Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Uccmal]

I'm having mixed feelings. Fully stocked on oil stocks (well, GXE mainly) but these kind of moves feel very unnatural after getting used to seeing such low oil prices. Sentiment has completely shifted in a matter of two weeks, very odd. You'll see that this post coincides with the medium term top! ;)

 

I did add some GXE even today (after it was already up 4%) as expected CF just rose circa 10% based on current prices (which is of course premature!). Hard to buy though... Valuation gap stays as wide as it was weeks ago at $0.70.

 

Well your not the only one who believes this price rise is just temporary. 

 

WCP, my largest oil holding has gone up a tiny bit, even though they raised the dividend last week, and analysts uniformly have buys on the stock and target prices from 12 to 16 - its around 9.60.

 

OBE went up a little bit and is moribund again. 

 

It appears there is going to be a lag effect.  Both of these companies and most others are going to be hedging into 2018 on the oil price rise. 

[JayGatsby]

A sudden change is what I expected, although it remains to be seen if this rally is that change or if this is just transitory.

 

In 2014, the prices went from $100 in August to $50 in January. The fundamentals didn't change that quickly, but the market realized the fundamentals had changed that quickly.  http://www.macrotrends.net/1369/crude-oil-price-history-chart

[HJ]

Maybe a bit late to the game.

 

I did buy a bit a while ago, and it feels like it's indeed a bit late to chase the current move right now.  Not able to distinguish one vs. another I decided to diversify and took a bit each of CJ, WCP, RRX CPG, BNE.  No particular reason on why one vs. another, just took the oilier names, and for no particular reasons (maybe it's the pipeline worries), didn't buy any oil sand names.  Other names on deck were KEL or OBE.  Trying to catch up on due diligence, and narrow things down a bit however, is turning into a pain.  All different plays with different economics, and for all I know, the market is probably pricing geology and management quality better than I can hope to decipher from the financials.  Was heavily influenced by this article:

https://www.albertaoilmagazine.com/2016/10/best-little-oil-companies-canada/

 

All the while I read oil sands supply is going up next 2 years, and pipeline takeaway capacity may not be there, and Canadian E&P can't give gas away at AECO or was it Station 2? and if oil needs to go by rail, it will only be absorbed by the WCS / WTI basis.  So now I feel stuck.  Incapable of narrowing down the names, and don't know how to evaluate the pipeline takeaway capacity question.  I do appreciate the fact that oil & gas investing in its nature is somewhat of a macro call on oil price.  But I still would like to pretend to be a "value investor" and form something of an opinion of on one company vs. the next.  The article made mention of the fact that Bonterra hadn't grown share count forever, a nugget near and dear to a generalist's heart.  Was my bias of oilier rather than gassier names justified, at least as it pertains to Western Canada?  Sometimes all the data serves to obfuscate rather than clarify the important questions in these investments,..., which I don't even know what that question is!  Just feel a bit overwhelmed by the sheer number of different instruments available out there.

 

I'm not 100% sold on the idea that oil is going one way up either by the way.  Reading transcripts from the shale players this quarter, EOG is talking about 10% IRR with oil in the 40's, and there seem to be other companies still with hefty growth plans going into 2018.  Sentiments seemed to have changed a bit on the Canadian juniors last couple of weeks, but narrative has yet to catch up. 

[SafetyinNumbers]

Seems like small caps are lagging. For example, still seeing PPR.TO and ATU.V trading below 3x cash flow and IPO.TO and GXE.TO, below 4x.

 

Maybe earnings this week for a lot of small caps will act as a catalyst.

[SharperDingaan]

Maybe a bit late to the game.

 

I did buy a bit a while ago, and it feels like it's indeed a bit late to chase the current move right now.  Not able to distinguish one vs. another I decided to diversify and took a bit each of CJ, WCP, RRX CPG, BNE.  No particular reason on why one vs. another, just took the oilier names, and for no particular reasons (maybe it's the pipeline worries), didn't buy any oil sand names.  Other names on deck were KEL or OBE.  Trying to catch up on due diligence, and narrow things down a bit however, is turning into a pain.  All different plays with different economics, and for all I know, the market is probably pricing geology and management quality better than I can hope to decipher from the financials.  Was heavily influenced by this article:

https://www.albertaoilmagazine.com/2016/10/best-little-oil-companies-canada/

 

All the while I read oil sands supply is going up next 2 years, and pipeline takeaway capacity may not be there, and Canadian E&P can't give gas away at AECO or was it Station 2? and if oil needs to go by rail, it will only be absorbed by the WCS / WTI basis.  So now I feel stuck.  Incapable of narrowing down the names, and don't know how to evaluate the pipeline takeaway capacity question.  I do appreciate the fact that oil & gas investing in its nature is somewhat of a macro call on oil price.  But I still would like to pretend to be a "value investor" and form something of an opinion of on one company vs. the next.  The article made mention of the fact that Bonterra hadn't grown share count forever, a nugget near and dear to a generalist's heart.  Was my bias of oilier rather than gassier names justified, at least as it pertains to Western Canada?  Sometimes all the data serves to obfuscate rather than clarify the important questions in these investments,..., which I don't even know what that question is!  Just feel a bit overwhelmed by the sheer number of different instruments available out there.

