Canada’s largest oil and gas producer, PanCanadian Energy Corp., announced third quarter earnings on Monday, but investors were just as focused on the startling news that David Tuer, the 52-year-old president and CEO since 1994, had resigned on Friday citing “personal reasons.” Tuer, who joined the company in 1988, had once been assistant deputy minister of energy in the Alberta provincial government, and was considered instrumental in leading the company toward booming production numbers. He also had been enthusiastic about PanCanadian’s spin-off from Canadian Pacific Ltd. last month.

However, in an earnings teleconference with investors, the exchange with PanCanadian’s CFO Wesley Twiss and COO David J. Boone proved unsatisfying for anyone interested in learning what may have happened behind closed doors last week. PanCanadian Chairman David O’Brien, who once led Canadian Pacific and helped to break it up into five separately traded companies to include PanCanadian, is now acting CEO, but he was absent from the conference.

PanCanadian has been high on a rumor list as a possible takeover candidate because of current low commodity prices, the depressed Canadian dollar and the spinoff in September (see Daily GPI, Oct. 12; Sept. 7), but there was no mention of any suitors on the horizon. Instead, Twiss and Boone spent about 20 minutes going through the third quarter financials, then another 45 minutes answering questions — many related to the company’s future direction.

Of immediate concern was whether the company’s capital expenditure would remain the same through the end of the year, as well as its plans into 2002. Twiss said that it was PanCanadian’s “intention to complete the C$1.9 billion capital expenditure program through this year. We’re putting together an operation plan for next year and have not changed that plan. Industry circumstances will be taken into account,” he said, referring to the low price for natural gas, and he said it would be “reasonable to assume you will see some moderation next year.”

With a “former CEO so enthusiastic about the spinoff, it was shocking news that we woke up to today,” said one investor who asked for reassurance that PanCanadian was not changing its course and also quizzed the executives for more details on why Tuer resigned.

“I’m afraid we can’t,” said Twiss when asked to elaborate. “As we said at the outset here, the company has made it clear that Mr. Tuer has left for personal reasons. We have no further information about his departure and therefore are not able to make any further comment on that,” said Twiss.

Boone was quick to remind the investor audience that the “rest of the management team is intact, and we are extremely enthusiastic about continuing our opportunities. It doesn’t get any better than that. Nothing has really changed in terms of the capability of this company, and we expect to continue to contribute the growth of the company. And that’s what we’re all committed to doing.”

Next year’s capital budget is likely to be one of the largest in the company’s history,” said Boone. “We’ll be able to achieve all of our objectives with our budget.” He said PanCanadian would have “very intensive” activity in the Western Canadian Basin in 2002, and continue its development in other natural gas fields in Canada, Montana and internationally.”I think we’ll see a very high level of activity that will help us continue to deliver.”

Twiss added, “Our portfolio is unconstrained by matters of economic quality.”

For the record, PanCanadian’s third quarter net income was C$286 million, or C $1.11 per share, compared to C$297 million, or C$1.17 per share, in the same quarter of 2000. Cash flow for the period was C$641 million, or C$2.49 per share, compared to C$654 million, or C$2.59 per share last year. Increased natural gas production and gains on natural gas hedges largely offset the effects of weaker market prices for natural gas and crude oil during the quarter.

Net income rose 75% in the third quarter to stand at C$1.2 billion, or C$4.73 per share, from the same period in 2000. Cash flow of C$2.2 billion, or C$8.56 per share, was ahead 34%, mostly from increased natural gas production and higher natural gas prices.

In the third quarter of 2001, natural gas production averaged 1,049 MMcf/d, up 12% from 940 MMcf/d a year earlier. Production of crude oil and natural gas liquids averaged 117,700 bbl/d, down slightly from 121,200 bbl/d in the same period of 2000. The decline, said PanCanadian, “reflects the disposition of certain non-core oil properties.”

Even though energy prices fell throughout the third quarter, largely as a result of weak demand caused by a global economic slowdown that was accelerated by the events of September 11, PanCanadian’s realized natural gas price increased 13% in the third quarter to average C$5.44/Mcf after a hedging gain of C$1.95/Mcf. Realized crude oil prices averaged C$30.84/bbl, down 13% from C$35.63/bbl a year ago. Also, commodity and currency hedges contributed C$185 million before tax in the quarter, primarily from the forward sale of 450 MMcf/d at an equivalent AECO price of C$8.66/Mcf.

In the quarter and year-to-date, administrative expenses were higher because of one-time costs associated with the reorganization, marketing incentive compensation costs and increased levels of activity. Operating costs were up for the quarter and year-to-date because of higher fuel and electricity costs, increased well work-overs and compressor maintenance. Going forward, PanCanadian expects fourth quarter operating costs to trend downward from current levels, and the “company remains committed to aggressive cost management,” Twiss said.

PanCanadian Energy “anticipates continued softness in energy prices for the remainder of the year and into early 2002. However, the long-term outlook for natural gas prices remains robust given the tight supply/demand fundamentals for natural gas in North America.” Because of the lower commodity prices, PanCanadian also has reduced the pace of several “activities,” and now expects that the growth rate of its natural gas volumes in the fourth quarter will be lower than had been anticipated earlier in the year. Drilling activity will remain at a high level, but the development of infrastructure to bring the resulting natural gas reserves on stream will be moderated.

As of September 30, PanCanadian had the following hedges in place:

In addition, PanCanadian has sold call options on 113,600 cf/d of AECO natural gas from November 2001 to October 2002 at an average strike price of C$6.05/Mcf.

Also announced with the shakeup in management following Tuer’s resignation as president, CEO and director, was that Michael Grandin will now act as president. Grandin, a director, is Canadian Pacific’s former CFO. PanCanadian also announced in a statement that the board of directors is “reviewing the issue of succession.”

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