How Large, New Shale Oil Formations around the Globe Are Estimated

By
Keith Schaefer
-
0

How much oil is there in newly economic shale oil deposits around the world?

We won’t know that for 50 years or more, but it’s not stopping energy companies from publicizing some extremely large prospective resource estimates – like, tens of billions of barrels of oil – with almost no data to back it up, and only one similar play on earth with any operating history.  A prospective resource is an estimate of the amount of oil that might be the recoverable volume of oil in an area.

Investors have certainly made tens of billions of dollars in profits on that one (and only producing) shale oil play – the Bakken in North Dakota/Saskatchewan.

And investors need to understand the risks that goes along with the big numbers they read, says Robin Bertram, Vice President at AJM Petroleum Consultants, one of the Big 4 reservoir engineering companies in Canada.

“They need to know what a lot of the contingencies are in shales and unconventional plays, and not just get excited about big volumes.  When we talk about prospective resources we have to point out that even though the numbers look big and promising, you could end up with significantly less than the estimate.”

All that Bakken wealth creation has both the industry and investors very excited about finding huge new shale oil plays around the globe now.

And they are being found.

TAG Oil (TAO-TSXv) has an independent report that says the “best case” resource estimate on their shale oil play in New Zealand could be 12 billion barrels of oil with a “high case” of 37 billion barrels – and that’s only on a fraction of their land.  There are three historical drill holes here. Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.

The “best case” is also called “P50,” or oil resources that have a 50% chance of actually being in place.

Toreador Resources (TRGL-NASD) has an independent report that says the Paris Basin in France where it is operating has generated 100 billion barrels of oil, 12 billion of which could be on their property.  There are 22 drill holes of consequence here.  Oh, and geologically it looks like the Bakken, and they plan to drill it this year.

PetroFrontier (PFC-TSX) has an independent report that says it could have 26.4 billion barrels of oil in its “best case” at the Arthur Creek shale play in Australia. There are 15 historical wells which may show the oil charged shale.  Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.

Do you see a theme developing in how companies are promoting their early stage projects?

Analysts are getting in on the big numbers too: one analyst said TAG, then $5, could have a Net Asset Value (NAV) of $224 a share in an “unrisked” valuation, which means if they hit oil on 100% of their wells.  Another analyst said PetroFrontier could have an NAV of $168/share “unrisked.”  Most intermediate sized oil producers in this energy bull market trade at 1X NAV or a bit better.  None of these analysts expect anything close to 100% success, but it’s a figure that shows the size potential of the play.

All these big numbers – in potential resources and potential stock values – is causing some large speculative premiums to enter these stocks.  Toreador was trading as high as 6x its NAV recently; TAG trades at least twice its NAV and PetroFrontier is trading just under 3x its NAV.

Now, I own TAG and Toreador, and I don’t want readers to think I’m being negative – I just want everyone to  understand what they’re reading.  I WANT to invest in juniors that have an unrisked NAV many times higher than the current stock price.  That means if they hit on their exploration, the stock is likely to go A LOT higher.

Independent evaluators like AJM take many data points into calculating prospective resource estimates in the early days of a play – mostly from historical drill hole data and any core, that may be available.   There is the obvious estimated length and width, or aerial extent of the formation, and the “pay” thickness – how thick is the formation, and the Total Organic Content, which makes up the oil or gas, and the porosity of the formations – how much room is there between the grains of sand or rock.

All this data and more is given to the evaluator, and they also look at what other geologically similar deposits have produced (in these cases, there is ONLY the Bakken), and how much oil was actually recovered out of these deposits (the Bakken) to come up with an early stage prediction of the resource potential of the shale formation.

“Early in the development of a petroleum reservoir we could expect to see a very broad range of estimates of the volume(s) within the reservoir,” Bertram writes. “Understanding that there is a high level of uncertainty in the early life of a reservoir, it would make sense that companies have large volumes in their resource estimates.  But investors need to be equally aware of what the minimum volumes could be, as those volumes are just as possible as the high volumes in the early life of a reservoir.”

Bertram says one of the questions that all evaluators wrestle with is – how far can you extend a discovered resource from a drill hole?  While these shale plays have shown themselves to be very consistent over tens of kilometres, they can also be patchy and it’s just a statistical guess that will get more refined each passing year with more data.  (Geostaticians in the mining sector do the same thing – how far can you extend the grade of the mineral around a drill hole.)

Remember, the very first shale play was the Barnett in Texas, and that only started producing about 12 years ago.  Getting oil and gas out of rock is the single largest and most important advancement in the energy industry since the age of oil began 150 years ago, and it’s still in its infancy.

What’s more, the technology that is liberating all the oil and gas from the shale – hydraulic fracturing, or  fracking – is still being improved upon every year.  So that creates a moving target for evaluators trying to guess a prospective resource.

Bertram has written a slightly more technical and comprehensive article on some of the factors surrounding this issue and well worth the read.  One of my favourite topics was – how do you quantify an “undiscovered resource.”  It’s a great read and a quick read and here is the link (I read all AJM’s articles):

http://www.ajmpc.com/our-perspective/our-blog.html

– Keith

Want to learn more about investing in junior oil and natural gas stocks? If you have a Facebook account, just “like” this article and a hidden link to Keith’s 10 page how-to on oil and gas investing will appear:

[facebook-like id=”1″ ]

Oil Exploration in Peru

By
1940bkg
-
0

When it gets really cold at home we like to dream of far-off and warmer places we can go to look for oil and gas.

