Strategies of Urban Morphologyfor Improving Outdoor Thermal Comfort and Susta...
canadian oil and gas industry
1. Canadian
Oil and Gas Industry
Fundamental Analysis and
Recommendations:
Suncor, Imperial Oil, Talisman
2. Presenters
• Karen Ford– Industry Overview
• Aaron Cawker– Suncor
• Stephanie Cornell– Talisman
• Rahim Dhanji– Imperial Oil
3. Industry Overview• Largest industry in the world
• Oil & gas trade surplus accounts 57% of
Canada’s merchandise trade balance in 2003
• 3.5 per cent share of the world market, since
1998
• Employment near 500,000 in Canada
• Invest close to $24 billion
4. Overview…continued
• Payments to governments have averaged close to $8.5
billion per year over the last 10 years
• In 2003, the oil and gas industry contributed an
estimated $16 billion to government revenues in the form
of royalty payments, bonus payments and income taxes.
• We produce more than 20% of North America’s crude oil
and natural gas but account for only 10% of its
consumption
• Capital Spending 2003: Conventional $23.8 billion
Oil Sands $5.0 billion
Total $28.8 billion
5. Origins and History
• Most crude oil and natural gas originate from
plant and animal life millions of years ago:
swamps and oceans.
• Heat and pressure transformed the soft parts of
the plants and animals into solid, liquid or
gaseous hydrocarbons known as fossil fuels -
coal, crude oil or natural gas
• Located in sand oils and oil fields
• Found by drilling and creating wells
7. Sectors of the Industry
• Petroleum Exploration and Production
– Upstream
• Refining
– Midstream
• Distribution and Retail Sales
– Downstream
8. Types and Uses
• Crude Oil and Natural Gas
• Uses:
– Mobility, heat and cool our homes and provide
electricity
• Products:
– plastics, life-saving medications, clothing, cosmetics,
and many other items you may use daily
• Barrel – a unit of measure for oil and petroleum products
that is equivalent to 42 U.S. gallons
9. Canadian Economy
• Canada's GDP 2003 grew 1.7%., 2002 it grew 2.2%
• Slowdown of Canada’s economy:
– weak U.S. economic growth for most of the year;
– a strong appreciation of the Canadian dollar;
– the SARS outbreak in Toronto;
– restrictions on exports of softwood lumber and beef (due to mad
cow disease).
• Recovery of the U.S. economy, high oil and natural gas
prices, and continued spending from the Canadian
government are expected to boost Canada’s economy in
2004.
• The Canadian economy is forecast to grow 3.6% in 2004
10. Situational Analysis
• Demand is increasing
• Oil and Natural Gas together provide the largest source
of energy (64%) in Canada
• Natural gas 39% and Oil 25%
• Hydro 20%
• Coal 11%
• Nuclear 5%
• Prices have become volatile on the market
• Energy shares make up 17 percent of the value of the
S&P/TSX, the second-largest group in the index
11. Crude Oil in Canada
Highlights
• Ninth-largest producer of crude oil in the world
• Prior to 2002, Canada did not even rank in the top 20 of
countries with the most proven crude oil reserves. Alberta's oil
sands, which stood at 174.4 billion barrels as of January 2004
• Saudi Arabia holds most crude oil reserves in the world
13. Crude Oil…continued
• Production:
– 3.1 million barrels per day (bbl/d) for 2003, an increase of
7% over 2002
– Oil sands production is expected to increase significantly
and to offset the decline in conventional crude oil
production, becoming Canada's major source of oil supply
– Western Canada Sedimentary Basin (WCSB), underlying
most Alberta and parts of British Columbia, Saskatchewan,
Manitoba and the Northwest Territories main source of oil
15. Crude Oil Continued…
• Wells Drilled: 4,845
• Exports
– US: 1.4 million barrels per day
– 3rd largest exporter of crude oil to
the US
– Canada makes up 15% of total US oil imports
– Canada supplies 9% of US oil consumption
• Imports
– 912,000 barrels per day
17. Crude Oil Forecast
• Significant potential for new crude oil
production planned to come on stream
over the next ten years
• Canada’s crude oil production growth is
driven by the development of oil sands in
Alberta and to a lesser degree by offshore
projects in eastern Canada
18. Crude Oil Prospects
• Maturing basin being extended by technology
– Horizontal drilling
– 3D Seismic
– New drilling/recovery technology
• Emerging basins
– Oil Sands
– Northern Canada
– Offshore East Coast
• Technology is key
• Total Canadian production is projected to increase
from the current 2.6 million barrels per day to
reach 3.6 million barrels per day (b/d) by 2015.