 

I'm not 100% sold on the idea that oil is going one way up either by the way.  Reading transcripts from the shale players this quarter, EOG is talking about 10% IRR with oil in the 40's, and there seem to be other companies still with hefty growth plans going into 2018.  Sentiments seemed to have changed a bit on the Canadian juniors last couple of weeks, but narrative has yet to catch up.

 

Welcome to the 'circle of competence'.

As in any business - you need to know your 'value add'. Where do you have advantages, what are they, why are they pluses, how do they apply here; and then only play within them. Sounds pretty obvious - but very few actually do it. Both management and investor have to know the business.

 

You might want to severely scope down your search, and settle on just 1-2 'circles'. If the business cycle seems favorable, drill a little further - if it's not; pass and move on.  A simple decision, but it might save you a fortune.

 

SD

   

[Uccmal]

Maybe a bit late to the game.

 

I did buy a bit a while ago, and it feels like it's indeed a bit late to chase the current move right now.  Not able to distinguish one vs. another I decided to diversify and took a bit each of CJ, WCP, RRX CPG, BNE.  No particular reason on why one vs. another, just took the oilier names, and for no particular reasons (maybe it's the pipeline worries), didn't buy any oil sand names.  Other names on deck were KEL or OBE.  Trying to catch up on due diligence, and narrow things down a bit however, is turning into a pain.  All different plays with different economics, and for all I know, the market is probably pricing geology and management quality better than I can hope to decipher from the financials.  Was heavily influenced by this article:

https://www.albertaoilmagazine.com/2016/10/best-little-oil-companies-canada/

 

All the while I read oil sands supply is going up next 2 years, and pipeline takeaway capacity may not be there, and Canadian E&P can't give gas away at AECO or was it Station 2? and if oil needs to go by rail, it will only be absorbed by the WCS / WTI basis.  So now I feel stuck.  Incapable of narrowing down the names, and don't know how to evaluate the pipeline takeaway capacity question.  I do appreciate the fact that oil & gas investing in its nature is somewhat of a macro call on oil price.  But I still would like to pretend to be a "value investor" and form something of an opinion of on one company vs. the next.  The article made mention of the fact that Bonterra hadn't grown share count forever, a nugget near and dear to a generalist's heart.  Was my bias of oilier rather than gassier names justified, at least as it pertains to Western Canada?  Sometimes all the data serves to obfuscate rather than clarify the important questions in these investments,..., which I don't even know what that question is!  Just feel a bit overwhelmed by the sheer number of different instruments available out there.

 

I'm not 100% sold on the idea that oil is going one way up either by the way.  Reading transcripts from the shale players this quarter, EOG is talking about 10% IRR with oil in the 40's, and there seem to be other companies still with hefty growth plans going into 2018.  Sentiments seemed to have changed a bit on the Canadian juniors last couple of weeks, but narrative has yet to catch up.

 

The basket approach seems a reasoanble way to do it. 

 

I am unsure what to think about US shale.  Hefty growth plans may not lead to more oil, or it may.  I lean towards depletion being faster than production. 

[HJ]

The one risk diversification doesn't solve, of course, is take away capacity, which gives rise to the basis.  But is that what caused the Canadian E&P disconnect from WTI price to start with?  Articles like this below makes one really leery of investing in the gassier names in Western Canada.

 

https://seekingalpha.com/article/4114056-western-canadian-natgas-production-growth-creates-illusion-value

 

Is light oil really that different?  The article mentions liquids by rail, but wouldn't the cost of transportation just be reflected in a wider Edmonton Par / WTI basis as well?

[Uccmal]

The one risk diversification doesn't solve, of course, is take away capacity, which gives rise to the basis.  But is that what caused the Canadian E&P disconnect from WTI price to start with?  Articles like this below makes one really leery of investing in the gassier names in Western Canada.

