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

[SharperDingaan]

https://www.islainvest.com/2016/12/22/letter-to-investors-december-2016/

 

Dear Investors,

 

From January 1 through November 30, 2016, net of all fees, the Tarpon Folio is up 91.8% compared to an increase of 9.8% in the S&P 500 over the same period.

 

As of the market close last Friday, December 16, Tarpon is up more than 100% year-to-date, after fees, on an unaudited basis. So I am pleased to report that it appears that you will have doubled your money in Tarpon in 2016.

Merry Christmas.

 

Thank you for hanging in there after a tough 2015. We are succeeding unconventionally. And we are not done yet.

We now have two ten-baggers in Tarpon. I have made no trades since August. And subsequent to that investor-only email I sent in early November, OPEC cut production, as expected, putting a floor under oil prices and formally closing out one of the most head-scratching chapters in the history of the oil market.

 

My expectation, in short, is that oil will continue to grind higher in 2017. Global oil flows now look to be in deficit, while elevated oil stocks will be drained further by the recent OPEC/non-OPEC production cut agreement.

 

I also believe the risk of sleepwalking into a supply crunch in either ’17 or ’18 remains uncomfortably high. That risk is due to several pro-cyclical idiosyncrasies of today’s oil market, the most notable of which is the inconsistent quality of global production and inventory data. IEA numbers in particular are, on occasion, confounding and irreconcilable, appearing to obscure or conflate trends in production and/or inventories which would otherwise be price-supportive for oil.

 

I suspected it a year ago, and now unequivocally believe it: there are some strange things in that macro oil data – whether Gulf of Mexico oil production forecasts, OECD inventory stock revisions, or the obscuring of oil-versus-condensate storage levels here in the U.S. All of which makes the forward curve even less predictive of future oil prices than it already is.

Get on it, 60 Minutes.

 

In any case, our companies remain resilient, and our returns in Tarpon next year should be attractive enough that I believe my primary goal as your portfolio manager is to avoid doing anything that might cut the compounding process short.

So let the record show that it’s in your best interest if I do a lot of fishing next year.

But let’s not get cocky – nor forget the role good luck played for us this year. We’ll all be better off if we ratchet down our expectations for 2017.

 

We found a glitch in The Matrix last year. It continues to be exploitable in a reasonably systematic way via the shares of deeply undervalued U.S. E&Ps – without using margin, derivatives or algorithms – although on occasion it does require some scotch. And we are not done taking advantage of it yet.

 

As a reminder:

Stock prices are not data. They are an opinion. To a value investor, they are an opinion about the future earnings power of a company. That there is a lot of data available to form an opinion about a company’s true value should not be confused with the idea that all opinions about stock prices are equally valid.

 

The vast majority of the time, the market values companies correctly – or, at least, an investor should start by assuming the market is correct. But every so often, the market makes a grievous error that alert and patient investors can exploit. And for Tarpon, this has been of those times.

 

Please understand that because of what we stand to gain the next few years, I will make no apologies for whatever short-term volatility may come as a result of continuing to hold our current Tarpon companies, at their current portfolio weights, for an indefinite period of time.

 

We own good assets, bought at even better prices, which produce a critical product that many in the market don’t appear to realize may temporarily be in short supply in the not-too-distant future. The primacy of price over all else in the oil market has been nearly absolute. But it is also untenable. I continue to believe this is a perfect storm of cognitive biases, incentives, ambiguity and groupthink on Wall Street that we can take advantage of.

 

And my job, essentially, is to not screw it up. So we are going to take every penny the market gives us in 2017.

Right now, though, there is a worrisome oversupply of eggnog in Islamorada.

 

And. I. Am. On. It.

 

I’ll have more thoughts on Tarpon, OPEC, the new U.S. administration and the shale industry’s response to higher oil prices in a few months.

 

In the meantime, Happy Holidays!

Peace, love and cash flow.

– Cale

 

Congratulations on the YTD return!

FWIW we also have a return > 100% this year, primarily from high weightings to PWT and PD.

 

SD

[sculpin]

Congrats SD. Tough to be contrarian when the mainstream media, Goldman - if not all the Ibanks and almost all conventional money managers are telling you that energy investments are not or never the place to be. Well won gains in 2016 while many of the conventional money managers have failed to even produce positive returns.

[SharperDingaan]

Congrats SD. Tough to be contrarian when the mainstream media, Goldman - if not all the Ibanks and almost all conventional money managers are telling you that energy investments are not or never the place to be. Well won gains in 2016 while many of the conventional money managers have failed to even produce positive returns.

 

Funny thing is that this year was actually the easy bit. As you point out - the smartest investment strategy next year will be to pretty much take the whole year off; of course the downside is the occasional 30-40% unrealized loss while you're crossing the desert, hence the systematic periodic capital withdrawals. It's also much easier to invest this way when money management isn't your primary business.

 

SD

   

 

[sculpin]

https://www.islainvest.com/2016/12/22/letter-to-investors-december-2016/

 

Dear Investors,

 

From January 1 through November 30, 2016, net of all fees, the Tarpon Folio is up 91.8% compared to an increase of 9.8% in the S&P 500 over the same period.

 

As of the market close last Friday, December 16, Tarpon is up more than 100% year-to-date, after fees, on an unaudited basis. So I am pleased to report that it appears that you will have doubled your money in Tarpon in 2016.

Merry Christmas.

 

Thank you for hanging in there after a tough 2015. We are succeeding unconventionally. And we are not done yet.

We now have two ten-baggers in Tarpon. I have made no trades since August. And subsequent to that investor-only email I sent in early November, OPEC cut production, as expected, putting a floor under oil prices and formally closing out one of the most head-scratching chapters in the history of the oil market.

 

My expectation, in short, is that oil will continue to grind higher in 2017. Global oil flows now look to be in deficit, while elevated oil stocks will be drained further by the recent OPEC/non-OPEC production cut agreement.

 

I also believe the risk of sleepwalking into a supply crunch in either ’17 or ’18 remains uncomfortably high. That risk is due to several pro-cyclical idiosyncrasies of today’s oil market, the most notable of which is the inconsistent quality of global production and inventory data. IEA numbers in particular are, on occasion, confounding and irreconcilable, appearing to obscure or conflate trends in production and/or inventories which would otherwise be price-supportive for oil.

 

I suspected it a year ago, and now unequivocally believe it: there are some strange things in that macro oil data – whether Gulf of Mexico oil production forecasts, OECD inventory stock revisions, or the obscuring of oil-versus-condensate storage levels here in the U.S. All of which makes the forward curve even less predictive of future oil prices than it already is.

Get on it, 60 Minutes.

 

In any case, our companies remain resilient, and our returns in Tarpon next year should be attractive enough that I believe my primary goal as your portfolio manager is to avoid doing anything that might cut the compounding process short.

