BUSINESS WATCH

An orphan goes on sale to the public

Petro-Canada’s $600-million stock issue, one of Canada’s largest, is not as bad a deal as its critics claim

Peter C. Newman June 10 1991
BUSINESS WATCH

An orphan goes on sale to the public

Petro-Canada’s $600-million stock issue, one of Canada’s largest, is not as bad a deal as its critics claim

Peter C. Newman June 10 1991

An orphan goes on sale to the public

BUSINESS WATCH

PETER C. NEWMAN

How do you empty a bingo hall in Baghdad? Just yell, “Under the B-52!” How do you empty a hall of Canadian investment dealers?

Just yell, “Here comes the Petro-Canada issue!”

That issue, worth an estimated $600 million, will be one of the largest in Canadian history. The advance billing has been dismal, with frantic analysts trying to outdo one another in predicting that the shares won’t remain at their issue price (most likely $15) and that the whole exercise will disappoint brokers and disillusion investors—even if the brokerage industry desperately needs the commissions involved.

It ain’t necessarily so.

Petro-Canada has always been an orphan. When it was launched in 1975, it was within the context of rapidly rising energy prices and a country afraid for its security of supply in a world being rattled by Arab threats of drastic price increases. At the same time, Ottawa was worried about the accelerating Americanization of Canadian energy companies and desperately wanted a window on the industry.

Except for the $ 1.6-billion takeover of Petrofina Canada Inc. in 1981, which was motivated by Ottawa’s desire to establish a strong federal presence in French Canada (presumably prompted by the fact that most of Petrofina’s stations were in Quebec and that Petro-Canada installations show lots of red and a maple leaf), and the Crown company’s exploration off Canada’s coasts, not very much happened. The government never really used Petro-Canada as a policy instrument; the company itself never behaved like a government branch plant.

By 1985, then-Energy Minister Pat Carney had cut Petro-Canada loose from any obligation to enhance government policy, and earlier this year the Mulroney government passed Bill C84 to privatize the company. Although only a preliminary 15 per cent is currently being marketed, the Tories will almost certainly try

Petro-Canada’s $600-million stock issue, one of Canada’s largest, is not as bad a deal as its critics claim

to sell off at least 51 per cent within the next 18 months, so that no future government can reverse the process.

The company being made available to investors ranks third among Canada’s crude-oil producers, averaging 82,100 barrels a day, or five per cent of Canada’s total production. Its conventional—easily drilled—oil reserves are an impressive 275 million barrels. It has another 243 million barrels of synthetic reserves, mostly in the tar sands. Petro-Canada is fifth in terms of natural-gas production (with three trillion cubic feet in reserve), selling 484 million cubic feet daily. On top of all that, the Crown corporation is the leader in frontier and Arctic exploration, where it has discovered another 720 million barrels of oil and 7.3 trillion cubic feet of natural gas. It also runs active or exploratory drilling operations in Yemen, Vietnam, Pakistan, Papua New Guinea, Malaysia, Colombia and Ecuador; has the third-largest Canadian network of gasoline service stations; owns 18 per cent of the country’s refining capacity; and holds a 37-per-cent stake in the profitable Westcoast Energy conglomerate.

These are major assets and should command a premium. Whatever the short-term prospect might be—and it is held back by the company’s

$2.4-billion debt—Petro-Canada is a jewel among the world’s energy companies. It is strategically placed to benefit long-term shareholders with generous returns. But partly because the Petro-Canada preliminary prospectus was originally issued on the same day as the company reported a record loss of $52 million on revenues of $1.34 billion for the first quarter of 1991 (compared with a profit of $40 million on revenues of $1.38 billion in the same period last year), the new issue has had terrible press. Carlyle Dunbar, editor of the semimonthly Investor’s Digest, calculates that the company has earned only 2.1 per cent on its invested capital in the past decade, while Imperial Oil (7.2 per cent) and Shell Canada (6.2 per cent) did much better. Ian Doig, the Calgary energy analyst, has pointed out that the main reason Petro-Canada needs to reduce its debt is that while still a Crown corporation, it took on the burden of bringing into production the expensive Hibernia field. Doig estimates that even after government grants to the Newfoundland offshore project, Petro-Canada will still have to contribute $100 million this year. That amount will quadruple in 1992 and 1993—though, according to Doig and other experts, the Hibernia field will be viable only if oil prices jump to $35 a barrel from the current level of $23 a barrel.

When I dropped in to see Bill Hopper in Calgary recently, the Petro-Canada chairman was hopping mad about those who criticize his Hibernia investment on the basis of future oil prices. He told me: “The price will be determined by the marketplace; it has nothing to do with the cost of production. That’s like building a $500,000 house and when the buyer says, ‘You built it near the city dump and I’ll give you only $100,000 for it,’ you insist that you want to get what it cost. The Grand Banks oil area where Hibernia is located is a larger area than the North Sea, and we haven’t really touched it. A lot of those undiscovered fields will be producers one day.

“One thing is certain,” he insists. “Govemment-run enterprises will never operate as efficiently as private-sector companies—even though Ottawa may pledge that they really don’t want to control you.” He added: “Any time you want to shut a plant down and throw a couple of hundred people out of work, you know someone’s going to call you up and say, ‘Jeez, what are you trying to do to us?’ And you know they’re not making the same phone call to Imperial. So that with all the best intentions on the government side, there are always going to be factors that impinge on the commerciality of the company. We have recently been starved for capital and that has seriously limited our ability to develop our assets. Access to the equity market will enable us to capitalize much more fully on the opportunities available to us.”

The Petro-Canada float, which will dominate the financial news for the next month, is not a sure bet. But buying a share of major energy assets, safely available within North America, is about as good as it gets these days. Mark Twain once commented that Wagner operas are not really as bad as they sound. Neither is Petro-Canada’s new stock issue.