf/yr) 6.4 6.4 6.4
Exports
Crude Oil (mmbl/d) 1.4 1.4 1.7
Natural Gas (tcf/yr) 3.7 3.8 3.8
Wells Drilled (Canada) 18,300 15,000 17,000
Company Background
Integrated energy company Strategically focused on developing one of
the world’s largest petroleum resource basins – Canada’s Athabasca oil sands
Ticker symbol: SU (both TSX and NYSE) Stock price: $28.80 (TSX) Market capitalization: US$9.95 Billion 3400 employees
Management Team Rick George, President and Chief Executive Officer – 23
years of experience at Suncor, 13 years as CEO Steve Williams, Executive Vice President, Oil Sands - over
20 years of international energy industry experience Ken Alley, Senior Vice President and Chief Financial
Officer - 19 years of experience at Suncor Dave Byler, Executive Vice President, Natural Gas and
Renewable Energy – 24 years of experience at Suncor Tom Ryley, Executive Vice President, Energy Marketing and
Refining – 20 years of experience at Suncor Mike Ashar, Executive Vice President, Refining and
Marketing U.S.A – 16 years of experience at Suncor, came from Petro-Canada
Main Business Units
Oil Sands (core business segment) Natural Gas and Renewable Energy Energy Marketing and Refining – Canada
(under the brand name “Sunoco”) Energy Marketing and Refining – U.S.A.
(acquired in 2003)
Strategic Priorities of Value
Creation
Reduce oil sands operating costs (by economies of scale with additional production)
Increase production from existing oil sands assets
Reduce the company’s net debt Continue to build the foundation for the next
stages of its growth strategy
Locations of Operations
Pipeline Network – Oil Sands Production
Oil Sands Mines and upgrades crude oil Operations are located near Fort McMurray, Alberta Oil sands production: 205,800 barrels per day Vision: 550,000 barrels per day in 2010 ~ 2012 Firebag In-situ Oil Sands Project: use horizontal wells to reach
deep oil sands deposits, heat it and bring the bitumen to the surface for processing
Advantages of in-situ technology: - recover large reserves that can’t be reached by traditional ways- suitable for staged growth - more environmental friendly- reduce costs of recovery
Oil Sands
Natural Gas and Renewable
Energy
Explores for and produces natural gas 3 locations in Western Canada Internally to power its Oil Sands facilities
and Sarnia Refinery Externally to supply markets throughout
North America
Natural Gas
Energy Marketing and Refining –
Canada
Refines crude oil and markets finished petroleum products
Customers are located primarily in Ontario and Quebec
Retail customers in Ontario under the Sunoco brand (over 500 retail sites)
Sales agreements in Ontario Refinery in Sarnia, Ontario
Energy Marketing and Refining –
U.S.A.
On July 31, 2003 Suncor acquired ConocoPhillips’ Denver, Colorado refinery, retail stations and associated storage, pipeline and distribution facilities
Flexibility to move crude and products to the Denver refinery or other customers
Provides increased control of its oil products from production straight through to the consumer
Energy Marketing and Refining
Reserve Estimate
Income/Investment Structure
Five-Year Highlights
Balance Sheet
Income Statement
Cash Flow Statement
Stock Price Summary
Stock price: $28.80 Change: -$0.10 (-0.35%) Volume: 1,118,900 52-week high: $29.25 52-week low: $22.76
Stock Price Performance
Suncor vs. Oil Index (U.S.)
