What's Surprising Me Most about Canadian Natural Gas

From guest analyst Keith Schaefer......

Western Canadian gas exports to the United States could be completely displaced into Northern California by....

1. Abundant, low cost US natural gas production,
2. And by several new gas pipelines in the US,

Says a new market study by Bentek, a US energy analysis company. Overall, Canadian gas exports to the US will drop 2 bcf/d over the next few years, almost 30%, and this impending loss of the northern California market builds upon the loss that western Canadian gas has in lower exports to the US northeast. Increased Canadian demand and declining Canadian supply will pick up some of the slack, but it won’t be enough to offset a significant loss of exports to the US market in the near term, they add.

Bentek’s report, titled “The Big Squeeze”, is a report that also outlines how fast growing production from the Marcellus shale in Pennsylvania is displacing Canadian gas to the lucrative Northeast US market, and how new pipeline capacity carrying low cost gas out of the Rocky Mountains is now set to displace much of Canadian gas to the US Midwest and lucrative California markets.

“What we outlined in our study was complete displacement of Canadian gas into Northern California by the summer of 2014,” says Jack Weixel, Director of Energy Analysis for Bentek.
Last summer I wrote about how the new $6 billion Rockies Express pipeline, or REX, going from Colorado to Ohio, was displacing western Canadian gas production by almost 10%. Lately, US natural gas production from the Marcellus shale has also been displacing Canadian gas to the US Northeast. Canadian suppliers have been able to send more natural gas into the Midwest and Western US to help make up for that drop.

But Bentek says even that market is at risk, and Canadians could see this market get curtailed within the next two weeks, in early December 2010. That’s when low cost Rockies gas supply will start flowing east on the newly installedBison Pipeline. This will give Rockies producers an additional 0.5 Bcf/d (billion cubic feet per day) of capacity out of the Powder River basin in Wyoming. The Bison connects into the Northern Border Pipeline, which moves mostly western Canadian supply.

Weixel expects the Bison Pipeline to create stiff competition for Canadian gas. He says Canadian gas has to get cheaper to stay competitive. “They (Canadian gas producers) need to drop 14 cents (an mcf). Let’s say Rockies gas is $3.50/mcf - that means that AECO (the Canadian natural gas benchmark price out of Edmonton) needs to be priced $3.36 to be competitive in northern California,” says Weixel, adding that the breakeven price for certain Rockies gas producers in the Pinedale and Jonah tight sands plays is “well below $3 per mcf.”

Weixel expects net Canadian exports to drop 2 bcf/d through 2015, out of a total of 6.9 bcf/d now. But it’s not all gloomy for producers – and their shareholde“At the same time exports are declining, you’ve got Canadian demand growing, primarily from oilsands in the west and coal retirements in the east,” he says. “You’ve also got production slipping from conventional gas plays in Alberta. So there is a tightening supply demand balance.

“Traditionally that would lend itself to gas prices getting stronger. But we believe that due to the drop in exports, that there will be just as much gas on hand in Canada as there is now. So if production drops 1.5 bcf/d but exports drop 2 bcf/d, they’re up half a “b” a day.
Canadian gas production is actually going up because of the unconventional plays in BC (read: MONTNEY), but Weixel says the gas rig count in Alberta dropped off a cliff this September, and is about half the number it was last year and about one quarter what it was in 2008.

What’s surprising to me is how little both the industry and investors appear to be concerned about this issue. The Calgary Herald ran a small story on this, and The Daily Oil Bulletin, which is ready by the industry only, ran a story (masthead, or lead story). There are thousands of high paying jobs at stake – mostly in Alberta but also in northern B.C.


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Why Producers Aren't Hedging Natural Gas

Natural gas prices in Canada are so low that end users are now trying to seduce producers to hedge, so they can lock in longer term low prices. But few producers are keen to lock in long term losses. RBC, Canada’s largest brokerage firm, suggested in a weekly comment that producers still have many reasons to hedge at $3.27 a gigajoule (GJ) now, and $4.11/GJ in April 2011. For context, the full cycle cost for new gas in North America is $5.60/mmcf and in Canada is $6.85/mmcf, according to independent analysts Ziff Energy. So producers would be selling at a significant loss.

