Oil Deals and Debacles

A $2 billion oil sands deal by a Norwegian company and a $5 billion Gulf of Mexico deal by an Italian company attest to confidence in the future for North American oil and gas, while a half billion dollar loss in natural gas trading by a Canadian bank attests to opportunity in imperfect markets.

Statoil (STO), the pending partial acquirer of buy-recommended Norsk Hydro (NHY) is buying leases in Alberta thought to contain two billion barrels of bitumen (extra heavy oil), recoverable by steam injection. A dozen of our buy-recommendations have exposure to the upside of Canadian oil sands.

European major ENI (E) is buying the offshore oil and gas assets of utility Dominion Resources (D) for $4.90 a thousand cubic feet (mcf) of proven reserves compared to our estimate of $4.80 an mcf of present value in buy-recommended offshore producer Energy Partners (EPL). A debacle for Bank of Montreal in futures trading following Amaranth last year reinforces our comfort in not trying to outguess the futures market in anticipating short-term natural gas price.

Yet, we believe there is an investment opportunity in buying and holding longer-term natural gas futures as well as in buy-recommended natural gas stocks because the discount to oil looks too wide to us.

Originally published on May 1, 2007