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

[SharperDingaan]

Also keep in mind that the geo-political 'stability' of the last few years is coming to an end.

 

Most would surmise that today's protests in Iran; are the response to the Iranian missile shot down over Riyadh by US missile defense last year, amplified by recent changes in the Saudi rulership. Riyadh clearly wants heads; Khomeini has successfully done this before, and is a very old dog. Pipelines are not defensible, Riyadh needs the Saudi-Aramco flotation to go well, and a lot of the current protest would vanish if a rocket landed on any one of a number of key Aramco facilities. Nobody protests if $80 oil allows the Ayatollahs to suddenly start distributing free food.

 

SD

 

[tombgrt]

What is incredible is that despite the daily run-ups in most oil stocks, they generally still lag the underlying oil price. When will this close (partly)?! Markets can only turn away for so long...

[tombgrt]

WTI nearly at $62. What a day.

[sculpin]

For those who own Gear Energy..

 

GXE is HFI top pick with target $3 to $4 share

 

https://seekingalpha.com/article/4135103-hfi-research-best-ideas-going-2018

 

Gear Energy, California Resources and Discovery Communications are our best ideas going into 2018.

 

The underlying fundamentals of Gear continues to grind higher despite bearish investment sentiment. With $70/bbl and $80/bbl potential in 2018 and 2019, Gear can trade to C$3 to C$4 per-share.

 

Gear Energy just released its 2018 guidance this week showing 15% exit-to-exit growth with almost certainty that the company will produce over 10,000 boe/d by 2019. The market however remains concerned over Western Canadian Select (heavy oil and more discussion in section 2) prices in 2018, and the recent price weakness is more reflective of that than the fundamentals of the business.

 

As we noted in our 2018 guidance update report, Gear’s capex spending for 2018 is “geared” to allow it to grow more in the years ahead by spending C$12 million on expanding inventory. This capex focus on expanding inventory should illustrate to investors the more long-term focused nature of the management, but given how bearish sentiment is today – the stock price continues to languish at the same level as last year despite 1) higher oil prices and 2) higher production.

 

But it’s with this diverging view between the company’s underlying fundamentals and the market’s view that we continue to see Gear as one of our best ideas in 2018. We have joked at times with subscribers that we have no interest in selling any Gear shares at least until we see C$3 per share, and that price target is moving higher and higher with each subsequent improvement in the underlying fundamentals.

 

 

This price target is also illustrative of what the potential may be if one was to take a longer-term view on oil and underlying fundamentals (something the market never does).

 

We estimate that if WTI can average $70/bbl in 2018 and $80/bbl in 2019, Gear could generate a total of C$61 million in free cash flow after capex of C$158 million, and produce 9,644 boe/d on average in 2019.

 

At a range of EV/DACF of 4.5x to 6x, Gear would trade between C$3 to C$4 per share making our reasoning for not selling any until C$3 per share all the more convincing if oil prices cooperate. And with the share price languishing around C$0.79, we feel the set-up into 2018 makes it all the more appealing to call this idea our best idea for a second-year in a row.

 

 

[Uccmal]

Also keep in mind that the geo-political 'stability' of the last few years is coming to an end.

 

Most would surmise that today's protests in Iran; are the response to the Iranian missile shot down over Riyadh by US missile defense last year, amplified by recent changes in the Saudi rulership. Riyadh clearly wants heads; Khomeini has successfully done this before, and is a very old dog. Pipelines are not defensible, Riyadh needs the Saudi-Aramco flotation to go well, and a lot of the current protest would vanish if a rocket landed on any one of a number of key Aramco facilities. Nobody protests if $80 oil allows the Ayatollahs to suddenly start distributing free food.

 

SD

 

No one is going to blow up the pipelines of another country.  The mid-east has been in a state of strife for decades and this has never happened on a large scale - one soveriegn to another.  It invites retaliation which does nobody any good and they all know that.  Self preservation by mutually assured destruction ensures this wont happen. 

 

 

[tombgrt]

Most interesting here is that almost no one seems tot be long in size. Sector really hated.

[SharperDingaan]

Also keep in mind that the geo-political 'stability' of the last few years is coming to an end.

 

Most would surmise that today's protests in Iran; are the response to the Iranian missile shot down over Riyadh by US missile defense last year, amplified by recent changes in the Saudi rulership. Riyadh clearly wants heads; Khomeini has successfully done this before, and is a very old dog. Pipelines are not defensible, Riyadh needs the Saudi-Aramco flotation to go well, and a lot of the current protest would vanish if a rocket landed on any one of a number of key Aramco facilities. Nobody protests if $80 oil allows the Ayatollahs to suddenly start distributing free food.