In that regard, Peru is emerging as a real hot spot for Canadian junior exploration companies.

In fact, almost all of South America is hot (literally and figuratively) right now. The International Energy Agency pegs Brazil to be the fastest growing non-OPEC producer after Canada, and Colombia has become a household name after the government there took steps a decade ago to attract foreign investment and reverse production declines at its major fields. In fact, Ecopetrol, the Colombian state oil company has undergone a complete transformation and now trades in both Toronto (ECP-TSX) and New York (EC-NYSE).

In that sense Peru is where Colombia was a decade ago. It has been an oil-producing country since the late 1800s and has seen its oil industry suffer from a lack of investment.

According to the U.S. government’s Energy Information Agency, the country’s oil production fell by half in the two decades from 1984 to 2004 — to a little less than 100,000 barrels a day — and has since recovered to about 150,000 bpd according to the most recent statistics.

In the same period the country’s consumption has skyrocketed as it strives to improve the standard of living of its people. It became a net oil importer in 1992, but it’s not for lack of oil.

According to the 2008 BP Statistical Energy Survey, Peru had proved oil reserves of 1.097 billion barrels at the end of 2007 or a little less than one per cent of the world’s reserves.

It’s also relatively unexplored and offers excellent wildcat potential. American majors like Hunt Oil have had good exploration success and the government is courting Asian investors like South Korea to build roads and infrastructure in exchange for attractive oil concessions.

Many South American countries have governments that make it difficult to operate or actively discourage business, but Peru has made efforts to improve transparency. Everyone knows how volatile Venezuela’s Hugo Chavez can be, and Ecuador and Bolivia have left wing governments modeled on Chavez’s Bolivar socialism.

Following its sovereign debt crisis a few years back, Argentina has a cap on oil prices, though the geologic potential is attracting a lot of attention. Canadian brokerage firm Wellington West Capital Markets just hosted an energy conference the highlighting the opportunities and some of the Canadian juniors doing business there and Peru is definitely in the same league.

According to Business Monitor International, which ranks country risk, Peru holds third place behind Colombia in its composite Business Environment (BE) ratings, which combine upstream and downstream scores.

While Peru’s absolute resource base may be small, BMI says its output growth outlook is excellent, reserves-to-production ratios (RPR) are above the regional average, and licensing terms are “particularly attractive.”

Peru also has a strong position in BMI’s downstream Business Environment ratings, ranking fourth, above Mexico and is on par with peers like Trinidad.

Most financial advisors will tell you that emerging markets offer more exposure to the global economic recovery (if and when it ever arrives) and with international oil prices nearing $120 a barrel, high risk-high reward exploration is an attractive proposition.

Compared to the Middle East and North Africa, South America is a relative haven of tranquility and countries like Colombia have been extremely successful in attracting the attention and investment capital of Canadian juniors like Petrominerales (TSX-PMG) and Petrolifera (TSX-PDP). Peru seems to be the next logical extension for these companies looking to expand beyond their regional base.

International majors have also taken note. Spain’s Repsol is a newcomer and Calgary-based Talisman Energy (TSX-TLM), which is also a major player in Colombia, has spent more than $70 million in Peru in preparation for drilling a series of exploration wells over the next few years.

Even Ecopetrol has announced $2.5-billion joint venture in Peru with the aim of quadrupling production over the next seven years to 50,000 bpd. If successful, it would amount to a third of the country’s overall output.

But several smaller Canadian players have been active too, with a mix of both dazzling and disappointing results.

Calgary-based Gran Tierra Energy (GTE-TSX) last week announced that its latest  Kanatari-1 effort came up dry, sending its shares about 10 per cent lower.

Despite the discouraging outcome Gran Tierra still has three more high-impact wells in the queue that could move the needle in terms of its share price. Despite the setback, the shares have still managed to double since last summer and many analysts still consider it a buying opportunity.

Other Canadian firms active in the region include Canacol (CNE-TSX), Orion Energy (OIP-TSX) and Veraz Petroleum (VRZ-TSX) which Calgary-based FirstEnergy rates a “strong buy.”

Veraz has non-operated interests in three onshore blocks in Peru along with a substantial amount of two-dimensional and three dimensional seismic data to bring to the table.

Following a farm-out deal with Petrominerales, the company has had to double its outstanding float to to come up with its share of development costs via an equity issue, but analysts including FirstEnergy said it wasn’t as dilutive as first feared.

The companies plan to drill three exploration wells in the second half of the year, any one of which could have a meaningful impact on its share price.

Veraz is currently trading in the middle of a 52-week range of 50 cents and $1, so its speculative rating is probably apropos.

There you have it: Peru, an oily basin with more than a century of production, some world-class exploration prospects and a diversity of large and small companies staking out prospects. Not to mention wonderful beaches and some tropical weather we can only dream of back home.

Happy hunting.

– OGIB Research Team

How the “Reserve Report” Can Tip Investors off to Junior Oil Stock Profits

By
1940bkg
-
0

Editor’s Note:  In my last story I explained how lower gas prices could affect reserves, as reserve reporting season is underway.  Below, here’s a look at how some junior oil companies might fare.
– Keith

Part 3 of a 3-part Series

Reserves redux:

Last time we talked about reserve reports and how natural gas producers could have their credit lines and valuations cut because of the low carrying value of their reserves.