So let the record show that it’s in your best interest if I do a lot of fishing next year.

But let’s not get cocky – nor forget the role good luck played for us this year. We’ll all be better off if we ratchet down our expectations for 2017.

 

We found a glitch in The Matrix last year. It continues to be exploitable in a reasonably systematic way via the shares of deeply undervalued U.S. E&Ps – without using margin, derivatives or algorithms – although on occasion it does require some scotch. And we are not done taking advantage of it yet.

 

As a reminder:

Stock prices are not data. They are an opinion. To a value investor, they are an opinion about the future earnings power of a company. That there is a lot of data available to form an opinion about a company’s true value should not be confused with the idea that all opinions about stock prices are equally valid.

 

The vast majority of the time, the market values companies correctly – or, at least, an investor should start by assuming the market is correct. But every so often, the market makes a grievous error that alert and patient investors can exploit. And for Tarpon, this has been of those times.

 

Please understand that because of what we stand to gain the next few years, I will make no apologies for whatever short-term volatility may come as a result of continuing to hold our current Tarpon companies, at their current portfolio weights, for an indefinite period of time.

 

We own good assets, bought at even better prices, which produce a critical product that many in the market don’t appear to realize may temporarily be in short supply in the not-too-distant future. The primacy of price over all else in the oil market has been nearly absolute. But it is also untenable. I continue to believe this is a perfect storm of cognitive biases, incentives, ambiguity and groupthink on Wall Street that we can take advantage of.

 

And my job, essentially, is to not screw it up. So we are going to take every penny the market gives us in 2017.

Right now, though, there is a worrisome oversupply of eggnog in Islamorada.

 

And. I. Am. On. It.

 

I’ll have more thoughts on Tarpon, OPEC, the new U.S. administration and the shale industry’s response to higher oil prices in a few months.

 

In the meantime, Happy Holidays!

Peace, love and cash flow.

– Cale

 

Congratulations on the YTD return!

FWIW we also have a return > 100% this year, primarily from high weightings to PWT and PD.

 

SD

Btw I am not Cale Smith & my returns while very good this year are not close to 100%.

[Cardboard]

EIA just reported a very bullish report IMO.

 

Crude build was 0.6 million barrels vs an expectation for a 1.4 million barrels decline. API had reported a 4.2 million barrels build last night.

 

So on that basis that is negative. However, total stocks (including this 0.6 million barrels oil build) were down 12.9 million barrels with gasoline, distillates, propane all down. And that small build of 0.6 million barrels could be accounted for a reduction of 0.7 million barrels going to refineries last week.

 

While true that some customers may have ordered more finished products for the Holiday season and the climate was relatively cold, consumption was still eye popping. Based on the data from the last few months, we very much seem to be in balance or in a small supply deficit despite the OPEC and non-OPEC cut not starting until January. With the Libya and Nigeria ramp up effect already behind us or over the last few months of 2016, the cut will definitely impact inventories materially.

 

Another positive news is the decline of 30,000 b/d in Lower 48 States production despite many rigs having been added over the last couple of months and mostly in the Permian Basin or the most prolific/cost effective area. I do believe that this continued refusal for production to increase despite more rigs in the field and drilled but uncompleted wells being completed, indicates that the decline rate is continuing to offset all this increased activity. Therefore, higher prices from here are needed to incentivize more production and with low hanging fruits being harvested, it will take even higher prices to go back to the Williston Basin and other higher cost places.

 

Cardboard

[SharperDingaan]

It’s useful to do a little arithmetic….

 

Assume a 1000 shale oil wells were drilled & connected, on Jan 01, 2014 (3 years ago). They stay in production their entire lives, and on day 1 they test out at 100 barrels/month of 100% light crude - or 1,200,000 barrels/year (1000x100/monthx12 months). Over time; pressure drop, gas and water cuts deplete production at 35%, 40%, 45%, 50% per year. At the end of year 4 the average well is no longer commercial. This is most shale oil.

 

At the end of year 1 - production is down to 780,000 barrels/year (1,200,000 x (1-.35)). At the end of year 2 it’s 468,000 barrels/year (780,000 x (1-.40)). At the end of year 3 it’s 257,400 barrels/year, at the end of year 4 it’s 128,700 barrels/year. Year 1, 2, 3, 4, 5 depletion was 420000, 312000, 210600, 128700, and 128700 barrels/year. Point is; significantly less depletion every year.

 

Were we in 2014 (Year 1) an additional 420,000 barrels/year of production (via the drill bit) would have just kept Year 1 production ‘flat’ at 1,200,000 barrels/year. That same drilling addition of 420,000 barrels/year of production in 2017 (Year 4) would have raised Year 4 production to 548,700 barrels/year – a 130% increase. Point is; at the aggregate level, the impact of new drilling is currently being swamped by depletion on existing wells. Hence we see rising rig counts, falling production, & drillers talking about better prospects.

 

Unfortunately, politics now matters.

 

While the US is not part of OPEC, the senior men in Trumps cabinet are part of ‘big oil’ and there is now a different kind of relationship with Russia - an OPEC ally. From the capital efficiency standpoint it makes sense to temporarily shut US shale in, and support oil price hikes; hence the GS appeal to higher prices. From the state bargaining standpoint it makes sense to consolidate the shale fields, and arm it with disciplined ‘big’ capital – parked on the sidelines (a modern day version of Standard Oil).

 

We think that for now that means aggressive drilling to get to self-sufficiency, and shut-in production for a while.

 

SD

 

[sculpin]

Acumen commentary...

 

Energy Sector 2017 Commodity Overview (Oil)

 

The key for me - and I think it should be for readers as well - are oil stocks.  For all of the gnashing of teeth as to whether Oman or Venezuela or Saudi will meet their production quota, the fact is that oil stocks have been DRAWING since July to the tune of 75 mm bbl.  Many clients have been waiting for "oil stocks to start going down" as the sign the market is turning around.  Well we are at that point in time now where it is occurring PRIOR to any OPEC action.  The IEA indicated that November preliminary numbers indicate another draw across the OECD (indicative of global storage) and in December US stocks have been falling at a faster pace than expected.  Yet, the IEA suggests that Q4 demand will be 96.9 mb/d while supply will be 98.1 mb/d leading to an expected Q4 BUILD of 1.2 mb/d or net build of 110.4 mmbbl. 

 

Just to have some fun with numbers, let's assume that IEA is correct.  And let's also assume that November isn't in fact a draw, as the IEA has indicated, but is neutral.  That means December stock builds need to be 128 mm bbl or >4 mb/d.  Or, the more rational explanation is that demand is higher than reported - which is a consistent pattern that is empirically proven - which means that 2017 demand needs to be revised higher and the market is well into deficit territory.  A little bit of a different narrative than the consensus isn't it?

