Gulf Canada emerging a winner after long stay in the doldrums

Gulf Canada's Sumatra Projects [74214 bytes]

(left) Gulf Canada President/CEO J.P. Bryan
There were two elements that we saw: assets that had been underexploited and a cost structure that was heavily laden and could be improved significantly. Gulf didn't really have any congenital problems or any that weren't easily correctable. What we have done here is not rocket science, and we have had a lot more applause than we deserved.

Gulf Canada Resources Ltd., Calgary, is headed for its first profitable year in this decade after 18 months of radical corporate surgery.

The turnaround began at the start of 1995 with a $300 million (Canadian) investment by Torch Energy Advisors Inc., Houston, to buy a 25% stake in the company. An international banking group held 70% of Gulf at that time.

J.P. Bryan, president and CEO of Torch, became president and CEO of Gulf. He has made Gulf a force to reckon with in the Canadian oil industry once again with a rapid-fire flurry of changes from day one of his administration. The speed of the turnaround has surprised industry analysts.

Initial changes

Initial changes under Bryan's administration included:

A 40% staff reduction from 1,200 to 700 the first 45 days of the new regime in 1995, including extensive cuts in management.
A new incentive compensation program for all employees tied to results.
Revision of the 1995 budget to sharply boost capital spending on exploration and production and restructuring of debt.
Sale of Gulf's 25% interest in the KomiArcticOil production joint venture in Russia to British Gas plc, a 25% participant.
Several takeovers designed to increase Gulf's resource inventory, cash flow, and production in western Canada.

Crux of the problem

Bryan says it was apparent Gulf had too many people, too much debt, and too high costs, but it also had some outstanding assets.

He says there were also problems of leadership with a company in which a banking group was the major shareholder and which earlier had been controlled by a property development company with severe financial problems.

"There were two elements that we saw: assets that had been underexploited and a cost structure that was heavily laden and could be improved significantly. Gulf didn't really have any congenital problems or any that weren't easily correctable," he said.

"What we have done here is not rocket science, and we have had a lot more applause than we deserved."

Gulf traces its Canadian roots back to the British-American Oil Co. in Ontario in 1906. In the mid-1980s, the company was an integrated operation with 10,000 employees and $5 billion in sales.

Olympia and York Developments Ltd., an international real estate developer, took a controlling interest in Gulf in the late 1980s and then ran into serious financial problems in a real estate property crash.

When Torch bought into Gulf in 1995, the latter was debt-heavy, overstaffed, and 70% owned by A&G Resources Corp., a group of 22 international banks, including the Hong Kong Bank and the Royal Bank of Canada.

Northern Alberta drilling is stepping up as Gulf Canada Resources Ltd. continues efforts to expand production in its core domestic producing areas. Photo courtesy Gulf.

Return to profitability

Gulf's prospects have changed dramatically for the better in the past 18 months, and Bryan says his foot remains firmly on the accelerator, driving Gulf towards its first annual profit since 1989.

It is on track to that target with a first quarter profit this year of $19 million. That compares with a $51 million loss for the same quarter in 1995. The company hit a low point in 1992 with a loss of $302 million.

The losses declined from $197 million in 1994 to $28 million in 1995 as the turnaround began to take hold. A profit is projected for 1996, and cash flow this year is projected to increase by $50 million.

In first quarter 1996, capital and exploration spending totaled $237 million, and Gulf participated in more than 250 wells. Liquids and gas sales for the period climbed to an average 119,300 b/d of oil equivalent (boed), up 18% from the first quarter of 1995. Sales increased to 127,500 boed.

Cash flow from operations more than doubled to $129 million, the highest quarterly level in more than 31/2 years. Bryan said Gulf is on track for its target of more than $400 million in cash flow this year.

Gulf Canada reported earnings of $25 million for the first 6 months of 1996 compared with a loss of $31 million in first half 1995.

The company attributed the improvement to increased sales volumes and commodity prices, an income tax settlement in March, and restructuring charges booked in 1995.

Sales of western Canada liquids and natural gas were up about 25% from first half 1995 to 109,300 boed. Total sales averaged 123,100 boed, compared with 101,500 boed in first half 1995.

Cash generation from continuing operations was $216 million in the first half, up almost 50% from $145 million in first half 1995.

A series of rapid corporate moves in 1995 established the initial momentum for recovery.

