August 31, 2001

ARC Energy Trust (AET.UN on TSE) Calgary, AB, tel: (403) 292-0680. Price: Aug 30/01: $12.16, 52-week range: $13.54-10.00. First mentioned at $9 on Feb 4/00 and last reviewed at $12.77 on May 12/01.  The trust reported only a so-so 2ndQ. Production slipped to an average rate of 42,097 boe/d from 44,271 in the first quarter.  This, combined with lower commodity prices, produced cash flow of $67.5 million, or 66 cents/unit, down from $89.3 million, or 96 cents/unit.  After having declared distributions of 22 cents/unit in each of the last 3 months, the trust has lowered the pay-out to 20 cents/unit in each of the next 3 months, a rate equivalent to that paid out earlier in the year.  The trust suggests that if natural gas prices stay at current levels, the monthly distribution may be further lowered in the last quarter.  Nevertheless, the trust is conservatively managed, with about 20% of cash flow held back for capital expenditures. At its current trading level, the units yield 19.3% and about 70% of the cash distribution will be considered taxable in 2001.

Allied Oil & Gas Corp. (AOG on TSE), Calgary, AB, Tel: (403) 265-9782. Price: Aug 30/01: $2.85, 52-week range: $3.40-0.73.   Last mention of the company in this newsletter was on June 22/01 when trading at $3.00.  During the 2ndQ, production rose 4%, mainly as the result of a 10% increase in natural gas production.  Since the average price received for this gas during the June quarter was $5.94/mcf vs $9.35 in the first, cash flow decreased from $6.4 million, or 28 cents/sh to $5.0 million, or 22 cents/sh, Q over Q.  The company is coming off a busy quarter, when 48 wells (32.6 net) were drilled, all successful.  In the first half of July, a further 27 gas wells (20.5 net) were drilled, again all successful.  During the 2ndQ, Allied also participated in the drilling of 40 other industry-operated wells in which it has minority interests.  All told, in the first 6 months of the year, the company participated in 139 wells, resulting in 133 gas wells, five oil wells and one dry hole.  Although this shallow drilling is low risk in nature, it nevertheless indicates a high level of activity for a junior this size, 23.3 million shs outstanding on a fully diluted basis.  If awarded a 3 times multiple to a revised cash flow estimate of 90 cents/sh, produces a share price of $2.70.  A multiple of $30,000 to the 2676 boe/d production produces a share value of $3.40

Atlas Energy Ltd. (AED on CDNX), Calgary, AB, Tel: (403) 215-8313.  Price:Aug 30/01: $2.11, 52-week range: $3.40-0.96.  Last mentioned in this newsletter at $2.80 on June 22/01. Atlas did not disappoint during the 2ndQ.  Natural gas production averaged 9.7 mmcf/d up 10% over the 1Q production rate and oil & NGL production averaged 604 bbl/d an increase of 20% over 1Q production.  Combined production for the Q was equivalent to 2,226 boe/d compared with 1,958 boe/d during the first quarter.  Natural gas prices averaged $5.77/mcf during Q2 compared with $8.74 in Q1.  Oil and NGL prices were steadier, but still down, at $28.64/bbl compared with $30.79 in Q1.  This produced revenues of $6.7 million, cash flow of $4.1 million or 22 cents/sh and net earnings of $1.5 million, or 8 cents/sh.  Because of lower prices obtained, these are down from Q1 figures of $8.2 million, $5.1 million or 27 cents/sh and $2.3 million, or 12 cents/sh.  During this Q2, Atlas participated in 7 wells (5 net) resulting in 1 oil well and 6 (4 net) gas wells.  At June 30, Atlas was producing at rates of 11.5 mmcf/d and 700 bbl/d.  Over the next 2 quarters, the company expects to drill a further 14 wells and exit the year with production averaging 12 Mmcf/d and between 600 and 700 bbl/d.  Capex of $4.0 million over the next 6 months should be well covered by cash flow of $9 million if gas averages $5/mcf and oil remains at current price levels. But even in a low case scenario of $3.50/mcf, cash flow over the remainder of the year would come in at $6 million. Company has long term debt of $9.6 million, representing about 0.6 times cash flow.  Atlas has 18.2 million shares out on a fully diluted basis.  The shares at $2.15 currently trade at 2.4 times the cash flow estimate of 88 cents/sh.  With better visibility, AED could trade at 3.5 times cash flow, or at a price level of $3.