 

In other words, oil is going quite a bit higher and rely on the IEA at your own peril.

[SharperDingaan]

Look at PD and TDG on the TSE. Both up 40% since Oct 01, and day rates on the premium rigs starting to rise.

The folks hiring them, aren't drinking the IEA cool-aid.

 

SD

[sculpin]

Look at PD and TDG on the TSE. Both up 40% since Oct 01, and day rates on the premium rigs starting to rise.

The folks hiring them, aren't drinking the IEA cool-aid.

 

SD

 

Yes the services sector should perform very well this year altho I have not invested in the the pure rig companies. Believe there is much more value in some of the anciliary service companies trading at fractions of book value, replacement and at low single digit multiples of cash flow at potential 2017/18 utilization levels. Names are Strad Energy Services (SDY - TSX) well site services US & Cda, Bri-Chem (BRY -TSX) energy fluid distributor all of North America, Critical Control (CCZ - TSX) natural gas flow software & hardware all of North America, Macro Enterprises (MCR - TSX) pipeline builder northeast British Columbia, Petrowest (PRW - TSX) infrastructure & construction NE BC & Alberta, Entrec (ENT - TSX) highly discounted crane operator, Questor (QST - TSX) clean tech service co to energy sector, Western One (WEQ - TSX) provides heat & rentals, modular bldgs to energy & other sectors.

 

 

[sculpin]

Look at PD and TDG on the TSE. Both up 40% since Oct 01, and day rates on the premium rigs starting to rise.

The folks hiring them, aren't drinking the IEA cool-aid.

 

SD

 

Yes the services sector should perform very well this year altho I have not invested in the the pure rig companies. Believe there is much more value in some of the anciliary service companies trading at fractions of book value, replacement and at low single digit multiples of cash flow at potential 2017/18 utilization levels. Names are Strad Energy Services (SDY - TSX) well site services US & Cda, Bri-Chem (BRY -TSX) energy fluid distributor all of North America, Critical Control (CCZ - TSX) natural gas flow software & hardware all of North America, Macro Enterprises (MCR - TSX) pipeline builder northeast British Columbia, Petrowest (PRW - TSX) infrastructure & construction NE BC & Alberta, Entrec (ENT - TSX) highly discounted crane operator, Questor (QST - TSX) clean tech service co to energy sector, Western One (WEQ - TSX) provides heat & rentals, modular bldgs to energy & other sectors.

 

Credit Suisse says " It Has Only Just Begun" For the Oilfield Service & Equip Sector

 

We are upgrading the Oilfield Services & Equipment sector along with several stocks for the seasonal and the cyclical recovery trade in 2017. The cyclical recovery is under way for onshore NAM. It will accelerate in 2017 with higher utilization and pricing. Onshore international will begin to improve by mid-2017. Offshore remains challenged, but there are select early-cycle stocks that deserve a look.Even understanding that earnings revision will begin any day, there is a strong chance we are all underestimating the magnitude of the recovery.

 

 

 

[Cardboard]

Horrible EIA report today: oil inventory up, major build in products, imports way up, Lower 48 States production up 190,000 b/d!

 

The latter is the most concerning IMO since OPEC and non-OPEC cuts should start to be more visible over the next few weeks as fewer vessels arrive. The cuts were taking effect after January 1. The increase of 190,000 b/d appears rather large considering that we didn't see much if any increase in previous weeks while the rig count has been climbing steadily.

 

We know that EIA is estimating Lower 48 States production unlike Alaska's production which is more or less exact. However, it would be nice to have more accurate info as this sudden jump after weeks of little change is a head scratcher.

 

Cardboard

[sculpin]

This is an excellent year end piece on the oil market by Nuttall at Sprott. Pretty much aligns with what my thoughts were through 2016 and what the future has in store. Full note at the link at the bottom of the page.

 

2017 is shaping up to be another solid year for energy investors. Our belief that the market would become “undersupplied” (we define that as the level of oil held in inventory falling on a year-over-year basis) came to pass in Q2/16 (note that this was BEFORE the OPEC cuts) and global oil inventories have been falling ever since. The decision by OPEC to curtail production by ~ 0.9MM Bbl/d + the potential for 0.6MM Bbl/d of non-OPEC curtailments only expedites the rebalancing process. The reason why this is happening is because demand continues to rise at a strong rate (~1.4MM Bbl/d in 2016) as it has in every year in modern history yet supply with only several exceptions is falling due to the inability of oil companies to drill enough wells due to depressed cash flows to allow them to offset their corporate declines. We believe this trend will continue until oil rallies to around $60/bbl which we believe will occur in 2017. Until that time given the impact of the OPEC/non-OPEC production curtailments combined with natural declines being experienced by the majority of oil producing nations/companies in the world we believe global oil inventories on a YOY basis could enter into a deficit by the end of Q1 and by the end of Q3 could be below the 5 year average. The finality of this event (and the path getting there) will act as a very bullish price signal for oil.

 

Despite the very bullish backdrop for oil there remain 4 concerns with some oil investors (I’m reminded of the saying “for every little girl with a balloon there is a little boy with a pin”) and we wanted to address each of them head on.

Firstly some investors believe that the recent OPEC production cut paid only lip service to the oil market and that OPEC will not abide by their 6-month pledge. This was summarized by the former (ie. fired) Oil Minister of Saudi Arabia who said “the unfortunate part is we tend to cheat.” Our view is that the OPEC of today is not the same as the OPEC of previous cycles. Unlike in previous down cycles when OPEC sat on upwards of 14MM Bbl/d of spare capacity we believe effective capacity (pre-cut) is effectively nil and that most members (including Saudi and Iraq) were already up against their maximum productive capacity. Further, the ring leader of OPEC (Saudi) is intending on divesting a stake in its state oil company as a means of raising capital with which it will use to attempt to diversify its economy away from strictly oil. The value of Saudi Aramco in early 2018 will be based largely on its 2017 cash flows which will be based on the 2017 oil price and hence Saudi has a very high incentive to adhere to its curtailment pledge. Lastly the fiscal duress being experienced by all members of OPEC from the implosion in the oil price is extreme by all historical precedents. Most members face one or a combination of hyperinflation (Venezuela), massive fiscal deficits (pretty much all of them), internal terrorism (Nigeria and Libya) or outright war (Iraq). The only result of the OPEC/Saudi “free oil market” experiment over the past 2 years was the devastation of OPEC’s collective balance sheets (Saudi Arabia budget deficit of $176BN in 2015 and 2016) and the forcing of US tight/ shale oil companies to become more cost efficient. As an aside it was reported on January 5th that Saudi Arabia had become fully compliant with their pledge.

