Gulf Canada has much riding on Indonesia IPO
Gulf Canada has much riding on Indonesia IPO
CALGARY (Reuter): Gulf Canada Resources Ltd, whose initial offering of Indonesian oil and gas assets is set to hit the market next week, has plenty riding on the deal as it aims to bring a huge debt load down to manageable levels.
Gulf plans to price up to 24.2 million shares of Gulf Indonesia Resources on Monday, in hopes of maximum net proceeds of US$455 million it could apply to its debt, which rings in at about C$2.6 billion (US$1.9 billion).
"There's no question the Indonesian initial public offering is pretty key to debt reduction plans," said Craig Langpap, analyst with Calgary-based brokerage Peters & Co Ltd.
"To me, it looks like if they receive the advertised prices they should be exceptionally pleased. I wouldn't have expected it to go for that much."
Industry sources said Gulf Chief Executive J.P. Bryan was persuasive in telling worldwide investors the deal meant attractive gains despite its relatively high price.
Gulf's offering could be priced as high as US$23 and as low as US$17 a share. The issue would be priced on Monday and start trading on the New York Stock Exchange on Tuesday, a Gulf spokeswoman said, adding demand had exceeded the number of shares being made available.
If priced at an expected level of about US$20 a share, Gulf Indonesia, would have a stock price of almost 11 times projected 1998 cash flow per share and seven times that expected by the end of 1999, analysts said.
The average cash flow multiple for Canadian and U.S. stocks is five to seven times the next year's cash flow.
No stranger to creative financing, Bryan often cites his success in buying Alberta's stake in the Syncrude Canada Ltd oil sands operation and creating a royalty trust, which has more than doubled in value since its 1995 IPO.
Bryan's stated aim now is to pull Gulf's debt, a millstone he has tried to shed since taking the company's helm in 1995, into investment-grade range by the end of this year.
The company took on more debt when it acquired Britain's Clyde Petroleum and Canada's Stampeder Exploration this year.
Besides the Indonesia issue, Gulf also plans to sell its Zama- Virgo, Alberta oil assets for C$400 million this year.
"I think that if he gets those two things done, he'll be well on his way to clearing up the concern over the balance sheet. That is one of the last remaining issues here," said Robert Hinckley, analyst with Merrill Lynch & Co in New York.
Gulf was indeed within shooting distance of investment- grade debt, said Zaheer Khan, managing director of corporate ratings for Canadian Bond Rating Service.
But before it clears its last hurdle, Gulf must not only reduce outstanding debt, but pay preferred shareholders all dividends in arrears and keep up current payments, Khan said.
Meanwhile, shares in Gulf Indonesia were not without risk, Hinckley said. As in all oil stocks, there was the chance that exploration might not be successful, he said.
Gulf Indonesia must also show it can operate profitably under Indonesia's fiscal terms, in which a firm's production take after recovering costs falls to 30 to 35 percent for gas projects and 15 percent for oil, he said.
"You've got to keep recycling the cash. The minute you stop reinvesting, your rates of return go to single digits."