This time we’re going to talk about how the same phenomenon is going to have the entirely opposite effect for oil producers, especially heavy oil that makes up the majority of the crude stream coming out of Western Canada.

If you’ll recall, we talked about how oil and gas companies have to file an inventory statement effective Dec. 31 that details the net present value of their reserves based on future projected cash flows (which in turn are based on independent price assumptions for the next 12 to 24 months).

Then we talked about how any drastic change in the valuation of those reserves was akin to lowering (or increasing) the net worth of your house against the balance of the mortgage on your home. We also talked about how a 20 per cent decline in the price of natural gas was going to bite into the NAVs of several high profile gas producers and possibly send them scrambling to shore up balance sheets, by jettisoning unprofitable assets, selling equity and paying down debt — or else.

The good news is that oil-weighted producers are going through the same exercise with a different conclusion. The really good news is that most of them are going to see their net asset values and credit lines increased, given where crude prices have been for the past 12 months and given where they’re likely to stay thanks to all the trouble in places like Libya and Egypt.

And the best news of all is that it means we’re probably looking at a round of upgrades — and higher stock prices — for the entire sector. This, even though the rising Canadian dollar essentially wiped out any oil price gains in 2010; Canadian-denominated crude prices were actually down about two per cent year over year.

But nobody wants to hear us crash the oil price party with mundane things like currency valuations. Much better to party like it’s 1992 — the last time the Middle East looked like it was set to explode. Back then, if you’ll recall, Saddam Hussein had oil prices pushing the then unheard-of heights of $75 with George the Elder banging at his door in Desert Storm I.

Then, as now: peace sells. The problem is that nobody’s buying.

According to a recent report by Peters and Co., the oil-weighted guys are going to be flush with cash which will drive consolidation within the junior heavy oil space. The start-up of Keystone into the U.S. Gull is going to change the market no matter what happens in places like Cairo or Tripoli.

The North American market is too localized to really be affected. The upshot is that tensions in far off places like Libya and Egypt only increase the role for Canadian oil, as the U.S. tries to diminish its dependence on Middle East crude.

Based on geography alone, Canadian producers hold an almost insurmountable advantage.

But before we go any further, a note of caution. The geopolitical risk trade is the worst trade you’ll ever make. Just because the world seems to be going up in a hand basket doesn’t mean oil is going to hit $150 any time soon. Or stay there for more than a few weeks if it does. Don’t get sucked into what MIGHT happen. More often than not, it doesn’t happen and you’ll be left holding the bag.

Think about WHAT’s going to happen when everything settles down.

Take some time, dig into the financial statements and look for that reserve report. Then take the forecast price of oil used in the financial statements, and knock it down 15 or even 20 per cent.

Anybody that’s showing profits at $50 a barrel is going to be doing just fine at $70 or even $80. Assuming prices do spike above $100 you’ll be in a good spot to reap big rewards — just don’t be banking on the sky to fall for it to happen.

A couple names to consider: Black Pearl Resources (PXX-TSX). Here you’re getting proven management in addition to oil price exposure. These were the guys behind Blackrock Ventures before it was sold to Shell for mega-billions a couple years ago.

Black Pearl is a new stage entrant, but they’ve got some good production history — 7,700 barrels a day and rising — and a lot of expertise working their main assets near Peace River. But a big chunk of their meteoric rise in stock price over the last few months is vastly (and fastly) growing reserves (sense a theme emerging?).

In January, the company released its 2010 reserve reconciliation showing they added 7.5 million boe in reserves, but added almost 750 million barrels in a more risky category – contingent resources – and about 98 per cent of it oil. That’s a staggering sum; we’re talking resources to production of almost 300 years at current rates.  Most of these resources come from its Blackrod SAGD heavy oil project (Steam Assisted Gravity Drainage).

As CEO John Festival said in the news release: “Our objective over the next few years is to get these barrels reclassified from the resource category to reserves.”

In doing so, the company will be adding real value that will inevitably translate into higher share price multiples. Think about what that family room addition will do to the resale value of your house.  And like I said, this management team has sold a company before for a lot of money.

Likewise, consider Twin Butte Energy (TBE-TSX). They started off as a gas company but quickly shifted to oil around 2006 when it became clear the Katrina Premium on gas prices was just a figment of the imagination.

Earlier this month the company reported a23 per cent increase in total proved plus probable oil and gas reserves, which rose by 6.9 million barrels of oil equivalent to 37.5 million boe.  That reserve addition was nearly quadruple 2010 reserves it produced.

Finding, development and acquisition (FD&A) including future development costs came in at $10.48 per boe on a proved plus probable basis and $14.28 per boe on a proved basis, which is right up the fairway and a chip shot to the green as far as industry-wide performance goes.

In other words, these guys will do quite well even if oil prices come down from current levels — which they probably will, if past events like the first Gulf War are any guide.

But the increase in reserves combined with the low operating and development costs will ensure a steady stream of cash and higher valuations for you, dear investor, dictators be damned.

It may be the end of the world as we know it, but as long as you’re long on oil, we’ll all be fine.

