New Stock Purchase; A Calgary Expert Says Low Natural Gas Prices are Here to Stay

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April 16, 2009

Natural Gas Prices are setting new lows almost every week – and everyone expects them to continue lower for some time. But natural gas stocks are going up.

Investors clearly believe that the collapse in the number of rigs searching for oil and gas is going to mean a sharp reduction in gas supply sometime in the coming months, causing gas prices to rebound. Consensus from many analyst reports I have read suggest that won’t happen until Oct-Nov this year, but all are recommending to their investors to begin positioning themselves now.

And the charts on the natural gas stocks say investors are listening.

Stocks do lead fundamentals by 6-9 months. And the many reports that I read are telling investors that when natural gas prices turn up (due to either much lower gas injections into storage in the summer or much larger net withdrawals from storage starting in October) it will be a very fast move up.

It’s only April, but I can almost smell the pent up demand from the market waiting for that first really bullish gas inventory number. And that’s what makes me think this gas market could stay lower for longer than most people think – but the rise in natural gas stocks says otherwise.

Rock Energy and Why Heavy Oil Has a Light Discount

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April 12, 2009

The heavy oil price in Canada has been surprisingly strong this year, and that led me to purchase some Rock Energy (RE-TSX) on Friday. It is one of the few (I’ve only found 2) juniors with exposure to heavy oil. The stock is cheap on several metrics compared to their peers – so cheap that if it was bought at the valuations some of these juniors are getting upon takeout, at least one brokerage firm estimates the stock could be a double or triple.

Rock currently has a recycle ratio of 1.9:1 – meaning they get $1.90 in profit per barrel of oil (boe) for every dollar in costs they have in getting it out – and almost nobody in the industry, gas or oil, is generating 2:1 at these energy prices. Few investors associate heavy oil with high profitability, but President Allan Bey and his team are doing it. (Rock is 1.9x company wide; but it is half natural gas – brokerage firm National Bank estimates the recycle ratio on just Rock’s heavy oil is probably 3.4:1 – very strong.)

So it is highly profitable, and they have had a high success rate in their heavy oil play, called Plains Core, and 60 low risk drill locations in this Alberta play are ready to go. But the wells only average 40 bopd, and with regular decline rates of 30%, along with a regular debt load (75% of the limit) make Rock a no-growth story for 2009.

So why did I buy on Friday?

Because I don’t think the new heavy oil story in Canada is out there in the market, and that presents an opportunity to investors who do their research.

I bought some Rock Energy today (RE:TSX)

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April 9, 2009

Rock Energy (RE-TSX) is one of the few oil-weighted juniors on the TSX (60% oil). Most of it is heavy oil, which gets a discount to regular crude in world markets. But that discount has narrowed dramatically as production cutbacks around the world have reduced supply.

While they do have debt, their wells are low cost and very profitable. Look for a more full report next week, but today I bought 10000 shares at an average cost of $1.18.

You should buy stocks on down days patiently, and not buy stocks on the last day of the week. But today we broke those rules. Sometimes you have to do that!

Shale Gas Companies – All talk, no walk?; Natural gas and Drilling Stocks Holding Up

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April 1, 2009

Natural gas prices and stocks have held up better than I had expected. In trying to find out why, I found a couple analysts now indicating the economics that shale gas companies present in their financial statements is not as good as what they talk about in their press releases.

This would actually be bullish for natural gas prices and natural gas stocks.

In other words, these gas companies allegedly talk the talk of cheap profitable gas in press releases but don’t walk the walk in showing it in their financials. Yet.

This newsletter has been part of the chorus that natural gas prices are going through a seismic shift downward because of the improved economics and technology behind horizontal drilling (HD) and multi-stage fracing (MSF).

I believe that the downturn in natural gas prices isn’t just cyclical because of the recession/depression and regular seasonal troughs; rather it’s a systemic issue. HD/MSF increases production per well dramatically, and opens up many new low-cost reservoirs, taking the marginal cost of natural gas down from $7.50/mcf to more like $4-5/mcf.

However, a couple prominent research firms have recently shown some data that could disprove this theory.

Reece Energy: Another Junior Gone; Take the Money!

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March 11, 2009

The recent buyout of Reece Energy (RXR-TSX) by PennWest is a good example of the issues facing junior producers of oil AND gas right now.

Reece had great exploration success, started slow, built up production and showed they were good operators as well as explorationists…kept their share structure clean, were able to raise money at successively higher prices, the stock jumped from $1-$5 last year…and they still had to sell out to an energy trust at a price where almost no investors made money.