 

https://seekingalpha.com/article/4114056-western-canadian-natgas-production-growth-creates-illusion-value

 

Is light oil really that different?  The article mentions liquids by rail, but wouldn't the cost of transportation just be reflected in a wider Edmonton Par / WTI basis as well?

 

Thats an awful lot of noise in that article.

 

I have tended to stay away from nat. gas, except from the pipeline side.  12 years ago there were several companies operating in my area trying to sign people up for long term 'price protection' plans.  My wife was intimidated for some reason when these people came to the door and twice she signed us up for a plan after showing the gas bill to a salesperson at the door.  And twice I called and cancelled the plan right away. 

 

The reason was threefold: 1) If gas prices kept going up and we were 'protected' these companies would go belly up; -and 2) I didn't believe gas demand would exceed supply, partly because I had been hearing the same nonsense for 10 years; and 3) These companies intended on making money as if they were mutual funds or brokers via skimming. 

 

My wife agreed that perhaps I should handle people coming to the door after that.  What was a real head scratcher for me was that she found these people so intimidating.  She scares me and I am 6 feet tall and 200 lbs.  Anyways I digress. 

 

We are really talking about two completely dis-associated products and markets.  WCP produces about 18% gas incidental to their oil production.  They just hedge most of it so as to not lose money on it. 

 

I think pipe for Bitument and the real heavy crudes from up north are more a concern, but they can easily shift to rail as needed.  Warren will happily tansport their priduct down to Texas or Oklahoma. 

[SharperDingaan]

It's useful to recognize that 'at the margin' gas is primarily a by-product of oil production, little different to water or condensate.

At least the water can get pumped back into the ground to re-pressure the field  - but where connection facilities are very limited, it's often cheaper to simply flare the gas off. And as the well depletes - the gas and water cuts get progressively higher.

 

Options are very limited. You are essentially flooding the market, with a product that is already very common in that market; it has no value, because there is already too much of it. Fixable - only if you have a way of getting it out. 

 

While gas pipelines are less controversial than oil (less damage in a spill), infrastructure is limited, & LNG carriers are essentially floating bombs. A tanker going off at a loading station (Halifax explosion) can really ruin your day.

 

The highest & best use is to simply put gas powered power stations on the field. Burn the gas locally, export electricity instead - & use the environmentalists to help you instead of fighting them (no spill damage, cleaner than coal, EV cleaner than gasoline, etc). Seldom happens though, as over the life of the power station - coal can often be supplied as the cheaper fuel.

 

A fairly distant second is to liquify, strip, and upgrade bitumen. The higher fractions going to the food service industry (ethane/ripening product at sea), the lower fractions to hydrogenation. Capital intense, much harder to do, & way less efficient. 

 

SD

 

 

       

[sculpin]

 

Cale Smith

Published on Oct 29, 2017

 

Cale Smith on oil prices.  Video #3 from the Islamorada Investment Management 2017 investor meeting.

 

 

 

 

 

[cwericb]

"...trying to sign people up for long term 'price protection' plans."

 

I always carry a small amount of gas & oil stocks so if the price goes up, the stocks go up and I don't mind paying a little more for gas at the pumps, & oil for the furnace.

[Uccmal]

"...trying to sign people up for long term 'price protection' plans."

 

I always carry a small amount of gas & oil stocks so if the price goes up, the stocks go up and I don't mind paying a little more for gas at the pumps, & oil for the furnace.

 

Thats great.  I hold a stake in Bell Canada purely to get the dividend to pay our phone bill.  The dividend actually goes up faster than the phone bill. 

[Uccmal]

 

Cale Smith

Published on Oct 29, 2017

 

Cale Smith on oil prices.  Video #3 from the Islamorada Investment Management 2017 investor meeting.

 

 

That was a realy well done presentation.  If he is right $100 oil is not far fetched, although I noticed he wont predict a price.  Thanks,

 

Al

[SharperDingaan]

 

Cale Smith

Published on Oct 29, 2017

 

Cale Smith on oil prices.  Video #3 from the Islamorada Investment Management 2017 investor meeting.

 

 

Thanks for posting ... and a couple of things worth adding.

 

It is obvious that there is a growing disconnect between facts and 'market sentiment'. Perception vs reality.

The 'because the market is never wrong; you must be, and just aren't getting it'. 2+2 =5 because we say so, and if enough people believe it - IT IS. All quite true - and wonderful for the value investor!

 

Less obvious, is that this degree of distortion could not be maintained without at least some degree of state complicity. Propaganda.