Ballard Power Systems Inc. (BLD on TSE, BLDP on NASDAQ), Burnaby, BC, Tel: (604) 412-3195. Price: Aug.30/01: C$27.62, 52-week range: C$179.75-27.05.  This is the first mention of the company in this newsletter.  The company has been around since 1979.  It is recognized as the world leader in developing, manufacturing and marketing zero-emission proton exchange membrane (PEM) fuel cells for use in transportation, electricity generation and portable power products.  In the automobile industry, Ballard has been partnering with DaimlerChrysler and Ford and has been conducting some prototype sales to Honda, Nissan, Volkswagen and Yamaha.  In stationary power generators, the company has been catering to GPU International, ALSTOM, Matsushita, and in portable power generators to the Coleman Powermate division of Sunbeam.  The latter should be coming to market by year-end 2001.  Vehicles powered by Ballard fuel cells are not expected on the road until 2010.  Revenues are currently modest: this years Q2 showed $14.9 million.  The company feels that its cash position, $692.8 million at June 30/01, will see it through until commercial revenues have some impact.  BLD has 90.5 million shares out along with 6.2 million options.  The stock cannot be evaluated on a conventional basis, but the company has a spot in a diversified investment portfolio as a long term, promising situation.

Canadian Pacific Limited  (CP on TSE and NYSE), Calgary AB, tel: (403) 218-8000. Price: Aug 30/01: C$56.75, 52-week range:$66.95-37.80.  This is the first mention of the company in this newsletter.  Subject to shareholders’s approval on Sep.26/01, Canadian Pacific is splitting up into 5 publicly-traded companies.  Although trading has begun on a “when issued” basis, shareholders of record October 5 will be receiving stock certificates of each of the 5 companies and trading of the regular shares are expected to commence trading on both the TSE and NYSE on October 3/01.

For each share of CP, the holder will receive:

- 0.684 shares of PanCanadian Energy Corporation, symbol PCE on TSE, PCX on NYSE
-
0.166 shares of Fording Inc., symbol FDG on TSE and NYSE
-
0.50 shares of Canadian Pacific Railway Limited, symbol CPZ on TSE, CP on NYSE
-
0.25 shares of CP Ships Limited, symbol TEU on TSE and NYSE
-
0.25 shares of Fairmont Hotels & Resorts Inc., symbol FHR on TSE and NYSE

Each of the companies are world class entities and it is this newsletter’s opinion that investment portfolios will attempt to build up representative dollar holdings in most of these five. The following attempts to briefly mention some of the characteristics of each:

Canadian Pacific Railway (CPZ on TSE, CP on NYSE) Calgary AB, tel: (403) 319-3591. Price: Aug 30/01: $29.85, 52-week range: $34-29.25.  CPR is expected to earn $2.55/sh this year, unchanged from that of last year.  Early projections for 2002 place earnings of $2.85/sh.  Comparisons with other railways suggest a one year share price target of $35.  There will be 158.2 million shares out.

CP Ships Limited (TEU on TSE & NYSE) London UK, tel: 44-20-7389-1100, Price: Aug 30/01: $17.35, 52-week range:$17.40-16.05.  In the near term, this may be the Cp unit that will lack in performance since the company is so closely tied to international economic conditions.  The company is among the top 10 container shipping companies in the world.  Because of fleet expansion there is currently downward pressure being put on freight rates.  Earnings for this year are expected to be about $2/sh, down from $2.61 in 2000.  Next year could see a further drop to possible a level of $1.70/sh, based on 79.1 million shs out.  That being the case, the stock could very well trade in a price rage of $17 to $22.

Fairmont Hotels & Resorts Inc. (FHR on TSE and NYSE), Toronto ON, Tel: ? , price: Aug 30/01: $35.35, 52-week range:$40.00-33.00.  Fairmont currently has 77 luxury and first class hotels in its portfolio, representing more than 30,000 rooms..  The properties are located in Canada, USA, Mexico, Bermuda and Barbados.  Some of the familiar names are: the Plaza in NYC, Fairmont in San Francisco, Royal York in Toronto, Chateau Frontenac in Quebec City, Banff Springs, Chateau Lake Louise, Jasper Park Lodge, Chateau Whistler, Kea Lani Maui in Hawaii, Scottsdale Princess, Hamilton Princess and Southampton Princess in Bermuda, Acapulco Princess and Pierre Marques in Mexico.  Earnings are projected at $1.10/sh this year, up from $1.07 in 2000, and for $1.50 next year.  There are 79.1 million shares out.

