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Gimme Credit: Petro-Canada's New Notes Will Underperform into 2009

by: FP Trading Desk May 18, 2008 | about stocks: ECA / PCZ    

FP Trading Desk

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Last Sunday, EnCana Corp. (ECA) announced its plan to split into two separate oil and natural gas firms, and on Monday, Petro-Canada (PCZ) said it agreed to issue $1.5-billion of senior notes.

For Philip Adams, an analyst a Gimme Credit, EnCana says “focus” while Petro-Canada says “diversity for consistently strong financials.”

He looked at the performance of both stocks in the past 12 months and found that Petro-Canada has underperformed versus its fellow integrated energy companies, while EnCana has run-up more than 40%. This, he says, implies event risk, since “companies whose equity performance lags their sector run the risk of becoming (whether self-inflicted or otherwise) less highly-rated.”

Nonetheless, the analyst noted that Petro-Canada’s recent move to borrow comes before it really needs it – the way it should be – with the funds being used primarily to pay down short term debt.

While corporate bonds have rallied of late, Mr. Adams suggests that this may be “the calm before the storm” for Petro-Canada’s, given the company’s intentions that imply as much as $4.8-billion of additional debt.

Petro-Canada’s biggest pending project is the Phase 1 of Fort Hills oil sands development, with a contribution of $8.5-billion of the $14.1-billion preliminary capital cost estimate.

While Mr. Adams believes the project will move forward, he thinks it will cost more than currently expected. He notes that first crude production is targeted for the second quarter of 2012, “which means three years of rapid investment and no meaningful cash flow from the project until four years from now.”

As a result, he thinks Petro-Canada’s new notes – 6.05% due in 2018 and 6.80% due in 2038 – will both underperform into 2009.

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