 

SD

 

No one is going to blow up the pipelines of another country.  The mid-east has been in a state of strife for decades and this has never happened on a large scale - one soveriegn to another.  It invites retaliation which does nobody any good and they all know that.  Self preservation by mutually assured destruction ensures this wont happen.

 

Agreed, but this is also the land of an eye for an eye; the measured response WOULD actually be a mildly damaged receiving facility, that puts it out of commission for a few months. The major loser would be the Saudis, the rest of the ME would benefit from higher oil prices, those with large populations would get some relief, and those with small ones &/or American 'presence' would experience pressure to 'behave'. Fermenting unrest is a two-way street, Khomeini is very good at it, and recent Saudi upheavals have created a lot of resentment.

 

Responding in kind just proves you're a madman, & largely neuters the use of American force - as Trump is a liability. The traditional desert solution to this kind of thing is a knife in the night, and its use would be fully understood in this part of the world. Ultimately somebody will lose, and the region will return to relative calm again. A facility attack doesn't even have to be 'successful' - the fact that it  occurred would be enough. Rockets don't have to carry warheads.

 

SD

 

 

 

[Uccmal]

Most interesting here is that almost no one seems tot be long in size. Sector really hated.

 

I sure am long in size.  My position in Whitecap is so huge its taking every bit of my strength of will not to sell too early into the rally.  Between WCP,  MTl, and RUS I am up around 35%.  Now I wouldn't do this with more companies on the more speculative end of the scale. 

[sculpin]

Most interesting here is that almost no one seems tot be long in size. Sector really hated.

 

I sure am long in size.  My position in Whitecap is so huge its taking every bit of my strength of will not to sell too early into the rally.  Between WCP,  MTl, and RUS I am up around 35%.  Now I wouldn't do this with more companies on the more speculative end of the scale.

 

WCP is an example of what is wrong with this market....

WCP execution flawless, operationally one of the best companies with well results and prodn beating expectations.

Executes a low decline rate acquisition in southeast Saskatchewan last November at the bottom (when oil was bouncing around in the $45 range) Closes asset and within a month or so oil at $62...that was great timing for a FCF oil play that worth more now.

Instituted share buyback, two dividend increases and mgt buying stock...

 

Stock is lower YoY, while oil is much higher? If a company like WCP is down doing everything right the market is not functioning correctly.Not sure what else they could have done.....

 

It should be a go to name for US generalist investors in the US , it has a huge cushion at $60+ oil, its safe down to $40. FCF is increasing with low decline assets.

[JayGatsby]

Challenge with WCP is the spread for Western Canada Select? How do you think about that spread before Kinder Morgan gets their pipeline built? It seems like the product is fairly landlocked at this point, similar to natural gas in the US (and Canada, I suppose). WCP does look interesting.. capex has been heavy but production growth has been real. Assuming you're correct about the long life of their assets their depletion accounting supports meaningful net income.

[tombgrt]

https://www.bloomberg.com/gadfly/articles/2018-01-07/don-t-expect-opec-s-oil-output-deal-to-collapse-in-2018

 

"“We tend to cheat,” former Saudi oil minister Ali Al-Naimi famously observed shortly after the output deal was agreed in November 2016. That has certainly been a perennial problem for OPEC in the past, but it may be much less of a problem in the coming months. That's not because of some new-found sense of collective responsibility so much as the fact that those countries most prone to flouting their pledges simply can't do so at the moment. They are already producing at, or very close to, full capacity."

 

Good example of Occam's razor principle if you ask me.

 

As in many sectors, most tend to overanalyse and overreact to each and every move and word said. Some can't see the forest for the trees no matter what you do or say.

 

[sculpin]

GMP's Weekly Crude Cut....

 

 

Weekly Crude Oil Cut

 

The comments below were prepared following the release of the U.S. Department of Energy’s weekly report on the United States petroleum market. Analysis is for data reported for the week ending December 29, 2017. The purpose of this report is to provide a general commentary by drawing on recent data and developments in the United States and global crude oil markets.

Initial market reaction. Price neutral.