– Keith Schaefer
Publisher, the Oil & Gas Investments Bulletin

Editor’s Note:  Ever wonder how companies can estimate tens of billions of barrels of oil on their property before they drill it?  I explore that here in this report: How Big Shale Formations Get Estimated – All Over the World.

The first two parts of the above series:

Part 1: How To Use the ‘Recycle Ratio’ To Invest in Oil & Gas
Part 2: Unconventional Oil & Gas Plays: What I Look for in the “Reserve Report”

 

Unconventional Oil and Gas Plays

By
Keith Schaefer
-
0

Part 2 of a 3-part Series:

The new “tight”or “unconventional” oil and gas plays being discovered all over the world are so different from conventional production that independent reserve evaluators face new challenges when calculating reserves.

That was one of the findings that came out of a conversation I had with Doug Ashton, Vice President of AJM Petroleum Consultants in Calgary, Alberta.  AJM is one of “The Big Four” reserve evaluation companies in Canada.

It’s the annual reserve reporting season for energy producers, where everyone has to say how much oil and gas they have found in the last 12 months, and what it cost to find it.  Companies like AJM (and Sproule & Associates, GLJ Petroleum Consultants and McDaniel and Associates) are basically appraising the asset base of the company… and deciding what is economic at current energy prices.  The reserve report is like the balance sheet.

This document is so important I wanted Doug to help me understand how the independent firms like AJM estimate (because that’s what it is) how much oil and gas a company has in the ground.

And one very interesting thing that came up was how the new tight sand or shale plays – which is what many of the junior and intermediate producers are chasing when they talk about ‘resource plays’ – are creating challenges for reserve evaluators.

That’s because the average well profile on resource plays is so different than conventional wells.  The dynamic duo technologies of horizontal drilling (HD) and multi-stage fracking (MSF) are used to create a lot more contact between the well bore and the oil/gas formation.  This often makes for a higher Initial Production (IP) rate than conventional wells in western Canada.

But history is showing that those IP rates fall off quickly – that’s called the decline rate.  The decline rate on tight plays is initially very steep and then flattens, while most conventional wells exhibit a more stable decline throughout their entire life.  Everything is so different with resource plays that they present a challenge to reserve evaluators.

“For these (tight) resource plays there are not a lot of analogies out there,” Ashton says.  “You’re trying to build a “type” well with data that’s less than 4-5 years old.  In a reservoir with low permeability, it may take 4-5 years to get a stabilized flow rate, so it makes it difficult use the result of other wells to predict and estimate reserves.”

Investors forget that history is short on these plays.  We all invest in tight oil/gas plays now, but HD & MSF have only been opening up tight sand and shale formations for 12 years, starting with the Barnett shale gas play in the late 1990s (and it’s not analogous to western Canadian plays).  And it has really only been 4-5 years now since HD & MSF have gone wildly commercial in many different basins.

“So we try to be conservative in calculating reserves for resource plays,” Ashton continues.  “That “conservative” word doesn’t always make our clients very happy – while both the evaluator and the client want the most realistic type well, sometimes it takes a bit of discussion to agree on what realistic looks like.

“There needs to be a lot of caution exercised by both the evaluator and the client.  If the production on the producing wells doesn’t follow the type well, the proved undeveloped and probable reserves could be at risk of being mis-stated.”

I asked Doug to walk me through how reserve evaluators do their job each year for their junior clients:

“We start by going through all their ownership information to determine their working interest and other royalties. Companies in Canada are required to report their working interest share of recoverable reserves.

“Step Two is figuring out what the company’s operating costs have been in the past year.  We use that to forecast future operating costs.  By definition you can’t have a reserve unless it’s economic.  If you have a producing well and ‘op costs’ have increased in the past year… it is possible that increase could render your reserves uneconomic.

“Step Three is figuring out reserves, which is the most time consuming part of our process.  Early on in the life of wells and pools we use “volumetric assessment,” which is a lot of geological work, where we determine the geometry of the reservoir, net pay (thickness of reservoir-KS), porosity, water content, pressures and temperatures.

“We then use that data to calculate the Original Oil or Gas in Place volume and then, based on what we think are good analogies we build our type well and estimate a recovery factor for the reservoir – which ultimately should result in a reasonable production profile. This is our predominant evaluation method for unconventional reservoirs.  We start our evaluation at the well level, then consolidate the results to the field level, and then the company level.  We look at each individual well.”

I asked how much time the reserve evaluators are in the field checking out wells.  He said they essentially spend  100% of their time in the office and that everything they need is shipped into the office electronically.

“The reality is that we’re working with data, so on-site visits, especially in Canada, don’t really add any value to the process. Some international clients want us to look at wells, often because the data isn’t as readily available, and we will do that if required,” says Ashton.

He added that each reservoir engineer uses their own price deck to determine what is economic – and these can vary, but not by a lot (to a regular investor like me).

Interestingly, these reports aren’t public documents.  But the law – in Canada it’s called National Instrument 51-101 – says companies must disclose a lot of the information that is in the reserve report.  Most companies summarize it in a press release. The hard-core investor can go to www.sedar.com, the regulatory electronic filing database for public companies in Canada, and find all the required-to-be-public data in the Annual Information Form (AIF).

I asked Doug what he would suggest that retail investors should look for in the press release that outlines the reserve report highlights.

