Overweight Natural Gas Stocks: Tristone Capital

By
Keith Schaefer
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Investors should overweight natural gas stocks in their portfolio right now, says a specialized oil and gas brokerage firm in Calgary, Alberta.

In a June 4 report, Tristone Capital says investors who wait to invest in natural gas stocks until the natural gas commodity price bottom in late summer – and they hold out the potential for US$3 gas or less – will miss out on a lot of capital gains.

It is the loudest bold call yet from financial industry I have seen yet this year on natural gas. Essentially, they are saying the bottom is in on natural gas stocks. They see an imminent supply decline, starting in July and accelerating quickly, because the North American rig count has dropped so much.

The natural gas rig count has gone from 1600 a year ago to 700 today in the US.

Tristone estimates the natural gas market is now 2-3 bcf/d (billion cubic feet per day) over supplied, but they expect gas production to fall by over 500 mmcf/d per month between now and the new year, with supply down 5.5 bcf/d by late Q1 2010 and 7 bcf/d by next spring.

Just like OPEC, that will take a lot of discipline by the many natural gas producers in the industry, particularly the juniors and intermediates that are cash flow starved and near their debt limits.
Tristone is forecasting a $6.75/mcf NYMEX gas price for 2010.

As yet, the drastically lower rig count in the US has not meant a drop in natural gas supply. The reason is that the number of rigs in the 3 prolific US shale gas plays – Haynesville, Marcellus and Fayetteville – is still increasing. So the newest, most productive rigs are active in the most productive formations, and delaying the supply drop, the report says.
Better rigs and more productive formations has increased the efficiency of rigs some 30%, Tristone adds, saying the average rig produced 9.7 mmcf/d at the beginning of 2007, and that’s up to 12.5 mmcf/d today.
But they contend the supply drop will happen, and soon.
The charts on natural gas stocks have been saying this for several weeks, as I showed on the previous article on Storm Exploration (SEO-TSX). And other brokerage firms have said the drastic rig drop will result in a sharp sudden increase of natural gas prices when the supply decline finally begins in earnest.
So if you believe this theory, in which natural gas stocks should you invest? Tristone says the senior gas stocks are fully valued, and the mid-caps are the best buys now.
I will outline some of the natural gas stocks in my portfolio in one of the first issues of my newsletter. I hope to be offering my subscription service for the investment newsletter by the third week of June.

Technical Analysis of Storm Exploration (SEO-TSX)

By
Keith Schaefer
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 By Brian Hoffman, CA, CPA

Prologue-Keith Schaefer

Natural gas prices continue to bounce on the bottom of their recent price range, yet natural gas stocks charts are looking bullish – which means the market really does believe that the sharply lower rig counts across North America will mean a (sharp?) increase in natural gas prices sometime later in 2009.

Storm Exploration is 92% gas, and is consistently one of the top recommendations of the many research reports I read weekly from Canadian brokerage firms.   Production is focused on the Montney tight gas play in British Columbia and Alberta. It has one of the lowest finding costs for oil and gas in the industry.  Underneath Brian’s technical analysis, I have included the highlights directly from their latest quarterly.

Storm is one of a handful of natural gas producers, with a track record of success (mgmt has built and sold companies before), that  investors should be tracking if they believe natural gas prices will rise this year.

Brian nor I own stock in Storm; he just finds charts he likes and does the technical analysis.  Storm is not a portfolio purchase for Oil and Gas Investments Bulletin.  I enjoy his write-ups and hope readers do as well.

____________________________________________

Storm Exploration (SEO-TSX) 1 year chart

The stock chart for Storm Exploration Inc. (SEO-TSX, $13.58) looks bullish with a recent breakout from a downward price channel marked by the blue dashed lines in the chart below.  Importantly, the breakout achieved a minimum 10 per cent move above the top dashed line and was accompanied by increased volume, which confirmed the breakout.

Storm’s share price faces resistance at about $14.25, which is the price level marked with the green line.  The share price has started to consolidate around the $13 to $13.50 level and should find support at the top of the downward price channel, currently at about $12.