 

The second concern that the market has is the ability of US tight/shale oil to very quickly respond to a $50+/bbl oil price and once again oversupply the market. The consensus view is that at $50/bbl every well in the US is wildly profitable and that as a result companies will ramp up their drilling activities and swamp the market just as it did several years ago. While we do believe the US can meaningfully grow oil production over the next several years (it better…more on that later) we disagree with the belief that this can occur nearly as quickly as the consensus. The market is ignoring what should be several obvious obstacles that will prevent US production from scaling as quickly as feared. These include a shortage of labour (150,000+ layoffs in North America during this downturn), stressed balance sheets that prevent a frenetic ramp in spending, and most importantly a stressed service sector. As oil companies cut spending by the greatest extent in history and demanded that service companies work for negative margins this exerted an enormous stress on their equipment (drilling rigs and especially fracture stimulation equipment). As a result much of the latent equipment is now unworkable due to the lack of proper maintenance and will require both time and an enormous injection of working capital to get back into working order. Hence, though the oil price might now allow industry to increase spending and ultimately production the shortage of workable equipment (and people) will mean that there will be a much greater lag than otherwise might have been thought.

 

The third concern is that while OPEC production growth is now limited (assuming 100% compliance) there remain a few members that are exempted (Iran, Nigeria, and Libya) that have the potential to ramp production. While it is difficult to evaluate exactly what is going on in Nigeria and Libya we take comfort in the many rosy estimates over the past year that were never met. For every interim peace treaty that makes the front page there is a pipeline bombing or rebel fighting outbreak that just doesn’t seem to get the same media traction. Experts far more qualified than I to comment on both countries believe that the situations in each country are far more volatile than what consensus would have you believe. Iran then is the easiest to evaluate over the next few years. Production today is now almost back to pre-sanction levels (late 2011 of ~ 3.6MM Bbl/d). During the four years of production constraints due to US sanctions  Iran lacked the ability to reinvest in its fields and grow productive capacity since so much of their oil revenues went to pay for state social expenses. Hence, as they are now back to peak levels it will take several years and many hundreds of millions of dollars to grow productive capacity. Given that project tendering has only now just begun Iran lacks the ability to meaningfully grow oil production for at least 2 years. So in summary the only 3 countries exempted from the OPEC production cut all still face significant challenges/logistical issues to be able to meaningfully grow oil production in the near term.

 

The final concern that some investors seem to have relates to electrical cars and the potential for the combustion engine to become obsolete in the near future. When an investor expresses this worry to me there are a few basic numbers that I share with them. First, annual global car and light passenger vehicle production is roughly 80,000,000. Second, assuming that the average useful life of said cars is 10 years that means there is a global install base of ~800,000,000 vehicles. Third, Tesla in 2016 produced 78,000 cars and has ambitions to grow this number to 400,000-500,000 (ignoring that they have never hit a production goal and still face highly significant challenges like adequate battery production). Giving them the full benefit of the doubt (along with Ford, GM, Daimler-Chrysler, Mercedes Benz, BMW, etc) it seems highly improbable that annual production could exceed 1,000,000 vehicles in the next 5 years. This means that maybe in 5 years electric cars would represent a whopping 1.25% of global car sales but most importantly it would take 800 years to displace the install base. This also ignores that those living in the major areas of car sale growth (India, China, etc.) cannot even afford a “low cost” $35,000 electric car when their average annual salary is sub-$10,000/year.

 

So in summary, OPEC compliance is likely to be much higher than consensus believes because it is in their best interest to adhere to their pledge, the production response from the US due to higher oil prices will take longer than consensus believes due to labour and equipment shortages that consensus seems to be forgetting about, the 3 exempted OPEC countries still face significant challenges to grow oil production and void the positive impact of the cuts, and Tesla is not taking over the world and displacing the need for gasoline any time soon.

So where do we see opportunity today?

 

Early in 2016 we made significant profits in stocks that were strongly out of favour due to poor (though not critical) balance sheets and were being priced as if they were imminently going bankrupt. Later in the year we crystalized these profits and high-graded the portfolio into companies that due to the rise in the oil price could expand their capex programs and grow production faster than what was being modelled by the Street. We also took positions in several service stocks that were trading at highly attractive valuations. Today the best opportunities are in oil companies that have the ability to grow oil production faster than consensus believes and as a result are much cheaper than is believed if one can look out beyond this year. We see about 40% upside in many of these companies. We’ve also retained positions in several natural gas stocks. The outlook for natural gas has improved significantly due to strong demand growth and production declines (implosion in natural gas drilling over the past few years + less indirect natural gas production from oil wells). Finally we retain positions in several service stocks that are exposed to the service areas that we believe could tighten much faster than consensus believes and by extension have the ability to raise prices/margins in the coming months. There are stocks where we see 50% upside to current 2018 consensus EBITDA estimates.

 

One last theme that we would like to leave you with is the reason why we believe that we are in a multi-year bull market for oil. We’ve spoken previously about how the greatest selloff in the history of oil also led to the largest drop in spending in the history of the oil and gas business (see below). The market tends to be a little too US-centric in its thinking as much of the focus of the oil market is on US shale/tight oil however this production only amounts to ~4% of total global production. Outside of the US most oil production comes from large projects that require 4-6 years to bring on and cost many billions of dollars. As a result of the massive drop in investment in such projects the amount of new production coming online from mega projects begins to implode in 2018 and given the lead time there is pretty good visibility out to 2021.

 

The global oil industry (OPEC+non-OPEC) needs to come up with roughly 5MM Bbls/d of new productive capacity each year (1MM for demand growth and 4MM to offset global declines). Given our view that OPEC is largely out of spare capacity and that the US can grow by a maximum of 1MM Bbl/d per year for the next 2+ years, the burden then falls on non-OPEC/non-US to make up for the shortfall. However the below chart shows that the level of new production from this collective jurisdiction falls in half between 2017 and 2019 and amounts to only ~1MM Bbl/d in 2019 and 2020. Given this implied undersupplied scenario of ~ 3MM Bbl/d we believe the oil market will remain tight for the next several years and that oil will have to progressively appreciate beyond $60/bbl in order to stimulate new investment and bring forward many of the projects that have been deferred or cancelled.

 

http://www.sprott.com/media/318873/sprott-energy-fund-monthly-commentary.pdf

 

[SharperDingaan]

Keep in mind that the o/g drilling industry is a close knit community, and the client/driller relationship is much closer than in other industries. Carry your driller through the lean times, and they will carry you through the good times; you get the rig, & the other guy is SOL - no matter how much he offers. In the WCSB this doesn't matter right now, but comes fall it is going to; & it matters a great deal if you're farming out acreage.   

 

O/G is also a leading industry; most of the other commodity industries are lagging indicators.

Segment rotation to control risk/return is going to matter.

 

SD

 

 

[Cardboard]

The data from EIA/API since mid-December has become nearly incomprehensible.