With what is transpiring in Japan/China/US/SK/NK, SA/Iran/Lebanon, Syria, & oil Supply/Demand - most would expect oil prices to include a very high risk premium; gasoline prices should be so high that they threaten the global economic recovery. Remaining silent, and not domestically reporting what's happening 'over there', is Propaganda 101. Propaganda 102 is substitute your own 'story' to fill that empty space. Heard anything about SA or NK in the US press recently? 

 

We would suggest that global events are now approaching the stage, where it's no longer practical to hide them.

Case in point: We know the SK Olympics are Feb-2018, and that it is not practical at this point to change the timing or location. It is also not practical to offer NK, in the current environment, such a large target within artillery range. A solution is required - hence the current Trump Asia tour. We know from historic precedent (Iran & the Shah's deposal) what 'deals' usually look like, and from other places - what happens when the deal isn't taken. None of this is good, and yet it doesn't move oil prices? Propaganda.

 

SD

       

 

 

 

 

[HJ]

Thank you for referencing Gear Energy in this discussion.  I very much enjoyed reading the CEO's monthly letter.  In the January 2015 letter, he used the attached set of simplified numbers to demonstrate why US shale at $45 a barrel is not sustainable. 

 

Using his framework, if the oil price input is set to $55/barrel, assume cash flow per barrel can get to say something around $22-$25 per barrel, with some level of capital efficiency improvement, the numbers all of a sudden can be balanced.  I know these are very crude approximations.  But isn't it then fair to say that a reasonable case can be made for shale oil sustainability somewhere between $55-$60 for a while?  Reading presentations from Continental, EOG, PXD, on their operation stats, those numbers seem to be quite achievable?  Those guys stats are actually better than that, and point to something more like $50-$55?  I guess the question is how much inventory they have that gets to this level of productivity, so we are all just waiting for those operating stats to deteriorate? 

 

2015-01.pdf

[Uccmal]

In reference to the presentation above by Islamorada.  Islamorada maimtaims that shale is on the decline.  Simultaneous to this we have OPEC stating that shale supply is going to increase and is increasing. 

 

OPEC obviously has the same data or better data than Islamadora.  How do we reconcile the one with the other.  Are the OPEC''s just jawboning to keep all eyes focused on continuing the reduced supply, or are they correct? 

 

I have no answer. 

[HJ]

Caught this podcast with Art Berman who generally believes oil price will go higher based on inventory data. 

 

https://www.macrovoices.com/313-art-berman-comparative-inventory-draws-spell-higher-oil-prices

 

However, towards the end of this podcast, Eric Townsend discusses the current term structure of oil future, where he relays a conversation he had with a commercial broker who's doing hedging on behalf of producers.  And indeed 2 year WTI is only at 51/52 today where front month is at $57.  The interpretation is that anytime that 2 year oil goes above $50, a lot of hedgers are brought out of the woodworks. 

 

The conversation on oil term structure starts a little after 1 Hr 11 Mins.

 

 

[tombgrt]

Seems like small caps are lagging. For example, still seeing PPR.TO and ATU.V trading below 3x cash flow and IPO.TO and GXE.TO, below 4x.

 

Maybe earnings this week for a lot of small caps will act as a catalyst.

 

Quarter for PPR.TO doesn't look so hot. Don't know them well however. Can you give me a quick overview here?

 

[sculpin]

Seems like small caps are lagging. For example, still seeing PPR.TO and ATU.V trading below 3x cash flow and IPO.TO and GXE.TO, below 4x.

 

Maybe earnings this week for a lot of small caps will act as a catalyst.

 

Quarter for PPR.TO doesn't look so hot. Don't know them well however. Can you give me a quick overview here?

 

Energy

PRAIRIE PROVIDENT RESOURCES INC.

PPR (CAD$0.50) – Target: $2.00 – BUY

[PDF]Conservative Capital Plan With a Focus On Oil

8 pages

Action: Reiterate BUY and 2.00 Target Price

PPR has a strong production and cash flow base to support the exploitation of large inventory of low risk Mannville locations at its Wheatland and Princes core area and stable high netback production from Evi. The company remains highly undervalued on a cash flow, reserves and NAV basis and we reiterate our BUY and $2.00 target price.

Details: Q3/17 Financial & Operating Results

Production & Cash Flow: Average Q3/17 production of 5,506 boe/d (weighted 61% to oil) was below with our forecast of 6,200 boe/d. Cash flow of $4.5 million ($0.04/fd share) was lower than our forecast of $6.5 million ($0.05/fd share) primarily due a lower realized natural gas price and lower production. Capital expenditures of $4.8 million were nearly fully funded with cash flow.