But some quick calls to the energy desks of the major Canadian firms showed that few producers are biting, and even one of my contacts at RBC said these “hedging strategies are geared more towards the end user market; the end users are trying to lock in really good prices. But nobody’s hedging.”

RBC lists several potential reasons for hedging, which often mirror the Ziff Energy white paper from June 2010 on the state of Canadian natural gas (a GREAT read – not too technical).

1. Strengthening Canadian Dollar

2. US Production Growth

3. Reduced Canadian Imports

4. Heightened Pipeline Delivery Competition in the US

5. Abundance of Canadian Storage

6. Material Expansion of Canadian Shale Gas Production

7. Growth in Marcellus Shale Gas Production – Production has increased by over 1 bcf/d since January 2010

That’s a big list! And it’s not good news for producers or their investors – especially the junior ones who either have high gas weightings or are close to their debt limit.

But despite producers losing money on every mmcf out of the ground, some may be inclined to hedge, says Ralph Glass of AJM Consultants.

“The bigger producers are still drilling and they can afford to (hedge); it’s part of their long term plan and their economics of scale allow it. The only advantage I can see is that if you’re making positive cash flow at $3.50/mmcf, this gives you stability to hang in for one more year. But it’s not an investment strategy.”

He added even small producers may consider it: “A small producer that has limited cash flow cannot afford to pay for capacity costs without actually producing the volumes.” This means they may have “take or pay” like provisions, where the producer must pay the pipeline companies their transportation tolls even if they don’t produce the gas.

For producers, it comes down to the same issue it always does, are prices going lower or higher? By not hedging, major producers are saying that despite all the gloomy market data, they see prices stable or higher.

Long term dated future gas prices are now below $5/mmcf for a full two years out now. With such a low, and flat futures pricing curve, producers are saying they would rather take their chances in the spot market then, rather than lock in losses now.

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Keith Schaefer: My #1 Question....When Should I Invest in Natural Gas?

A Contrarian View of the Gas Market....and 4 Questions To Ask Yourself

It is, by a longshot, the most frequently asked question among OGIB readers over the last two years....“When should I buy natural gas? And should I buy ETFs? Future contracts? Natural gas producer stocks? I’ll tell you my thoughts, and I’ll also give investors four questions to ask the management teams of their natural gas producers that could help you protect your investment. The culprit of these low prices is the highly profitable shale gas plays that have grown very quickly all over North America. Shale gas wells often pay out very quickly, on an operating cost basis. The team writing the energy daily letter at National Bank in Canada had an interesting take on gas yesterday that mirrored my thoughts.

“Finally, the conventional wisdom that appears to be growing in the gas market is that the market is poised for a significant rally because of the overwhelmingly bearish mood and the fact that there are no buyers anymore out there for gas. “We would agree if in fact there were no buyers out there for gas. “But there are buyers, ETF investors (in a big way at these low prices), Reliance Industries, Mitsui, KoGas, Statoil, China National Petroleum Corporation, BG Group and Shell to name a few. Once these capital injections cease, the time will be right to become very bullish on gas. The key is to be the first one to recognize this phenomenon…or at least not the last.” The companies they named are large foreign producers who have paid big money to farm into shale plays just to learn the technology.

In 2009, the investment bankers were able to raise money for even the junior gas companies that were unhedged. Raising money for senior or intermediate producers was even easier. And just as the buy side institutions that bought those financings became wary of a long time of low gas prices, the industry was able to get capital from these international players.

Until all these sources of capital dry up and natural gas producers are feeling more forced to curtail production, gas prices could remain this low or lower. The good news is that with these low prices, producers can’t hedge good prices for 2011, like they could last year for their 2010 production.

