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

[Cardboard]

http://money.cnn.com/2018/06/11/investing/opec-president-us-more-oil/index.html?section=money_markets&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_markets+%28CNNMoney%3A+Markets%29

 

News based on anonymous sources, algorithmic trading: perfect recipe to make a killing if you are on the inside. SEC prosecution? LOL!

 

Cardboard

[Uccmal]

Funny quote from Opec president: 

 

"Tehran had requested that OPEC address US sanctions at its June 22 meeting, according to the country's OPEC governor. But Al Mazrouei said the cartel would steer clear of politics.

"I will fight not to make OPEC ... a political organization," said Al Mazrouei. "It has never been a political organization. The objective of the organization is to ensure that the market is well supplied."

 

Uh, huh, Yep......  Opec is not a political organization.  It is the most bizzarre political organization on earth.  Two or more countries lobbing missiles at one another and meeting to set production (prices).  The Klingon civil war in TNG must have been modelled after these guys. 

[sculpin]

Couple of interesting posts from IV Energy...

 

Review of where we are

 

Over the past month, what have we seen. First, a counterseasonal draw this past

winter, instead of a build--markets in physical balance in the winter/spring.

Usually that is when we build, because summer sees a rapid rise in use, in large

part to aircondition the desperately hot producing countries in the middle east.

 

Since April, what has happened. Venezuela is collapsing, with output falling rapidly,

maybe to zero by the end of this year or early next(R. Rapier). Demand is accellerating

due to increasing rates of economic growth--China just at 8% growth in its economy

and in apparent oil demand(that is close to 1 million b/d growth). The rest of Asia is

growing fast, and surprise, so is the US. Only Europe and japan are lagging in oil

demand growth. It will be an amazement if oil demand--if not choked by prices--does

not grow at a rate of 2 million b/d or more in 2018. Now we add sanctions on Iran.

Based on the past, these could result in a drop in Iranian output of up to one million

b/d over the year following November.

 

Offsetting this, we have mainly US production growth of light shale oil, and some

canadian growth--both now choked by a lack of pipelines.

 

But prices are falling over the past month. Why? Shale oil plus an illogical

speculation that OPEC will boost what it has spent the last 2 years consticting?

 

Now, just this week, Venezuela has further collapsed being unable to ship or process

its heavy oil and Libya is back at it fighting in a way that reduced exports by

a quarter million b/d.

 

Prices falling? Beam me up. How much paper oil just got foisted on the market?

But maybe, just maybe, shortages are starting. Heavy crude is selling better than

WTI in the gulf and distillate shortages are looming. But we have lots of paper oil!

 

 

Oil physical  delivery is almost nonexistent as a percent of paper trading.  So price is totally manipulated just like with gold.  However this only works in the short-term with oil.

 

With gold the manipulation works in the short-term as well as long-term.

 

The difference is that every year gold produced equals about 2% of the existing stock of total gold stored above ground.  So there is a massive pool of gold inventories that is kept around as a store of wealth.  And of the gold produced only about 20% is actually "consumed" as jewelry and electronics coatings and the jewelry can eventualy be melted down and considered part of the gold storage stocks.  So gold is produced mainly for use a stored wealth.

 

With oil every year about 37 billion barrels of liquids are produced and consumed.  But the oil produced is not 2% of existing stocks but something like 400% of total oil products stored above ground (rough estimate of total global oil products inventories including SPRs).  And rather than 20% of the gold being consumed every year instead 100% of the oil is consumed.

 

So yes these are the two top commodites and both have scams and manipulated futures trading markets but that is all they have in common.

 

So in the short-term or over a few years the EIA and IEA and trading companies around the CME and ICE futures can continually manipulate oil prices lower and lower and lower...and they use the mainstream media to help do this...but eventually this catches up with the industry because oil is fundamentally different from gold in those two factors plus the continual decline of wells...so new capex and discoveries have to continually come up with more supply and you cannot just convince the inventory holders to adjust the price of their stored product down like you can with gold.  Oil is not stored for wealth except maybe for SPR - the rest is held as working inventories and for near term use and as a supply buffer.