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Quick thoughts on oil and natural gas prices

By
Keith Schaefer
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When I first started the newsletter in January, one of my best stockbroker friends asked me – where do you think the price of oil is going to be at Christmas 2009? I said US$65 or $75.  Wow that’s high, he said, compared to all other analysts.

But research analysts base their oil price projections on fundamentals.  And like everything else in the market, the oil price is based on the psychology of what the fundamentals may look like 6-9 months ahead.  (Plus they are concerned about not being embarrassed on being wrong on a gutsy call that was well outside their peer group.  Iconoclastic newsletter editors aren’t burdened with that.)

I said to my friend – the market has shown it can take oil to $147 per barrel.  Then take it to $38 per barrel.  The market is powerful enough it can put the oil price wherever it wants.  All fundamentals do is show the barest of trends, which over the last 3 months has been optimism, and the market takes that and runs with it – hard. 

The inventory numbers on oil this week were higher than expected, and therefore bearish.  But over the last 3 months there have been several inventory statistics that were bearish and the market continued to take oil higher.  So I’m not convinced that was all the reason for the drop this week…

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Natural Gas: Costs Go Down as Learning Curve Goes Up

By
Keith Schaefer
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Operating costs are still coming down in North American natural gas and oil plays.  This isn’t showing up as reduced all-in costs on the financial statements of these energy producers just yet, but it will. 

Costs are lowering for two reasons.  One is demand destruction, which has cut in half the number of rigs drilling for oil and gas in North America.  This has meant that rig rates have also dropped – energy executives are saying they see 20%-35% cost reductions year over year.  Lower drilling costs have an obvious impact on profitability.

The second is that companies in both the US and Canada are figuring out how to properly frac these new unconventional gas plays – both tight gas and shale gas. 

There was a 20 year learning curve to get the first shale play, the Barnett Shale in Texas, into production.  (It’s actually a great story of petrochemical engineering and sleuthing  that I will share with you all another time.) Well, that learning curve is still happening.  Production out of these long horizontal wells is getting better in ALL the unconventional gas plays (and oil plays) in North America. 

Chesapeake (CHK-NYSE) is the largest natural gas producer in the US.  They announced in their latest quarterly that they have a new well producing 9.6 million cubic feet of natural gas (mmcfe) – and associated liquids – per day during the past 30 days, which they believe to be the highest 30 day  rate of any well in the entire Barnett Shale play to date.

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How to Increase Recoverable World Oil Resources by 10%-20% – Very Cheaply

By
Keith Schaefer
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What would the world pay for a product or technology that could, at a very, very small cost, increase the amount of  recoverable oil in the entire earth by 10%? What about 20%?

My next portfolio purchase for Oil and Gas Investments Bulletin is a company which just might be able to do that.   The ideas behind Wavefront Technology Solutions (WEE-TSXV; $0.70) are powerfully simple – and are being put into oil fields right now.  It has the potential to make the company a very fast growing profitable company, and be a 10-bagger for investors over the next 3 – 5 years.

Few companies fill such a large market need with such a simple product. I put 48,000 shares into the portfolio at 70 cents on May 27.  Below you will find my initial report.  Further updates will be for subscribers only.

Wavefront Technology Solutions

Trading Symbol: WEE.V

Shares Outstanding          71.5 million

Mgmt Ownership              8.46 million

Cash                                $17.9 million

Debt                                $0

Revenue Q1+Q2             $700,000

Loss  Q1 & Q2               $4.3 million

Many of the best ideas in life are so powerful because of their simplicity.   Wavefront Technology Solutions Inc. (WEE-TSXV; $0.70) is now marketing its proprietary yet simple technology – called Powerwave – that has the potential to greatly increase the supply of oil in every oil field the world.

In its most crass, simplified form, all they do is pulse fluid into an oil well, like a beating heart. Ba-boom. Ba-boom.  That pulsing pressure opens up the rock pores in the reservoir only slightly, (this is called increasing porosity), and for a short time, but it increases the flow of oil through the reservoir rock to the well bore dramatically (this is called permeability).