So what does this mean for retail investors, how can we use that information to protect or increase the value of our portfolio? The answer is, know your investments, and here are four questions to ask management. Investors in the junior gas weighted stocks, in both Canada and the US, should be very cautious now.

First investors should check if their company’s are near their debt ceiling, and there are lots who are, because these companies can’t raise money (equity; or issue shares) now. They only have their debt line and cash flow. And net cash flow right now is very low for these producers.

Second, investors should ask management if they would have to take any reserve writedowns if the independent evaluators came in to do their calculations at today’s prices. A company’s reserves are their assets from which they can secure lending against. If those reserves were economic last December 31, they might not be this year at these lower prices, we have yet to see any meaningful rally in gas prices this fall, compared to last year. And reserves are This which would mean they may have to suddenly sell assets or do very dilutive financings at very low share price just to stay alive.

Third, investors should also be checking if their natural gas weighted investments are reducing production, which is good for preserving cash but generally not for the stock price. The market pays for growth, not contraction.

Energy consultants Ziff Energy recently said that junior producers should not be spending any money, in order to preserve capital during this time when full cycle costs, where you amortize everything into your costs of production, are almost twice what the current gas price is in Canada, and 50% higher than current spot price in the US.

Fourth, ask management what their plan is to survive an even longer period of low natural gas prices if they are unhedged. It’s your company and it’s your money.


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A Breakthrough Invention in the Oil and Gas Market?

From Keith Schaefer at "Oil and Gas Investments Bulletin"....

An oil and gas entrepreneur in the US has devised an inexpensive way to capture oil and natural gas vapors around a well site, and sell them to make money. These vapors are often flared (burned), or vented into the atmosphere, and trust me, if people really knew how much oil and gas was flared around the world every day, even in first world countries, the media outcry would make the "water fracking" issue look like a kindergarten party. In fact satellite images show intense flaring occurring, principally in third world countries. Shell has just committed $2 billion to reduce flaring from its operations in Nigeria.


“Air pollution requirements related to oil and gas production from the states are becoming increasingly restrictive,” says co-inventor Dr. Paul Trost. And Trost's solution can be profitable. He adds that a study near Denver in the hydrocarbon rich Denver Basin containing almost 8000 oil and gas wells showed the “fugitive” hydrocarbons, gases emanating from production tanks can be captured and sold at a profit rather than burned in a flare. Just like water evaporates in a dish, oil and gas evaporates from the production tank at a well site, and escapes into the atmosphere or alternately is burned (flared).

The problem becomes bigger when a combination of gas and oil are produced with the gas being injected into a pipeline having pressure. The oil then is also pressurized and the pressurized gases (like gas in a pop can) then “flash” or boil off like a shaken beer can. In certain areas these gases are captured and directed to a flare for burning rather than being allowed to vent to the atmosphere.

Trost’s invention, called the V3RU (Variable Volume Vapor Recovery Unit), is different than other vapor recovery systems in that it uses a flexible accumulator (bag) to capture the vapors. “It swells up like it is taking a deep breath,” says Trost. “The bag thus captures both the flash gas and also any contained liquids. We exhale it slowly into compressor for injection and sale to a pipeline. It’s a variable volume bag and it’s safety rated. The alternative energy industry already uses it around breweries located in or adjacent to cities.” Without a bag, Trost says oxygen can get at the vapour and then it won’t meet pipeline specifications. The gas is then useless and must be flared. Using a bag allows some back pressure to be used, so it won’t let air in, and the gas retains its purity and suitability for pipeline sale.

Trost says the payout for the V3RU increases as the oil content of the natural gas increases, and also as the oil gets lighter (has a higher API rating) and contains more condensate. Typically the V3RU will range in cost from $8,000-$30,000. He gives a real life example of a gas/condensate well in Colorado that was producing about 30 BOPD and 400 mcfd, but high pipeline pressures were causing a large amount of “flash” gas, containing both recoverable oil and gas, was being lost. Application of the V3RU will allow the operator was able to capture an additional 8-10 boe/d, resulting in roughly a 2 year payout.