Gulf reinstated suspended dividends on senior preference shares in February, 1995. It began paying dividends on arrears on those shares this past March.

Acquisition action

In May, Bryan followed through on promises of expansion with successful bids for Mannville Oil & Gas Ltd., and a purchase of Alberta gas assets from Archer Resources Ltd.

The Mannville takeover-costing $143 million plus $78 million of assumed debt-added more than 475,000 net acres to Gulf's land bank and production of 50 MMcfd of natural gas and 3,000 b/d of liquids. The $56 million purchase of Archer properties added 230,000 net acres and production of 20 MMcfd of gas and 500 b/d of liquids.

In April, Gulf made a $250 million deal to buy all of Pennzoil Co.'s western Canada oil and gas assets except those going into a joint venture the two companies will use to develop existing oil and gas reserves in Alberta's Zama-Virgo field.

The purchase gives Gulf an additional 267,000 net acres in the area and a combined land position of about 450,000 net acres. Liquids production for Gulf is more than 12,000 b/d, and the company expects similar potential from acquired lands to be developed. In addition, the Pennzoil purchase added 570,000 net acres in Alberta and British Columbia to Gulf's land inventory for development.

In contrast with the successful takeovers, Gulf failed in two acquisition bids last fall for Calgary independents Czar Resources Ltd. and Orbit Oil & Gas Ltd. It said the result means that Gulf will not pursue acquisitions at any cost and will only make purchases in areas that are strategic to the company's goals and add value.

Financial progress

In June, the AG banking group sold 18.4 million Gulf shares to underwriters for a public share offering that increased Gulf's public float to 31% from 23%. A $130 million public offering in March increased the company's public float to 53% for the first time in its history, with A&G holding 30% and Torch Group 17%.

Gulf achieved another major objective in February with a listing on the New York Stock Exchange. The stock is now being tracked by a number of major U.S. investment houses.

In July 1995, Gulf completed a 10 year, $200 million (U.S.) senior subordinated debenture issue that it used to repay senior bank debt. The financing and other debt prepayments eliminated all scheduled debt repayments due before 1997, strengthened the corporate balance sheet, and earned Gulf a two-level upgrade in its credit rating.

Gulf now has $800 million (U.S.) in debt with $500 million subordinated and due in 2004-05. The remaining $300 million is due in 1997-98, but Bryan says that will be refinanced out beyond 2005, noting Gulf can do that any time it wishes. The company strategy is not to pay off debt now but to shrink it as a portion of its capital structure.

Expanding domestic upstream

High on Gulf's agenda is increasing production and development of its home base territory in western Canada, where it has assembled a portfolio of more than 3 million acres.

Gulf continues to expand operations in western Canada after last year doubling spending on conventional oil and gas E&D to $427 million from the previous year while focusing on land acquisition and development of core properties in key areas.

During 1995 Gulf participated in more than 400 gross wells and replaced almost 250% of conventional Canadian production with 70 million bbl of oil equivalent (BOE) of gross proved reserve additions from drilling, 30 million BOE of that from exploration projects.

At yearend 1995, gross proved reserves of conventional Canadian liquids were up 17% to 150 million bbl and of natural gas 50% to 1.396 bcf.

Gulf's oil development group focused on its core producing areas such as Zama-Virgo field in northern Alberta where it holds 86% working interest and 180,000 net acres. The gas development group focused on the Ghost Pine and Richdale areas where the company has extensive interests.

The company's exploration group was active in both oil and gas in North Alberta, South Central Alberta, and gas plays in Northeast British Columbia. At yearend 1995, Gulf-operated properties accounted for about 70% of the company's production. The company also invested more than $70 million last year to maintain and upgrade processing and tie-in pipeline capacity.

Sumatra campaign

Bryan says another major objective for the company is development of its assets in Sumatra being developed under production-sharing agreements (PSAs) with Pertamina, Indonesia's state oil company.

The Gulf CEO says the corporate goal is to make those assets worth what all of Gulf is worth today by 2000. Bryan says the Sumatra projects can contribute $200 million/year in cash flow to Gulf within several years.

Gulf's Asamera unit operates 5 million gross acres (3 million net) on the island in eight contract areas.

The company has two new major natural gas projects under way and is continuing to develop an enhanced oil recovery operation.

In the first quarter, Gulf completed an underwriting agreement for as much as $450 million (U.S.) in financing for the $600 million (U.S.) Corridor block gas project in South Sumatra.