Suncor vs. S&P 500
Valuation - Benchmark
Valuation Ratios Company Industry Sector S&P 500
P/E 13.05 12.42 15.63 25.40
Beta 0.15 0.42 0.55 1.00
Price to Book 3.51 2.51 2.49 4.27
Dividend Yield 0.67 3.05 2.75 2.05
Div. – 5 yr growth 0.00 3.03 4.11 6.33
Sales – 5 yr growth 17.89 4.01 9.34 9.71
EPS – 5 yr growth 22.78 -8.15 -2.16 10.58
Valuation - BenchmarkFinancial Strength Company Industry Sector S&P 500
Quick Ratio 0.62 0.77 0.95 1.29
Debt to Equity 0.57 0.23 0.51 0.97
Interest Coverage 37.40 19.43 10.53 13.02
Profitability
Gross Margin 69.03 31.07 34.76 46.96
Operating Margin 28.43 9.95 10.95 18.04
Net Profit Margin 16.91 5.94 5.68 11.85
Management
ROI 12.74 12.79 8.75 9.57
ROA 11.59 9.94 7.00 6.10
ROE 32.63 21.19 16.21 17.85
Inventory Turnover 6.68 19.48 17.95 9.96
Valuation - Trend
Valuation Model
Net Asset Value (NAV): market value of assets net of liabilities divided by the shares outstanding
$28.50 price target based on a 22% premium to estimated NAV under base case price scenario (Gordon Gee, RBC Capital Markets)
Current stock price: $28.80 (TSX)
Growth Strategy
Developing oil sands large resource base through mining and in-situ technology
Expanding oil sands facilities to increase the production of crude oil
Controlling costs through economies of scale and management of engineering, procurement and construction
Developing new marketing and refining opportunities that further integrate upstream and downstream businesses
Growth Strategy - Illustration
Future Plans and Investments
$496 million on oil sands growth projects: to support Firebag In-situ Oil Sands Project
$145 million on projects related to Sarnia refinery and Sunoco’s Ontario retail network
Five-year $100 million plan to develop renewable energy for the future
Fundamental Analysis – Moderate Buy
Strong sales and EPS growth High profitability compared to industry and S&P 500 Relatively high return ratios (ROE, ROA, ROI) Expansion strategy is supported by its in-situ technology Increasing presence in the U.S. markets by the acquisition
Concerns: - low inventory turnover- low Beta (?)- higher P/E and price to book compared to industry- rapid expansion strategy can be risky
Technical Analysis – Signals of Caution
Recommendation – HOLD!!!
EnCana: Background
Explores, produces, and markets natural gas, crude oil, and natural gas liquids
Created by a merger in April 2002Alberta Energy (AEC)PanCanadian Energy (PCE)
Market Capitalization: US$21 Billion
EnCana: Enterprise Value
EnCana: Management Team
Gwyn Morgan, President & CEO Randy Eresman, Executive Vice-President & COO John Watson, Executive Vice-President and CFO Roger Biemans, President, EnCana Oil & Gas (USA)
Inc. Gerry Macey, President, International New Ventures
Exploration Bill Oliver, President, Midstream & Marketing
EnCana: Four Pillars of Value Creation
High-quality assets Solid credible reserves Strong financial management Sound corporate governance
EnCana: Business Segments
UpstreamOnshore North AmericaOffshore & International OperationsOffshore & New Ventures Exploration
Midstream & Marketing
EnCana: Onshore North America
Exploration, development and production in gas & oil on-land
More than 17 million net acres of undeveloped land Compete through: large, concentrated land blocks;
high working interests; low operating costs; low royalties and well-developed infrastructure
Geographically operating in: Plains of Alberta and Saskatchewan Foothills of Western Alberta and Northeast B.C. Canadian Oilsands region Rocky Mountain states of the USA
EnCana: Offshore & International Operations
Develop reserves, and establish new production operations
Enhance value through acquisitions and ongoing asset portfolio upgrades
Four regional productions in:Latin AmericaEast Coast of CanadaGulf of MexicoU.K. Central North Sea
EnCana: Offshore & New Ventures Exploration
High-quality, focused offshore exploration program and turning new discoveries into operating facilities at the earliest possible date
Drilling team must be able to handle unique requirements
Includes exploration activity in: The Canadian East Coast: Deep Panuke The Gulf of Mexico: Tahiti, Sturgis The U.K. central North Sea: Buzzard, Farragon Africa, Australia, Latin America
Currently seeking out new opportunities in: Mackenzie Delta, Alaska, Brazil, North Africa, the
Middle East, and off the west coast of Canada
EnCana: Midstream & Marketing
Enhances value of core upstream operations
Gas storageNatural gas liquids extractionPower generation
EnCana: Worldwide Exploration
EnCana: Acquisitions
Ecuador Start-up of the OCP Pipeline (spans 500km) Currently producing 96,000 barrels of oil per day
Cutbank Ridge Acquired 500,000 net acres of prospective
natural gas development lands Estimated to ultimately recover more than 4TCF
U.K. Acquired an additional 14% in both the Scott
and Telford fields Expected production of 20,000 barrels of oil
equivalent per day
EnCana: Divestitures
Syncrude Divested syncrude project interests for $1.5
billion in cash considerations No gain or loss on sale
Midstream – Pipelines Sold interests in the Cold Lake Pipeline System
and Express Pipeline System for total considerations of $1.6 billion
After-tax gain on sale of $263 million Part of EnCana’s strategic realignment to focus
on its large portfolio of higher return growth assets.