The product has been used almost exclusively in the Denver Basin, Trost says, but it is now starting to be used in other areas. Trost is a board member of Nextraction Energy (NEX-TSXv), which will be using the V3RU vapor recovery system to meet air quality regulations at Nextraction’s newly discovered gas-condensate well located at the Pinedale Anticline play in Wyoming.

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Which Came First, God or the Government?

From guest blogger Keith Schaefer at Oil and Gas Investment Bulletins.....

CEO Tom MacNeill likes to throw that line out to investors as he explains the opportunity at 49 North Resources Inc. (FNR-TSX). 49 North is a specialized venture capital company that is quickly morphing into a fast growing oil producer, with a twist. It’s focused solely on Saskatchewan. The map that illustrates his point shows a stark contrast between Alberta and Saskatchewan. In Alberta, the map has an abundance of oil and gas properties being developed. Moving east across the border in Saskatchewan is like falling off a cliff; there is a dramatic and immediate drop off in the amount of activity in oil and gas.

The productive oil and gas geology doesn’t stop on a dime like that, says MacNeill. He sees huge opportunity in that map. His theory is that 40 years of socialist governments in Saskatchewan have slowed the development of the province’s energy resources, but the new business friendly government of Premier Brad Wall has created a huge wealth of opportunity for energy entrepreneurs like himself. “This is early days (in resource development) in Saskatchewan. The only thing that’s held us up in Saskatchewan is politics. We are at Year 1 in a 50 year process. We have 50 years of upside,” he gushes.

“Use Alberta as an analogue,” he adds, noting that Saskatchewan already has more conventional oil production than Alberta. “We do 500,000 bopd of conventional production. Alberta production peaked in 1983, 40 years after (the original) Leduc #1 (well). We are 40-50 years away from Peak Oil (in Saskatchewan).” 49 North has a suite of mining and oil and gas assets, but has recently been increasing its energy weighting. As is typical of these public venture capital companies, it trades at a 40% discount to its Net Asset Value.

MacNeill has invested directly in several oil and gas land packages, and has production net to 49 North of 80 bopd now, but hopes to have an exit rate of 1000 bopd from its 10 net section land package that produces from the Viking formation “This is not exploration in the Viking. We can do 16 wells per section and we have 10 sections.” 49 North had 100% success on the five wells it drilled last quarter. MacNeill joint ventures or buys out many small operators, and helps them get big fast. “We have so many opportunities, we could make swiss cheese out of this province” he says. “We’ve done a lot of geophysical work in this province. We have a lot of proprietary information from mineral exploration work we’ve done in our mining assets, and there are great synergies there (for oil and gas).”


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Only a Handful of Investors Truly Understand

Think of it as light heavy oil, thick and gooey enough that it needs a pump to get out of the ground, but not so thick that it needs expensive heating to flow, hence the name cold flow. Now when I say that cold flow heavy oil is the most profitable, I mean that producers get more profit per barrel (the netback) than from other types of oil.

For every dollar producers put in the ground to get the oil, they get anywhere from $3-$7 back, sometimes up to $11, compared to $1-$3 for light oil. That's due to two factors:

1. The heavy oil is shallow so it doesn't cost much to get out, and
2. U.S. refineries love Canadian crude as Mexico and Venezuela heavy oil production declines, so heavy oil prices in Canada are now strong

And Canada has more of this oil than anyone else in the world. The real opportunity comes from the fact that right now, at this very moment, only a few junior and intermediate producers focus on cold flow heavy oil. That will soon change and as a result, investors will see a host of explosive new profit opportunities as this massive Canadian resource gets developed.

But make no mistake, the biggest, juiciest profits will come from those companies who are already in the cold flow heavy oil game. I've just prepared a new research report that examines three fast growing producers who stand to provide early investors with astounding returns as a result of this opportunity.