Gulf is operator of the project with a 54% interest. Interest holders will receive crude oil in exchange for about 300 MMcfd of gas. A crude-for-gas agreement was completed in the first quarter and negotiations completed with the main contractor for a gas processing plant and related facilities. First gas is scheduled to flow in early 1998.

The Corridor block gas will replace 45,000 b/d of oil burned to generate steam at the Duri steamflood operated by Caltex and about 250 million bbl for the life of the project. A 300 mile pipeline will deliver the gas to Duri.

The main source of gas initially will be Dayung field, but Gulf says potentially significant gas reserves have also been discovered in the Jambi B PSA area.

The 1 Bungkal wildcat completed earlier this year 8 miles from Dayung found 321 ft of net pay. Four zones tested at a combined rate of 36.5 MMcfd.

"We think there is anywhere from 15 tcf to 25 tcf of gas to be found along the Corridor project and 1-1.5 billion bbl of oil," Bryan said.

"We have numerous structures to drill there because our acreage is next to the pipeline. We will always have a market. Delivered pipeline capacity will be 300 MMcfd, and it can go up to 600 MMcfd. There is easily that much demand. There is no problem with oil. You can easily tanker that stuff, and we are already producing 14,000 b/d."

Another major gas development, the Block A gas project in North Sumatra, received approval in principle in February from Pertamina. Estimated cost from 1996 to start-up is about $300 million (U.S.).

The project involves production of about 200 MMcfd of raw gas for processing at Arun, a major liquefied natural gas export terminal in North Sumatra operated by Mobil Corp. Production will supply as many as 15 cargoes/year of LNG, equivalent to about 120 MMcfd of sales gas. Gulf is operator for the Block A project with a 50% interest.

Gulf will build and operate a gas processing plant for three fields in Block A. First gas is expected to flow late in 1999 when production from Arun field is to begin declining.

In March, a second oil field was added to the company-operated Jambi enhanced oil recovery operation. Gross Jambi production from Kenali Asam field and new Tempino field reached 5,000 b/d. Gulf through its Asamera Indonesia units has a 60% interest in the fields.

Gulf also signed a new 30-year PSA in 1995 for the 128,000-acre Calik block adjacent to its existing operations. Recently, Gulf disclosed two Corridor block oil discoveries, 1 Pijar well and the 4 Puyuh test-the fifth well in Puyuh field, discovered in 1993.

The company is also focusing on expanding production in its established Ramba and Rawa oil fields.

Drilling is under way on Gulf Canada unit Asamera's acreage in the Corridor Block of South Sumatra, focus of the company's biggest foreign upstream push. Photo courtesy Gulf.

Other foreign E&D

In addition to its Indonesian holdings, Gulf is also developing international prospects in the U.S., Australia, and Algeria.

In mid-1995, Gulf set up a new unit, GCRL Energy Ltd., to begin an exploration program in North Dakota's Williston basin Lodgepole trend, in the Minnelusa trend of Wyoming, and in Montana's Sheep Mountain basin. The company has increased its net acreage in the three states to 300,000 acres from about 185,000 acres at yearend 1995 and plans to drill as many as 50 wells this year.

The company conducted a seismic program on the Muiron and Tamar blocks off Northwest Australia and plans an exploration test on the El Ouar block in Algeria in second half 1996.

Bryan is also enthusiastic about the potential for growth from development of oilsands deposits in the Fort McMurray region of North Alberta. Gulf has increased its holdings in the area since he took over.

"The oilsands are the only oil stream in the world where the revenue stream is going up and costs are going down. And you could call the reserves nearly perpetual," Bryan said.

"I think they are the best investment you can make in the Canadian oil business today. The oilsands are now competitive with conventional oil producers."

Last November, Athabasca Oil Sands Investment Inc., set up by Gulf, bought the Alberta government's 11.74% interest in the Syncrude Canada Ltd. oilsands operation at Fort McMurray. A $270 million offering of the trust units helped Gulf finance the purchase. Gulf bought $17.6 million of the units and was hired to administer Athabasca Oil Sands and market its share of Syncrude production.

Gulf already held a 9.03% interest in Syncrude, which contributed an average 18,100 b/d of sweet crude to its production in 1995. The company will also test in situ steam assisted gravity drainage technology at its Surmont oilsands leases, where it added 17,000 acres last year for a total of 135,000 acres.