Petro-Canada pumped up

"The stock remains cheap,"" says Yorkton Securities analyst Mark Heim. “It's the cheapest among its peers despite having some of the best growth."

The Globe and Mail
February 7, 2001

Petro-Canada pumped up
Shares expected to continue climbing, especially if Ottawa divests rest of stake
Dave Ebner

Petro-Canada, whose stock soared an impressive 87 per cent last year, should continue to climb in 2001, analysts believe.

"The stock remains cheap," says Yorkton Securities analyst Mark Heim. “It's the cheapest among its peers despite having some of the best growth."

Calgary-based Petrocan, one of Canada's largest integrated oil and gas companies, closed at $36.35 on the Toronto Stock Exchange yesterday. Although it is not far off its 52-week high of $38.15, it trades at 11.08 times trailing earnings. Mr. Heim says Petrocan historically has traded closer to 20 times trailing earnings. He who rates it a "top pick" with a 12-month target of $46.

Created in 1975 by the federal government, part of Petrocan was sold to the private sector in 1991. The government sold a second chunk in 1995 but still holds 18.2 per cent. Rumours that Ottawa might divest its stake have flown up and down Bay Street for some time, but Mr. Heim thinks this may be the year.

"It's a very strong possibility," he says, suggesting proposed government legislation will lead to the government's final Petrocan sale.

Last week, the Liberal government reintroduced a bill that proposes to ease Petrocan's ownership restrictions. The bill, formerly known as C-39, died when last fall's election was called. Renamed C-3, the bill would allow individuals to own 20 per cent of the company, up from 10 per cent.

It also would allow unlimited aggregate foreign ownership, although the legislation still requires the head office to remain in Calgary and the majority of the board to be Canadian. Further, the bill would provide
Petrocan greater control over its assets by loosening disposal rules.

"To grow and compete in the global market, Petro-Canada needs to be on a level playing field with its competitors," Natural Resources Minister Ralph Goodale said when bill C-3 was tabled. "The [bill] should allow [Petrocan] to attract more investment capital, while ensuring that decision will continue to be made in Canada."

According to Merrill Lynch Canada, Petrocan is one of the leading integrated oil and gas companies in the world.

Analyst Randy Ollenberger says Petrocan, which posted record revenue and profit in 2000, will produce additional earnings momentum this year.

The company's upstream business — the search for oil and gas — has been streamlined and Mr. Ollenberger says results should keep improving. But it's the downstream side — refining and marketing businesses – could exceed expectations.

In 2000, refining more than doubled operating earnings year-over-year on the strength of improved margins, the best in 15 years. Mr. Ollenberger says there will be more improvement.

"The downstream performance, this year, is going to be better than people expect," he says.

Mr. Ollenberger says investors should keep an eye on the launch of the $2.2-billion Terra Nova oil project off Newfoundland. Petrocan operates and owns 34 per cent of Terra Nova and it is expected to begin pumping in June.

"If we see some fits and starts in production, that could have a bit of a near-term impact on the stock," Mr. Ollenberger says.

Analysts love Petrocan. Of 26 analysts surveyed by Bloomberg News, only one rates the company "hold." The rest have "buy" ratings."

The only note of dissent is the longer-term outlook for commodity prices. Although oil and gas prices are expected to stay high this year, Value Line Inc. says they eventually will soften.

"This suggests that earnings expansion over the long haul is somewhat limited, hurting [the] stock's appreciation potential to the 2003-2005 horizon," Value Line analyst Rick Plummer wrote in a recent report. "As such, we recommend this timely stock primarily for year-ahead investing."

Bottom line: Petrocan appears poised to top 2000's record revenue and profit results and analysts believe the stock could get an additional boost if the federal government divests its stake.

Petro-Canada: vital statistics

Business description
Explores for, develops, produces and markets crude oil, natural gas, and natural gas liquids.
Head office: Calgary
Telephone: 403-296-8000
Web site: http://www.petro-canada.ca
TSE symbol: PCA
Employees: 4,417

Share values
Trailing 12-month earnings per share $3.28
Trailing 12-month P/E ratio 11.08
Annual dividend 40¢
Dividend yield 1.10%
52-week intraday high $3.60
52-week intraday low $19
Last close $36.35
Change from previous -5¢
1-year total return 7.56%
59-month average annual return 17.6%

Funds with heaviest weighting in Petro-Canada
Share holding as a % of total fund value, as of Dec. 29.
Ivy Canadian 3.1
Investors Summa 3.3
Universal Canadian Growth 4.2
CI Harbour Fund 6.3
Investors Retirement Mutual Fund 3.3
Universal Future 2.1
AGF Canadian Stock 2.0


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