21. Natural Gas Highlights
• Canada is the third-largest producer of natural gas
• Production:
– 16.9 billion cubic feet per day
• Reserves:
– 59.1 Tcf (Jan. 2004)
• Wells Drilled in 2003: 12,951
• Exports:
– 2nd largest exporter in world
– to US: 3.8 trillion cubic feet per year
– Largest exporter of natural gas to the US
– Canada makes up 94% of total US gas imports
– Canada supplies 17% of US gas consumption
• No imports listed
23. Natural Gas Outlook
• Short-term outlook, natural gas production is
expected to decline 3%, from 16.3 Bcf/d at the
end of 2002, to 15.8 Bcf/d in 2005
– new fields coming onstream are small and
quickly depleted
• If prices stay high, incentive to exploit the many
small natural gas pools in the WCSB, as well as
coalbead methane, of which the region holds
considerable reserves
25. Prospects of Natural Gas
• Natural gas demand keeps growing
– Supply running hard to catch growing demand
– New sources of supply coming on
• Gas from tight sands is promising resource
• Arctic gas from the Mackenzie Delta to be piped to
Canadian and U.S. network of pipes
• As demand for gas grows, Canada’s resources will
combine with Liquid Natural Gas (LNG) imports as
important sources of this cleaner-burning fuel of choice
in an increasingly environmentally conscious North
America
26. Natural Gas Prospects…
• Significant untapped potential
remaining
• Sufficient pipeline capacity New
supplies:
– Northern gas
– East Coast offshore
– Coal-bed methane
29. Strengths
• Size and number oil sands in Alberta
• Potential of Eastern and Northern Canada
• high-tech exploration
• cold-climate and offshore operations
• construction and operations of pipelines
• specialized controls and computer applications
• environmental protection technology and safety training
• innovative products and services that meet customer
needs
• refining processes that produce quality petroleum-based
products while minimizing the impact on the
environment.
30. Weaknesses
• Limited natural gas reserves
• Capacity for natural gas is forecasted to decrease
• Canada is one of the high-cost places in the world to find
and produce oil and gas
• Deep gas, natural gas from coal and developments
offshore, in the oil sands and the North are large,
complex and expensive and have long lead times before
they turn a profit
• Challenges in meeting North America’s energy needs
31. Opportunities
• Exporting to the US
• Oils Sands
• Exploration of Northern and Eastern Canada
• World population is currently around 6 billion
people, but is expected to grow to approximately
7.6 billion by 2020.-- a huge increase in the
demand for transportation fuels, electricity, and
many other consumer products made from oil
and natural gas.
33. Threats
• Price volatility
• High Development costs
• Environmental Issue
• Especially Marine Life
• Substitutes
– Alternatives to oil and gas
• Solar Power, Coal, Wind, Hydro, and Nuclear
Power
34. Competitive Rivalry
Top Companies in Oil and Gas Producers
(Selected by Assets)
• EnCana Corp.
• Canadian Natural Resources
• Nexen
• Penn West Petroleum
• Western Oil Sands Inc
• Paramount Resources
• Compton Petroleum
• Bonavista Energy Trust
• PetroKazakhstan Inc.
37. Crude Oil Price Forecast
West Texas Intermediate Crude Oil Price $/bbl Average of Month.
Oct Nov Dec Jan Feb Mar
2004 2004 2004 2005 2005 2005
Value 37.9 30 32.1 40.8 40.6 40.9
Standard Deviation 0.7 0.6 0.7 0.9 1 1
Correlation Coefficient 0.95 0.95 0.95 0.95 0.95 0.95
Updated Thursday, October 28, 2004
42. Current Events
• Despite high oil and gas prices, anticipated market volatility is preventing energy
companies from increasing their rate of investment
• Nov. 8 (Bloomberg)
Canadian Stocks Fall as Oil Prices Slip; Suncor, Talisman Drop
-- Canadian stocks fell, led by oil and gas producers such as Suncor Energy Inc.,
after crude oil prices declined. A rise in the Canadian dollar to 84 U.S. cents for the
first time in more than 12 years weighed on the benchmark index.