 

API announced a draw of 5 million barrels last night and this morning we have EIA announcing a build of 2.3 million barrels.

 

We also have gasoline stocks growing rapidly for the second week in a row and when I was in the U.S. a few weeks ago, the cost of gasoline on the East Coast was very close to $2.50 U.S./gallon at the pump which I thought was too high based on these inflated stocks.

 

And now refineries apparently really reduced their intake last week with a 4.473 million barrels reduction and we still get a 6 million barrels increase in gasoline???

 

Is the economy going from good to recession in one week? Have we switched from Winter to Fall in one week???

 

Finally, we read that Lower 48 States production grew by 190,000 b/d last week and this week it moved by the grand sum of "0". The guy was probably on vacation or something!!!

 

The only thing that seems to make sense is a reduction in net imports of 4.557 million barrels for the week as likely fewer vessels are now arriving in the U.S. with OPEC/non-OPEC cuts having started Jan 1.

 

I hope that Trump's Energy Secretary will fire some of the administrators of this joke EIA.

 

Cardboard

[Cardboard]

http://finance.yahoo.com/news/two-commodities-veterans-are-calling-for-100-oil-in-2018-163400527.html

 

The IEA is another organization that should get its act examined.

 

Cardboard

[DooDiligence]

An oldie but a goodie...

 

http://www.geoexpro.com/articles/2011/03/the-best-place-to-find-oil

[sculpin]

Goehring & Rozencwajg Year End Letter

 

Natural Resource Market Commentary 4th Quarter 2016

 

Friday, January 20, 2017

 

Oil prices are headed much, much higher.

 

To understand why, let’s turn the clock back 11 years back to the fall of 2006. As many of you might remember, oil prices peaked in a new bull-market high of $77 per barrel in the summer of 2006. By November, prices had fallen by a steep 30%. Repeated warnings by the International Energy Agency (IEA) regarding huge oversupplies in 2007, the resulting oil price pullback, and the surge in bearish sentiment caused a series of events to take place at the end of 2006 that set the stage for the relentless 150% surge in oil prices starting in January of 2007 which lasted for the next 18 months. We believe it’s imperative to understand the underlying oil market fundamentals in 2006 - both actual and as reported by the IEA. In response to these perceived fundamentals, OPEC reacted strongly and cut production just as the oil market slipped into deficit. OPEC’s actions caused a tight market to become even tighter, which resulted in the huge surge in oil prices

 

In an ironic twist, we believe that the events that took place at the end of 2006 have now been repeated: OPEC has agreed to significantly cut production into an oil market that has already slipped into deficit, just like they did in 2006. And just like back in 2007 and 2008, we believe oil prices are now set to surge again in the coming 18 months.

 

According to the IEA, the huge run-up in global oil prices beginning in 2007 should never have happened. In the summer of 2006, the IEA released their first estimates for the 2007 global oil market balances. In that report, the IEA forecast normal demand growth in 2007 (up 1.4 mm b/d) and extremely strong supply growth (non-OPEC supply growth up 1.9 mm b/d). Based upon these forecasts, the IEA projected that the oil markets in 2007 would face significant over-supply. But it wasn’t only the 2007 oil markets that would be oversupplied, according to the IEA. According to their numbers, the IEA believed 2006 was also a year where global supply had significantly exceeded global demand.

 

As 2006 entered its final quarter, the IEA repeated its assessment that total global oil supply would exceed oil demand by a huge 800,000 barrels per day for all of 2006. The IEA’s estimates of huge over-supply in 2006, combined with their over-supply projections for 2007, meant that OPEC would need to cut production significantly going into 2007. With OPEC producing slightly over 30 mm b/d in 2006, the IEA estimated that the organization must cut a minimum of 1.7 mm b/d to avoid significantly building inventories and putting severe downward pressure on prices in 2007. At the end of the third quarter of 2006, the IEA again raised its non-OPEC oil supply growth forecast to 2 mm b/d and again strongly reiterated its conviction that markets in 2007 were about to be flooded with oil.

 

Given these extremely oversupplied projections, and given how widely followed the IEA’s projections were, it is easy to understand how bearishness gripped the oil markets during the fourth quarter of 2006. By the fall, oil prices had dipped below $60 per barrel and, given the fundamental outlook put forward by the IEA, many energy analysts believed prices were set to fall back into the low $20s – crude oil’s average price throughout the 1980s and 1990s. Reflecting the price drop, speculators and hedge funds had swung from having significant net-long positions during the summer of 2006 to being significantly net-short on the NYMEX futures exchange by the fall. Everyone was bearish. All you had to do was look at the IEA’s numbers to see an oil market that was in serious over supply—prices were going to fall.

 

Heeding the IEA’s warnings and succumbing to the huge surge in bearish sentiment that gripped global oil markets, OPEC met in October 2006 in Doha, Qatar, and quickly agreed to a large 1.2 mm b/d production cut that would become effective in November of 2006.

 

In retrospect, it is painfully obvious these OPEC production cuts were unnecessary. Back in 2006, we wrote extensively about the flaws in the IEA data. The IEA was significantly overestimating 2007 non-OPEC oil supply and underestimating 2007 global demand. Also, if you carefully analyzed 2006 oil market data, it was clear the IEA was seriously misestimating 2006 oil balances as well. Although ignored by most oil analysts, by the end of 2006 almost 600,000 “missing barrels” had crept into the IEA’s oil balances. Instead of building inventories by 800,000 b/d in 2006, which is what should have happened according to the IEA data, actual global inventories built by only 200,000 b/d. This implied that either the IEA was significantly underestimating oil demand, overestimating supply, or doing a combination of both. Also, if you assumed these “missing barrels” were not really “missing,” but rather were either consumed or else were never produced, then the 2006 oil market was nearly balanced. Instead of being wildly oversupplied (as portrayed by the IEA), global oil markets were basically balanced in 2006 and were about to significantly tighten in 2007, even without any cuts in OPEC’s production. In retrospect, OPEC was about to cut production in a market that by the fourth quarter of 2006 had already slipped into deficit, resulting in a market that became ultra-tight as 2007 passed into 2008. In response to the over-tightening, global oil inventories drew by over 300,000 b/d through 2007 and into the spring of 2008. Prices advanced relentlessly in response to falling global inventories and eventually spiked to almost $150 in July of 2008.