 

Eventually the manipulation game ends and oil prices must go up and they will.  Trump is strong and can perhaps hold prices down through the rest of 2018 but this just sets up the next bull phase to be even stronger and longer...

 

[HJ]

Baytex announces a merger with RRX, both stocks go down like 10-15%, on a day oil is up.  How does that make sense?  Are Canadian juniors totally overvalued?

[SafetyinNumbers]

Baytex announces a merger with RRX, both stocks go down like 10-15%, on a day oil is up.  How does that make sense?  Are Canadian juniors totally overvalued?

 

All stock deal with a small premium. Baytex shareholders owned for leverage to oil and those prospects are diluted by this deal. Raging River shareholders owned it for takeover and they are disappointed by small premium and the paper they are getting. Ironically, probably a good strategic deal for both!

[Joe689]

Has there been one M&A in CA E&P that the market cheered?    Tough times considering M&A is exactly what Canada E&P needs.

[StevieV]

All stock deal with a small premium. Baytex shareholders owned for leverage to oil and those prospects are diluted by this deal. Raging River shareholders owned it for takeover and they are disappointed by small premium and the paper they are getting.

 

I think this is correct.  Not what either of the shareholder bases were looking for.  Doesn't mean it is a bad deal.  I don't have an opinion on that yet.

[SharperDingaan]

It really speaks to the elephant in the room - WCSB o/g is landlocked

Mergers are a no-brainer but if you can't get the production out ..... you are limited to just cost efficiencies, land position, and an all-stock transaction. No cash because you because you cant get the incremental supply out to service any acquisition related debt.

 

BTE in this case, seems to be largely replacing its Eagle Ford depletion with WCSB drilling, to maintain its combined light-oil flow in the pipeline. The metrics (4.9B/555M shares for 1.36 BTE @ 6.94) suggest there is only around a 27% premium for consolidation.

 

Long-term it makes a lot of sense for the heavy oil folks to simply take out the light oil producers, and blend to extract transportation synergies. The blended oil becoming both 'cleaner' and less 'toxic' than heavier crude alone would be, were there a pipeline spill. If the result is a now more 'acceptable' crude flowing west, and a permanent reduction in the WCS differential, the acquisitions pay for themselves.

 

Let the consolidations take place now, and simply scoop the combination later.

Not the short-term traders plan.

 

SD

 

 

[Cardboard]

"It really speaks to the elephant in the room - WCSB o/g is landlocked"

 

LOL!

 

A very large portion of oil produced in Saudi Arabia and Russia is also landlocked or not produced on a sea platform. And it is the same for a multitude of countries: has to travel 100's of miles into a pipeline to reach a port.

 

The problem are socialists or eco-terrorists blocking pipelines by electing idiots. Not geography and even less geopolitics being an issue on this one since the oil has to travel only through the country that produces it. Talk about self-inflicted pain and stupidity!

 

Regarding replacing depletion of their Eagle Ford, you are out to lunch once again. Raging River decline rate is over 40%/year, approaching 45%. So it is higher than Baytex current 28% corporate decline rate. Merging with RRX does not help BTE on that regard.

 

The problems with Raging River are: one if not highest decline rate in Canada, running out of new wells to drill in the Viking to offset such decline, involved into what remains an exploration play in the East Duvernay and trading at the highest valuation metrics in Canada (before deal announced).

 

Any Canadian player buying this was bound to see a big hit the day of the announcement.

 

Cardboard

[SharperDingaan]

You miss the point. Likelihood that the inventory of targets in the WCSB was better (on average) than the remaining targets in Eagle Ford. The 45% decline rate on existing RRX wells just pushed RRX into either accepting the merger or folding their tent.

 

Like it or not Alberta oil isn't moving west through BC, and they haven't buckled yet. 

Diminish the damage that a spill may cause, by diminishing its toxicity, and it makes it easier for environmentalists to ease.

Do you want a pipeline or not?