This new report, "North America's Heavy Oil and 3 Junior Heavy Oil Producers Set to Explode", spells out all the details, including:

* A detailed explanation of heavy oil and how big the market for it might be * How new technology will impact the market and create new opportunities for forward-thinking investors in the coming months * Why we're in the midst of extraordinary times for Canadian heavy oil producers and how long these good times might last * And most importantly, the names of three carefully selected junior/intermediate Canadian heavy oil producers perfectly positioned to take advantage of this unique market scenario.

You can claim your copy of this detailed report "North America's Heavy Oil and 3 Junior Heavy Oil Producers Set to Explode", immediately via email by clicking the link below.

While this report includes the type of research that might ordinarily cost hundreds of dollars, and includes three stocks with triple digit profit potential. But don't delay, as word begins to spread of the opportunity in cold flow heavy oil, the stocks revealed in this report will begin to move up sharply and I wouldn't want you to miss out.

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5 Reasons Natural Gas Is Poised for Upside

From Bill Powers and Keith Schaefer....

This last week before Labor Day marked the 2009 low for natural gas prices. Both the natural gas price and natural gas stocks had a big run through to January 2010, creating great wealth for investors. Could that happen again this year? How real is the seasonal trade in natural gas? And how does the natural gas market compare this year over last?

This chart, published by www.rigzone.com (they have one of the best daily free e-letters in the industry) shows how well the big seasonal trade worked last year, and how it has fared for the last 10 years.
Looking at this year, 2010, we have on the positive side:
Storage is Trending Lower:
The EIA reported that for the week ended August 27, 2010 working gas in storage was 3,106 billion cubic feet (bcf), only 54 bcf larger than the prior week. U.S. storage is now 208 bcf less than last year at this time and 169 bcf above the 5-year average.
More importantly, storage injections have been below the 5-year average for 11 consecutive weeks and this trend is set to continue. Gas storage could end the refill season on November 1st at approximately 3,500 bcf. This level of storage heading into the winter heating season supports substantially higher natural gas prices.
2. Demand Continues to Strengthen:
According to the EIA demand for the first 6 months of 2010 was approximately 4.3% greater than the first 6 months of 2009.
Given the strong prices for coal this year, many utilities have stepped up their purchases of gas to run their usage of their natural gas fired power plant fleet.
Additionally, despite the weak economy in the U.S., industrial demand for natural gas has is higher this year compared to 2009.
Also, as we head into the winter heating season, demand for natural gas always picks up and should we have another cold winter storage could be drawn down very quickly.

3. Oil/Gas Ratio is Bullish:
While oil and gas on an energy equivalent basis should trade at a 6:1, the two commodities currently trade at approximately 19:1. Many natural gas focused exploration and production companies have turned their attention away from natural gas and towards oil. Chesapeake Energy (NYSE:CHK), the most active driller of shale gas wells in the U.S., has dramatically reduced its natural drilling in favor of a dozen new oil focused projects. Other companies have pursued similar paths.

4. Production Starting to Roll Over:
Monthly U.S. natural gas production which showed production fell 1.2% from May 2010 to June 2010, Due to falling production in the Gulf of Mexico, which accounts for nearly 11% of U.S. production, and several big producing states like Texas, Wyoming and New Mexico, overall U.S. production is headed downward for at least the next two years. Production growth from shale plays can no longer offset declines from the Gulf of Mexico and conventional areas.

5. Pressure Pumping Chokepoint: Due to increased demand for fracture stimulation services from the nearly dozen unconventional oil and gas plays currently under development in the U.S. and Canada, many operators are now having to wait weeks and even months for fracturing services. Once gas prices pick up and operators step up the pace of natural gas directed drilling, limited availability of fracture stimulation services will keep U.S. gas production from reversing its recently begun downtrend.

6. The forward curve for natural gas prices is much lower this year, which is to say the futures price for gas in 2011-2014 are lower than they were last year, this is bullish because it means producers can’t hedge big profits. It has also helped create the huge negative sentiment around natural gas prices, which we believe to be bullish.