Fording Inc. (FDG on TSE and NYSE), Calgary AB, tel: (403) 260-9800, price: Aug 30/01: $24.60, 52-week range: $27.25-24.00. The company is a major producer of metallurgical coal and is planning on producing thermal coal for power plants.  Earnings are projected at $1.75 this year and $1.95 for 2002.  In comparison to similar companies (Peabody, Arch, Consul, Massey Energy), the stock could trade at a $30 level over a 1 year time period.  Fording expects to pay a quarterly dividend of 12.5 cents, thus providing the stock with a yield of 2.0%.  There will be 52.5 million shares out.

PanCanadian Energy Corporation (PCE on TSE, PCX on NYSE), Calgary AB, tel: (403) 290-2020, price: Aug 30/01: $36.50, 52-week range: $37.50-35.20.  The company is a major producer of oil and gas.  The stock is currently trading at a modest 3.4 times anticipated cash flow of $10.80/sh for 2001, or 6.6 times projected earnings of $5.50/sh.  In addition the stock pays a 10 cents quarterly dividend, to yield 1.1%.  A 1-year share price target of $42 appears reasonable, based on the dynamic nature of its exploration program. There are 254 million shares outstanding.

Equatorial Energy Inc. (OZ on TSE), Calgary AB, tel: (403) 264-9562. Price: Aug 30/01: $2.75, 52-week range: $4.20-1.90.  This is the first mention of the company in this newsletter.  The company is engaged in the acquisition, exploration and development of petroleum and natural gas in Western Canada and Indonesia.  50% of Equatorial’s production is from Indonesia and this is mainly oil from its two 100% controlled fields, Sembakung on the northeast coast of Kalimantan and Tanjung Lontar in South Sumatra.  In Canada, the company’s reserve base is 51% oil and 49% gas on 125,000 acres with core properties in Alberta along with some non-core properties in Saskatchewan.  In addition, Equatorial has an inventory of 247,000 net acres of undeveloped land.  Production during Q2 averaged 8,708 bbl/d of oil & NGL, a 24% increase from the first quarter average production of 7,009 bbl/d, while natural gas production increased marginally, quarter over quarter, from19.9Mmcf/d to 20.5 Mmcf/d.  Combined, production came in at a rate of 12,118 boe/d, a significant increase over the 9,905 boe/d rate of a year ago.  This production during the 2nd quarter produced revenues pf $39.3 million, compared with $31.5 million in the first quarter, cash flow of $15.6 million vs $9.1 million Q/Q, or 52 cent/sh fully diluted vs. 37 cents.  Adding these up made for a total over the first 6 months this year of $70.8 million in cash flow, or 91 cents on a fully diluted basis.  Q2 production was split 6,519 boe/d in Indonesia and 5,599 boe/d in Canada. Over the first 6 months, the company drilled 17 wells in Indonesia and 22 in Canada and plans to drill a further 18 wells in Indonesia and 20 wells in Canada over the last 6 months of this year.  Equatorial has 27.9 million shares outstanding, 32.1 million on a fully diluted basis.  It appears the company will produce $50 million cash flow for the year, or $1.55 per fully diluted share.  Since the company appears to have growth potential, particularly around Kalimantan but also along the large amount of undeveloped Canadian acreage, a multiple of 3 times cash flow may be warranted, pointing the way to a share price of $4.50.

Freehold Royalty Trust (FRU.UN on TSE) Calgary, AB  tel: (403) 221-0802.  Price: Aug 30/01: $9.20, 52-week range: $10.10-8.00. Last covered in this newsletter at $9.75 on May 12/01, first mentioned at $8.60 on Dec 28/00.  Production during the 2ndQ of 2001 came in at 6,050 boe/d compared with 5,709 in the 1st Q.  Because of the large differential between the price of heavy oil and light as well as from lower prices for natural gas, revenue generated during the 2nd quarter was down from the first, in spite of increased production.  Distributable income for unitholders amounted to 44 cents/unit down from 53 cents/unit.  Although the regular pay-out of 12 cents/unit each month is being maintained, the extra for September is 5 cents compared with 11 cents in June.  It now appears that between 50% and 55% of the income distribution will be taxable for 2001.  The price of heavy oil normally increases in the 2nd half.  Management maintains they are on the lookout for additional acquisition opportunities.  Meanwhile, the apparent $1.64 projected pay-out provides unit holders with a 17.5% yield.

