|
|
Oil and Gas Discussion BB
|
|
||
A bit from the Dratwa letter on O&GFWIW Let the valuation debate begin: Crude oil is rising after a forecast that U.S. shale oil output would record its first monthly decline in more than four years. Oil prices continue to shrug off scares tied to storage risks and the potential lift of Iran’s oil-export ban. The last positive jolt came with the EIA calling for a decline in US Shale oil production for both April and May. As our readers will recall, our March 18 wire suggested a similar outcome if one was projecting the downtrend in oil rig counts. Now what? WTI has broken above its 50-day and 100-day moving averages and most investors wonder where the rally will peter out. Refinery runs are rising anew and given the depleted level of US motor gasoline inventories, the next positive surprise in the energy patch could be much lower crude inventory builds and/or sooner-than-expected draws. Meanwhile, many investors remain wary of energy stocks which are said to discount ~$75-80/bbl. Can energy stocks be rich already? The answer depends on the valuation metric being used. We are not comfortable with valuation models spitting out commodity prices embedded into share prices because this methodology assumes an absolute valuation multiple while investing is a relative game. For example, the TSX energy index could be considered rich at a forward P/CF of 8x but what if the overall market is at 9x? True, the energy sector appears rich on profitability measures such as P/CF and P/EBITDA but this is normal around cyclical profitability troughs. But less volatile P/Sales and P/BV ratios are still below their historical average and lower than at past sector peaks. Thus, one could argue that the energy sector remains attractive vs. the S&P/TSX. (CG 15Apr15) >due to the length of the article, please call/email us if you would like it in its entirety. Rumor de jour>Canadian Oilsands (COS-t) to sell off to one of their partners (i.e. Suncor, SU-t). There should be plenty of takeouts/mergers at these depressed valuations>.we hope. Donald Dony over at “The Technical Speculator” tells his readers, “WTI oil prices are following the pattern of a completion of a Commodity cycle and the start of a new Stock (S&P 500) cycle. The rising U.S. dollar, new highs in the S&P 500 and the on-going shift of capital toward non-commodity sectors helps to reinforce our belief that a new secular Stock cycle has begun. As in the last Stock cycle (1980-2000), we anticipate that WTIC prices will remain contained. However, unlike in the last Stock cycle where oil held within the $10-$40 range, we believe WTIC should be remain above the $40 support level but hold to the $40-$65 range. (15Apr15) Canadian Oilsands Suncor Keith Schaefer of the “Oil and Gas Investments Bulletin”: “OK let’s say WTI oil is going to $65—that’s $12/barrel or 25% from here. With most companies having a roughly $40 breakeven op cost, that’s a doubling of cash flows. Does that mean stock prices double? For the leaders who are already up 70-100% from their December or January lows, almost certainly not (but never say never). Let’s forget the fact that at US$65 WTI, very few US shale plays work at all for the juniors. Forget that—because really what you’re buying here is a trade, not a company or group of companies. You’re wondering where the Big Money can take junior stocks as they get caught up in the ‘Great Idea: Energy is Back’. (Cynical people call it the Greater Fool Theory) In Canada it’s different— because of the low Loonie. My guess is that US$65 WTI would only increase Canada’s dollar from 78 cents to 83- 85us cents. A loonie worth 83-c turns $65 oil into $78.31 oil up in Canada, and that price does work—and what I mean by that is that companies can grow production inside of cash flow (though a bit more slowly than they are used to). (15Apr15) Top Natural Gas Play: Another of our contacts tells us, “Pine Cliff (PNE-t) is our top natural gas investment idea in this market. It has proven it can thrive in down markets and yet its cash flows are extremely levered to natural gas prices should the market improve. • What you need to know about the company: Company was founded by George Fink, one of the highest regarded oil and gas executives in Calgary. He founded Bonterra Energy, which has provided investors with annual returns of over 30% over the last 15 years. He also founded Comaplex Minerals, which provided annual returns of over 20% for ~15 years. These accomplishments are summarized in our initiation report attached. • Mr. Fink has positioned PNE as an acquirer of the dry natural gas assets that other producers don’t want. PNE has been able to complete several acquisitions over the last 3 years and each time the stock has gone materially higher. The company now produces approximately 12,000 boe/d, and we anticipate it will be active in the acquisition market early in 2015. Low oil and gas prices are putting several companies in distress, which we believe will lead to companies needing to sell assets. • We believe is well positioned to sustain low gas prices and in fact create value through a downturn, which it has done several times in past cycles through acquisitions. • Most levered name to gas prices, should pricing improve. PNE is ~95% natural gas. A $1 increase to the AECO price increases cash flow by almost 40%, making it the most levered name to natural gas prices amongst the peer group.” (15Apr15) Eric Nuttall over at Sprott told us a week or so ago he likes the energy service sector to get back into “the game”. One of our contacts tells us, “Russ, lots of value out there but we’re cautious on some balance sheets. If you can go down cap-wise, Total Energy Services (TOT-t) has been a favorite for some time. It’s incredibly well managed with a history of making smart acquisitions in downturns. If you need more liquidity, Secure Energy Services (SES-t) is one to pick away at.” (14Apr15) Pine |
return to message board, top of board |