In plain English, Wavefront increases production per well, and per field – usually 10-20%, but sometimes a lot more.  And it does this very, very cheaply. It is being used by an increasing number of top tier companies, including a top five global producer, one of Canada’s largest natural gas producers and one of its largest integrated producers.  One of the reasons we are buying the stock now is in hopes that one will make a large order.

Logistically, almost all the products are easy to install in 2-10 hours, and none requires a change in the well equipment.  It does cost the customer $5-50K to install depending on the product, but payback can be very quick.

Economically, the business model shows obvious and powerful economics for the customer, and Wavefront shareholders.

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At CAD$60 oil, oil companies only need 1.7 extra barrels of oil per day (bopd) out of a typical five well formation to break even on the monthly rental for the product – less than 0.5 bopd per well – and that price still provides very high margin, recurring revenue for Wavefront.

wee-oil-price-cost-recovery

Powerwave can be a game changer for the oil industry worldwide. It was inititally developed in 1998, and so far it has worked in every type of geology and reservoir where it has been used.

I bought the stock today at 70 cents because in my talks with both management and other sources in the oilpatch, I believe their technology could rapidly be adopted by a lot more companies, and used a lot more by current customers. This is not a niche product; it can be used everywhere.

And if I’m wrong, they have $17 million cash, or about 4 years working capital, if sales and costs stay constant.  The company does not have to raise money for a long time.

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Technical Analysis of natural gas ETF – UNG:NYSE

By
Keith Schaefer
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0

By Brian Hoffman, CPA, CA

Natural-gas prices have shown some strength recently, piggy-backing on higher oil prices.  Although last week’s higher than expected gas storage update is bearish in the short-term for natural-gas prices, the longer term outlook bodes well for significantly higher natural-gas prices.

Although oil prices will also probably pull-back from the recent run-up with the technical outlook turning bearish in the short-term if oil prices breach the US$50 support level, oil prices are likely to remain strong in the years ahead, which will help to support natural-gas prices.

Despite the current over-supply of natural-gas, the supply-demand situation is likely to achieve equilibrium over the next two years that will support higher long-term natural-gas prices.  Supply has increased substantially primarily due to reduced industrial demand during the recession and a warmer than usual winter in the north east U.S.  However, many natural-gas exploration and production companies have reduced their drilling plans for 2009, which will result in less gas going into storage over the next two years.  The supply-demand fundamentals are expected to improve considerably when industrial demand starts to pick up in light of reduced drilling.

The energy equivalency of natural-gas compared to oil is generally 6,000 cubic feet to one barrel of oil, and the price for 1,000 cubic feet (1 Mcf) will generally trade for one-sixth of the price for one barrel of oil during normal times.  As you are well aware, we are definitely experiencing anything but normal times in the current environment.

Over the past two years oil has traded for about 10 to 12 times the price of natural-gas.  With current prices for oil at about US$61 per barrel and natural-gas at about US$3.40 per Mcf, the ratio is almost 18 to 1.  Natural-gas prices stand to benefit from closing the gap in pricing relative to oil prices.

Natural-gas prices have spiked twice in the past four years and accompanied spikes in oil prices – in 2005 after hurricane Katrina hit Louisiana and during last year’s run-up in prices.  Another price spike could occur when the supply-demand outlook improves.

An opportunity to benefit from a recovery in natural-gas prices, particularly a price spike, is through the United States Natural Gas Fund (UNG: NYSE, $13.70), which invests in near-month natural-gas futures contracts.

In the chart below note the significant downtrend in the price of UNG over the past year.  The downtrend is still intact but the price is ripe for a breakout later this year, which could set the stage for a significant trend reversal.

UNG-NYSE Natural Gas ETF
UNG-NYSE Natural Gas ETF
UNG’s price experienced an exhaustion break in this downtrend, also referred to as a whipsaw, during May but was unable to find support at the downward trendline, probably due to last week’s natural-gas storage update.