On the negative side:
1. Producers are still being forced to drill to keep/earn land leases

2. Which is causing a continuing high rig count

3. And to pay for all this in the face of low cash flow, several large natural gas producers have formed joint ventures with big international companies, oftentimes National Oil Companies (NOC). This is BIG free money for these cash starved producers, and gives them the ability to keep drilling in the face of low prices.

4. Producers are now choking back production on prolific horizontal wells, reducing the steep (and highly publicized) decline rate of production in shale gas plays

5. Increased LNG capacity in both eastern Canada and the eastern US (though Liquid Natural Gas has been a non-factor in the North American market this year, and supply has been soaked up by Japan, Taiwan and China).

6. ETF (UNG-NYSE) buying continues to support prices. If low prices are the cure for low prices, investor buying in natural gas ETFs doesn’t help.

One of the last points for investors to consider, and this is neither bullish nor bearish, is that large commodity producers should not be relied upon as great gurus of their own pricing. In the last decade, some of the largest uranium, copper and gold producers, were caught completely by surprise when their commodity price spiked upwards, and were saddled with highly unprofitable hedges for years, at great cost to their shareholders.

The market will tell us within 60 days or less if the large seasonal run in natural gas prices will happen this year. We will be watching very closely.

With the fundamentals for natural gas greatly improved over the last couple of months and investment sentiment towards the commodity and gas weighted equities very negative, contrarian investors may consider getting positioned for a sharp rebound in gas prices.


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The “Secret” – and More Profitable – Sector of Natural Gas Stocks: Why NOW Is The Time to Buy Them

From guest analyst Keith Schaefer

This is what I call the “shopping season” for natural gas stocks. And even though I’m a longer term bear on natural gas, there is one part of the natural gas market that is not well known, I think mis-understood, and potentially mis-priced. As a result, I think it could make me money this year, and I think now is the time for me to be buying this little subset.

The reason for these purchases NOW is that every year, summer is the weakest time of the year for natural gas and sets up an annual trade for natural gas stocks, buy in June-August, sell in December-January when North American heating demand should have natural gas trading at its year highs.

Last year gas stocks languished badly through the summer, forcing fire sales on assets and it took every bit of goodwill the bankers and producers (in Canada) had for each other for some of these companies not to go bankrupt. But September 2009 saw a large seasonal jump in natural gas prices, they roughly doubled from $2.50/mmcf to $5 in January 2010, despite fundamentals remaining poor. And there was a great 4 month trading rally.

However, natural gas prices in the US and Canada actually turned up last week, enough to get the market excited. I see that the market wants this trade to work so desperately. I am not bullish intermediate or even long term on natural gas, so I expect that if there is a rally in gas, it will just be a traders rally. But like I said, last year gave investors a fantastic seasonal rally in natural gas stocks, as long as you sold in January, the seasonal high.

As a trader, natural gas does have some positive things going for it besides seasonality:

1. Technically, it had a minor breakout this week. The 28 week moving average for natural gas this week was $4.52. This is just my sense but as the price neared that level, more speculative fever came into the market that it would break through this level, and when it did, natural gas got a pop. And the Canadian market followed suit in sympathy.
2. The market is clearly willing to bid natural gas up on weekly injections that are only a bit smaller than last year.
3. It’s possible that at some point in the coming weeks the cumulative amount of gas going into storage will slip below last year, and the market could take that as a bullish point to move up the gas price. US gas is only about 2% above last year’s storage levels at this time. (See chart below).
4. And US gas prices will certainly get an emotional boost whenever the first hurricane is named.
5. Coal prices are trending higher, making natural gas more competitive in some areas.
6. US gas demand is up year over year and crude inventories are declining.
7. The blowout of a US gas rig in Marcellus shale could bring in new drilling regulations increasing the cost and time to get wells into production.