``Oil and gas stocks in Canada are very sensitive to falling oil prices because of how
high'' crude prices are
• Tuesday, November 09, 2004
Crude oil futures tumbled below $48 (U.S.) a barrel Tuesday, closing at their lowest
level in seven weeks, on rising expectations that the U.S. supply of transport and
home-heating fuels will be adequate this winter.
44. Company Overview
• Suncor Energy Inc. is an integrated
energy company strategically focused on
developing one of the world’s largest
petroleum resource basins – Canada’s
Athabasca oil sands.
• Strong focus on technology
• 37 years of oil sands experience
45. Company Overview
• Became a publicly traded company in
1992
• Total returns to shareholders have
averaged more than 25% per year.
46. Corporate Committee
• Richard George – President & CEO since 1991
• Kenneth Alley – Senior VP & CFO since 2003, with Suncor since
1984
• Mike Ashar – Executive VP, Refining and Marketing since 2003,
with Suncore since 1987
• David Byler – Executive VP, Natural Gas & Renewable Energy
since 2000, with Suncore since 1979
• Terrence Hopwood – Senior VP & General Council since 2002,
with Suncore since 1988
• Sue Lee – Senior VP, HR & Communications since 1996
• Kevin Nabholz – Senior VP, Major projects since 2002, with
Suncore since 1986
• Thomas Ryley – Executive VP, Energy Marketing & Refining, with
Suncore since 1983
• Steven Williams – Executive VP Oil Sands since 2003, with
Suncore since 2002. 20 years of energy industry experience.
48. Businesses
• Oil Sands
– Located near Fort McMurray, Alberta
– The foundation of Suncor’s assets and is the center of their
growth strategy.
• Natural Gas and Renewable Energy
– Based in Calgary, Alberta
– Produce natural gas in Western Canada
– Provides a price hedge against internal consumption at oil sands
and refining operations.
49. • Refining, Marketing and Retail
– Canada
• Refinery feedstock and natural gas production are
marketed to commercial and industrial consumers.
• Products from the Sarnia refinery are sold to
customers in Ontario, Quebec, and the
Northeastern US, and to retail customers through
approximately 500 Suncor-owned(Sunoco) and
joint venture service stations in Ontario.
Businesses
50. – United States
• In August 2003, acquired a Denver, Colorado
refinery along with 43 Phillips 66 retail stations.
• Expansion into the rocky Mountain States allows
easier movement of crude oil products to US
markets.
Businesses
51. Business Strategy - growth
• Develop multiple sources of supply from the oil
sands resource base
• Upgrade technology to increase production
• Use increase production to feed growing North
American energy market
• How to improve current model: make it bigger.
53. Short term Goals
• Increase crude oil production to more than
500000 barrels per day by 2010-2012 from
current level of 216600 bpd.
• Reduce costs of production
• Provide superior shareholder returns while
providing social and economic benefits to
stakeholders.
• Reduce environmental impact of operations
54. Crude Oil Production
• Planned expansion is
designed to leverage
economies of scale to
keep costs per barrel
among the lowest in the
industry.
58. Oil Sands
• Suncor’s future is built on Canada’s oil
sands
• An estimated 175 billion barrels of crude
oil reserves
• First company to develop oil sands
• Leases contain an estimated 12 billion
barrels of bitumen reserves (heavy oil)
59. Oil Sands
• With known resource base, Suncor
doesn’t have risk and cost associated with
conventional exploration.
• 12000 million barrels = (12000/0.5)1/365 =
65+ years of resources.
• In the process of acquiring further leases
60. Supply of Bitumen
• Mining – Surface mines supply majority of current
production, plans to extend current mines with new
operations planned to begin in 2010
• In-situ – Firebag development uses steam assisted
gravity drainage (SAGD) to heat the underground
reservoir, allowing the bitumen to be pumped to the
surface. Expected to be at full production in 2005.
• Third Party Agreements – plan on providing a fee-for-
service agreement to process 27000 barrels per day of
3rd
party butimen (2008).