There are different types of reserves, including
1.       Proved developed non producing
2.       Proved undeveloped

These reserves both need more capital to get into production and the companies have to disclose how much capital that requires, which is called “future development capital” or FDC.  Sometimes – but not often – you will see a company add reserves but not add in the FDC.  This can be tens of millions of dollars, so by not having it included, it could be misleading for investors.

Ashton added that investors should check what portion of proved reserves are in production vs undeveloped non producing.  The higher percentage of reserves that are producing, the less risk there is – so if only 25% of reserves are producing then a lot more capital is needed, which is more risky.

But as an investor, I say the flip side to that is – the more undeveloped reserves, the more upside there is in the stock, which should be realized as those assets do get into production.

Either way, you get all the data from the reserve report.

– Keith Schaefer
Publisher, the Oil & Gas Investments Bulletin

Part III — The “Reserve Report” — How some junior heavy oil companies are benefiting greatly from these reserve reports… and how it can tip off investors to profits in the junior oil space.

Part 1: Using the ‘Recycle Ratio’ for O&G Investing

How To Use the ‘Recycle Ratio’ To Invest in Oil & Gas

By
1940bkg
-
0

Dear OGIB Reader,

Over the next few weeks, oil and gas companies are going through a special sort of reporting period… and it’s going to have some important ramifications for stock prices — especially for junior gas producers.

Here’s why:

At the end of each calendar year, every single junior energy producer is obliged to prepare an independent reserves report — essentially a snapshot of the value of their inventory of oil and gas in the ground as of Dec. 31.

Oil and gas companies produce away their main asset each year –- reserves — and have to replace them or eventually go out of business. It’s a fact of life. Valuations, debt lines and ultimately stock prices flow from this single piece of paper, which is how you figure out profitability.

The oil and gas business is not about how fast you can get it out of the ground. Big IP rates can give a stock a quick pop, but the real money wants big reserves that they can rely on to provide LONG-TERM cash flow that provides funds for reinvestment. The market will pay more for bigger, less profitable reserves than smaller, highly profitable reserves.

This is important for a few reasons, but especially because it gives a glimpse into a company’s finding and development costs, or F&D as the industry calls it.  This measures a company’s ability to replace production at low cost. How good is management at finding oil or gas?  And how good are they at getting it out cheaply, so there’s lots of profit left for shareholders?

The reserve report is also the first clue into a key valuation tool called the Recycle Ratio – which is profit per barrel (the industry calls this the “netback”) divided by costs per barrel – the F&D.

If you spend $20 to get a barrel of oil out of the ground, and get $60 profit for that barrel after all costs, then you are recycling your money 3:1 – hence the name ‘recycle ratio.’

The Recycle Ratio is only easy to find if you know where to look.  It’s usually in the middle of the quarterly financial document called the MD&A – Management Discussion and Analysis.

Most junior producers in Canada are gas-weighted, so this year, there’s a lot to chew on. The release of year-end reserve reports will highlight the growing chasm between the oily haves and the gassy have-nots, especially considering gas prices fell by 20 per cent in 2010, on top of a 25 per cent drop the year before.

According to Dundee Capital, lower gas prices means that several gas-weighted juniors could see their reserves reduced.  Reserves by definition have to be economic at a certain gas price, and obviously reserves will be less with a lower gas price.

Just this week, junior gas weighted producer Orleans Energy (OEX-TSX) dropped 1.34 million boe in reserves because of low gas prices, adding that their reserves dropped 35% year over year.  They also announced they were selling their deep mineral rights for $10 million on the same day.  The stock fell off a cliff, dropping 17%.

Energy producers use a lot of debt, and the banks will lend them money against their assets – their reserves.  Lower reserves will mean a lower credit line – but what if their debt is already above their newly reduced credit line?

It’s like having the value of your home be worth less than the mortgage – your asset value is less than your debt.  Then the bank forces you get enough collateral by selling assets or raising equity to pay down debt (which dilutes net asset value per share) or go out of business.

Because the reserves value is calculated at year-end, which just happens to be the coldest part of the winter heating season, the gas guys have been lucky the past couple years. But not even the coldest winter in a decade could help them this year– the going rate for gas at Dec. 31 was barely four bucks and change.

This only serves to highlight what a tough game the gas business has become. At the end of the day, abundant cheap supplies are definitely good for consumers, and probably the economy as a whole.

But for producers, it’s a tough way to make a living.

You can still make money in gas but it means you have to be the lowest cost producer. He who adds the most reserves the cheapest will probably weather the storm and come out better for it. That what doesn’t kill you definitely makes you stronger.

Dundee says names to watch (and possibly avoid, depending on your point of view) include top ranked picks like Orleans Energy Ltd. (OEX-TSX) (good call Dundee) and Open Range Energy Corp. (ONR-TSX) that face the greatest risk of having credit lines slashed. Terra Energy Corp. (TT-TSX) and DeeThree Exploration Ltd.(DTX-TSX) are two more names with attractive assets that have wound up on Dundee’s watch list.

All these companies are desperately trying to shift to oil prospects, and rightly so because they’re the most gas-levered names in the business. The oil industry is a fashion industry for investors, after all. But it’s tough to turn on a dime and by the time the gas market breaks it might be too late to prevent these guys from being bought out – cheap.