 

Back in 2006, our research told us that the IEA numbers were flawed and that the OPEC production cuts were unnecessary. In October 2006, in our third quarter letter, we wrote:

 

“Also, it turns out that although we tend to forget the past, in this oil bull market every time OPEC has cut production, it has only supported the ongoing bull market.... Will history repeat itself here if OPEC cuts back production for the fourth time in five years? Our research indicates that there is a high probability that the same thing will happen in 2007. In each of the previous three production cuts, OPEC was looking at three things that never materialized... First, although inventories were rising on each occasion, it turned out that fears of future high inventory levels were overstated. Second, non-OPEC oil production, which was always projected to grow by 1.5-2.0 mm b/d , had failed to materialize every year since 2002, and third, OPEC has consistently underestimated the growing demand for oil coming from the developing part of the global economy....Our analysis suggests that the call on OPEC oil production will increase substantially again in 2007, and I see the global oil market becoming tighter with prices risk increasing to the upside.”

 

It turns out that our analysis was indeed correct, and we wrote again in July 0f 2007:

 

“I wrote in last year’s 3rd Q letter that anticipated OPEC production cuts in the 4th quarter of 2006 were unnecessary and would lead to extreme tightness in global inventories by mid- 2007. We based our viewpoint on our models which indicated that non-OPEC oil production would grow by only 500,000-700,000 b/d in 2007. This production growth estimate was significantly less than the originally 1.9 mm b/d grow estimate by the IEA. We also estimated that global oil demand would grow by 1.2-1.3 mm b/d. Using these projections, we felt that OPEC would need to increase production by 600,00-700,000 b/d to balance the global oil market in 2007-not decrease production by 1.0 mm b/d.”

 

Today, our research tells us the world is in a situation almost identical to 2006.The global markets have already slipped into deficit and, based upon our modelling of 2017 supply and demand, we believe that the deficit will only increase as 2017 progresses -- even without any OPEC production cuts.

 

Global Oil Commentary

 

Back in April of last year, we wrote how we had gone from being bullish to “wildly” bullish on global crude-oil markets. We outlined how global demand was growing much faster than most industry observers realized, and that a collapse in global drilling would result in large non-OPEC production declines. Large over-supply in the crude markets, brought about by Saudi Arabia’s decision to increase production by nearly 1 million barrels per day over the course of 2015, would be absorbed by increased demand and falling non-OPEC supply during the second half of 2016, and that OECD inventories (a good proxy for global inventories since very few non-OECD countries maintain crude stockpiles), would begin to draw relative to normal levels. While the absolute inventory levels would likely remain high for some time, our experiences have told us the direction of inventory levels is what matters and that oil prices would move higher as inventories drew down.

 

When we wrote our analysis, crude prices had already started their rally off of the February lows of $26 per barrel and were trading at $43 per barrel. Since then, pretty much everything we wrote about has come to pass. Crude has advanced by 100% from the lows and 22% since we wrote in April, making it one of the best performing investments of 2016.

 

On the demand front, we wrote how the IEA, which forms the basis for nearly every oil analyst’s forecast, was significantly underestimating 2016 demand. In April, we predicted the IEA would need to revise their demand figures higher to nearly 96.8 mm b/d—up more than 1.6 mm b/d from their original 2016 projection made in the summer of 2015. Since then, they have indeed revised demand steadily higher to 96.4 mm b/d -- up 1.2 mm b/d from their original estimate. While this is less than our estimate, our models continue telling us the IEA still has to revise upwards its 2016 demand figures by over 400,000 b/d.

 

Our rationale for today’s required demand revisions is the same as it was back then. As we have discussed at length in these letters, the IEA’s supply-and-demand figures simply do not reconcile with their reported change in inventory levels. For example, based upon the IEA’s figures for supply and demand, OECD inventories should have grown by nearly 255 million barrels over the course of 2016. Instead, based upon the preliminary figures just released by the IEA, OECD inventories were flat year-on-year, implying an incredible 255 mm bb (or 700,000 b/d) of “missing oil.” Of course, as long-time readers of our research are well aware, this oil is never really missing, but is ultimately accounted for when the IEA eventually revises its demand figures higher. Over the last 15 years, the IEA has consistently underestimated non-OECD demand growth, and our models clearly state the IEA’s demand underestimation continues.

 

On the supply front, total non-OPEC supply declined by 850,000 barrels per day in 2016, the largest year of non-OPEC declines since 1992. As a result of the stronger-than-anticipated demand and large production declines, global oil inventories did indeed begin to draw relative to normal levels beginning in April (even sooner than we would have expected). Since then, OECD inventories have drawn relative to normal by approximately 87 million barrels, which suggests the global crude markets were under-supplied by 350,000 b/d. This represents the largest under-supply since the change in OPEC policy three years ago, and explains why we’re seeing continued upward pressure on oil prices.

 

This fundamental shift in the oil markets has gone largely unnoticed by the energy analysts and the markets. As recently as September, the IEA was writing about bulging inventory, an ongoing surplus and how “the supply-demand dynamic may not change significantly in the coming months.” This complacency in the market combined with the view that low oil prices are here for the foreseeable future, has left the world today in a very precarious situation (with very bullish implications).

Responding to the seemingly endless barrage of bearish reports, OPEC has now agreed to cut its crude oil production by 1.2 million barrels per day starting in January 2017, while certain non- OPEC countries have agreed to curtail their production by an additional 560,000 barrels per day. In effect, OPEC has agreed to its largest production cut in eight years, right at the time when the crude oil markets are beginning to rapidly tighten.

 

In an ironic twist, as we outlined in the introduction of this letter, today’s oil market bears an uncanny resemblance to the 2006-2008 period when OPEC also cut into an already-tight market and caused oil prices to surge from $51 per barrel to $145 per barrel in eighteen months’ time. In fact, our models tell us that the dynamics today could become more precarious than they were a decade ago.

 

Looking forward to 2017, the IEA is predicting that global demand will grow by 1.3 m b/d to 97.6 mm b/d. Non-OPEC supply is expected to recover and grow by 400,000 b/d, after having declined by 700,000 b/d this year. In total, non-OPEC supply is expected to average 64 m b/d next year. Taking the IEA’s figures at face value implies OPEC will need to pump at 33.6 m/d. Considering that OPEC pumped in November at 34.2 m b/d, the IEA is suggesting that OPEC will need to cut production by 600,000 b/d to balance the market.

 

However, in much the same way as the IEA’s figures misrepresented the market in 2006/2007, we believe the IEA’s 2016 and 2017 numbers are incorrect. First, the IEA is claiming that the oil market is over-supplied today and is ignoring the fact that inventories are drawing sharply relative to normal levels (just like in 2006/2007). According to the IEA data, inventories should be growing by 1.1 m b/d in the fourth quarter. However, based on preliminary data available through November, they have actually drawn by 400,000 b/d. Also, just like in 2006/2007, the IEA is dismissing the fact that oil prices have nearly doubled from their lows this year, which indicates to us that inventories are indeed drawing.

