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Canadian Oil and Gas Industry: Analysis, Regulation, and Recommendations

This presentation provides an overview of the Canadian oil and gas industry, including industry analysis, regulation, supply and demand, and company analysis with recommendations.

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Canadian Oil and Gas Industry: Analysis, Regulation, and Recommendations

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  1. The Canadian Oil and Gas Industry BUS 417: Group Presentation Mahmoud Houshmand Francis SantosIan Graf November 10, 2004

  2. Presentation Overview • Industry Analysis • Industry Analysis and Regulation: Ian • Supply and Demand: Mahmoud • Oil Extraction and Refining Explained: Francis • Company Analysis and Recommendations • Canadian Oil Sands: Mahmoud • Petro-Canada: Ian • Suncor: Francis

  3. Industry Analysis

  4. Industry Analysis Agenda • Industry Structure • Products • Regulation • Supply and Demand • Brief Overview of Oil Extraction and Refining

  5. Industry Analysis • Canadian industry produced $77.5 billion in revenues in 2003 • Canada is 3rd largest producer of natural gas in the world • 9th largest producer of crude oil • Canadian upstream sector is largest single private investor

  6. Industry Analysis • In 2003, the industry contributed approx. $16 billion to government revenues • Crude oil & natural gas trade surplus responsible for 57% of the country’s 2003 merchandise trade balance • Canada responsible for over 20% of North America’s crude oil and natural gas • However, we only consume 10% • Industry’s total 2003 employment impact was measured at 500,000

  7. Industry Structure • Industry consists mainly of miners & drillers, refiners, and retailers • Many businesses take an integrated approach and are involved in all aspects • Business is done locally and south of the border; utilize cross-border pipeline to distribute oil • Country’s largest source of crude oil is the Canadian Oil Sands • American VP Dick Cheney described Canada’s oil sands as a, ”pillar of North American energy and economic security.”

  8. Industry Structure • Mergers & acquisitions are frequent • Recent growth in royalty trusts (unit trusts) • Highly regulated by Canadian government • Affected by volatile oil prices, interest rate fluctuations, international events

  9. Industry Structure • Largest Canadian Oil & Gas Companies (in alphabetical order): • Albian Sands Energy Inc. • Canadian Natural Resources Ltd. • Canadian Oil Sands • EnCana Corporation • Husky Energy Inc. • Imperial Oil Resources Ltd. • Petro-Canada • Shell Canada Ltd. • Suncor Energy Inc. • Syncrude Canada Ltd.

  10. Products • Crude oil • Refined to create petroleum gas, gasoline, kerosene, lubricating oil, industrial fuel, residuals • Natural gas • Used commercially, residentially, in fuel cells, building block for methanol which has many industrial purposes • Ethanol • Normally made from fermentation process but is cheaper when processed from petroleum feedstock • Green Energy Sources • Wind energy

  11. Regulation • Four intertwining levels; municipal, provincial, national, & international • Constitution Act 1982 gives jurisdiction to provinces over natural resources • Natural Energy Board (Fed body) has control over movement of oil & gas, taxation, and tariffs • Department of energy collects royalties on behalf of the province • Companies must adhere to applicable provincial environmental acts and involve the public in process • Extraction limits • OSC requires companies to declare their reserve levels every 90 days • Controls to reduce emissions  Kyoto Accord • Sept 11th called for increasing security of pipelines

  12. Crude Oil : Supply • World Crude Oil Production By Region

  13. Crude Oil : Demand

  14. Crude Oil : Exports • Crude oil exports have been growing in North America

  15. Canadian Crude Oil : Supply • Second largest crude oil reserves after Saudi Arabia • Canadian oil sands contains 175 billion barrels of oil reserves • 420,000 barrels of crude have been approved off Canada’s east coast

  16. Canadian Oil Production & Consumption

  17. Natural Gas : Reserves

  18. Natural Gas : Supply

  19. Natural Gas : Demand

  20. Refined Products

  21. Crude Oil Prices

  22. Price of Oil Futures: One Year Chart

  23. Oil Extraction • Canadian Oil Sands 1. Mining: • Oil that is near the surface can extracted using traditional techniques 2. SAGD: Steam Assisted Gravity Drainage • Because of the rising prices of natural gas, crude producers are moving towards using bitumen or high sulphur fuels to generate steam. • Natural Gas • Wells are drilled and gas flows under its own pressure.

  24. Oil Refining • Steps 1. Fractional Distillation 2. Conversion 3. Recombination 4. Treatment

  25. Canadian Oil Sands

  26. Canadian Oil Sands Agenda • Company Background • Core Business • Business Strategy • Hedging Strategy • Financial Statement Analysis • Stock Price Performance • Recommendation

  27. Background • Canadian Oil Sands acts as a middleman between oil producers and pipeline operators. • Takes possession of the oil and markets it to pipelines • Generates income from a 35% interest in the Syncrude operation in the Alberta Oil Sands. • Largest pure-play investment opportunity in Oil Sands. • Organized as an Open-Ended Investment Trust. • Currently has approximately 91.1 million units outstanding. • Traded on TSX (Ticker COS.UN) • Market Capitalization of approximately $5.8 Billion • Distributions in 2003 totaled $2.00 per unit

  28. Core Business • Income trusts are equity investments designed to deliver cash flows from operations to shareholders in a tax-efficient manner. • Reduces double taxation of income. • Core business is marketing oil from its 31% share of Syncrude oil. • Pure-play oil company. Revenues derived solely from selling crude oil.

