www.globeandmail.com By DEBORAH YEDLIN Friday, February 28, 2003 - Page B2

Closing Markets - Thursday, Feb. 27 S&P/TSX 73.86 6582.19 DJIA 78.01 7884.99 S&P500 9.73 837.28 Nasdaq 20.26 1323.94 Venture -2.23 1102.34 DJUK -.87 145.22 Nikkei 2.57 8359.38 HSeng 17.96 9134.24 DJ Net .37 38.85 Gold (NY) -7.90 346.20 Oil (NY) -0.50 37.20 CRB Index -4.09 246.09 30 yr Can. +0.00 5.46 30 yr U.S. -0.01 4.73 CDN$ buys US$ -0.0008 0.6688 Yen +0.1800 78.6400 Euro +0.0011 0.6213 US$ buys CDN$ +0.0017 1.4952 Yen +0.4000 117.5800 Euro +0.0027 0.9290

It's tough to imagine a better scenario in the oil patch: Natural gas prices flirting with $10 (U.S.) per thousand cubic feet (mcf), crude prices stuck well north of $35 a barrel and energy companies posting record numbers for earnings and cash flow.

On a year-over-year basis, oil prices are ahead 50 per cent this year while natural gas is trading at 1.5 times what it was a year ago.

Last week EnCana Corp. announced earnings of $1.25-billion (Canadian) and cash flow of $4.2-billion for 2002, and on Wednesday fourth-quarter results posted by Canadian Natural Resources Ltd. exceeded the consensus estimates for both cash flow and and boosted its annual dividend by 20 per cent to 60 cents.

In the old world of investing parameters, all the fundamentals are pointing in the right direction for energy stocks -- high commodity prices, low debt levels and tight supply.

And all that should translate into lofty stock prices for the sector.

After all, investors paid up for tech stocks that offered but a promise of earnings and cash flow at some time down the road while the oil and gas companies are delivering both in spades today.

Instead, the big-cap companies are looking at stocks that reflect commodity prices of about $23 (U.S.) for oil and $3.75 per mcf for natural gas and stingy trading multiples of about 3.5 to 4 times cash flow when they should be higher by two points or more.

So what is it?

Part of what is going on simply has to do with the fact that stocks are mired in a major bear market and equities simply don't respond the way they used to -- even if the fundamentals are good.

The situation is exacerbated by the overriding uncertainty of the current geopolitical environment.

The other part of the equation relates to the market's psyche and its lack of faith regarding the sustainability of high commodity prices.

That might be true for crude prices, because a war premium is helping to push prices skyward, but as soon as the situation in the Middle East is resolved, expectations are that prices will settle back down below $30 a barrel because that is what happened during the last go-round in the Persian Gulf.

Then again, the situation today, from a supply and production capacity standpoint, is different than it was in 1991.

Back then, excess OPEC production capacity was in the order of six million barrels a day; today that number is closer to 2.8 million barrels. Add to that the continued disruption in Venezuela and the expectation that only two-thirds of its production will come on stream by year-end, and the possibility of a scorched-earth policy pursued by Iraq with regard to its oil fields, and the result is an oil price that is likely to average $26 or $27 this year.

The market might think it is clever by looking through the existing noise, but the reality is that crude oil supplies remain tight, the industry is plagued by a lack of growth and there is limited excess capacity.

What makes the current situation with energy stocks even more confusing is that natural gas prices are at levels only dreamers expected.

While oil is a global commodity and subject to the health of the global economy, natural gas remains a North American commodity and to see prices of almost $10 per mcf in the absence of a roaring economy serves as a clear indication that growth in demand is clearly outstripping growth in supply.

That means -- to the delight of the Alberta government, but not its citizens -- the high prices are likely to stick around for a while.

What's an energy company to do if the market doesn't want to pay up for its shares?

Well, if big earnings, cash flow, boosting dividends and paying down debt doesn't work, they can always turn to buying back their shares.

On the one hand, proponents of this strategy argue that buying back shares constitutes a vote of confidence in the company's prospects and is a more effective use of cash than paying ridiculous prices for assets -- which is what happens when commodity prices are high.

Moreover, share buybacks, because they lower the number of shares outstanding, boost the latest industry yardstick -- production per share. This new measure is almost a reaction to the previous philosophy that advocated production growth at any cost; now the focus is on value -- through adding production per share and showing investors a return on capital.

Still, it's doubtful share buybacks will be enough to inspire institutional investors to make the necessary leap of faith and pay up for energy stocks.

Bitten by the tech wreck, the pendulum has swung too far back in the opposite direction and investors are scared to buy in at what they perceive to be the top of the cycle for commodity prices.

But that presupposes the market can be timed.

Better to buy the long-term fundamentals and have a little patience, and in that case, the energy sector remains a good bet -- even at these levels.

www.chron.com Feb. 20, 2003, 11:19PM

By NELSON ANTOSH Copyright 2003 Houston Chronicle

Halliburton on Thursday reported a fourth-quarter loss of $602 million, equal to $1.39 a share, the result of charges for asbestos and discontinued operations.

