Petro-Canada $50 – Toronto symbol PCA

PETRO-CANADA $50 (Toronto symbol PCA; Conservative Growth Portfolio, Resources sector; SI Rating: Average) operates major oil and natural gas projects in Western Canada and Newfoundland. Canada accounts for 75% of its total production. Petro-Canada has expanded its international presence in the past few years, and now gets 25% of its production from the North Sea, Algeria and Libya.

Oil accounts for roughly two-thirds of total production, and natural gas accounts for the remaining third. It also operates refineries, and a nationwide chain of over 1,300 retail gas stations.

In the third quarter of 2006, earnings before unusual items fell 8.1%, to $1.13 a share (total $564 million) from $1.23 a share ($638 million) a year earlier. The company had to shut down its Terra Nova offshore oil platform near Newfoundland for repairs, and production in the latest quarter fell 6%. (Petro-Canada owns 34% of Terra Nova and operates it.) However, higher oil prices raised cash flow per share 12.4%, to $2.17 from $1.93. Revenue grew 10.6%, to $5.2 billion from $4.7 billion.

Repairs to Terra Nova will cost Petro-Canada $77 million. But these upgrades will improve the long-term reliability of this asset. When it returns to service in the fourth quarter of 2006, Terra Nova should account for roughly 10% of Petro-Canada’s total daily production.

The company also has high hopes for its new offshore platform in the North Sea’s Buzzard field. Petro-Canada has a 29.9% interest in Buzzard, which should reach full production in late 2007.

Another area of growth for Petro-Canada is its oil sands developments in Alberta. It owns 12% of Syncrude project, as well as its own development at MacKay River. It recently acquired 55% of the planned Fort Hills oil sands field. The company is still examining the costs of this project, but hopes to begin production in 2011.

Offshore and oil sands projects are more expensive than conventional projects. But Petro-Canada’s strong cash flow, particularly from its refineries and gas stations, should help it cover these costs. Its experience running similar facilities will also help keep costs down.

Petro-Canada offers better value than Imperial Oil, partly due to Ottawa’s 20% limit on the amount a single investor can own, which rules out takeover possibilities. The stock now trades at just 12.2 times its likely 2006 earnings of $4.10 a share, and 7.4 times forecast cash flow of $6.80 a share. The $0.40 dividend yields 0.8%.

Petro-Canada is a buy.

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