EnCana: Segmented Income
EnCana: Upstream Results
EnCana: Income Statement
(in CAD$millions) First 9 Months Annual Data
Prior to Merger
2003 2002 2002 2001 2000
Net Revenue $10,378 $6,388 $10,011 $4,894 $4,366
Expenses $7,447 $5,287 $8,148 $3,009 $2,733
Net Earnings $2,418 $729 $1,225 $1,254 $1,000
Basic EPS $5.69 $1.99 $2.92 $5.02 $4.02
Diluted EPS $5.60 $1.96 $2.87 $4.90 $3.95
EnCana: Balance Sheet
(in CAD$millions) As of Sept 2003 Prior to Merger
2003 2002 2001
Assets
Current Assets $2,676 $4,289 $1,673
LT Assets $27,536 $27,033 $9,127
Total Assets $30,212 $31,322 $10,800
Liabilities & S/H Equity
Current Liabilities $2,222 $3,879 $1,640
LT Liabilities $13,037 $13,649 $5,181
S/H Equity $14,953 $13,794 $3,979
Total Liabilities & S/H Equity $30,212 $31,322 $10,800
EnCana: Cash Flow Statement
First Nine Months Annual Data
(in CAD$millions) Prior to Merger
2003 2002 2002 2001 2000
Operating Activities $4,834 $1,590 $2,571 $2,774 $2,229
Investing Activities ($ 3,279.00) ($ 3,349.00) ($ 4,062.00) ($ 1,697.00) ($ 2,321.00)
Financing Activities ($ 1,381.00) $ 1,218.00 $ 747.00 ($ 330.00) $ 158.00
Cash Change $ 152.00 ($ 548.00) ($ 751.00) $ 766.00 $ 65.00
EnCana: Benchmarks
Financial Strength Company Industry Sector S&P 500
Quick Ratio (MRQ) 0.73 0.87 0.95 1.29
Debt to Equity (MRQ) 0.48 0.89 0.51 0.97
Interest Coverage (TTM) 9.28 7.36 10.58 13.05
Profitability Ratios (%)
Gross Margin (TTM) 66.37 56.78 37.49 47.12
Operating Margin (TTM) 26.11 25.91 14.07 19.1
Net Profit Margin (TTM) 20.65 15.07 8.01 12.68
Management Effectiveness (%)
Return On Investment (TTM) 10.34 7.52 8.77 9.62
Return On Assets (TTM) 9.39 6.42 7 6.13
Return On Equity (TTM) 20.14 16.74 16.29 17.89
Inventory Turnover (TTM) 7.17 18.37 17.83 9.92
EnCana: Benchmarks
Valuation Ratios Company Industry Sector S&P 500
P/E Ratio (TTM) 7.98 14.2 15.36 24.98
Beta -0.28 0.52 0.55 1
Price to Book (MRQ) 1.51 2.1 2.43 4.21
Dividend Yield 0.86 2.17 2.81 2.08
Price to Cash Flow (TTM) 3.89 6.48 8.65 17.37
EPS - 5 Yr. Growth Rate 15.85 14.14 -2.18 10.51
Sales - 5 Yr. Growth Rate 25.17 18.65 9.47 9.69
EnCana: Stock Information
Ticker Symbol: ECA Stock Price: US$35.93 52 Week High: US$39.63 52 Week Low: US$26.75 # of Shares Outstanding: 465 Million
EnCana: Stock Performance
EnCana: Stock vs. Oil & Gas
EnCana: Stock vs. S&P 500
EnCana: Growth Strategies
Growing natural gas production, gas storage capacity, and crude oil production.
Building oil growth platforms in the U.K. central North Sea and Gulf of Mexico
Continue efforts to expand its medium and long-term growth prospects through new ventures exploration
EnCana: Valuation
Net Asset Value (NAV) Method US$43.00 Price Target
29% premium on estimated NAV under a base case price scenario
1% discount to estimated NAV on NYMEX futures and a debt-adjusted 2003E P/CF
Current Price US$35.93 [11/20/2003]
EnCana: Recommendations
Current operations are desirable, as EPS and ROE is better than the industry
Bought back some common shares Have sufficient cash flow to carry out
its growth prospects Integrity in reserve estimates Recommendation: BUY!
Company Background
First 10 years: Grown from a small Canadian company with a market cap of about $500 million to an $11 billion international company with an extremely successful track record.
