Petro-Canada's Deal with Libya Should Boost Long-Term Earnings

Petro-Canada's (PCZ) new exploration and production sharing agreements with the Libyan National Oil Corp. should boost production and earnings in the long-term, according to UBS analyst Andrew Potter.

On Monday, the Canadian oil giant said that it had agreed to convert existing agreements with the Libyan National Oil Corp. into six new agreements. The new agreement will last 30 years, and requires Petro-Canada to pay 50% of the development capital in exchange for a 12% entitlement share of production.

In a note, Mr. Potter told clients that the company is expected to double production at the existing joint-venture project with the LNOC over the next 5 to 7 years to 200,000 barrels of oil equivalent per day.

"Importantly, Libyan production will be ramping up just as Buzzard is expected to decline," he told clients.

He added that while the impact of the new agreement is neglible to near-term estimates, while long-term it is expected that the earnings contribution will be material at greater than C$300-million per year and C$450-million per year of cash flow.

The analyst reiterated his "buy" rating, and left his C$70 price target unchanged.

Canaccord Adams analyst Terry Peters maintained his "buy" rating and C$65 price target, also saying the new agreements bode well for Petro-Canada.

In note to clients he said,

The proposed agreement will underpin significant incremental oil production growth over the mid to longer term of approximately 50,000 barrels per day (net), excluding exploration upside. We expect the transaction to be modestly earnings accretive in 2008.