 

SD

 

 

[HJ]

The fact that both went down by more than 10% leads one to conclude that the holders of BTE stocks thinks RRX is overvalued, and vice versa for the RRX holders.  I understand that different investor base value different characteristics of a company.  But this action here, to me, really throws a question mark on the valuation of the entire Canadian junior E&P space.  Multiple groups of knowledgeable and sophisticated investors thinks another group of knowledgeable and sophisticated investors in the space is off the mark in how they are valuing their respectively favored companies.

 

Would anybody board member here be buying these stocks now down 10%?

 

 

 

[tombgrt]

RRX was expensive in my view.

 

And prices set in the margin, can understand that many holders of BTE and RRX felt the deal wasn't very attractive for them.

 

Individual stock picks have been very important to returns. I've had big hits but also a miss or two so far.

[Uccmal]

The fact that both went down by more than 10% leads one to conclude that the holders of BTE stocks thinks RRX is overvalued, and vice versa for the RRX holders.  I understand that different investor base value different characteristics of a company.  But this action here, to me, really throws a question mark on the valuation of the entire Canadian junior E&P space.  Multiple groups of knowledgeable and sophisticated investors thinks another group of knowledgeable and sophisticated investors in the space is off the mark in how they are valuing their respectively favored companies.

 

Would anybody board member here be buying these stocks now down 10%?

 

Too much debt.  And a dogs breakfast of assets.  Sold the last Baytex out of my Wife's account today, at a 25% gain.  Sold another tranche a couple of months ago at a higher price.  So, no, I wont be a buyer.  To me it signified desparation for both parties.  I am holding only Whitecap now - big position. 

[Joe689]

Uccmal, what is your opinion of the under performance in WCP lately?  High quality name.  Do you think they could be transacting next?

[Uccmal]

Uccmal, what is your opinion of the under performance in WCP lately?  High quality name.  Do you think they could be transacting next?

 

The underperformance of the stock is disappointing but they are obviously not alone.  They bought the weyburn assets late last year.  I doubt they will do anything other than small bolt ons.  Who knows though, If things stay this cheap in the Cdn. West....  You can be sure if they buy anything they will finance it with cheap long term debt and keep the debt to funds flow ratios stable.  At 65 equivalent for WTI they are generating at least 160 million/year in free funds flow (after all expenses including the dividend which they seem to increase every few months).  They buy back some stock as well, and the senior people have all bought significant amounts of stock recently. 

 

The managers are staying very conservative.  They could raise the dividend by .40 cents per share and still stay within their guidance of debt to funds flow below 1.5.  Compare that to Baytex/Raging River which is forecasting debt to funds flow of 1.9 x. 

 

On this thread everyone keeps pointing out the problems with getting oil to market and the pricing discounts as the reason why the stocks stay down.  But these bottlenecks existed in 2007, 2011, early 2014, etc., and these stocks traded massively higher then.  The primary reason for the low stock prices is the hesitancy to buy oil companies in general. 

 

We are still in an oil recession.  The reasons are multiple including a fear that the US could pump more, OPEC may pump more, demand destruction may occur, and so on.  Anyone following this space closely is likely aware that US shale is maxing out in the short term due to lack of takeaway capacity, and the likelihood of horizontal wells overlapping (See: There Will be Blood - movie).  OPEC and

Russia may pump more but it is really unknown how much spare capacity they actually have.  Demand destruction seems distant so far,  despite all the hype. 

 

I think its all just taking more time than we expected.  We all thought stock prices would jump as oil prices recover but its taking its sweet time. 

[Cardboard]

https://www.bnnbloomberg.ca/investing/video/us-100-oil-would-be-concerning-and-opec-is-very-aware-canoe-financial~1420594

 

Many good points by analyst in that video.

 

Cardboard

[tombgrt]

https://www.bnnbloomberg.ca/investing/video/us-100-oil-would-be-concerning-and-opec-is-very-aware-canoe-financial~1420594

 

Many good points by analyst in that video.

 

Cardboard

 

From 6:00 - 7:00 says it all.

 

Also good point on Columbia. Crazy! My investment in GCM actually down because gold dropped a little. Nuts!