We say pay close attention, because these are the names that are going to be the prey for consolidators. Encana’s multi-billion dollar deal with PetroChina shows even dry gas assets still have substantial long-term value, but markets can stay irrational longer than you can stay solvent.

This is a nice way of saying that any gas-levered company operating in Western Canada is ripe for takeover, especially for deep pocketed majors with time — and money — on their side.

Some juniors in the OGIB portfolio have been relatively strong performers, especially given where gas prices have been. But the trend is always your friend or worst enemy.

As always, timing is the key for investors trying to get ahead of a company sale/buy-out. Get it right and you could be looking at some attractive capital gains relative to (the newly reduced) net asset values when the predators start looking for some easy pickings. But beware. Jump in too early and you could be riding a slippery slope to the downside; wait too long and you could miss out all together.

But the reserve report will be the first clue.

by +Keith Schaefer

Part 2:  An Inside Look at Unconventional, “Tight” Oil & Gas Plays
Part 3: What the “Reserve Report” Can Teach Investors

 

Canada’s Junior Gas Stocks: The Surprise Performers

By
Keith Schaefer
-
0

It’s strange but true – some of the best performing energy stocks in Canada have been the junior GAS stocks.

And there is also an argument that the future may be brighter than previously thought for a select few gas stocks.

All these stocks have three things in common:

1.      They have core areas in the Montney formation that straddle the BC-Alberta border.
2.      Their wells are liquids-rich, i.e. high Natural Gas Liquid (NGL) count, or wet gas count – especially CONDENSATE.
3.      They hit big wells, and better understand the multi-zone potential of the Montney

In January Artek (RTK-TSXv) jumped 30% from $1.30 when it announced a well that was 1895 boe/d – including an eye-popping  1000 barrels a day of condensate, which gets roughly the same price as oil. And the stock has kept rising – now at $2.10

Cequence (CQE-TSX) almost doubled from $1.60-$3.10 per share in the last three months as it announced several Montney wells, including one well that was 8 mmcf/d (million cubic feet of gas per day) and 200 bopd of NGLs.

Painted Pony has gone from $6-$11 in the last few months not because of its great Bakken oil lands, but because of its Montney reserves, production and flow rates.  One of their wells flowed 13 mmcf/d, and all their wells had more than 20 bbl/mmcf – 20 barrels of NGLs for every million cubic feet of gas.

My own little favourite, Donnybrook Energy (DEI-TSXv) has gone from 23 to 70 cents on its Montney lands – a triple for OGIB subscribers (not many junior gas stocks can say that…).

These stock are popping up because the industry is still improving how well they frack this formation, and are continuing to get higher and higher flow rates.  But I think more importantly, the ENTIRE market is now getting just how profitable the NGLs, especially condensate, really are for these producers.

Condensate, or C5, as the industry calls it, is a very light oil, over 50 API, and has a ready market in Alberta as it is used to dilute the goopy, syrupy heavy oil from the oil sands, so it will flow in a pipeline.   As oil sands production increases, the need for condensate will keep its price strong power for many years.

An ‘Alternative’ Trade that Should Reward Investors for Years

 

Conventional water-based fracking has become contentious in many parts of the oil patch.

(So much so, in fact, that New York State has essentially banned the practice.)

That’s all changing, right now… thanks to one very unique, fast-growing company.

Learn all about its innovative fracking process — and how it should enrich investors for years to come — in this new video.

Doug Ashton, VP Engineering at AJM Consultants in Alberta just posted a great model at their website that shows how just a little condensate can go a long way to improving economics for gas producers:

http://www.ajmpc.com/ajmblog/133/Got-Condensate/d,blog_detail.html

 

Doug writes: “At AJM, we were wondering just how much of an impact condensate can have on the economics of a new well, so we ran a few test cases.

“First, we picked a play: the Montney in NE British Columbia and NW Alberta.

“Then, we built a type well: Initial rate, 4,500 Mcf/d. Ultimate reserves, 3.0 Bcf. The production for the well has been profiled to have a very steep initial drop, flattening to around a 20 percent annual decline after about one and a half years.

“Finally, we estimated capital and operating costs based on data in our in-house files, added some royalty incentives (assuming crown lands), loaded in AJM’s December 31, 2010 forecast pricing, and voilà:

“While even the “dry” type well shows fairly robust economics, it is clear that even a small condensate recovery can have a significant impact on the profitability of continued gas drilling in North America.”

(Their website, www.ajmpc.com, is a great resource of free information for the dedicated oil and gas investor – one of my favourite bookmarks.)

And it’s not just stock prices that are rising in the Montney – land values are going up as well.  The Montney generally runs 20-40 bbl/mmcf, but a new liquid-rich play at the bottom, the Duvernay shale (about 1000 m below the Montney), has been shown to have 75 bbl/mmcf and have OGIP (Original Gas In Place) of 5x what the Montney has.

The industry has since paid $800 million for land where the Duvernay is the focus.

Trilogy, Celtic Explorations (CLT-TSX) and Yoho Resources (YO-TSX) are now drilling the Duvernay shale at the bottom of the Montney, and this formation goes out across much of the play.   This consortium has found the Duvernay has 100 bcf of Original Gas In Place (OGIP) per section, compared to 20 bcf for the Montney.  So recoverable gas in the Duvernay could be 2-3x what it is in the Montney – across much of the play – and with twice the condensate content of the Montney.  Many juniors don’t have the $10 million per well to drill the Duvernay – but if it’s there under their property, whomever buys them out almost certainly will.