 

And most important, just like in 2006/2007, the IEA is very likely overstating non-OPEC supply growth for next year. In particular, Canadian production is expected to grow by 200,000 b/d in 2017 which would represent its strongest growth since 2014 despite the fact that the Canadian rig count is more than 50% lower than it was three years ago. Similarly, the IEA is projecting that non- OPEC production outside of North America will grow by 120,000 b/d in aggregate, despite the fact that this category has actually declined in four of the last six years and the fact that the international rig count right now is at an eleven-year low.

 

Could the US increase its drilling activity and materially grow the production coming from the shales? The short answer is that while this is possible, it would require a huge increase in drilling activity which would require a much higher oil price. As it stands today, the IEA is already calling for US growth in 2017 of 320,000 b/d. Our models indicate 1,000 rigs (or approximately a doubling from todays’ rig count) would be required to achieve this level of growth. While it is certainly possible for the rig count to double from here, a much higher oil price would be needed to incentivize additional drilling activity. Instead, we think the risk is much greater that the US falls short of the IEA’s projections and that the market ends up even tighter than we are modeling today.

 

To conclude: our models tell us that the global oil markets today are very similar to the end of 2006. The market has quietly slipped into deficit, yet few market participants seem to realize it. The steady oil price advance over the course of the year, driven by drawing inventories, has largely been ignored by energy market analysts. The pervasive bearish reports have led OPEC to announce very large production cuts at exactly the wrong moment. If our models are correct (as we’re very confident they are) and OPEC cuts even a fraction of what they have announced, the world oil markets will end up severely under-supplied by over 600,000 b/d during 2017. Although inventories are much higher than 2006-2007, our modelling tells us that inventories levels will approach 2008’s dangerously low levels by the end of 2018. As mentioned earlier, triple-digit oil prices are a very high probability in the next 18 months.

[sculpin]

Oil Poised to Reach $80

 

Source: The Energy Report  (1/26/17)

 

Joe McAlinden, founder of McAlinden Research Partners and former chief global strategist with Morgan Stanley Investment Management, outlines the trends for energy and discusses which sectors should see the most growth under the Trump administration.

The Energy Report: Welcome, Joe. What is your outlook for oil?

 

Joe McAlinden: We've been bullish on oil prices and published a piece last April predicting an energy shortage. I continue to think that is where we're headed. There is a self-correcting mechanism in relatively free markets that have been operative in the U.S. As prices fell, producers that are capitalists have cut back production and shut down a lot of drilling activity. We see that in the plunge that we've had in the number of operating rigs and in the number of barrels produced in the U.S.

 

Meanwhile, in less free markets for energy, namely the Organization of the Petroleum Exporting Countries (OPEC) members, we have seen more and more duress in the governments that are dependent on high oil prices to maintain their governments and living standards for their citizens. And even with non-OPEC members where there's a lot of government intervention in the markets, such as Russia, the same thing has been true.

 

Another factor is that the financial pressures on producers basically have forced them to the negotiating table, resulting in the recent agreement to cut production that finally came out between OPEC and non-OPEC producers but really between the Saudis and the Russians as the big players. It is important. It's important psychologically because since the agreement was announced, oil prices have moved up. But it is important in the actual supply/demand balance as we look at 2017.

 

U.S. production has been cut way back. The non-U.S. producers have announced an agreement to cut back. And the stage is clearly set for the supply side to be getting its house in order.

 

TER: What about demand?

 

JM: On the demand side, there is a degree of price elasticity in this market. When oil prices have come down, we've seen, for example in the U.S. data, miles driven be very strong. So demand has been very positive.

 

With the Trump election comes the plans to implement pro-growth policies, cut taxes, reduce regulation, etc., and hopefully get growth up to 3% to 4% in GDP. That's going to be a big positive for oil demand in the U.S. Even with conservation, more efficient vehicles and the usage of natural gas for generating electricity, as well as inroads made by adding alternative energy into the picture, we still have some degree of sensitivity in crude oil demand to the GDP growth rate. So if we've had 1.5% growth on average, but the trend has been about 1.5% to 2%, and the new administration promises to raise that to between 3% and 4%, that is going to have a positive further effect on demand.

 

That's part of what has changed in the wake of the election in the energy picture. I am more bullish than ever on the whole energy complex, where we had been predicting $60 to $80/barrel oil, and we continue to think that is the upside target.

 

The other thing that's important is that this administration has outlined plans for opening up public lands to drilling, for expanding fracking and for bringing back the coal industry, all of which are going to run into tremendous pressure from environmentalists. Nonetheless, it is what's on the table, and it's what's planned.

 

TER: What areas have the greatest investment potential?

 

JM: I believe that between the rise in prices that we're beginning to see for crude oil and the plans in the U.S. for tremendous expansion of drilling activity, at this point my call is that the energy oilfield services business is poised to do even better than the energy industry overall. This is best characterized by the stocks that you would find in the VanEck Vectors Oil Services ETF (OIH), which I believe will outperform the broad energy industry, which I also like, and which is best characterized by the Energy Select Sector SPDR ETF (XLE).

 

I'm still bullish on oil and I think the XLE goes a lot higher, but I think the OIH goes up percentagewise a lot more. That's my view on energy.

 

TER: Thanks for your time, Joe.

 

Joe McAlinden has over 50 years of investment experience. He is the founder of McAlinden Research Partners and its parent company, Catalpa Capital Advisors. Previously, McAlinden spent more than 12 years with Morgan Stanley Investment Management, first as chief investment officer and then as chief global strategist, where he articulated the firm's investment policy and outlook. He received a bachelor's degree cum laude in economics from Rutgers University and holds the Chartered Financial Analyst designation. McAlinden has served on the board of the New York Society of Security Analysts.

 

 

[SharperDingaan]

There's a reason we raised our exposure to the drilling sector  ;)

 

Notable is that over the last year, both the Baltic Dry and the Copper indexes have risen materially. They indicate that global economic activity was increasing - yet the IEA numbers didn't pick up the higher net demand this was causing? Post US election, the copper index has risen again - & the fall in the Baltic Dry seems to be ending. It is highly likely that demand is actually higher than many people think.

 

For the technically minded; look at the paper market contract expiries, & the IEA reports over the same period. Look at the total open contracts the day before, and the day after expiry, to get a sense of how much was rolled - and what the actual draw/build was. Then compare to the IEA report. Program it, back test it over the last 2 years, and compare it against the current hypothesis of 'missing barrels'.

 

Its not exact, but very interesting, n'est-ce pas ?  ;)

 

SD   

[sculpin]

Our nascent energy bull market...

 

It is also a feature of new bull markets to rise as high as possible for as long as possible with as few market participants as possible. Therefore, during key points in the primary uptrend, bull-market dynamics of asset-and-sector rotation can often convey confusing signals that amplify volatility and uncertainty — which further reinforce investor mistrust in the new trend and serve to keep most market participants sidelined.

