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Message: Investment advisers critical of new Alberta royalty program...

Investment advisers critical of new Alberta royalty program...

posted on Nov 20, 2008 09:36AM

Investment advisers critical of new Alberta royalty program

Dan Healing, Calgary Herald

Published: Thursday, November 20, 2008

CALGARY - The morning after the Alberta government introduced a transitional royalty program for new wells drilled over the next five years, oil prices fell, energy company stock prices tumbled and investment advisers published reports saying the plan offers limited benefits and administrative headaches.

The Toronto Stock Exchange's oil and gas subindex, which includes shares of oil explorers, integrated companies and oil field service providers, skidded seven per cent or 13.76 points to 192.63, its lowest level since Oct. 16.

"Unfortunately for many of the Alberta-based drillers, they're going to be cash-strapped looking into 2009," Tristone Capital analyst Chris Feltin said.

Alberta premier Ed Stelmach reveals changes to the province's royalty program in Edmonton, Nov. 19

Canwest News Service

"While the new government incentive looks like it does open up some opportunity ... many operators aren't going to be able to act on those opportunities due to the lower revenue outlook."

U.S. crude oil was down five per cent at $50.73 a barrel and natural gas sank more than six per cent to $6.312 per million British thermal units. Gas was hit hard after a U.S. government report showed an unexpected build in inventories.

Among big names taking hits on Thursday, Canadian Natural Resources Ltd. fell 11 per cent to $40.23, Suncor Energy Inc. skidded 10 per cent to $20.03, and Talisman Energy Inc. sank seven per cent to $9.51.

In reports drafted after the transitional program was announced late Wednesday afternoon and sent out early Thursday morning, Peters & Co. Ltd., Tristone Capital Inc. and UBS Investment Research concluded it will ease but not eliminate the investment chill caused by the province's new royalty program combined with a credit crunch and low commodity prices.

As the price of crude oil slipped to about a third of the $147 US record high reached in July, analysts also said the government's numbers don't add up.

"More clarity is needed on oil royalties as the calculations laid out by the government last night are inconsistant with the royalty rates they published," wrote Tristone in a review titled: "The more things change, the more they stay the same."

"As presented by government, the natural gas formulae appear correct but their natural gas curve is incorrect. Conversely, for crude oil, the example curve looks believable but the formulae are totally inconsistant," added Peters & Co.

The program is expected to save companies up to $1.8 billion by offering a lower average rate on wells drilled to depths of 1,000 to 3,500 metres between Jan. 1, 2009 and Dec. 31, 2013. Companies can choose between the transitional plan and the new royalty regime announced last year, which was designed to bring the government an extra 20 per cent or $1.4 billion per year.

UBS wrote that the new program will have only a modest effect on drilling plans "and therefore is unlikely to drive meaningfully higher spending levels."

It said companies that will likely benefit are those targetting medium-depth zones that are able to direct funding back to Alberta, including Canadian Natural Resources Ltd., Baytex Energy Trust and Galleon Energy Inc.

"The program will likely be an administrative headache for both the province and producers as there will essentially be two parallel royalty regimes in place for five years and producers will need to evaluate economics under alternative scenarios," wrote Tristone.

It said the main beneficiaries of the transitional program will be companies that qualify for the capped 30 per cent gas royalty (50 per cent under the new royalty framework) at high production rates on new drilling, including EnCana Corp., Advantage Energy Income Fund and Compton Petroleum Corp.

Peters wrote that not every company will be better off under the neww transitional plan.

"High-rate wells at depth of 1,000 to 2,500 metres will benefit under the transitional rate plan while low-rate wells and higher rate wells at depths of 2,750 metres or greater are still better off under the new royalty framework."

It's list of winners are mid-depth drillers in the Peace River Arch and in West Central Alberta, such as Birchcliff Energy Ltd. and Progress Energy Trust.

Drillers in the Montney play in the Greater Dawson area such as EnCana and Talisman Energy Inc., will also get a big boost, it wrote.

With a file from Reuters
dhealing@theherald.canwest.com


© Calgary Herald 2008

http://www.canada.com/calgaryherald/...

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