The losses offset revenue gains in both its oil-field services and engineering and construction businesses.

The Houston-based company thus joins the other big oil-field service companies, Schlumberger and Baker Hughes, which reported losses for the fourth quarter.

Halliburton's quarter included a loss from discontinued operations of $473 million, or $1.09 per share. Of that amount, $452 million represents a change in its estimate of asbestos liability, minus estimated insurance recoveries, with the rest for legal expenses covering the proposed global settlement.

The energy industry was at a low point in its business cycle, with drilling activity down, particularly in the United States and Canada.

Given the market situation, "we really had a great quarter," said Chairman, President and Chief Executive Dave Lesar.

For the year, Halliburton posted a loss of $984 million, or $2.27 per diluted share, against a 2001 profit of $809 million, or $1.88 a share.

Revenues for the fourth quarter at $3.3 billion were up 6 percent from a year ago and up 12 percent from the third quarter, while 2002 revenues at $12.57 billion were down from 2001 revenues of $13.05 billion.

Its Landmark Graphics business had a record quarter and a record year, mostly from sales of software for interpreting seismic data.

Also, there were improvements in the engineering and construction business, with fourth-quarter revenues for the group up 25 percent from the third quarter and up 30 percent year over year, although Lesar said margins still aren't large enough.

Lesar said he expects drilling in North America to pick back up during the second half, but noted that the oil workers' strike in Venezuela will have a greater effect on the company's earnings during the first quarter than during the fourth.

Halliburton's stock gained 2 cents to close Thursday at $19.42, which is up 3.79 percent for the year to date.

focus.scmp.com Wednesday, February 19, 2003 DAVID VICTOR and NADEJDA VICTOR

   Since the Iron Curtain came crashing down, American and Russian diplomats have been searching for a special relationship between their countries to replace Cold War animosity.

Security matters have not yielded much. On issues such as the expansion of Nato, stabilising Yugoslavia and the war in Chechnya, the two have sought each other's tolerance more than co-operation. Nor have the two nations developed much economic interaction, as a result of Russia's weak institutions and faltering economy. Thus, by default, "energy" has become the new special topic in Russian-American relations.

This enthusiasm is misplaced, however. A collapse of oil prices in the aftermath of an invasion of Iraq may soon lay bare the countries' divergent interests. Russia needs high oil prices to keep its economy afloat, whereas US policy would be largely unaffected by falling energy costs. Moreover, cheerleaders of a new Russian-American oil partnership fail to understand that there is not much the two can do to influence the global energy market or even investment in Russia's oil sector.

The focus on oil has also eclipsed another area in which US and Russian common interests could run deeper: nuclear power. Joint efforts to develop new technologies for generating nuclear power and managing nuclear waste could result in a huge payoff for both countries. These issues, which are the keys to keeping nuclear power viable, are formally on the Russian-American political agenda, but little has been done to tap the potential for co-operation. Given Russia's scientific talent and the urgent need to reinvigorate nuclear non-proliferation programmes, a relatively minor commitment of diplomatic and financial resources could deliver significant long-term benefits to the United States.

On the surface, energy co-operation seems a wise choice. Russia is rich in hydrocarbons and the US wants them. Oil and gas account for two-fifths of Russian exports. Last year, Russia reclaimed its status, last held in the late 1980s, as the world's top oil producer. Its oil output this year is expected to top eight million barrels per day and is on track to rise further. Russian oil firms also made their first shipments to US markets last year - some symbolically purchased as part of US efforts to augment its strategic petroleum reserve. In addition, four Russian oil companies are preparing a new, large port in Murmansk as part of a plan to supply more than 10 per cent of total US oil imports within a decade.

Meanwhile, the US remains the world's largest consumer and importer of oil. This year, it will import about 60 per cent of the oil it burns, and the US Energy Information Administration expects foreign dependence will rise to about 70 per cent by 2010, and continue inching upwards thereafter. Although the US economy is much less sensitive to fluctuations in oil prices than it was three decades ago, diversification and stability in world oil markets are a constant worry.

War jitters and political divisions cast a long shadow over the Persian Gulf, source of one-quarter of the world's oil. In Nigeria, the largest African oil exporter, sectarian violence periodically not only interrupts oil operations but also sent Miss World contestants packing last year. A scheme by Latin America's top producer, Venezuela, to pump up its share of world production helped trigger a collapse in world oil prices in the late 1990s and ushered in the leftist government of President Hugo Chavez. Last year, labour strikes aimed at unseating Mr Chavez shut Venezuela's ports and helped raise prices to more than US$30 (HK$234) a barrel. Next to these players, Russia is a paragon of stability.