61. Production of Crude Oil vs. Revenue
Total Revenue by Year
0
1000
2000
3000
4000
5000
6000
7000
1999 2000 2001 2002 2003
Millions($)
62. Markets
• Refining and marketing strategy builds on
connections between the Oil sands
production base and North American
refiners and consumers.
• This is the largest crude oil and refined
product market in the world.
63. Markets - continued
•Don’t just supply
the market, also
participate in it
through short and
long-term
marketing
contracts as well
as through retail
distribution
(Sunoco).
64. • Retail
– operates nearly 300 Sunoco-branded retail
stations in Ontario and supplies to over 200
other stations through joint venture
operations.
– In 2003, purchased 43 Phillips 66 retail
stations in Colorado and long-term supply
contracts with nearly 150 more retailers.
Markets - continued
66. Investments
• Currently producing hydrocarbon fuels to
meet today’s needs
• Investing to supply new markets with
renewable energy.
• In 2003, they began the wind power
project in southern Alberta, with partner
EHN Wind Power Canada, Inc.
67. Stock Info.
Price as of Nov. 10, 2004: $40.46
52 week low: $27.00
52 week high: $44.49
Average Daily Volume ≈ 1,500,000
Number of Shares Outstanding: 453,421,000
76. Recent News
• Oct 18:
• Suncor CEO Richard George told the downtown Toronto business
audience:
– American consumption of oil and gas is expected to increase almost 50
per cent by 2025,
– Domestic production is projected to remain flat.
– The United States is looking north to close the gap, and this represents
a big opportunity for Canada's energy industry.
• "The bottom line for Canada is that energy is not an obstacle to
economic growth. It's a key driver of economic growth," said
George.
• "This is not just an opportunity for Western Canada. Our energy
industry is about Canada's opportunity, Canada's prosperity, and
our role globally."
77. More news
Suncor profit climbs, but oil hedges limit
gain
– Suncor, known for its huge oil sands mining
and synthetic crude operations, would have
earned 25 percent more if over a third of its
output not been sold forward at $22.50 a
barrel. Oil averaged nearly $44 a barrel in the
quarter.
78. What the Brokers say
Strong Buy 5
Buy 8
Hold 6
Sell 2
Strong Sell 0
79. Value Drivers
• Production of crude oil
• Since they are essentially price takers, the more
they produce, the more revenues increase
• The price of oil
– This is the price of their product, and if price
increases, earnings increase.
• To a lesser extent the success of downstream
operations
80. Recommendation
• BUY
– Pros:
• Sound business plan
• Product is in constant demand
• Near unlimited resources, just a matter of extracting them
• Continuous growth in revenue and earnings
– Cons:
• Stock price has surged over last year, and stock is expensive
compared to 1 year ago
82. Talisman’s Background
• Large independent oil and gas producer with
global operations
– focused mainly on exploration and development
• Created in 1992 – Formally British Petroleum
Canada
• Started out with operations solely in Canada
– Market Capitalization approximately $500million
– Produced 51,00 boe/d
83. Talisman’s Background
• Through corporate and asset acquisitions , operations
were quickly established in the North Sea, North Africa,
and Southeast Asia
• Today – 11 billion dollar company with global operations
– 2003 – production was 437,000 boe/d
• 60% of reserves are natural gas, 40% crude oil and
natural gas liquids
84. Management Team
James W. Buckee, President & CEO
o 1977-1991 British Petroleum Canada, 1991 appointed Chief operating officer of
Talisman, 1993 became CEO of Talisman
Ron J. Eckhardt, Executive Vice President, North America
o 1986 – Joined Talisman (then British Petroleum Canada)
T.N.D. Hares, Executive Vice-President, Frontier & International Op.
