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ENERGY - OIL & GAS

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Of Note:

Teck Cominco, overwhelmed with nearly $10-billion (U.S.) in debt after an ill-timed play for Fording, is a possible victim.

But here's another candidate for 2009: Petro-Canada.

Of the 10 Canadian oil and pipeline companies that are still worth at least $10-billion (Canadian), it's the worst performer
(one year, three years, five years - take your pick).

Every industry has its 98-pound weakling. Petrocan happens to be the oil sector's.


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It's a crisis of confidence for Petro-Canada

DEREK DeCLOET
Globe and Mail
November 15, 2008

It began as a mortgage crisis. It morphed into a credit crisis, then mutated into a financial crisis, one that has taken a scythe to the value of bonds, loans, stocks, gold, real estate and just about every other asset you can think of. Now it's an economic crisis, deep and global in scope.

Can a full-fledged crisis in Canada's resource industry be far behind? We don't mean falling commodity prices or the implosion of poorly financed junior companies: That's already happening. We're talking about the kind of seismic, once-in-a-generation shakeout that causes bankruptcies, mega-deals and makes former giants disappear - sort of a Western Canadian version of what's happened on Wall Street.

Teck Cominco, overwhelmed with nearly $10-billion (U.S.) in debt after an ill-timed play for Fording, is a possible victim. But here's another candidate for 2009: Petro-Canada. Not that the People's Oil Company is broke (financially, it's just fine). But it is broken. In other words, it has been struck not by a credit crisis but by a confidence crisis.

The meanness of its nickname - PetroPig - says it all. Of the 10 Canadian oil and pipeline companies that are still worth at least $10-billion (Canadian), it's the worst performer (one year, three years, five years - take your pick). A dollar invested in the company on this date in 2003 is worth about a dollar today. The return is zero. It's as though the historic increase in oil prices never happened. Investors give the company so little respect that the stock trades for three times this year's estimated profit. Try not to snicker.

But so what? Every industry has its 98-pound weakling. Petrocan happens to be the oil sector's. Is there any reason to think matters might come to a head soon? Actually, there are four. The first is Fort Hills, its huge Alberta oil sands project. The second is management. The third is the shareholders. And the fourth is the nature of the financial crisis itself.

The Fort Hills saga is the most important. Petrocan owns 60 per cent of what is billed as one of the largest capital projects in Canadian history (with a $24-billion price tag, at last estimate). It's supposed to turn out 140,000 barrels a day, starting in 2011. But with oil falling toward $50 a barrel, there are big worries about the economics of it. Besides, a joint venture is only as strong as its partners, and Teck and UTS Energy, which each own 20 per cent, are, to use the technical term, screwed.

Hence the speculation, reported this week by my colleague Andrew Willis, that Petrocan will buy out UTS, Fort Hills will be scaled back and a deal struck with Suncor Energy. Rather than spend billions on an upgrader, the Fort Hills group would ship their bitumen to a Suncor facility. (An upgrader removes some carbon and adds hydrogen to turn heavy bitumen into more valuable oil products.)

All of this makes sense, and it could happen. But it won't do much to assuage the concerns that when it comes to spending capital, Petrocan doesn't carry a sharp pencil, and that management is far too enamoured with growth plans (not just Fort Hills, but others) that carry modest returns, given the risks. This distorts decision making. For instance: Petro-Canada shares have been far too cheap for a long time; in recent months, they've arguably been trading at less than 50 cents for every dollar in underlying value (though that depends on your view of oil prices). The rational thing to do is to take advantage of this if you've got the money, yet the company spent not a penny repurchasing shares in the first nine months of 2008.

So Petrocan's centrepiece project is a big question mark, and given the company's performance, the credibility of chief executive officer Ron Brenneman has never been weaker. He has had plenty of time - January will mark nine years in the job - so patience is short. That points to a shakeup. But who will force it? If not the board, perhaps the shareholders, who seem justifiably fed up. In the summer, there was talk that an investment group in Toronto had sent Mr. Brenneman a proposal for restructuring, including asset sales.

So you have a potent mix here, to which you can add one more factor: Petro-Canada's weak position. At a shrivelled $12.5-billion, it lives in the shadow of Canadian Natural Resources ($26-billion) and Suncor ($22-billion). "If they could scoop up all of Petro-Canada," says one investor with intimate knowledge of the business, "they would." If Suncor can be a player at Fort Hills, why not let it run the project?

Ah, the shareholders would love it; they have more faith in Suncor's Rick George than in Mr. Brenneman. A takeover would require a change to the Petro-Canada Public Participation Act, but that's so antiquated, it should have been wiped from the books years ago. Former Prime Minister Pierre Trudeau's creation would disappear, but a new national champion would be created. Yes, it seems a little far-fetched, but we're in a time when even the preposterous has become plausible. Oil at $55? Teck Cominco on the brink? Six months ago, those were unthinkable, too.

http://www.theglobeandmail.com/servlet/story/LAC.20081115.RDECLOET15//TPStory/Business


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Ron Brenneman, president and chief executive officer o