[Cardboard]

https://www.bloomberg.com//news/articles/2018-06-19/opec-s-plunging-spare-capacity-poised-to-boost-forward-oil-curve

 

This could be really positive for equities as this "hesitancy to buy" as properly pointed out by Uccmal and with many now trading at low single digit multiple of cash flow is linked IMO to a lack in confidence on the future price for oil.

 

Cardboard

[Cardboard]

"Shale Crude Output Facing Obstacles From Labor Shortages to Input Costs, Dallas Fed Says

19 Jun 2018 13:01 ET

 

01:01 PM EDT, 06/19/2018 (MT Newswires) -- Shale crude production in the US faces challenges in the medium term including a shortage of labor, input costs, infrastructure and the return requirements of capital providers, the Federal Reserve Bank of Dallas said in a report on Tuesday.

 

The oil and gas industries in the Permian Basin are facing a shortage of potential workers, the Fed said. Companies are facing competition for workers who are leaving for higher pay at competitors or are leaving due to the "strenuous" working conditions.

 

"In addition, companies report finding it difficult to attract previously laid-off workers back to the industry," the report said. "Bureau of Labor Statistics data indicate that layoffs during the oil price decline of 2014-2015 resulted in an estimated loss of one-third of the workforce, and industry contacts report that many workers either are reluctant to return to the industry or need significant financial and/or job security incentives to return given the boom/bust nature of the industry."

 

While it's become more efficient, drilling and completing wells is labor intensive. The crude production sector added more than 40,000 jobs in Texas from December 2016 through April 2018, the Fed said. The increased demand has led to "significant" wage pressures for companies.

 

Illustrating the problem is the labor rate in Midland, Texas, which stood at 2.2% in May. The region is also facing a housing shortage and companies have resorted to using temporary structures for workers.

 

Producers also face environmental and infrastructure challenges.

 

"Water and sand are key inputs used in shale production, accounting for 30% to 35% of the cost of drilling and completing a well," the Fed said. "Contacts report that sand costs have increased substantially during the past 12 months. Specifically, increasing volumes of sand used in well fracking are creating strains on infrastructure in the region (10,000 tons of sand per well is not uncommon, requiring 100 railcars or 400 truckloads for transport)."

 

Water is also short in the region, which is causing both logistical and financial challenges. It's not just finding and procuring water, it's also water disposal. About three to five barrels of water are used for each barrel of oil produced, and the waste generally must be transported to a saltwater disposal well or be recycled and used as fracking water, a process that is generally considered too expensive for most operators, the Fed said.

 

"Several industry contacts and other observers have cited their concerns regarding water and air pollution, wastewater management and other issues relating to emissions of greenhouse gases," the report said.

 

Another concern, the Fed said, is pipeline capacity. The bank said it believes capacity will be "very tight" late this year and into 2019, and possibly sooner if output surprises to the upside. Still, pipeline bottlenecks likely will be eased in the second half of 2019 as new pipelines come online.

 

Equity owners are also pushing for capital discipline after stock prices rose by 1.1% from January 2017 through June 2018 while the price of oil jumped 36% and the S&P 500 increased by 24%, the Fed said.

 

"As a result of this underperformance, industry contacts report that capital providers are increasingly pressuring management teams to increase their focus on achieving higher rates of return, rather than focusing primarily on increasing overall production levels," the bank said. "Contacts report that this capital-discipline focus is causing many boards of directors to revise incentive structures and compensation arrangements for company management teams. It may also have the impact of encouraging some independent production companies to more proactively consider mergers and other actions that increase scale and improve operating margins."

 

MT Newswires"

 

Cardboard

[Cardboard]

This should help:

 

https://www.cnbc.com/2018/06/22/opec-ministers-strike-deal-on-oil-production-levels.html

 

The OPEC/non-OPEC deal was supposed to run unchanged for all of 2018 but, due to Iran sanctions and Venezuela removing more barrels than planned from the market, it had to be "tappered" earlier.

 

A key concern from many investors, or a reason not to invest in energy equities, was this overhang or 1.8 million barrels/day cuts and what would happen to the oil price once removed?

 

Today we pretty much have the answer on 1 million barrels/day being added back: no collapse, WTI above $65 and Brent at $75.