– Keith

P.S. Follow these links for more of my research on the Montney gas formation:

The Montney Gas Play: Here’s where the attention is shifting now

An Unconventional Gas Play Goes “The Full Montney”

Oil Service Stocks in 2011: What’s Pushing the Sector Forward

By
Keith Schaefer
-
0

Dear OGIB Reader,

Following is a story my research team put together on the oil field service sector, including what it is that’s driving the positive numbers… and two ways to play the momentum. Enjoy,

– Keith

————————————————–

Drilling levels in Western Canada are often a good barometer of the weather. And according to the Canadian Association of Oilwell Drilling Contractors (CAODC), January’s rig utilization averaged 66 per cent compared to 46 per cent last year… making it the best start since 2007.

That says two things:

First, it’s been a cold, cold winter, which is a good thing for service companies – the ground is rock hard and it’s easier to move rigs.

Second, it tells us the oil field service sector as a group could be in for the best year since the financial crash.

Likewise, the Petroleum Services Association of Canada (PSAC) on Monday increased its forecast 2011 well count by 500 wells to 12,750 compared to 12,000 or so rig released last year. While it’s a far cry from the 24,000 wells punched in 2006, the trend is moving in the right direction.

Typically drilling is overwhelmingly weighted to natural gas, but the interesting thing thus far in 2011 is that oil is carrying the day for only the second time in a decade (the first was in 2010) thanks to the application of horizontal drilling and multi-stage fracking technology.

Some third-party engineering firms in Canada and the U.S. are saying onshore conventional oil production could start rising again for the first time in 30 years. In the U.S., it already has, according to a report last week from the Energy Information Agency (EIA).

Analysts agree the renewed focus on oil is what’s driving the positive drilling numbers.

Despite a 20% drop in the number of new gas wells, Canadian brokerage firm Wellington West is forecasting a 30% increase in overall capital spending this year to more than $30 billion in Canada alone.

Like fishing and farming, drilling is a seasonal activity and it’s overwhelmingly front end loaded onto the first quarter, which can make or break the entire year. Wellington also pegs 2011 as the start of a multi-year “super-cycle” that won’t peak until 2013.

According to services analyst Greg Colman, that increased capex will mean a further 13% year over year revenue growth for his group of service stocks in 2012.

Most service outfits have already had some big runs – up anywhere from 75-100% in the last six months.

As a result, we’re seeing some big names get bigger through consolidation… and we’re also seeing some new entrants that present opportunistic buying opportunities (many of which we’ve bought into in the Oil & Gas Investments Bulletin portfolio.)

One example is Western Energy Services Corp. (WRG-TSX). This is a small, early-stage entrant that’s already managed to pull off a few acquisitions while it strives to gain critical mass.

The company is run by former Precision VP Dale Tremblay, who was arguably the driving force behind the creation of the country’s largest contract drilling firm.

It’s always a good play to invest in management and the stock has doubled since October, from 20 cents to 40 cents as of Friday.

That’s when the company outlined a $50 million capital budget to add new iron tailored specifically to the new resource plays.

Watch for Western to hit the acquisition trail to further speed its growth, as there are quite a few smaller mom and pops that are ripe for the picking.

Thanks to the uptick in drilling, there is no shortage of work. And as margins and profitability return to the sector, companies like Western will be poised to execute even if gas prices don’t recover over the longer term.

Longer term, it takes a couple of quarters to get companies like this rolling. The proof will come in the next winter drilling season in 2012, when Western could be a much bigger company, and very active.

Tuscany International Drilling Inc. (TID-TSX) is a relatively new Calgary-based drilling company but focused exclusively in Latin America, where demand – and profit margins – are high.

The company is initially focused on Colombia and Peru with plans to expand into Brazil. Foreign service companies are still relatively scarce even as several Canadian juniors and intermediates are starting to make waves, which gives it a first-mover advantage in an area where services are still relatively scarce.

After going public last April, the company has managed to pull off a clean double since September, closing Monday at $1.87.

– Oil & Gas Investments Bulletin Research Team

DISCLOSURE – Keith Schaefer has a position in Tuscany.

P.S. Here’s an article from December, written by guest columnist Brian Hoffman:
Why oil services stocks are outperforming oil producer stocks

Want to learn more about investing in junior oil and natural gas stocks? If you have a Facebook account, just “like” this article and a hidden link to Keith’s 10 page how-to on oil and gas investing will appear:

[facebook-like id=”1″ ]

ETF Investing in the Oil & Gas Market: Part 2

By
Keith Schaefer
-
0

Understanding the future—not just the present—is very important to ETF returns. And this is where the two basic questions for investors get answered.

What is the timeline of the trade?

The real question here is, how many times does the ETF have to “roll” its futures contracts between now and that trade date?

Use oil as an example. Because the ETF issuers never want to physically own the oil, they must sell their futures contract before it expires, at which point they would need to take possession. So they sell it and buy a longer-dated futures contract — either the next month or several months out. This buying and selling of futures is called “rolling” it forward.