o 1972-1994 – Worked for British Petroleum, 1994 joined Talisman
Joseph Horler, Executive VP, Marketing
o 1987 – Joined Talisman (BP Canada)
Michael D. McDonald, E.V.P. Finance and CFO
o 1982 – Joined BP Canada
Robert M. Redgate, E.V.P., Corporate Services
o 1978 – Joined Talisman (BP Canada)
Jacqueline Sheppard, E.V.P., Corporate and Legal
o 1993 – Joined Talisman, prior to this she was a partner in a law firm
John ‘t Hart, E.V.P., Exploration
o 1978 – Joined Talisman (BP Canada)
85. Competitors
• EnCana
• Penn West Petroleum
• Compton Petroleum
• Canadian Natural Resources
• Western Oil Sands Inc
• Bonavista Energy Trust
• Nexen
• Paramount Resources
• PetroKazakhstan Inc
86. Areas of Operation
• North America – 50% of company’s production
(2003)
• International – 50% of company’s production (2003)
87. North America (Canada and US)
• Mainly Natural Gas, but also oil and
liquids
• Focuses mainly on natural gas in Rocky
mountain foothills in Alberta
• New core gas area in upstate New York
88. North Sea (United Kingdom and Norway)
• Represented 2/3 of international production in 2003
• Mainly oil and liquids
• In UK central North Sea - Established a number of commercial
hubs
• Norwegian sector of North Sea– building a new core area
• Large drilling program underway designed to increase liquid and
oil production by 5-10% in 2005
89. Caribbean and Latin America (Columbia,
Trinidad and Tobago)
• Working in a number of high exploration
areas.
• Trinidad – development of the Greater
Angostura oil and gas project is underway
• Columbia and Trinidad – exploration
drilling programs
90. Africa and Middle East (Algeria, and
Qatar)
• March 2003 – completed sale of its
indirectly held interest in the Greater Nile
Oil project in Sudan
– $1.1 billion, gain of $296 million
• Production and development interests in
Algeria and exploration acreage in Qatar
91. Stock Information
• Share Price – $30.85 CAD (November 8, 2004)
• Listed – Toronto and New York Stock exchanges
• Ticker Symbol – TLM
• Shares Outstanding – 384,105,983 (November 8, 2004)
• Market Capitalization – $11,849,669,575.55 (384,105,983*
$30.85)
• 52 Week low and High – $21.25 - $35.10
• Dividends - June 30, 2004 - $.15 and Dec 31, 2004 - $.15
97. Breaking News – Nov. 9/04
• Supply cushion – only about 1% of the 82.4
million barrels consumed daily
• Two key exporters might be vulnerable to
disruptions in the near future
– Iraq – US military have vowed to disrupt the country’s
oil exports, and a northern pipeline has been knocked
out by saboteurs lowering supply
– Nigeria – Oil workers are planning a general strike
aimed at halting the country’s exports –
• Nigeria is America’s fifth largest source of crude oil
99. Recommendations
• Sound business plan
• Product is always in demand
• Price of stock is down right now and is likely to
increase
• Company has increased production by 11% year
to date
• BUY!
100. Corporate Profile
• Imperial Oil Limited has been a leading member
of the Canadian energy industry for more than
120 years
• One of the largest producers of crude oil and
natural gas liquids in Canada and a major
producer of natural gas
• Canada’s largest refiner and marketer of
petroleum products – sold primarily under the
Esso brand name
• Major producer of petrochemicals
101. Management
Team
Imperial's 2003 Board of Directors (left to right)
P. Des Marais II, B.J. Fischer, T.J. Hearn, R. Phillips, J.F. Shepard,
P.A. Smith, S.D. Whittaker, K.C. Williams, V.L. Young
•Majority of management team are from within Imperial Oil
or Exxon/Mobil
•(Exxon has a 69.59% interest in Imperial)
102. Management Team
• T.J. (Tim) Hearn has been a director of Imperial Oil since January
1, 2002.
– With the company since 1967
– He is currently Imperial's chairman, president and CEO
• P.A. (Paul) Smith
Mr. Smith has been a director of Imperial Oil since February 1,
2002.
– He is currently controller and senior vice-president, finance and
administration.
– Joined Imperial Oil in 1980
103. Management cont…
• B.J. (Brian) Fischer
Mr. Fischer has been a director of Imperial since Sept. 1, 1992.
– He is currently senior vice-president of Imperial's products and
chemicals division
– Joined Imperial Oil in 1968
• J. M. (Mike) Yeager
Mr. Yeager has been a director of Imperial Oil since August 1, 2004.
– He is currently senior vice-president, resources division, and president
and chief executive officer of Imperial Oil Resources
– He joined the company from Mobil
104. Natural Resources Segment
CRUDE OIL
• Wholly owned Cold Lake operation in Northern
Alberta
• 25 percent ownership position in Syncrude.