 

The other 800,000 barrels/day (if real at all) will easily be absorbed by demand growth in 2019.

 

So I think that confidence in future cash flow of energy producers should now rise dramatically. The climb from $50 to $65 in WTI was simply too quick and investors perceived risk on the sustainability of this higher price.

 

With $65 WTI now appearing to be the base vs a top, it makes no sense for valuations of 3 to 4 times EV/DACF using that price. The multiple must go up.

 

Cardboard

 

[Cardboard]

Another lie dismissed:

 

"09:08 AM EDT, 06/22/2018 (MT Newswires) -- Oil prices were up sharply early Friday on reports OPEC members agreed to a smaller than expected production increase of just 600,000 additional barrels per day, easing concern that the cartel would oversupply the market by abandoning all of the 1.8 million bpd of supply cuts that have helped push up prices and winnow global inventories.

 

Brent crude for August delivery, the international benchmark, was up US$1.85 to US$74.90 while August West Texas Intermediate was up US$1.49 to US$67.03 at last look.

 

OPEC members were said to agree to a one-million bpd increase in members quotas, which effectively adds 600,000 bpd of new supply because not all members can raise output. The agreement comes after the Trump Administration pushed the group to boost supplies in order to cut U.S. gasoline prices.

 

"The smaller than feared production increase is supportive of prices, which have slumped in recent weeks on concerns that higher production would again push oil supplies above demand and rebuild inventories," Action Economics said in a research note.

 

MT Newswires"

 

400,000 barrels/day of "cuts" simply did not exist. Now if you use the same percentage on the remaining 800,000 barrels/day, there is another 320,000 barrels/day of cuts that is fake.

 

Cardboard

[tombgrt]

Confidence indeed going up, wow! CRC, RIG and ESV, which I all own, up a lot. If only I didn't sell so many of my CRC options already. Luckily I still own 12% in options on various positions. Looking for new ATH in my portfolio value today!

 

edit: correction

[SharperDingaan]

China's big arrow.

"China and the U.S. seem to be going tit-for-tat with each other, but as Dan Flynn of the PRICE Futures Group explains, China has a disadvantage: "The Chinese are running out of U.S. imports to put a tariff on." The one big arrow left in their quiver, of course, is oil. The U.S. exports more than 300,000 barrels a day to China — about $1 billion US worth a month. http://www.cbc.ca/news/business/china-opec-oil-tariffs-1.4713944

 

The gist is that China puts a 25% tariff on US oil, & buys direct from Iran instead. Everybody gets to shaft Trump, & the US suffers a 300,000 boe/d reduction in oil exports. Protest and China simply pulls back from the US bond window, forcing up US interest rates.

 

SD

 

 

 

 

 

[Cardboard]

"China's big arrow" LOL!

 

"...about $1 billion US worth a month." That is only $585 million/month by the way at $65 U.S. WTI. So $7 billion/year.

 

Like such a tiny sum is going to make a difference to trade  ::)

 

And they love U.S. oil because it is super easy to refine unlike sour Iranian crude and it is $7 to $10 cheaper per barrel.

 

Why don't you compare the SPY chart with FXI to get a flavour of who has the advantage? And the Shangai composite is way more ugly looking than FXI.

 

Cardboard

[Zorrofan]

"The gist is that China puts a 25% tariff on US oil, & buys direct from Iran instead. Everybody gets to shaft Trump, & the US suffers a 300,000 boe/d reduction in oil exports. Protest and China simply pulls back from the US bond window, forcing up US interest rates."

 

Lets say China buys more oil from Iran and less from US, Europe will be buying less from Iran due to sanctions and likely buy more from US instead. Oil is a global market and the oil is going to go somewhere. If not, what am I missing?  Years of under-investment in larger projects (i.e. offshore) is going to start showing up at some point, likely sooner than later, and render the issue moot if those in the Eric Nuttell camp are correct about coming supply shortfalls.

 

As far as a trade war goes, China has more to lose than the US but neither side really wants a trade war. I still believe some sort of a face saving deal will be reached that will satisfy both sides.

 

cheers

Zorro