Young oil-search firm bucks energy glut, touts potential
Since it started trading on the New York Stock Exchange last August, stock of Ensource Inc. has sold for as much as $12.50 a share. Last Friday, it closed at 41/8.
Still, Johnie M. Ouzts, president and chief executive officer of the eight-month-old oil and gas exploration and production company, thinks ''this is a super time to be in the business.''
For companies with ready cash to spend -- and Ensource has more than $30 million -- there are ''many opportunities to find oil and gas. In fact, I wish we had even more money to spend on exploration,'' Mr. Ouzts says. Having cash in hand means a company doesn't have to borrow at current high interest rates to drill. Those rates are cited as one reason drilling activity has fallen this year after making dramatic climbs in previous years.
The problem with the stock market, Mr. Ouzts contends, is that with the world oil glut, Wall Street tends to lump all energy companies together. And as long as the world price of oil remains soft and demand for it is equally squishy, energy companies just don't look attractive to most investors right now.
So he and the executives of several other US oil and gas companies are traveling around the country doing ''road shows,'' talking to brokers, financial analysts, and institutional investors, trying to convince them that their companies are the good apples in the oil company barrel, deserving special consideration. Mr. Ouzts was interviewed prior to one of these presentations in Boston.
''The industry as a whole is depressed by the overhang of the oil surplus,'' he said. Normally, he explained, there is about a 90-day supply in free world inventories. Now, it stands at around 120 days. This surplus will take three to six months to work off, he believes.
In the meantime, he said, Ensource is ''being treated a little more harshly by Wall Street than the industry as a whole. That's partly because we're a new company with no track record.
''As a new company, we have very little institutional buying. Institutions aren't risk-takers. There's no incentive for them to invest until you have a track record.''
Ensource's ''low stock price is a function of Wall Street's perception of what oil prices might do,'' Robert H. Hinckley III, a vice-president at E. F. Hutton, says in agreement. ''We need to get into a more discerning market.'' When that time comes, Mr. Hinckley holds, Ensource will look more attractive.
Ensource began its official existence on Aug. 12, just one day before its listing on the Big Board. Mr. Ouzts, previously the president of Hamilton Brothers, another oil development company, had spent the 10 months leading up to August preparing the exchange offer that created the Englewood, Colo.-based firm. That exchange -- ''the largest of its kind to date,'' Mr. Hinckley says -- traded shares of common stock in Ensource for prospective acreage and producing properties.
Since then, Ensource has become one of many companies that are part of a burgeoning effort to find and develop oil and gas reserves in the United States. Last year, a record 78,884 new oil and gas wells were drilled, up 25.8 percent from 1980. And 1980 saw 27.7 percent more wells drilled than 1979, according to figures from the Petroleum Information Corporation, a subsidiary of the A.C. Nielsen Company. PIC expects another record to be set this year.
But the big jumps in drilling activity of previous years won't be repeated this year, says Michael Maddox, energy analyst with Data Resources Inc., a Lexington, Mass., economic consulting firm. Because of a combination of falling energy prices, high drilling costs, and the recent realization that the Reagan administration won't push for early decontrol of natural gas prices, Mr. Maddox sees drilling activity growing only 5 or 6 percent this year. Under the Natural Gas Policy Act, some gas prices are to be gradually increased until 1985, when about 50 percent of natural gas will be decontrolled.
''Since the end of the year, the number of active rigs has been falling for 14 straight weeks,'' Mr. Maddox said.
The hectic drilling of the last two years added ''very little'' to the nation's reserves, notes Bruce Putnam, manager of the energy service section at Arthur D. Little Inc., a Cambridge, Mass., consulting firm. The drilling did succeed in preventing a decline in US reserves. ''If we didn't do the drilling, we would have ended up with even less than we have,'' Mr. Putnam said.
''A lot of companies did not have a very successful year in 1981,'' said Rosario S. Ilacqua, an energy analyst with L.F. Rothschild, Unterberg, Towbin. ''There is some reason to hope it will improve in 1982.''
Ensource's effort to find some of these new resources will concentrate on natural gas, Mr. Ouzts says. The company is putting some 80 percent of its effort into gas, he notes, and is getting about 60 percent of its revenues from this resource. ''I think the gas ratio will continue to go up.''
A key to keeping Ensource alive while waiting for Wall Street to take notice, Mr. Ouzts says, is to share as many drilling projects as possible with other companies. Thus, Ensource has only a partial interest in more than 2,200 producing wells. It shares the expense, risk, and profits from drilling with companies like Occidental Petroleum and Patrick Petroleum, a Jackson, Mich.-based company that has been able to find commercial quantities of oil and gas one-third of the time, compared with an industry average of only about 18 percent.
We have very few wells in which we're a 100 percent owner,'' Mr. Ouzts said. ''We generally take a one-third to one-half share.''
''I don't think it's a prudent business practice to bet the store on any one well,'' he argued. He noted that one company spent over $12 million last year for total control of what it was sure would be a producing well in the Overthrust Belt. The well was dry. If Ensource had done that, he added, it would have take a big bite out of the company's $30 million exploration budget for this year.
For now, it is concentrating on looking for and developing new oil and gas reserves, rather than trying to produce and sell the stuff coming out of existing wells. When the oil surplus is worked off and as decontrol of natural gas prices goes into effect, production will be increased, Mr. Ouzts said.