Company Background
Exploration and production: Upstream hydrocarbon business
Primarily focused on discovery and acquisition of new reserves
Formally British Petroleum Canada (Talisman: 10 years old)
Management Team
•SIX out of the EIGHT executive positions are held by former BP employees
•Recent executive succession has been internal
BOD Member Highlights
Al L. Flood: Former CIBC BOD Member and Executive Committee Chair
Dale G. Parker: Former President and CEO WCB B.C.
Roland Priddle: Former Chairman of the National Energy Board of Canada
Lawrence G. Tapp: Dean of the Richard Ivey School of Business of the University of Western
Ontario
Operating Business Units:
Domestic and international natural gas and liquids exploration and production operations
Upstream hydrocarbon
North America
¾ of production occurs in Canada, 60% of which comes from the north sea
Large natural gas operations New properties in Canadian Foothills and New
York State
New York Acquisition
Late in 2002 and early 2003, Talisman’s wholly-owned subsidiary, Fortuna Energy Inc., acquired natural gas properties, production and facilities in upstate New York for US$309 million.
Growing new core gas area with low operating costs, 138 bcf of proved gas reserves, production of 60-70 mmcf/d and over 50 drilling locations.
North Sea:
Commercial hub operations Low risk development, adjacent exploration
opportunities, secondary recovery and 3rd party tariff receipts
Production was up 15% over 2001.
SE Asia:
Poised for significant growth Developing large gas reserves and sales
opportunities; Indonesia PM-3 commercial agreement:
Malaysia/Vietnam Offshore block acquisitions: Vietnam
Latin America and Caribbean:
New high impact development projects: Trinidad/Columbia
First production 2005
Africa and Middle East:
Non-operational interests: Algeria New exploration acreage in proven offshore
basin: Qatar
Sudan Impact and Controversy:
Shareholders grew tired of controversy stemming from the long standing conflict in the country
Sold Sudan interest: US $758 million CEO expressed that Talisman felt these
operations were financially beneficial to the company and to the people of Sudan
Gain on Sudan:
Growth Strategy:
Continue to develop large North American gas business, while at the same time growing and adding to its international operations
Growth via exploration and acquisition 10 year average: 13% production per share
increase compounded annually 2002 Record: 6% increase in production to
445,000 boe/d
Growth Strategy:
Continue on past three years: replaced 184% of production at and average development cost of $7.66/boe
Target: 5-10% growth in production per share Shareholder Value Creation:
Repurchased 5.8 million shares in 2002 Create value for SH with proceeds from Sudan
sale
Share Capital
•Ticker Symbol: TLM
•Market Cap: $6.35 Billion
•Current Stock Price: $49.59
•52-Week Range: $34.12 - $51.30
5 Year Trend:
Talisman vs. Oil & Gas
Talisman vs. S&P 500
Valuation:
Valuation Ratios
Company Industry Sector S&P 500
P/E 8.14 14.53 15.63 25.40
Beta 0.33 0.52 0.55 1.00
Price to Book
1.88 2.13 2.49 4.27
Dividend Yield
1.16 2.13 2.75 2.05
Sales – 5 yr growth
25.50 18.70 9.34 9.71
EPS – 5 yr growth
60.26 14.18 -2.16 10.58
Valuation:Financial Strength
Company Industry Sector S&P 500
Quick Ratio 0.79 0.87 0.95 1.29
Debt to Equity 0.47 0.86 0.46 0.65
Interest Coverage 8.81 7.39 10.53 13.02
Profitability
Gross Margin 75.51 56.90 37.50 47.15
Operating Margin 24.34 25.58 13.97 18.99
Net Profit Margin 23.41 14.94 8.00 12.67
Management
ROA 9.53 6.47 7.00 6.10
ROE 24.72 16.51 16.21 17.85
Inventory Turnover
9.01 18.43 17.95 9.96
Valuation:
Net Asset Value (NAV): market value of assets net of liabilities divided by the shares outstanding
$74.50 price target based on a 14% premium to estimated NAV under base case price scenario (Gordon Gee, RBC Capital Markets)
Current stock price: $50.18 (TSX)
Recent Developments
Banc of America Securities downgraded the energy company to "neutral" from "buy," saying the ratings change is driven by a recent rise in the stock price and not a change in the operational outlook for the company.
Recommendation:
Strong sales and EPS growth High profitability compared to industry
and S&P 500 High return ratios (ROE, ROA, ROI) Strong recent track record in
increasing production
BUY