What’s a Frac – or WAF?

By
Keith Schaefer
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One of the two most important technologies in the development of the natural gas market in the last few years is “multi-stage fracing” (pronounced “fracking”), which is short for fracturing, as in fracturing the rock in which the oil and gas is held.  (The other technology is Liquid Natural Gas, or LNG).

Fracing is sending a specially designed fluid down the oil or gas well at high pressure and blowing it out into the reservoir rock to create cracks and channels through which the hydrocarbons can get to the well.

How big an impact has multi-stage fracing (MSF) had? Once the industry figured out how to frac the shale rock formations to get at all the natural gas they hold, it opened up huge new reservoirs across North America, and is the leading reason on the supply side as to why the price of natural gas has plummeted.

It’s exciting for the industry and investors because improvements to MSF are still being made – the industry is continually getting more production, more fracs, or stages, per well. Initial fracing was done in 4 stages over 500 meters.  Now you can see 16 stages over a 1600 metre horizontal length.  (One active fracing company said this week that the average Montney well has 7-12 fracs).

The industry hasn’t hit the end of what MSF can do; innovation is still happening.   And they’re fracing tighter and narrower reservoirs or payzones.  One of the largest oil discoveries in North America is the Bakken play, which straddles the Dakotas and  Saskatchewan (the US Geological Society estimates over billion barrels are there)  – but the zone can often be as narrow as 3 metres, or 9.5 feet.

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With Conflicting Signals on Natural Gas and Oil Stocks, We Sit

By
Keith Schaefer
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I am busy writing my first issue, but wanted to make a couple quick comments on the oil and gas markets.  The market is divided on whether this rally can continue, in both the Dow Jones and in oil. For the Dow, I see sentiment shifting from a “Sell in May and Go Away” mode to a “This Stimulus Rally has Legs Until At Least September”.

Oil and natural gas are in similar positions – prices are rising at a time when the world is overflowing with supply. Should the market sentiment shift to focus more on future supply as opposed to future demand, energy stocks would have a definite swoon.

Investors should note that the Canadian dollar is also rapidly rising, (or rather, the US dollar is rapidly declining) so net cash flows to TSX publicly traded companies are not improving as much as one might think. 

Despite charts breaking out on some of my favourite stocks, and some of the energy indexes, I am not a buyer here – but not a seller, either.  I have some stop losses in to protect profits.  All the chart breakouts have been on declining volumes, which is not a bullish sign.  I am waiting to buy some of my favourite names – which I will mention in my first issue.

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

By
Keith Schaefer
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Today I purchased 500 shares of Petrobank (PBG-TSX) at $24.10.  Please see my report on Petrobank under the Sample section of the website.

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Peter Tertzakian is a well respected oil and gas analyst in Calgary.  He has authored a couple books on oil and energy, and is chief energy economist at ARC Financial, a buy-side firm (institutional money manager).

His views on natural gas was the focus of a big story today in one of Canada’s two national business papers, The National Post.  Here is the link to the story:

http://www.financialpost.com/story.html?id=1513242

Natural Gas Prices Goes Down, Natural Gas Stocks Go Up

By
Keith Schaefer
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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.

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Rock Energy and Why Heavy Oil Has a Light Discount

By
Keith Schaefer
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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.

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I bought some Rock Energy today (RE:TSX)

By
Keith Schaefer
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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!

More on Rock on Tuesday.

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

By
Keith Schaefer
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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.

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Reece Energy: Another Junior Gone; Take the Money!

By
Keith Schaefer
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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.

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