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Forward Contract Stifles Canadian 88's Growth

Forward Contract Stifles Canadian 88's Growth

Despite 1999 production revenue increases of 51% and cash flow increases of 43%, Calgary-based Canadian 88 took a sharp hit to its bottom line by a natural gas forward sales contract, which resulted in the company posting a loss of $6.5 million ($0.06 per share). The company had reported earnings of $1.8 million ($0.02 per share) in 1998.

Stating the obvious, Canadian 88 president and CEO Joe Pritchett III said last week that "clearly, deliverability is a priority for our company." He said the goal for his company this year will be to sell some non-core assets and punch up the bottom line with a influx of cash until it gets through the problems created by the sales contract.

The company has a $65 million capital budget for 2000 and intends to fund the program through cash flow and divestment of non-core assets. Approximately 75% of the planned capital will be directed toward low-risk exploitation and production optimization targets, with the balance spent on exploration projects. Pritchett predicted that the company would be back on its feet, cash-flow wise, by October 2000.

"Our strategy will be toward risk management," Pritchett said. "Risk management is going to become a very hot priority for Canadian 88. An undisciplined hedge can kill you."

If the natural gas forward sales contract not been in place, Canadian 88 estimated that its cash flow would have been approximately $53 million ($0.50 per share), compared to the reported $31.8 million ($0.30).

At close of business last Tuesday, Pritchett said that the company was up $2.6 million, which will protect the company's cash flow. But he was clearly disappointed that the forward sales contract had impacted Canadian 88's current cash flow.

"Had this hedge not been on, as we speak it's a $50 million impact on cash flow at current prices," he said.

Asked if the oil and gas independent would ever use a forward sales contract again, Pritchett responded that a "prudent hedge strategy is prudent business." He said that the company might consider forward sales contracts in the future, but that it will look at "the value of the hedge." He said the forward sales contract that hurt cash flow this year was not a prudent decision.

"Capital is a precious commodity," Pritchett said. "We plan to live through our current cash flow until we get through this hedge in October 2000."

In 1999, production revenue increased 51% to $105 million, compared to $69.5 million in 1999, and cash flow from operations increased 43% to $31.8 million ($0.30) in 1999 compared to $22 million ($0.23 per share) in 1998.

Pritchett only joined Canadian 88 a month ago. He had been executive vice president of Houston's Duke Energy Hydrocarbons LLC and joined Canadian 88 in April when the two companies entered into an agreement whereby Duke Energy made a strategic investment in Canadian 88. Under the alliance, Duke Energy assumed marketing of Canadian 88's natural gas production and expects to optimize the value of Canadian 88's gathering and processing assets (see NGI, March 27).

Duke Energy acquired 25 million common shares of Canadian 88 at a price of $2 per share, and holds about 19% of the common stock of the company. As part of the agreement, Pritchett resigned his post as executive vice president at Duke Energy and joined Canadian 88 as president and CEO.

Carolyn Davis, Houston

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