Gauntlet Energy Corporation (GAU on TSE), Calgary AB, tel: (403) 216-8660. Price: Aug 30/01:$3.50, 52-week range: $6.50-1.10.  Last covered in this newsletter at $5.45 on June 22/01.  As expected, production increased Q/Q, but not quite as much as forecast because of some restraints in the gas gathering system at Hamburg as well as some delays hampering exploration activity in central Alberta.  Nevertheless, natural gas production in the 2ndQ of 18.1Mmcf/d increased 33% over the 13.6 Mmcf/d rate of the 1stQ.  With oil production remaining at modest levels, the combined rate of 3,226 boe/d showed an increase of close to 30% over the 2,491 average rate in Q1. Revenues and cash flow comparisons pale Q over Q, as the average price received for gas in the second quarter came to $5.69/mcf compared with $8.71 received in the 1st quarter.  So, in spite of the increased production, revenues of $10.0 million in the most recent period compares with $11.5 million received in the March quarter and cash flow was reduced from $6.6 million, or 40 cents/fdsh, to $5.1 million, or 30 cents per fully diluted share.  Based on current production rates and present commodity pricing structures, Gauntlet stock may find a trading level at $4.80 rather than the price level of $7.60 mentioned on June 22.

NAL Oil & Gas Trust (NAE.UN on TSE) Calgary, AB, tel: (403) 294-3600. Price: Aug 30/01: $9.29 , 52-week range: $11.75-8.11.  Last mentioned in this newsletter at $10.95 on May 12/01. The trust reported distributable income of $15.9 million in the June 2ndQ, down from $23.3 million for the March 1stQ.  After applying $1.9 million to pay down debt as opposed to the $7.1 million used in the Q1, income of $17.8 million, or 66 cents/unit, was distributed to unit holders compared with $16.2 million, or 60 cents in the 1stQ.  Production during this recent quarter came to an average rate of 7,440 boe/d, down from the 8,592 rate prevailing in the 1stQ.  Average price received for natural gas was $6.61/mcf, contrasted with $9.44 received in the first quarter.  As a result of these disappointing results, the trust has reduced monthly pay-out to unitholders to 20 cents/unit in each of the months of Sept., Oct. and Nov. compared with the 23 cents pay-out in each of the 3 previous months.  At the current rate of $2.40, the units presently trade to yield 25.9%.

Nycan Energy Corp. (NYE on TSE), Calgary, AB, tel: (403) 264-7377. Price: Aug 30/01: $1.24, 52-week range: $2.25-1.05. Last mentioned in this newsletter on June 22/01 at $1.42.  The Company reported 2nd quarter production figures comparable to the 1stQ, with a slight increase in oil production.  During the 3Q, gas production is expected to increase to the rate of 7.7 Mmcf/d from 6.2. The company acquired an additional 15,000 acres bringing its holdings to a total of 70,000 net acres.  Refreshing to see a director of the company recently acquiring 841,000 shares at $1.37/sh, bringing his total held to 4.2 million shares, or 25% of the outstanding shares.  It now appears the company is operating on the basis of producing on an annual cash flow of 55 cents/sh and net of 26 cents/sh.  That being the case, a stock trading level of $2.20 would be reasonable.

PrimeWest Energy Trust (PWI.UN on TSE) Calgary, AB, tel: (403) 234-6600. Price: Aug 30/01: $7.69, 52-week range: $10.62-7.49.  Last mentioned in this newsletter at $9.91 on May 12/01.  Production figures for the June 2Q came in marginally better than expected at an average rate of 35,353 boe/d, composed of 14,067 bbl/d of oil & NGL and 128 Mmcf/d of natural gas.  Due to lower commodity prices, cash flow represented 59 cents/unit, down from Q1’s 79 cents/unit.  The fund managers intent to continue paying out on a monthly basis 22 cents/unit, at least through until the end of 2001.  At this rate, the units currently trade to yield 33%.  However, they foresee the possibility of cutting this to 15 cents/unit on a monthly basis in 2002 if prices, particularly natural gas, trend lower. At a $1.80 annual pay-out, the units yield 22.5%

Real Resources  (RER on TSE) Calgary, AB, tel: (403) 262-9077.  Price: Aug 30/01: $2.95, 52-week range: $4.80-2.55.  Last mentioned in this newsletter at $3.94 on June 22/01.  The company came out with an excellent June quarter.  Production of 4,218 boe/d topped the March Q1 rate of 3,568 boed.  This was composed of oil and NGL at a rate of 2,616 bbl/d compared with March’s 2,117 and natural gas averaging 9,612 Mmcf/d up from the Q1 rate of 8,708.  In spite of weaker commodity prices, particularly gas averaging $5.46/mcf vs $8.52 in the 1st quarter, revenues and cash flow held steady and net income increased to $3.1 million, or 17 cents/sh compared with$2.3 million or 12 cents/sh in the 1st quarter.  Real Resources appears to be well on its way to achieving cash flow of $1.50/sh for the year and with continued growth in production, its shares could command a 3.5 times multiple to cash flow, implying a possible share price of $5.25. 

