PFC Energy: Russian firms, LNG suppliers dominate energy 50 rankings
By OGJ editors
HOUSTON, Feb. 10 -- The yearend 2002 ranking of the world's 50 largest energy companies was shaped by some significant events:
-- Russian oil and gas companies continued to scale the Energy 50 list for the second year in a row. These firms posted high returns for 2001 as well (OGJ, Feb 11, 2002, p. 32).
-- While many international companies and traditional electric utilities performed well, energy merchant firms—many of which have dropped from the Energy 50 rankings—"failed to emerge from their slump."
-- Certain energy firms—taking full advantage of "the distressed (economic) environment to acquire assets"—bought properties "integral to supplying the US gas market," particularly "LNG assets or capacity in the US in 2002 to position themselves to fill anticipated supply shortages in the US gas market in the coming years."
These were some of the key findings from the most recent Energy 50 ranking—a quarterly and yearend assessment based on energy companies' market capitalization—that was released last month by PFC Energy (formerly Petroleum Finance Co.) of Washington, DC.
Strong Russian presence
Regarding Russian oil and natural gas firms, PFC Energy noted, "Strong gains made by the Russian oil sector boosted the overall performance of the PFC Energy 50, as did leading returns of other non-US oils"—among them the Chinese firms PetroChina, Sinopec, and CNOOC; European mid-caps ENI SPA and Statoil ASA; Indian national oil firm Oil & Natural Gas Corp.; and Canada's EnCana Corp.
Overall, the share price performance for the fourth quarter of 2002 for the Energy 50 rankings increased 6.5%, PFC Energy noted. "In the ranking's two sub-sectors, the oil and service companies were up 7.5% over the third quarter, and the gas and power companies were up 5% (over the third quarter)," the company said.
"Despite the Russian oils' leading share-price growth in 2002, (OAO) Sibneft was the only Russian company among the oil and service companies in the PFC Energy 50 to post double-digit gains in the fourth quarter (of 2002), PFC noted. "Having generated explosive share price growth over the past 2 years, the Russian oils may soon be leaving off to growth rates and returns that are more in line with the sector," the company said.
Merchant sector slump
PFC Energy noted that the ailing energy merchant sector will have a large amount of debt that will mature in the coming year. ". . .the potential exists for additional damage to the sector if the debt can't be serviced on time and credit ratings head further south," PFC Energy said. PFC added that a number of these companies are "retrenching" their international operations—"or already have"—and are "deemphasizing trading, and selling assets."
PFC Energy noted, "While the merchant companies restructure their portfolios to strengthen their balance sheets and get back on a growth trajectory, other energy companies are taking advantage of the distressed environment to acquire assets, particularly assets integral to supplying the US gas market." Notably, examples of such companies include Royal Dutch/Shell Group, Statiol, Dominion Energy, and others, PFC Energy said. These companies "bought LNG assets or capacity in the US in 2002 to position themselves to fill anticipated supply shortages in the US gas market in the coming years," PFC Energy noted.
"Although the merchant energy sector is on life support and most global equity markets closed 2002 on weak notes (marking the third consecutive bear year), energy companies ranking in the yearend PFC Energy 50 gained 8% in aggregate year-over-year," PFC Energy concluded.
PFC Energy said it was worth noting that while other merchant energy firms were squeezed from the Energy 50 rankings, there were those that were first-time entrants, namely New Orleans-based Entergy.
"Entergy is the second-largest nuclear generator in the US, and has much of its operations focused on the regulated electricity sector in the southeastern US," PFC said. "The company also sells power into markets in the northeast, and has a marketing and trading joint venture (Entergy-Koch) with privately held Koch Industries (of Witchita, Kan.). In contract to most of the merchant energy sector, Entergy-Koch has weathered the tumultuous market fairly well, as evidenced by a still strong credit rating assigned by Moody's," PFC Energy said.
LNG window of opportunity
"In the wake of Enron's collapse, much of the energy industry has focused on staying afloat rather than capturing growth opportunities," PFC Energy noted. "But a handful of companies with large balance sheets are taking advantage of the distressed market to bolster their positions in what is expected to be a tight gas market. Several of the key LNG players are pinning portfolio growth on the development of a few large LNG projects in the Altantic-Mediterranean basin," the company observed.
Some gas and electric power firms, including Houston-based El Paso Corp. and Tulsa-based Williams Cos. Inc. have been "forced" to divest themselves of certain assets—particularly LNG properties, capacity rights, and supply contracts—while working their best to restructure their portfolios in order to meet debt obligations, PFC Energy noted. These sales have created opportunities for other companies to "fill expected supply shortages in the US gas market," PFC Energy said.
"PFC Energy projects natural gas demand in the US to grow at (about) 2%/year until 2010, while domestic supply will unlikely be able to match demand growth," it said. "Even with sustained gas prices that make marginal drilling attractive, both Canadian and US producers have reported new wells flowing at lower rates and declining faster than older wells. . .," it continued. "The logical filler for flattering US production is Canadian imports. However, if Canadian imports grow substantially during the next few years, the potential exists to max out export capacity to the US by 2005," PFC Energy said.
"The core Lower 48 and Western Canadian supply basins cannot satisfy US gas demand in the future, and new sources of gas will be essential," PFC Energy concluded, adding, that "two potential new sources are LNG imports and long-haul gas from Alaska and Canada."
It said, "PFC Energy foresees a window of opportunity for additional base-load LNG imports into the US opening in 2004-05. . .and we believe that the risks for competing new source gas are low. Alternative long-term supply options that pose limited risks to the medium-term viability of LNG imports include: new discoveries that reverse North American gas production trends, Arctic gas arriving in the US market much sooner than currently expected, and very aggressive investment in Mexico to increase production and expand export pipeline capacity."