The big news this summer at the Canadian Association of Petroleum Producers (CAPP) 2000 Oil and Gas Investment Symposium in Calgary was the natural gas potential of the Northwest Territories and offshore eastern Canada, as well as the heavy oil potential found in the eastern Alberta-western Saskatchewan region. As in past years, the annual conference was also the stage for the announcement of another major Canadian upstream merger-this time Husky Oil Ltd.'s $4.4-billion buy of Renaissance Energy Inc. But investors also focused on the improved cash flows of out-of-favor junior oils who ticked off a litany of shallow to deep, natural gas-rich growth prospects that have become enticing in the western Canadian provinces amid $4-plus gas futures prices. "The presenting companies appeared unanimously happy with the outlook for Canadian natural gas prices-and they should," says Terry Steele, investment manager for Humboldt Capital Corp. in East Lothian, Scotland. "With new export pipeline capacity to the U.S. coming on and gas-price differentials virtually gone, Canadian producers are now looking at a much healthier cash flow stream." Steele sees small publicly traded Canadian producers-largely ignored by the market because of the influx of investor capital into dot-com issues-as high-quality growth stocks that are trading at only two to three times cash flow. "Fund managers don't seem willing to be contrarians and look for value where value is." Clearly, the Scottish buysider isn't one of them. "There were a lot of undervalued stories at this conference within the small-cap universe," he says. "These are well-managed companies that, given another two or three years, will make it to the intermediate, or midcap, level." Among the Toronto Stock Exchange-listed value/growth producers that presented at CAPP, Steele likes Cypress Energy Inc., Genesis Exploration Ltd. and Purcell Energy Ltd. James D. Guiang, London and British Virgin Islands-based director of Azure Capital Management-the investment manager to the Azure Energy Fund Inc. in the Bahamas-says, "What we saw at CAPP is that those producers that are self-funding in their activities through cash flow are the most successful," he says. "They're the ones that are making acquisitions and taking advantage of new technologies to create greater efficiencies. Good examples are oil sands-rich Suncor Energy Inc. and Syncrude Canada Ltd." The other successful Canadian producers are those undertaking greater globalization in their activities, says Guiang. He points to Alberta Energy Co. Ltd. and Talisman Energy Inc. "Although Talisman has been criticized heavily in North America for its activities in Sudan, that region is commercially very attractive for the company. Regrettably, some of the best prospects in the world have historically been in the least stable political environments." Says Frank Reinhardt, partner in the New York-based investment banking firm of Carl H. Pforzheimer & Co., "The theme emerging from CAPP is that current North American natural gas supply isn't going to be adequate to meet rising demand. "In my opinion, we're going to see a window of firm natural gas prices-around $4 per Mcf-during the next three to four years, which is good news for gas-oriented producers." In the southern provinces, the Foothills play in Alberta and British Columbia will be sources of new and fairly big gas reserves, he says. "But these additional reserves won't be big enough to handle the gas supply problem. From what I've heard at this conference, the real hot gas plays in Canada-and maybe in all of North America-are going to take place in the southern part of the northern Canadian provinces, including the Forth Liard area in the Northwest Territories. Later on, Sable Island offshore eastern Canada and the MacKenzie Delta area in the upper part of the Northwest Territories will add substantial new gas reserves." Shawn Reynolds, vice president and E&P analyst for Goldman, Sachs & Co. in New York, observes that, while strong commodity prices are making Canadian producers comfortable with their capital position, these operators are largely opportunity poor. "There has been a lot of movement to the deep Foothills [of Alberta and British Colombia] and to the Northwest Territories, but we don't see the high-impact drilling programs coming forward nearly as rapidly as we had hoped." -Brian A. Toal