  29. Business Strategy • Expand Syncrude Production Capacity • Expansion began in 2001. • Expected to boost current production by 50% to approximately 350,000 barrels per day – 124,000 barrels per day net to Canadian Oil Sands Trust. based on its interest. • Product quality will also be enhanced to Syncrude Sweet Premium (SSP). • The total capital budget for the expansion is estimated at $7.8 billion, or approximately $2.8 billion net to the Trust. • It is expected to be in-service by mid 2006.

  30. Corporate Value Drivers • Increase production capacity from existing assets. • Reduce operating costs of existing assets through economies of scale and by upgrading process technologies. • Increase reserves (asset base) by pursuing new developments.

  31. Reserves • Very long-life reserves compared to industry average. • Thus, disbursements in income trust are quite safe.

  32. Factors That Affect Financials • Ongoing volatility of CDN/US exchange rates • Ongoing volatility of global and North American oil markets • New introduction of crude oil supply to North America • Ongoing variability in refining & retail margins • Unscheduled maintenance shutdowns • Oils Sands Alberta Crown Royalties • Suncor ability to compete for projects • Extreme cold weather in 4Q

  33. Hedging Strategy • Value of revenues is dependent on: • Price of crude oil • Exchange rate with USD • Interest rate on debt • Crude Oil Hedging • Lost $82M in revenues in Q3 2004 ($10.22 per barrel). • YTD 2004 – have incurred a $182M loss.

  34. Hedging Strategy (continued) • Crude Oil Hedging (continued) • As the funding requirements for expansion diminish (and balance sheet becomes stronger due to Stage 3 revenues), they intend to reduce crude oil hedging • Foreign Exchange Hedging • Q3 2004 made $3M in foreign exchange hedging ($0.39 per barrel). • Interest Rate Hedging • Impact cash flows based on amount of floating rate debt that is outstanding.

  35. Consolidated Balance Sheet

  36. Balance Sheet Analysis • The trust increased its capital assets by $2.5 billion during 2003 (stage 3 expansion). • Capital assets are recorded at cost and include the costs of acquiring the working interest and subsequent additions to property, plant, and equipment. • In February 2003, the trust gained $ 732 million in new equity to finance a significant portion of the 10 percent working interest in Syncrude from EnCanca. In July 2003, an additional $220 million was raised. • The long term debt increased by $ 810 million.

  37. Consolidated Statement of Earnings

  38. Income Statement Analysis • Revenues higher due to increased oil prices. • Operating expense increased by $ 200 million mainly because of an unplanned coker turnaround and expended maintenance work. • Coker : Vessels in which bitumen, the molasses-like substance that comprises up to 18% of oil sand, is cracked into its fractions and from which coke is withdrawn to start the process of converting bitumen to upgraded crude oil. • Coker maintenance resulted in a 24 cent increase in operating cost per barrel in 2003. • The trust lost $135 million as a result of hedging.

  39. Stock-based Compensation • Before Q3 of 2003, Canadian Oil Sands recorded no compensation costs for unit options granted to its employees and directors. • The Canadian Institute of Chartered Accountants modified the rules for stock-based compensation program. • During the third quarter of 2003, Canadian Oil Sands adopted the fair-value method of accounting for stock based compensation. • Compensation costs of $0.6 million have been included as Administration expenses in the company’s net income.

  40. Statement of Cash Flow

  41. Cash Flow Statement Analysis • Free cash flow amount to –2 billion dollars for 2003, due to the acquisition of Syncrude working interest. • On February 28, 2003, Canadian Oil Sands closed the acquisition With EnCana Corporation to purchase an indirect 10 percent working interest in Suncrude for approximately $1.05 billion cash • On July 10, 2003, Canadian Oil Sands purchased EnCana’s remaining 3.75 percent interest in Syncrude for $430 million cash • The acquisition is treated as a purchase of asset under GAAP • Cash flow from operating activities decreased due to a $147 million foreign exchange loss on long-term debt

  42. Financial Strength Ratios

  43. Stock Price Summary • Traded on TSX • Symbol: COS.UN • Current Price $55.79 CDN • 91.1 million units outstanding • Market Capitalization of approximately $5.1 Billion

  44. Stock Price Performance: One Year Chart

  45. Stock Price Performance: Five Year Chart

  46. Stock Price Performance Vs. Oil & Gas Index: One Year Chart

  47. Recommendation BUY

  48. Petro-Canada

  49. Petro-Canada Agenda • Company Background • Management Team and Executive Compensation • Core Business Units • Business Strategy • Corporate Value Drivers • Reserves • Hedging Strategy • Financial Statement Analysis • Stock Price Performance • Recommendation

  50. Company Background • Petro-Canada was established in 1975 as a Crown Corporation • Privatized in 1991; final government stake sold in September 2004 • One of Canada’s largest integrated oil and gas companies • Produces 464,500 barrels of oil equivalent per day (2003) • Earnings from operations (2003): $1.6 Billion • More than 4,500 employees across Canada and internationally • Publicly traded on TSX (PCA) and NYSE (PCZ) • Stock price of $63.60 (Friday close) • 262,100,000 shares outstanding • Net capitalization exceeding $16 Billion • Headquartered in Calgary, Alberta *All dollar figures in CDN dollars

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