A pipe dream come true
Deborah Yedlin
Calgary Herald
Thursday, May 08, 2008
When Canadian Natural Resources chairman Allan Markin stands in front of shareholders today at the company's annual meeting, it will be as the steward of an enterprise valued at more than $50 billion.
That's a far cry from what things were like at CNQ when he joined the company 20 years ago. At that time, the shares were trading at 18 cents, oil production was 123 barrels a day and gas was five million cubic feet per day.
In an interview dating back to 1990 when one of the questions addressed the company's future, Markin said there was more to come. No kidding.
The company's shares hit an all-time high of $92 Tuesday, closing at $91.81 Wednesday and marking a more than $30 jump since the beginning of February, when they were trading at $60.95.
Year-to-date it is the best performing big-cap energy stock listed on the S&P/TSX. And from the 123 barrels a day produced in Alberta back in 1988, the company produced an average 609,289 barrels of oil equivalent per day from Canada, the North Sea and West Africa and generated cash flow of $6.2 billion in 2007.
Markin might well say today, as he did 18 years ago, there is more to come. The big challenge for CNQ, as for any big oil company generating scads of cash flow, is how best to reinvest the cash. Numbers crunched earlier this year by one investment firm showed that an increase in the oil price from $80 a barrel to $90 added a total of $10 billion in cash flow to the country's four largest, non-integrated producers -- EnCana, Nexen, Talisman and Canadian Natural.
With oil prices now $40 beyond the $80 baseline, the numbers are eye popping. And CNQ wasn't the only energy player to reach a record high this week.
Suncor, after having been given the "dead parrot" treatment by the market when its shares fell to $85.72 in January, hit a record high of $121.12 on Tuesday -- putting the value of the company at $56 billion.
The same held true for Nexen, which closed at $37.72 on Tuesday, and Talisman, whose shares were worth $21.99 on the same day. This week's run in the share price of the big cap companies arguably has something to do with a Goldman Sachs research report that hit the street Tuesday, which talked about a "super spike" in prices that could cause a barrel of crude to hit between $150 and $200 in the next six to 24 months.
Some were more bullish, saying $150 oil by October wasn't out of the question. Given the record intra-day trading price of $123.80 reached on Wednesday, even as U.S. crude oil inventories rose by 5.7 million barrels, that $150 mark might be closer than many think.
The fact remains -- as CIBC World Markets chief economist Jeff Rubin noted two weeks ago in a report addressing the question of how high prices will go -- that global oil supply is not growing, but global demand for gasoline is.
That simple dynamic means the era of cheap oil is indeed behind the western, industrialized world. Rubin called for oil at $150 by 2010 and $200 by 2012 in that same report; given what has taken place this week, it might already be outdated.
Each week, it seems, more data appears showing the growing demand for gasoline and crude oil in the developing parts of the world. While some point to this fact and say it's evidence the countries are industrializing -- a good thing -- and creating a middle class with a higher amount of disposable income, there is another side to consider. A significant amount of the gasoline consumption is because of the high subsidies in places such as Venezuela, Iran and other oil-producing nations within the Organization of Petroleum Exporting Countries.
The subsidies are creating an addiction to cheap gasoline, decreasing what is available for export and, with a rising middle class, the rate of consumption is going to keep going up.
The rising demand is increasingly being juxtaposed against the mounting evidence that supply will not be able to keep up. Whether it's the result of a lack of investment by countries with energy resources -- such as Russia and Mexico -- the inability to rely on production from countries such as Nigeria or the reality that the supply cushion that once existed within OPEC is inadequate in the context of current global demand, it's getting harder to make the case that current prices can't last.
They can and they will. All this leaves Canada's big cap energy players -- especially those like Canadian Natural with mammoth oilsands exposure -- in positions of financial strength that were nothing more than pipe dreams 20 years ago.
dyedlin@theherald.canwest.com
© The Calgary Herald 2008