So I’m going to establish some small starter positions in producers in one particular subsector of the natural gas market – that is potentially mispriced by the market. All boe (barrels of oil equivalent) are not created equal.

Now, as usual with the stocks in my portfolio, these companies also have large undeveloped land packages, and are low cost producers. I’m not making any big bets yet, but subscribers will see where I’m going and can decide their own comfort level and timing.

In my next article, I’m going to tell you what this little known sector is, and why these particular natural gas companies are so much more profitable than their peers.

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Determining Oil & Gas Valuations

How do valuations get set for oil and gas companies? I ask because I’m seeing very fast rising valuations in the junior and intermediate oil sector that I cover. I have seen junior oil producers valued at $200,000 per flowing barrel recently, more than triple the peer group average.

Industry statistics concur. A December 24th report by Peters & Co., a Calgary based securities firm that is an oil and gas boutique, showed that the average purchase/sale price for oil weighted production in Q4 2009 was $100,000 per flowing barrel. This is up more than 50% from the Q3 valuation of just over $60,000. (Oil and gas equivalent is the way the industry puts the two commodities into one valuation, usually at 6:1 ratio of gas-to-oil).

The report showed that valuations for natural gas weighted purchases also jumped up more than 50% in Q4, from $35,000 per flowing boe to $54,700. These numbers have an immediate impact on junior and intermediate stocks across the board, as you’ll read.


(There are several ways to value oil and gas companies, but I find the price per flowing barrel to be the simplest. It’s easily calculated: market cap + debt (or minus cash) divided by the daily production level of the company, in barrels per day.)

What is driving these fast rising valuations? It’s

1) an increasing oil price and

2) improving technology – especially multi-stage fracking – that is allowing producers to retrieve more oil and gas, more quickly, in each well. This increases cash flow which increases stock prices.

3) Lower risk oil reservoirs—especially with the new “tight” oil and gas plays—drilling success rate is often 95%-100% now.


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Cardium Oil Play Valuations Setting Up Big Year for M&A in 2010

The new Cardium oil play in Alberta is rapidly approaching the stature of Saskatchewan’s famous Bakken play, and this is very good news for investors in Canada’s junior oil and gas sector. The four year old Bakken play has created huge shareholder wealth for investors, as companies like Crescent Point Energy and Petrobank bought out junior after junior after junior to increase their land base and production profile.

The same thing is now starting to happen in Alberta’s Cardium play. And valuations (read: stock prices) are getting much richer, much faster than what happened in the Bakken. As an example, TSX listed Result Energy is a Cardium focused play that was just taken over and re-capitalized by the management team from TriStar Oil and Gas, a Bakken play that itself was bought out in August 2009.

Brett Herman and his TriStar team announced several acquisitions immediately, and one Canadian analyst estimated they paid $275,000 per flowing barrel for them. As comparison, the average Canadian listed junior trades at about $60,000, the intermediates at $71,000, and if it’s a natural gas weighted producer, it can be as low as $30,000. Even the leading juniors in the more profitable Bakken play – Painted Pony Explorations would be a good example of this – trade at $140,000 per flowing barrel.....Read the entire article.


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Oil Stock Valuations Increasing....and Not Just From Higher Oil Prices

I have noticed valuations in the junior oil sector creeping up, sometimes to the point where I have to blink. But it’s not just the increase in the price of oil this year that has driven up valuations. Technology is increasing how much oil or gas companies can produce from a well in a day, and in the overall amount of oil or gas they can recover from a given formation, essentially how fast and how much they produce. Technology is giving investors more leverage to the price of oil.

This is especially true of the hot new “tight” plays that are being developed in western Canada and the US, where I have been focusing the subscriber portfolio.
(“Tight” just means the oil is held in rocks like shale or sandstone, as opposed to the more conventional type of looser sands that hold hydrocarbons, and from which almost all the world’s production has come from in the last 100 years.