 

Price direction. More sideways, but with some tendency to rise in the coming weeks. The evidence is accumulating that the global and U.S. crude oil markets have been largely resetting themselves to much lower crude oil inventory levels. This reduction has been engineered by a combination of lower supplies from the OPEC/Non-OPEC supply agreement and what has been a very strong global demand picture supporting U.S. crude oil exports and strong U.S. refining runs. All indications are that this demand picture is going to remain strong for most 2018, contributing to what will be additional reductions in crude oil inventories worldwide. It was these inventories that were the single largest source of inventory bloat in 2015 and 2016, especially those in the United States, and which were holding back meaningful price recovery. With most of that bloat now gone, we think that WTI and Brent crude oil prices have a very firm foundation to hold and improve on current US$60+ per barrel prices. Although refined product stocks may increase more in the coming months, we think these will be offset by additional reductions in crude oil inventories, and we forecast an additional 20 to 30 million barrels coming out of U.S. commercial holdings of crude oil before the end of 1Q18. This would run counter to typical seasonal builds in crude oil inventories during the first quarter of the calendar year. With inventory and demand trends looking very supportive, the remaining holdback on prices may be the degree to which U.S. petroleum supplies are able to expand in 2018. Although we are likely to revise up our expectations of U.S. supply growth for 2018 simply because prices are outperforming our bullish forecast, we think the supply gains can be easily managed by a U.S. and global market that is clearly signaling the need for more supplies. In other words, don’t get too bent out of shape concerning additional U.S. crude oil supply growth. It’s coming and will be consumed quite readily and will not be a serious price negative.

 

Martin King

(403) 262- 0625

mking@gmpfirstenergy.com

 

 

 

[tombgrt]

Thx sculpin. Nicely in line with what HFI research (see SA articles) has been saying for some time. No need to make it overly complex.

[sculpin]

THE MOTHER OF ALL CONVERGENCE TRADES

 

Energy equities generally trade as a proxy for the commodity. To this point, over the past 29

years there have been only three decouplings of consequence between energy share prices

and crude with 2017 being the most stark. The analysis below and those on the following

page are updated though the end of last week. Relative to the S&P 500, the energy sector is

trading as if WTI was being priced at $28/barrel, as per below. We see this disconnect as

being unsustainable.

 

The gap between energy equities and oil prices that took place in 1999 ended up closing as a

function of capitulation – we don’t recall there having been any particular spark to start the

process. In 2003, however, the reconnect began with something rather innocuous which was

a restatement of Shell Oil’s petroleum reserves. Whether the catalyst this time around will be

something innocuous remains to be seen

 

 

 

https://gallery.mailchimp.com/1fd69cd92527e68cf2ef3aeb5/files/29f516a1-3068-42f4-bd41-06f4db3903b1/The_Morning_Energy_Update_8_Jan_2018.pdf

 

[JayGatsby]

Relative to the S&P 500, the energy sector is

trading as if WTI was being priced at $28/barrel, as per below.

That doesn't seem right to me. What is the Y axis on their data? A lot of E&Ps never traded down nearly as much as you would have thought. As a result, the rebound has been fairly minimal. $28/barrel would mean bankruptcy for a large portion of the sector, but the market definitely isn't pricing that.

 

I've been short PXD, and despite raising additional equity through the downtown shares haven't really changed. In August 2014 they were ~$200, now they're ~$180. Exxon has gone from ~$100 to $87 over that time period. Continental Resources peaked at $80 in August 2014, and is now at $56.

[sculpin]

And it continues. Eventually this will be very beneficial to Canadian heavy oil producers...

 

Lee Saks‏

@Lee_Saks

 

#VENEZUELA CRUDE #OIL OUTPUT DECLINES ANOTHER 151K B/D IN DEC - PDVSA EXECS: ARGUS. #OOTT

[Joe689]

Oil spiking as we speak.    Broke an important level of resistance.    When will the market wake up and see the opportunity here?  E&Ps will become profitable again.  Either I'm crazy or Canadian E&P (light oil) could be a multibagger by this time next year if prices keep up.

 

Just keep buying tech!  ;)

[JayGatsby]

And it continues. Eventually this will be very beneficial to Canadian heavy oil producers...

 

Lee Saks‏

@Lee_Saks

 

#VENEZUELA CRUDE #OIL OUTPUT DECLINES ANOTHER 151K B/D IN DEC - PDVSA EXECS: ARGUS. #OOTT

Is your point that think declining output of Venezuelan heavy oil may increase the relative demand for Canadian heavy as it's required to mix with light Texas shale, possibly reducing the price difference between WCS and WTI?

