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  • bluecheese4u bluecheese4u Oct 26, 2007 1:21 PM Flag

    Oil patch mired in royalties decision

    Oil patch mired in royalties decision

    Globe and Mail Update

    October 26, 2007 at 12:47 PM EDT

    Oil and gas stocks slumped Friday as investors reacted to Alberta Premier Ed Stelmach's plan to increase the amount of royalties it takes from energy companies, however the drop was tempered by record-high crude prices.

    Although the province's oil industry had issued dire warnings of major job losses and billions of dollars in spending cuts if royalties were hiked, initial stock action was muted while corporate and analyst responses were guarded and tempered.

    UBS analyst Grant Hofer said Friday that while ?still imperfect? the new royalty rates are ?significantly better? than the royalty panel's original recommendations. According to his estimates, corporate royalty rates will rise less than 5 per cent.

    ?Although fundamentally we believe that the royalty impact is modest, we would not be surprised to see stocks sell off slightly as the market digests the impact of these changes,? Mr. Hofer said. ?We would view such weakness as a buying opportunity.?

    Under the Alberta government's new plan, money collected from the energy business could be 20 per cent higher in 2010, potentially bringing an additional $1.4-billion to the provincial coffers. That figure is nearly half a billion dollars less than a government-commissioned panel recommended last month.

    Higher royalties, which kick in in 2009, will go up for conventional oil, natural gas and oil sands projects. They are based on a sliding scale of crude oil prices and well rates, and contain higher natural gas thresholds.

    Shares of oil and gas companies fell in midday trading on Friday, with the energy trust sub-index falling 0.9 per cent while energy stocks lost 0.5 per cent. Suncor Energy Inc. lost 1.6 per cent, Canadian Oil Sands Trust fell 1.9 per cent, EnCana Corp. lost 0.4 per cent, Canadian Natural Resources Ltd. was down 0.1 per cent, while Imperial Oil and Husky Energy Inc. climbed 1 per cent.

    The price crude, meanwhile, surged to a record for the second straight session on Friday, rising to $92.22 a barrel in New York. The Canadian dollar likewise shrugged off the royalties hike and touched a new 33-year high of $1.0416 (U.S.) as the greenback continued to falter.

    Analyst Kim Page of Wellington West Capital Markets Inc. said new oil sands investment will face increased scrutiny in view of a significant jump in pre- and after-payout royalty increases. However, ?increasingly strong oil and gas prices may ultimately offset expected somewhat negative market reaction.?

    UBS's Mr. Hofer said that drilling activity and spending levels will fall, but that the natural gas amendments will make the impact more muted than had been expected. ?Indeed, initial conversations with some companies noted that although well economics will weaken, the revised royalties are unlikely to change their investment decisions.?

    According to UBS projections, the net present value of a typical upgraded mining oil sands project will decline 2.7 per cent in a $50-a-barrel crude-oil universe, and 5.9 per cent in a $80 price environment. Cash flow for senior producers and integrated companies will fall 1 per cent in 2009, while trusts will see little change. Junior producers will be hit hardest, with cash flow dropping 10 per cent.

    Crescent Point Energy Trust, a small energy trust that had threatened not to spend any money in Alberta next year because of the uncertainty of potential higher royalties, said Friday an initial evaluation had led it to believe the royalty changes will have a ?minimal? impact on its production and operations.

    Scott Saxberg, Crescent Point's chief executive officer, said the

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