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As an example of valuations increasing, in August 2009 TriStar Oil and Gas merged with Petrobank’s Canadian operations, and was valued at about $109,000 per flowing barrel, which was almost double its average peer group valuation at the time. They were a 20,000+ bopd producer, and the larger the company, generally, the larger the valuation.

But now I am seeing junior producers one tenth that size, 2000 bopd or even 1000 bopd producers, get valuations in the $90,000 – $110,000 per flowing boe (barrels of oil equivalent) range. Most of these are in the 3 year old Bakken play in Saskatchewan, or the several months old Cardium play in Alberta. Several Canadian brokerage firms have issued reports saying these two oil plays have the best economics of any in Canada.....Read the entire article.

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How To Invest in Oil & Gas Stocks – Part II

What are the questions that educated investors ask in oil and gas?

Last month I gave investors 10 questions they should be asking management teams, or searching for on the company website, in a recent article. They were basic questions, and you can read them here. After those first 10 are answered, you know how much production a company has, how fast they’re growing, how much cash or debt they have etc. But if you’re still not sure if you want to invest in the company after all that, or just want to know more…what are the right questions to ask? What pitfalls or opportunities might an investor uncover?

1. Decline rates are something management teams don’t really hide, but don’t really talk about either. Every well has declining production until it’s uneconomic. The new shale gas plays often have 85% decline in production in the first year. Tight oil plays (Bakken, Lower Shaunavon etc) have 75% initial decline rates. Decline rates are increasing over time now as the industry drills deeper and tighter plays. Ask management what the initial decline rate is, both company wide, and specifically on their main, big play that they believe will be the growth engine of the company. Then ask what the decline rate flattens out to it’s usually 20-30%.

Why is this important? Because many investors, when forecasting growth, use the only public numbers given for a well – the ones in the press release. Most companies have a production decline graph in their powerpoint, but few actually say what the production levels in the wells in the area flatten out at.....Read the entire article.

What Really Caused The Oil Price to Collapse?

What really caused the oil price to collapse? Philip Treick says it’s not what everybody believes. Conventional thinking believes the oil price collapsed because of the dropping global demand from a world wide recession sparked by the US sub-prime fallout. Treick, founder and principal of Thermopolis Partners LLC, has a slightly different view. He explains how everything – the oil price collapse, the global economy collapse – started with an unannounced policy change in China towards its currency. More importantly, he uses his theory to tell investors what to look for in the coming months and years that will guide us in finding profits. His charts, reproduced below, provide a sharp image to back up his comments.

KS: Most people think the collapse in the US sub prime housing crisis caused the global recession. But you don’t. Why is that?

Treick: Well, I point out if you look at mortgage equity withdrawn in the United States – that peaked in late 2006. Identifying that point in time as the top of the credit cycle, our credit based economy had already started to contract prior to the collapse in oil and copper. So one can’t say that the credit contraction was the sole cause of this collapse in commodity prices, because it was already in full force. It definitely contributed to it, but it wasn’t the sole cause. Something else had to contribute. That something else was an unannounced change in currency policy out of China.....read the entire article, interview and charts.

Following the Jockeys in the Oil Patch

You’re only as good as your last deal.

Buy the jockey, not the horse.

That’s what came to mind today when I read that Eagle Rock Explorations (ERX-TSXv) was bringing in a new management and re-capitalizing this 550 boe producer operating in Alberta and Saskatchewan. Half the new group is from Crescent Point Energy (CPG-TSX) the most highly valued intermediate oil producer on the TSX. That’s a great calling card. The other half comes from Wild River and Prairie Schooner, two junior producers that were build and sold earlier this decade.

And the Eagle Rock stock showed the worth of this team, quadrupling to 32 cents on huge volume of 12 million shares – 22% of the stock outstanding. Many investors follow this strategy, find successful management teams who have built and sold companies before, and follow them on every deal. So in my next issue for subscribers, due out in the first couple weeks of October, I will profile three new young companies that are the new ventures for three highly successful management teams in the Canadian oil patch.....Read the entire article