The aftermath of a war in Iraq would probably provide a first test for the shallow new Russian-American partnership. Most attention on Russian interests in Iraq has focused on two issues: Iraq's lingering Soviet-era debt, variously measured at US$7 billion to US$12 billion, and the dominant position of Russian companies in controlling leases for several Iraqi oilfields. Both are red herrings. No company that has signed lease deals with Saddam Hussein's government could believe those rights are secure. Russia's top oil company, Lukoil, knew that when it met Iraqi opposition leaders in an attempt to hedge its bets for possible regime change. (Saddam's discovery of those contacts proved the point: he cancelled, then later reinstated, Lukoil's interests in the massive Western Kurna field.)

Russian officials have pressed the US to guarantee the existing contracts, but officials have wisely demurred. There would be no faster way to confirm Arab suspicions that regime change is merely a cover for taking control of Iraq's oil than by awarding the jewels before a new government is known and seated.

Of course, the impact of a war on world oil supply and price is hard to predict. A long war and a tortuous rebuilding process could deprive the market of Iraqi crude oil (about two million barrels a day, last year). Damage to nearby fields in Kuwait and Saudi Arabia could make oil even more scarce. And already tight inventories and continued troubles in Venezuela could deliver a "perfect storm" of soaring oil prices.

The most plausible scenario, however, is bad news for Russia: a brief war, quickly followed by increased Iraqi exports, along with a clear policy of releasing oil from America's reserves to deter speculators. A more lasting Russian-American energy agenda would focus on subjects beyond the current, fleeting common interest in oil. To find an area in which dialogue can truly make a difference, Russia and the US should look to the subject that occupied much of their effort in the 1990s, but that both sides neglected too quickly: nuclear power.

With the end of the Cold War, the two nations created a multi-billion-dollar programme to sequester Russia's prodigious quantities of fissile material and nuclear technology. The goal was to prevent these "loose nukes" from falling into the hands of terrorists or hostile states.

The Co-operative Threat Reduction programme also included funds to employ Russian scientists through joint research projects and academic exchanges.

Inevitably, it has failed to meet all its goals. In a country where central control has broken down and scientific salaries have evaporated, it is difficult to halt the departure of every nuclear resource. Nor is it surprising that US appropriators have failed to deliver the billions of dollars promised for the collective endeavour. Other priorities have constantly intervened, and Russia's uneven record in complying with arms control agreements has made appropriation of funds a perpetual congressional battle. Various good ideas for reinvigorating the programme have gone without funding and bureaucratic attention - even in the post-September 11 political environment, in which practically any idea for fighting terrorism can get money.

Russia has opened nuclear waste encapsulation and storage facilities near Krasnoyarsk, raising the possibility of creating an international storage site for nuclear waste. This topic has long been taboo, but it is an essential issue to raise if the global nuclear power industry is to move beyond the inefficiencies of small-scale nuclear waste management.

Russia should also be brought into worldwide efforts to design new nuclear reactors. The global nuclear research community, under US leadership, has outlined comprehensive and implementable plans for the next generation of fission reactors. The Russian nuclear programme is one of the world's leaders in handling the materials necessary for new reactor designs. Yet Russia is not currently a member of the US government-led Generation IV International Forum, one of the main vehicles for international co-operation on fission reactors and their fuel cycles. Top US priorities must include integrating Russia into that effort, endorsing Russia's relationships with other key nuclear innovators (such as Japan), and delivering on the promise made at last summer's G8 meeting of leaders of the world's biggest economies - to help Russia secure its nuclear materials.

For opponents of nuclear power, no plan will be acceptable. But the emerging recognition that global warming is a real threat demands that nations develop serious, environmentally friendly energy alternatives. Of all the major options available today, only nuclear power and hydroelectricity offer usable energy with essentially zero emissions of greenhouse gases.

Neither government should be naive about the sustainability of this endeavour. Russia is not an ideal partner because its borders have been a sieve for nuclear know-how and because its nuclear managers are suspected of abetting the outflow. Thus, plans for nuclear waste storage, for example, must ensure that they render the waste a minimal threat for proliferation. The US must also be more mindful of Russian sensitivity to co-operation on matters that, to date, have been military secrets.

Another difficult issue that both nations must confront is Russia's relationship with Iran. A perennial thorn in ties, Russia's nuclear co-operation with officials in Tehran owes much not just to Iranian money but to the complex relationship between the two countries over drilling and export routes for Caspian oil. This link to Iran cannot be wished away, as it is rooted in Russia's very geography. Any sustainable nuclear partnership between the US and Russia must develop a political strategy to handle this reality.

The world, including the US, needs the option of viable nuclear power. Yet Russia's talented scientists and nuclear resources sit idle, ready for action.

David Victor is director of the Programme on Energy and Sustainable Development at Stanford University and adjunct senior fellow at the Council on Foreign Relations. Nadejda Victor is research associate in the Department of Economics at Yale University and in the Programme on the Human Environment at Rockefeller University. This article is adapted from one in Foreign Affairs magazine.