 

Agree the Canadian producers seem interesting... trying to learn a bit more about that.

[tombgrt]

Crude -11.19MM

Gasoline +4.338

Distillate +4.685MM

Cushing -2.516MM

 

 

Lol.

[sculpin]

Couple of posts from twitter....

 

On supply..

 

Crudehead  ?‏

@cbjom

 

I’m thinking the key talking point in the #oil markets for 1Q18 will be Venezuela rather than US crude production. #OOTT

2:31 PM - 9 Jan 2018

 

On demand...

 

Cuneyt Kazokoglu

‏

@ckazok

 

The issue with demand is that it keeps growing while the majority of press is dominated by "surging electric cars" and "peak demand", i.e. there is a big gap between perception and reality. My gut feeling is 8/10 articles in media is bearish on demand. Misguiding.

 

[Cardboard]

An oil draw of 4.9 million barrels which is still a lot for this time of year but, a lot less than the 11 million mentioned by API last night.

 

What I found more interesting in the report is the very large decline of 293,000 barrels/day in Lower 48 States production.

 

Where is that coming from? There was no hurricane. And the XL pipeline has been returning to normal shipments. While the weather was cold, then bad on the East coast, could this be all related to very cold weather in North Dakota affecting production and shipment? The number still looks way too large.

 

Or is this the adjustment that we have been waiting for a long time for EIA to normalize the difference between monthly and weekly production? Looking for an explanation.

 

Cardboard

[Joe689]

Freeze-offs  is one explanation.  See https://btuanalytics.com/permian-freeze-offs-ahead/  .

 

[sculpin]

An oil draw of 4.9 million barrels which is still a lot for this time of year but, a lot less than the 11 million mentioned by API last night.

 

What I found more interesting in the report is the very large decline of 293,000 barrels/day in Lower 48 States production.

 

Where is that coming from? There was no hurricane. And the XL pipeline has been returning to normal shipments. While the weather was cold, then bad on the East coast, could this be all related to very cold weather in North Dakota affecting production and shipment? The number still looks way too large.

 

Or is this the adjustment that we have been waiting for a long time for EIA to normalize the difference between monthly and weekly production? Looking for an explanation.

 

Cardboard

 

Excellent explanation of today's production drop in 2 tweets.

EIA reported today a major in US crude oil production by 293 kbd to 8.979 mb/d while it production of Natural Gas Plant Liquids by 275 kbd. This is not an actual change in one week, this is a reclassification, which my friends and I have been calling for in our tweets https://t.co/UxB7pA14FC

 

I expect additional downward revisions of US crude production for the last 4 months of 2017. I also expect the #EIA , #IEA, and #OPEC to revise down their expectations of US crude #oil production for 2018 and 2019, making those two years more bullish than what most people think. https://t.co/N9b0DrgKc3

 

[SharperDingaan]

Just a disclosure that we've concluded building a position in WCP.

Purely a dividend paying trading position for us, that we see jumping by at least 25% (or more) over 1H 2018.

 

SD

 

[sculpin]

Hold on to your Cdn heavies....We are bullish on Western Canadian Select

 

From the Eight Capital report today....

 

• Our big out of consensus call: We are bullish on Western Canadian Select (WCS) pricing. We believe the current differential of US$25/Bbl is unsustainably wide because: A) The rail bottlenecks are temporary and typically clear out around late Q1, early Q2; B) Multiple sources state that the Keystone mainline is back at full rates, which should help reduce Alberta storage levels and mitigate large apportionments on the Enbridge mainline; and C) Shell's 255 MBbl/d Scotford upgrader had a one month unplanned outage in late November. Additionally, we note that Latin American heavy oil exports to the U.S. have been on a significant decline over the past seven years owing to falling production in Mexico and Venezuela. Plus Venezuela's economic woes are likely to continue to negatively impact its production, which recently hit a low not seen since 2003. This is important because the quality of WCS is similar to that of the heavy oil production coming from Mexico and Venezuela. With the U.S. Gulf Coast and Midwest refining complexes being large consumers of this type of heavy oil, we see this being a further benefit to WCS, which is why we expect to see differentials narrowing dramatically from the current US$25/Bbl Spot price in Q2/18 and beyond. BUY rated ATH, MEG, and to some extent CNQ are our best ideas on this. NEUTRAL rated BTE should also benefit.