Win some, lose some
Producers get punished, while service companies soar
by Max Fawcett
The oil patch is in the midst of reporting season for the fourth quarter of 2012, and the emerging theme should be a familiar one to investors: pipeline companies good, producers bad. Take Petrominerales (TSE:PMG), the spin-off from the Petrobank family with assets in Colombia and other parts of South America which, as someone on the Stockhouse comment board (surely one of the thousands of investors who are underwater on this stock) noted, “couldn’t find oil at an Exxon station.” FirstEnergy wasn’t quite so withering in its analysis, but it noted that the 20 per cent decrease in 2P reserves from 2011 levels and the company’s inability to drill successful wells (they drilled four dusters in the quarter) was almost certain to disappoint investors. And it did: as of 10 a.m. today the stock was trading down almost 10 per cent on the day, and nearly 22 per cent on the week. Ouch.
Things are scarcely any better over at Talisman Energy (TSE:TLM). The company had an investor day that CIBC analyst Andrew Potter described rather apocryphally as “make or break.” And while newish CEO Hal Kvisle continues to keep the company on a crash diet – its projected capex for 2013 is down 25 per cent year over year, it intends to sell some of its Montney and Duvernay shale assets and is looking to either sell $2 to $3 billion in assets over the next couple of years or bring in a similar amount of money through joint-venture partnerships – it’s not clear that it will be enough to save the company from oblivion. The problem? As the Calgary Herald’s Stephen Ewart points out in an interesting column in today’s paper, the company is stuck in the middle: too big to really flex its muscles, and too small to move nimbly enough around those that do. “The irony for Talisman is that for all its properties around the world, the company finds itself in no man’s land,” Ewart writes. “With production targeted to decline to as low as 375,000 barrels of oil equivalent a day in 2013, Talisman is neither a fast-growing North American junior nor does it have the financial clout of a global super major.”
The companies that get that product to market, though? They’re going gangbusters, if the recent slough of results is any indication. Take Pembina Pipelines (TSE:PPL), which absolutely annihilated the street’s projections for its 4Q12 earnings ($199 million of EBITDA versus FirstEnergy’s estimate of $134 million, and adjusted earnings per share of $0.28 compared to the estimated $0.13) and then announced an additional $1 billion expansion of its NGL infrastructure.
And in today’s Globe and Mail, Shirley Won speaks to Barometer Capital Management’s David Burrows about why he still likes midstream players like Gibson Energy (TSE:GEI). “They definitely have pricing power,’” she quotes him as saying, “’but their real leverage is in the processing. They are buying cheap butane and cheap heavy oil, and mixing them to come up with light oil, which they market at a big premium.’” Burrows believes that Gibson can increase its dividend by 10 to 15 per cent a year for the next five years, and may have the financial flexibility to also make acquisitions if they’re accretive to the company’s bottom line.
Burrows isn’t worried about the increasingly rich valuations of companies like Gibson, either. “Many people say that these companies are expensive relative to history,” he told Won. “But they are looking at a period where growth was considerably lower, and less predictable than it is today.”