 

Sale of non-core assets: On October 1, 2017, PPR sold non-core properties which are expected to reduce Q4/17 production by ~400 boe/d but have a minimal impact on cash flow

 

Additional Financial Flexibility With Expanded Borrowing Base: On October 31, 2017, PPR announced the closing of a two-part debt financing, consisting of a US$40 million revolving facility due October 31, 2020 (3-years) and a US$16 million secured notes due October 31, 2021 (4 years). On a blended basis, the revolving facility and the secured notes offer an average coupon rate of 8.2%. The overall debt structure expands the PPR’s borrowing base from C$65 million to approximately C$72 million and extends the term of its debt instruments. PPR issued to the lender 2,318,000 warrants with an exercise price of $0.549.

 

Princess & Wheatland Core Area Update: In Princess, in Q3/17, PPR drilled one (0.7 net) Detrital well and commenced the tie-in of two (1.7 net) standing wells expected to be on production in Q4/17. In Wheatland, PPR drilled one (1.0 net) exploratory well and tied-in two (2.0 net) wells.

 

The Stock Is Cheap: At the current market price of $0.51 per share, PPR trades at 33% of its proven developed producing (“PDP”) reserves valuation of $1.55/sh and at a 2017E EV/DACF multiple of just 4.1x.

 

Normal Course Issuer Bid (or “NCIB”): Given the company trades at a large discount to its underlying value, the Board of Directors of PPR have approved plans to implement a NCIB.

Impact: Neutral; Cash Flow To Benefit From Recent Oil Price Rebound

PPR is opportunity rich and we expect the company to accelerate growth in Q4/17 and in 2018 on the back of the recent recover in oil prices. We believe a NCIB is prudent give the company trades at a steep discount to its PDP value. We maintain our BUY recommendation and our $2.00 target price.

 

 

  By Bill Newman – 2017/11/10

PPR_Mackie.pdf

[tombgrt]

From what I have read, I have no idea why anyone would buy this over say GXE. It is not even cheaper which it should be.

[SafetyinNumbers]

From what I have read, I have no idea why anyone would buy this over say GXE. It is not even cheaper which it should be.

 

I own both. I thought the quarter was disappointing too. It looked cheaper before the quarter! Cash flow should be higher next year at current oil prices to make its valuation a bit cheaper than GXE. It has more financial leverage as well which is a knock for sure but does mean more upside to the equity. Finally, it has the QC Utica shale exposure, which if realized could be an enormous opportunity.

 

Catalyst wise, I imagine Goldman is waiting for some clarity on the Utica shale before trying to sell the company.

[tombgrt]

Ok, thanks for your view. I think PPR would be in for a decent pummeling if oil prices were to drop 20% from here. Not something I'm comfortable with and understandable it gets a decent discount from the market. And prices can rise but management needs to deliver too. If your operations go to shit, you won't notice much of higher prices.

 

I prefer lower leverage anyway for oil companies. Gives management operational leverage, easier to shift gears. Miss the timing on highly leveraged ones results in the stock looking cheap all the way down.

 

[SafetyinNumbers]

Ok, thanks for your view. I think PPR would be in for a decent pummeling if oil prices were to drop 20% from here. Not something I'm comfortable with and understandable it gets a decent discount from the market. And prices can rise but management needs to deliver too. If your operations go to shit, you won't notice much of higher prices.

 

I prefer lower leverage anyway for oil companies. Gives management operational leverage, easier to shift gears. Miss the timing on highly leveraged ones results in the stock looking cheap all the way down.

 

I think every oil stock would get a decent pummeling if the oil price stepped back 20% from here.

[Uccmal]

Ok, thanks for your view. I think PPR would be in for a decent pummeling if oil prices were to drop 20% from here. Not something I'm comfortable with and understandable it gets a decent discount from the market. And prices can rise but management needs to deliver too. If your operations go to shit, you won't notice much of higher prices.

 

I prefer lower leverage anyway for oil companies. Gives management operational leverage, easier to shift gears. Miss the timing on highly leveraged ones results in the stock looking cheap all the way down.

 

I think every oil stock would get a decent pummeling if the oil price stepped back 20% from here.

 

There are so many moving parts.  By my estimate the rise in oil this year from 45 to 57 is now costing the worlds oil users roughly 1 B more per day than last year. 

 

This coupled with quantitative tightening, rising interest rates and so forth may (will) start to dampen growth at some point.  Whether or not this translates into slower demand growth and slower price growth is anyones guess. 

[tombgrt]

http://www.nasdaq.com/article/venezuela-oil-output-hits-28year-low--opec-20171113-00932

 

All is fine...