Over the past few months UNG’s chart has formed a right-angled broadening formation, which is an accumulation pattern.  A buy-signal will be triggered if volume expands on a breakout above the top line in this formation, which is at about US$18.  A breakout will be confirmed if the price moves 10 per cent above this top line – to about US$20.

A subsequent pull-back towards the top line of the formation, which would become a new support level, would offer a low-risk entry point.  Although the gain from US$13.70 to US$18 is foregone, the US$18 entry level after a pull-back would reduce the risk of the investment considerably.  Also, breakouts from these consolidation patterns are generally followed by substantially price increases, so the potential increase from the US$18 level is enormous.

Inflation is pending in the U.S. with the government “printing” money to save its economy.  The U.S. dollar is expected to weaken relative to other currencies, including Canada’s petro-currency, and commodities – particularly oil and gold – are seen as hedges against inflation and a considerably weaker U.S. dollar.  As a result, investors need to consider that higher commodity prices in U.S. dollar terms will likely be impacted by a weaker U.S. dollar.

In any event, the outlook bodes well for natural-gas prices beyond 2009 and UNG provides investors an opportunity to benefit from a recovery in natural-gas prices.  The potential for the price discrepancy to close between gas and oil prices adds to the appeal of this investment opportunity.

Brian Hoffman, CA, CPA, is an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

Tweeting at www.twitter.com/oilandgasinvest

By
Keith Schaefer
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0

Tweeting on Twitter.com

I had a Eureka! moment this week.  My marketing team and several web-savvy friends said I should be “tweeting”, or posting comments to www.twitter.com. I still don’t understand Twitter.com, but I did find a use for it which all readers should know about. 

When I’m doing my reading and research for stories, whether it’s about the industry in general or specific stocks, I come across lots of fun or unique facts that aren’t worth a full story.  Or even a full blog post.  So what I’m going to do is put them up on twitter.  You’re only allowed to write 140 characters, so I’ll have to keep it brief and relevant.

So I’m going to share some of my short musings at my twitter account – www.twitter.com/oilandgasinvest — more often now.  Interesting facts, links to articles with intriguing points of view, teasers of future articles…that’s where I’m going to post a lot of that.

Twitter even has its own lingo.  I am now what’s known as a stocktwit.  My wife could have told them that.

Portfolio Update

By
Keith Schaefer
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0

The first two purchases for the newsletter, Rock Energy (RE-TSX) and Petrobank Energy (PBG-TSX) each announced their first quarter (Q1) results in the last week.  Both met or exceeded expectations, as oil prices were better than expected through March.  Both companies simply continued doing what they have done the last year – find oil cheaply and extract it profitably.

Heavy oil prices in particular remained strong for Rock, making them one of the most profitable junior oil and gas companies, per barrel of oil, on the Toronto Stock Exchange. 

Heavy oil trades at a discount to the “light” oil price that is the one usually quoted in the media. But over the last several months that discount has been smaller than normal, as most of OPEC’s production cuts have been heavy oil – it costs more to produce, so in times of low oil prices it’s the first to go.  Simple economics say that when supply goes down, prices go up, and so has it been for Canadian heavy crude, as it has replaced Mexican and Venezuelan heavy crude taken off the market.

So as the oil price slowly moved up from $38 – $50 through Q1, heavy oil had an even greater percentage rise – as the discount went from 36% to 29% in Canada.  That may not sound like much, but it has turned a traditional lower profitability sector of the energy market into one of the most profitable right now.  And as Mexican production continues to decline, that differential could even get smaller.

Management at Rock got a better price and better production – President Allan Bey said their average 3818 barrels of oil per day (bopd) production beat their own estimates by 150 bopd.  Rock drills small wells – an average of only 40 bopd, but are very good operators.  They get a well producing for about $525,000, or just over $13,000 per flowing barrel.  Rock currently trades for about $21,000 per barrel.

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