Their mistake, as I see it, was overextending themselves in Q4 2008 when they already had a lot of debt, but they were very good explorationists and operators. Plus they were not able to get some new production online in time to meet their 2008 goal of 2500 bopd by Dec. 31 – delaying much needed cash flow.

Reece caught my attention last October because of its high rate of drilling success. I almost wrote about it then but debt levels and high valuation made me reconsider. It was one of the examples I mentioned in my last post where I had done all the research and wrote the article, and would now share those with readers. Then came the buyout. Get me rewrite!

In the junior space, Reece’s competitive edge was its horizontal drilling expertise, and management’s ability to use it in areas that other people ignored – like the Viking formation in western Saskatchewan. They assembled a large land package very cheap, and it turned out to be a big winner for them.

A Tale of Two Markets – Oil and Gas

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March 10, 2009

Oil and gas are moving in opposite directions right now – oil up and gas down. Oil stocks are tepidly advancing, not quite convinced the move in the oil price is sustainable. Natural gas stocks -those not already crushed – I fear are getting ready for a further 20-30% decline as the next down leg in natural gas prices have begun.

OIL

Colleague Richard Reinhard and I postulated last week that Canadian listed oil stocks would start to rise as sentiment was looking for any excuse to rally oil, and that the US dollar would remain strong and stronger as long as the equity markets were under pressure – and this is happening.

With the US$ now at $1.30 CAD, and oil at US$47/barrel, the Canadian producers’ oil price is $61.10. Many producers make money at that price – making the recent sell off in oil stocks overdone. Some of the really low cost producers who have a lot of horizontal wells (see one of my original stories on this breakthrough technology that greatly increases production and lowers costs) have costs of CAD$30/barrel in the prolific Bakken oil play of Saskatchewan.

Bulls are making much of the fact that the oil price is rising while the Dow Jones Industrial Average continues to fall 50-100 points per day. Two bullish statistics were that investors saw oil inventories decline for the first time in several weeks last week, and the EIA (Energy Information Administration in the US) reported that gasoline use actually increased in the last week of January, year over year – only 0.8%, but an increase nonetheless.

I am not convinced oil is ready to break out of its trading range. Investor sentiment is fragile – one bad week of oil inventory build up could see prices and stocks tumble. I suspect this is a tradable rally but continuing rise in unemployment will put a lid on demand, and I see oil making one more trip down to the bottom of its trading channel before the massive global stimulus packages and rock bottom interest rates make oil break out.

Currencies and Oil; Oil Could Have an Imminent Traders’ Rally

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March 1, 2009

By Richard Reinhard and Keith Schaefer

Currency movements affect the prices of oil and gas stocks as much as commodity prices. And I think there is an increasing likelihood a mix of slightly rising oil prices and a steady to lower Canadian dollar could result in a big jump in Canadian oil stocks in March and April.

Regular readers know we have not been bullish on energy stocks, especially natural gas. But we believe oil stocks could have a tradable jump up for a couple reasons:

The big oil ETF in the US is symbol USO and it’s cleaning up its act. We wrote an article in early February that outlined how the large size of this very popular investment vehicle has forced oil prices lower every month. This has been by far this website’s most read story. Essentially, they have to roll over their oil contracts each month so they don’t end up taking physical delivery of the commodity itself. For several days this skews the market; the oil market isn’t real for awhile, and investors hate that. Bowing to public pressure, USO will now roll over their contracts over a longer number of days, hoping to not influence the market. If they are successful, we believe investors will cheer this more orderly market and use it as an excuse to move the oil price higher.
There is evidence that the market is looking for any excuse to move the global oil price higher. People can talk about fundamentals all they want, and over the long term they rule, but over the short term emotions rule and there is a rising bullish sentiment on oil in the markets right now. The markets took oil to $147/barrel, and then it took oil down to $35/barrel. The market can move oil wherever it wants it to go as traders and the public accentuate the trend. When we see Canadian oil stocks moving 6-12% on an up day, much more than they should on any new fundamentals, it tells us they are a coiled spring waiting to be let go.
Continued uncertainty in equity markets will keep the US dollar higher for longer than most people believe. This means a relatively lower Canadian dollar, which means a higher oil price in Canadian dollars. If oil is US$40 per barrel and the Canadian dollar (nickname: the loonie) is at par with the greenback, then oil in Canada is the same price. But if the US$ rises to $1.25 to the loonie, then Canadian oil prices really are rising to 1.25 x 40=CAD$50/barrel. That means increased cash flow and stock prices for Canadian producers.

We see this as a likely scenario for the spring of 2009. We don’t believe the fundamentals of the global economy are going to allow for any sustained rise in the oil price over the next few months. But the stock market does look 6-9 months ahead. And I think we’re about to have another round of hope before another round of gloom in oil.