Storm Energy Inc.  (SME on TSE) Calgary, AB, Tel: (403) 264-3959,  Price: Aug 30/01: $8.00, 52-week range: $12.00-5.00.  First covered at $2.30 on Dec 26/99 and last mentioned at $10.10 on May 12/01.  The company reported strong results in Q2 ended June 30.  Production increased 7.4% to 10,266 boe/d from 9,560 in the first Q, with the increase coming from natural gas produced at an average rate of 24.6 mcf/d compared with 18.9 in the first quarter.  Because the average price realized from gas in the 2nd Q was $6.66/mcf compared with $11.04 in the first, cash flow came to $21.7 million, or 75 cents/sh, down from $23 million, or 81 cents/sh.    Production is currently running at a rate 2% higher and management expects to maintain this level through the 3Q during which it expects to $10 million on exploration, drilling 14 wells.  Under borrowing facilities of $100 million, the company currently has a net debt of $67.6 million.  Management expects cash flow of $44.7 million over the remaining 2 quarters and after committing $28 million in exploration over this remaining time frame, expects to end the year with a net debt position of $50 million.  The company is now forecasting cash flow for the year at $$89.4 million, or $3.12/fully diluted share, and net income of $34.6 million, or $1.21/fds.  A multiple of 3.5 times the quality cash-flow, points to a $10.90 share evaluation.  A $30,000 factor applied to production of 10,500 boe/d implies a share evaluation of $11.25. 

Summit Resources  (SUI on TSE), Calgary, AB, tel: (403) 269-4400. Price: Aug 30/01: $5.10, 52-week range: $7.40-3.70.  Last mentioned in this newsletter on May 12/01 at $6.55.  Summit came off a good 2Q ended June 30 when production increased by 3% to an average rate of 14,047 boe/d from 13,662 during the first quarter.  Due to considerably lower natural gas prices Q over Q, from $9.22/mcf/d in Q1 to $6.47 in Q2, cash flow declined to $27.6 million, or 84 cents/sh, from $$33.3 million, or $1.1/sh.  Because of a lower tax rate enacted in Alberta, net income actually increased during the quarter to $12.4 million, or 38 cents/sh, from $11.8 million, or 36 cents/sh. in the March first quarter.  Debt has been reduced by over $30 million from year-end and now stands at $71 million.  Put in perspective, management expects to generate cash flow this year of $100 million.  The company has 4 drill rigs currently operating in southern Alberta and southeast Saskatchewan.  The third quarter is expected to be one of the busiest for the company with capital expenditures of $20 million. If management’s projection of $3.10/sh in cash flow is met, the shares could very well trade at 3 times this multiple, proving the stock to be currently under-valued.

Zargon Oil & Gas Ltd. (ZAR on TSE), Calgary AB, Tel: (403) 264-4992, Price: Aug 30/01: $7.00, 52-week range: $7.70-3.71.  Last mentioned in this newsletter at $7.11 on June 22/01.  The company has just come off a second quarter (June 30) in which production increased moderately, albeit at lower commodity price levels, and during which it made an acquisition.  Production increased 4.6% to 5,187 boe/d in the 2ndQ from 4,957 in the first. Current quarter production consisted of 2,100 bbl/d oil and 18.5 mmcf/d natural gas.  While oil prices held up pretty well, the company realized an average price on natural gas of $5.92/mcf in the quarter, down from an average price of $8.92 during the March Q.  Cash flow declined to $8.6 million, or 57 cents/sh, from the Q1 flow through of $10.6 million, or 71 cents.  In July, Zargon acquired Herc Oil for $25 million.  The acquisition brings an oil production from southeast Saskatchewan and northern Montana of 1,000 bbl/d of light oil.  With this added production, cash flow for the year should come to about $35.6 million, or $2/sh. based on 17.8 million shares out.  With an aggressive attitude for growth and an emphasis on producing light crude, Zargon could see its shares trade at a 4 times multiple to cash flow, in other words, a share price level of $8.  This price level is lower than the $10.40 mentioned on June 22, in keeping with a downgrading of values to oil & gas stocks in general.

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