 

Thanks to 13D Research

[sculpin]

Is There a Better Asymmetric Investment Play in E&P Land Than Pan Orient (POE - TSX - $1.30)?

 

Playing the slots for $15 for $1 payoff with 25% COS and almost certain to get your dollar back…

For Pan Orient there is a very important catalyst coming up in the drilling of a well in Indonesia that is being fully funded by global super major Repsol in the next 3 months. The upside potential dwarfs any downside in the short term and over the longer term the value of POE is likely in excess of the current market value of the Company today even without this Indonesian well.

 

The way to look at this is what do we get for our $1.30 current value (market price) in POE…

 

Cash (no debt) $0.86/share

Thailand asset $0.24 (570,000 bbls oil P&P)

SAGD asset $4.15 (option on $70+ oil pricing (see below #1))

Angunn well $0 to $11+ (outcome of Repsol well #2 below)

 

Total potential upside —– $16+

Total potential downside — perhaps trade in short term to cash value. Most likely POE would be broken up & sold on Angunn failure. SOTP > $1.30

 

#1……Canada – Sawn Lake: On September 26th, 2016, POE announced the results of an -updated NI 51-101 compliant contingent resource estimate for the Sawn Lake SAGD project in Alberta. The unrisked “Best Case” contingent resource estimate increased by 8% to 166.3 million barrels net to POE’s 71.8% interest with the NPV (10% dcf) on an after-tax bases increased by 26% to $228 million ($4.15/sh). The Sawn Lake SAGD project represents significant longer term upside but will require higher oil prices before development.

 

Successful Demonstration Project In late 2013, the operators drilled one SAGD well pair to a vertical depth of 650 metres and with a horizon section of 780 metres within the Bluesky formation. Steam injection commenced on May 21, 2014 with first bitumen production commencing on September 16, 2014. Over a 17 month period, bitumen production continually increased and the steam to oil ratio continuously decreased. In January and February 2016, bitumen production reached a steady state average rate of 615 bbl/d with cumulative steam-oil ratio (“CSOR “) of 2.1. Although the final production test results of the Sawn Lake SAGD pilot project are impressive, the demonstration project was suspended at the end of February 2016 due to low oil prices.

 

#2…….EAST JABUNG, INDONESIA –HIGH-IMPACT EXPLORATION PLANNED FOR Q1/17 Background: On June 1, 2015, POE completed a farmout agreement with a subsidiary of Talisman Energy Inc. (now a subsidiary of Repsol). POE transferred an operated 51% interest in the East Jabung block to Talisman (“the Operator”), in return of a US$8 million cash payment, the funding of the first US$10 million of the cost of the first exploration well as well as funding the first US$5 million of the cost of a contingent appraisal well, if the first well is successful.

 

POE retains a 49% non-operated working interest in the East Jabung PSC. Drilling to commence in Q1/17: Construction of the access road and drilling pad is expected to commence late December. The Ayu-1 exploration well is expected to spud in late Q1/17 and will be drilled to a total depth of ~1,500 metres. The well is targeting the company maker Anggun prospect. Large Resource Potential: Gaffney Cline & Associates completed a NI 51-101 compliant Prospective Resource Report for the Anggun effective June 30, 2015 (Figure 1). The Anggun prospect has three potential reservoir targets; the Intra Air Benakat formation, the Gumai Formation and the Batu Raja Fromation. All three horizons hold large resource potential with a geological chance of success ranging from 11% to 26%.

 

As shown in the presentation below, POE has various chances with 3 different reservoirs in this prospect. The outcome as modelled by the reservoir engineer provides an outcome listed to POE’s net interest as follows: Low 16.2mm bbls, Best 73mm bbls and High 417mm bbls. My guess it will either be $0 outcome or possibly the mean of the engineer estimates. For a company with a market cap of $72mm and EV of about $26mm this is an extraordinary option! Even the mean outcome of 123mm bbls at a conservative $5 bbl reserve value would be worth over $11 per share to little POE. If it is 0 bbls this is disappointing and there is likely some short term selling and price weakness. However the Company would remain worth more than the current share price on a break up or sale.

 

http://www.panorient.ca/images/stories/file/Pan_Orient_Presentation_June_15_2016.pdf

[SharperDingaan]

This is why 'ya dance with the one that brung ya' .....

You're not getting one of these rigs this fall/winter unless you carried us through the lean times - making a farm-out on PWT lands much more valuable than it would be on someone else's property. The PWT farm-out comes with one of those critical rigs.

 

SD

 

http://business.financialpost.com/investing/trading-desk/precision-drilling-corp-considered-best-play-on-tightening-rig-market?__lsa=3b65-057f

 

In Canada, however, the analyst pointed out that Precision’s high spec Super Triple rigs, of which it has roughly 40 of in its fleet, are nearly fully utilized. They also make up approximately 50 per cent of the highest tier of the market in the three key plays, where rigs are crucial for unconventional drilling.

 

“Winter drilling activity has surprised to the upside and consumed most of the high spec fleet,” Meakim said, noting that Precision should see better rates by the second half of the year, as bookings encounter a much tighter market.

 

 

 

[Cardboard]

14.2 million barrels weekly build according to API last night or 2nd biggest ever! Expectations were for a build of 2.5 million.

 

That is 2 million barrels/day that had to come from somewhere while reports are indicating 80% and above compliance from announced cuts.

 

And while rigs have been added consistently over the last couple of months in the U.S. with some signs of increased production, Lower 48 States production was down 45,000 barrels/day last week according to EIA.

 

It would be nice to have access to OECD weekly inventories so we could reconciliate some of that information which has been erratic to say the least since Christmas. Based on just U.S. information, one would think that the world has added a few million barrels of production/day and not the opposite...

 

Cardboard

[Joe689]

Counter-intuitive day for oil after EIA confirms API. 

 

Would have thought today would have been the day for a shot below $50.    Seems to be quite a lot of liquidity and support for oil.  Can't fight the trend....

 

 

Just another day in the oil markets  ;).

[SharperDingaan]

The unexpected net build was supposedly 11.7M bbl – or roughly 5-6 VLCC’s off-loading on US shores over the week. If we’re pretty sure supply is being throttled back, & lower 48 production is in fact lower; this has to be either false data – or the supply came from floating storage. The fact that oil didn’t move on these announcements, suggests it’s false data.

 

Rigs are drilling because price is rising, but it will take around 3 months (May/June) for that newly found shale oil to start hitting the pipelines. It’s also why lower 48 production is currently down – the new production hasn’t arrived yet.

 

There may well have actually been 1-2 VLCC deliveries, but it’s highly unlikely there were 5-6. It suggests instead that either a big ‘correction’ has just been made to historic data, or that there will be a sizeable offsetting adjustment coming up in the next little while.

 

All good.

 

SD