Are the futures contracts showing higher prices (in contango) or lower prices (backwardation)?

When the market is in steep contango or backwardation, that is to say when the futures market is very different than the spot price, indicating a big move in commodity prices, the ETFs get caught in a tight spot.

InvescoPowerShares’ Lake explains: “If you’re rolling into a contango market, an upward sloping curve, you will roll into a more expensive contract, and there will be a drag on performance.” (The PowerShares oil ETF symbol is DBO-NYSE.) “We use a more flexible rolling strategy, so we can reduce the impact of contango and increase the benefits of a backwardated futures market.”

In 2009, that drag was severe, as the spot price of oil rose almost 70%, and the futures market correctly anticipated that move, as there was a ladder of higher prices in the futures contracts. The problem: ETFs had to sell their lower-priced contracts that were nearly expired and buy the more expensive contracts dated farther out. And the more often they rolled, the greater divergence there was between spot prices moving and ETF prices moving.

That scenario caused many retail and professional investors, like Philip Treick, managing partner of Thermopolis Partners, to avoid going long the ETF sector.

“The contango futures curve forces an ETF manager to sell the current expiring contract low and buy the replacement contract higher — hardly a recipe for success,” says Treick, who manages two natural resource funds out of San Francisco and Jackson Hole, Wyoming.

“Institutional and individual investors bought these ETFs hand over fist assuming they were gaining exposure to a rising commodity price when actually, the roll was obliterating returns.”

In 2010, however, Hyland says it has been a different story.

“Year-to-date, the amount of contango in the front-month oil contract for WTI has been eroding a bit more than 1% from the return. If someone is looking at this investment as a three- or four-week play, how much do they care about contango or backwardation? It’s not that you won’t feel it, but in the bigger picture, how much does it really matter? In any single day the spot oil price often moves 1% to 1.5%.

“But if you’re looking at 12 months, then it’s a bigger factor.”

In other words, the trade timeline is greatly affected by the roll.

Hyland’s funds continue to roll their contracts forward monthly, to the nearest contract. While this is simple, it also increases any distortions from contango or backwardation. Other ETFs, like PowerShares’ DBO, use a more flexible strategy that can roll once or many times a year.

Morningstar ETF analyst Abraham Bailin says the ETF issuers are evolving their products to meet the market’s concerns about the roll.

“Futures-based funds are using dynamic strategies, like USCI, The United States Commodity Index Fund, for instance. They can choose contracts out as far as 12 or 13 months, that can maximize gains or minimize losses posed by the implied roll yield. Some of these dynamic methodologies are getting very crafty.”

USCI trades all commodities, not just energy, and will buy futures in backwardation, where it can sell higher-priced, near-term futures contracts and buy lower-priced contracts farther out in time, pocketing the difference.

___________________________________________________________________

“—-ing Will Change Everything”

Technology, by its very nature, creates change.

But there’s one technology in particular that is causing massive changes in the oil and gas exploration industries.

Now…I can’t give it all away right here.  But rest assured – “—–ing” is a technology understood by very few.

But at the same time, “—–ing” is about to create explosive short-term profit opportunities for those investors who know where to look.

That’s where I come in.

I’ll tell you all about “—–ing”… along with one very special company that’s about to make a fortune as its technology goes global.

And for individual investors, this is a profit opportunity not to be missed.

Click here to learn more right now.

___________________________________________________________________

Tax Issues with ETFs

A secondary characteristic of ETFs that few investors pay attention to is their tax treatment, which depends on the funds’ structure. The Wall Street Journal reported in April of this year that ETF holders could get taxed at 23% — higher than the 15% rate investors are used to paying on stocks and mutual funds in the U.S. — on gains they haven’t taken yet under I.R.S. rules, which state that open positions in futures contracts are to be “marked to market” at year-end.

“We find it (futures-based commodity funds) irritating to customers at tax time,” says Richard Shaw of QVM Group, South Glastonbury, Connecticut. He buys a lot of ETFs for his clients, and writes about them as well—but he doesn’t buy energy ETFs, because of the roll issue, and “they are taxed in complicated ways. A CPA has to take more time.”

There are other issues with energy ETFs as well. Sometimes the popularity of an ETF will cause it to trade above its net asset value if the issuer is not granted permission to increase the number of units.

Professional traders claim they can “front” the roll at the expense of other ETF shareholders, by buying large amounts of the same futures contract that the ETF does — just before the ETF buys it. They then sell into the ETF buying.

There are also a growing number of levered commodity ETFs, which try to give investors two or three times leverage to the moves in commodity prices or commodity indexes or commodity equities. These often take the form of exchange-traded notes, or ETNs, which have completely different issues for investors and taxation methods.

But for ETFs, understanding how the futures market works, and how the ETFs play that market, are two sides of the same coin that investors must have comfortably in their pocket before spending a dime on the funds.

People invest in ETFs like they would a stock, but because of the way they are structured, they act more like a bond. Like a bond-maturity date, the futures market tells investors where their investment in a futures- based ETF is likely headed, and they need to determine which ETF product gets them there the most profitably.

– Keith

Follow this link for Part 1 of my report, ETF Investing in the Oil & Gas Market

* Article originally published in Oil & Gas Investor in December 2010

1...107108109...118Page 108 of 118
© Copyright 2023 - Profit Prospects