NATURAL GAS
• Wizard Lake
• Sable Offshore Energy Project
• Gwillim Field
105. Crude Oil – Cold Lake
• This is a long-life asset
• Net proved reserves were 760 MB at year-
end 2003
• Additional untapped resource
107. Crude Oil - Syncrude
• World's largest mineable oil sands
operation.
• Syncrude is the single largest crude oil
producer in Canada with net reserves of
about 3 billion barrels and production of
over 200 kbd in 2003.
• Imperial was a founding member of
Syncrude and has a 25 percent interest
108. Natural Gas
• Full production from the natural gas cap at Imperial’s Wizard Lake
oil field in Alberta began in July 2003.
– Production rates of about 180 million cubic feet a day will be achieved in
2004 once gas plant capacity is available and are expected to continue
through 2006.
• In November, the first natural gas was produced from the Gwillim
field in northeastern BC. Additional development of this field is
planned.
• Natural gas production from 9% interest in the Sable offshore
energy project averaged 40 million cubic feet a day before royalties.
– production began from a fourth Sable field, Alma, and construction was
started on facilities for a fifth field, South Venture.
• Funding was also approved for a natural gas compression facility
that will service production from all Sable fields by late 2006.
109. Natural Resources - Potential
• Kearl Oil Sands (200k barrels/day)
• Mackenzie Gas Project
– regulatory review process to take about 2 years
– design and construction should take 3-4 years
– potential for Mackenzie gas production by the end of
the decade
• Cree exploration well abandoned in the third
quarter
• Acquired 25% interest in Orphan Basin (Natural
Gas)
112. Petroleum Products Segment
• 787 company-owned sites
• Average productivity per site for 2003 was 5.2 million litres a year, up six
percent from 2002.
• 650 Esso convenience stores across Canada, including On the Run and
Tiger Express, was the second largest in Canada.
• Convenience-store sales rose by about nine percent in 2003, well above the
industry average.
• 400 sites with car-wash facilities is the largest in the industry.
• Esso retail sites providing Tim Hortons food and refreshments had
increased to more than 300 from 270 in 2002
113. Petroleum Products cont…
• Points-Exchange alliances
• Market leader in finished lubricants
• Exclusive Canadian marketer of Mobil
products
• Quadrupled average productivity per site
114. Petroleum Products cont…
• Focus on reducing working capital
• Decreased days inventory by 4% vs. 2002
• Freed up more than $35 million in cash
• Over the last 10 years, this has been
reduced by about 25 percent.
115. Petroleum Products cont…
• Capital Expenditures of $478 million in
2003
– Allowed them to meet specifications of 2004
model-year automobile technology
• Refineries have improved energy
efficiency by more than 40 percent over
last 30 years
116. Chemicals Segment
• Earnings of $37 million
• Cash flow from earnings of $66 million
• Sales of petrochemical products were
3,300 tonnes a day, down slightly from
2002.
• N.A. demand was low in 2003, with high
feedstock costs and soft sales volumes.
117. Chemicals cont…
• One of Canada’s leading producers of
chemical products
• Largest market share in North America for
polyethylene
• Largest share of the Canadian market for
solvents
• Annual capacity of 450,000 tonnes
118. Chemicals cont…
• $41 million in Capital Expenditures aimed
at reducing net costs of ethylene
production by 10 percent.
122. Ratios cont…
Financial Strength Company Industry
Quick Ratio 0.775 0.87
Debt to Equity 0.24 0.86
Interest Coverage 57.2 7.39
Profitability
Gross Margin 60.28 56.90
Net Profit Margin 8.76 14.94
Management
ROA 19.4 6.47
ROE 29.1 16.51
Inventory Turnover 28.45 18.43
*Due to repayment of LT Debt
123. Growth Measures
• Revenue growth of 49.44% from 1999
• S/H Equity growth of 33.53% from 1999:
– Increased due to increasing net earnings
– Partly offset by Share Repurchase Program
133. Recommendation:
• Strong sales and EPS growth
• High profitability compared to industry and S&P
500
• High return ratios (ROE, ROA, ROI)
• Steady return potential for capital investments
• Strong dividend record and repurchase record
• BUY