I often say – there’s ALWAYS a bull market somewhere in energy – and right now it is in heavy oil.

Heavy oil should – and normally does – trade at a discount to light oil because it is more expensive to refine.  But now that gap is closing, and now heavy oil actually trades at a premium in many places around the world.  Energy investors should take note!

Yes, this is a GLOBAL phenomenon; it’s a major shift.  To show you what I mean, here are some price charts that show what’s happening:

The Mars benchmark for Gulf of Mexico produced medium sour is trading at a premium to Light Louisiana Sweet.

And heavy Louisiana Sweet, which normally trades at a discount to Light Louisiana Sweet has also been trading at a premium for much of 2019.

I showed you that the heavier Mars Gulf of Mexico crude was trading at a premium to Light Louisiana Sweet.  Mars is also trading at a premium to WTI.

What should be very concerning to shale producers is that a similar effect is also already being seen globally, as several medium to heavy sour crude grades produced in the Middle East are now trading at a premium to Brent.

Saudi Arabia set the official selling price for its Arab Heavy grade for February to the U.S. at a US$0.50 premium to the Argus Sour Crude Index, the first premium in at least 10 years.

Arab Heavy is also selling at a premium to Brent and the heavier Russian Ural crude is also at multi-year highs relative to lighter blends.

Another Middle East grade Oman – which has a higher sulfur content than European oil – also rose above the lighter London benchmark and has traded at a premium.

Bloomberg recently reported that in Asia the state-run energy giant PetroChina had been selling Venezuelan Merey oil in February at a premium of about $5 a barrel to WTI.

Here in Canada, heavy-crude prices have surged since Alberta Premier Rachel Notley mandated a production curtailment of 325,000 barrels a day – though it’s not above light oil prices yet.

The Canadian heavy crude price known as Western Canadian Select (WCS) is now trading at a $9 discount to WTI and has been as low as $7 in recent weeks.  That is the lowest discount to WTI in a decade and not large enough to cover the cost to get WCS to the U.S. Gulf Coast refiners.

At the Gulf Coast WCS is actually being priced above the lighter, superior quality WTI.  Refiners who aren’t able to process WTI light oil need WCS so they have to pay more to get it with supply constrained.

The single digit discount is down from as much as US$50/b in October 2018.  This huge run in heavy oil prices has barely been reflected in Canadian heavy oil stocks; fundamentally they are now cash cows but the stocks are being treated as dead cows.  (I just bought small positions in two, to add to a third I’ve owned since just before Christmas.)

WHY IS THIS HAPPENING?

The available supply of heavy crude has plummeted of late.

Venezuela is falling apart and so is the country’s oil production (which is all heavy oil).  Production is down 1 million barrels per day from 2015’s level of 2.4 million barrels per day with the rate of decrease accelerating in 2018.

Recent sanctions by President Trump on U.S. entities purchasing Venezuelan crude are now another supply constraint on top of the production decline.  In fact, just this past week, Venezuelan imports into the US were ZERO for the first time in a very long time.

There is no magic switch to flip to bring this production back any time soon.

US President Trump’s decision to re-impose sanctions on Iran has also shrunk Middle East supplies, most of which are of “medium-sour” quality which is heavier than light crudes.  Plus Saudi Arabia throttling back production makes the supply situation even tighter.

The Alberta Government mandated production cutbacks are contributing too.

Why this matters… Gulf Coast refiners need heavy oil and not the oil produced from shale.  That is why U.S. oil exports are surging; the US refiners fitted to handle light crude already have more than enough.

The U.S. has more light crude than it can handle.

America is producing the wrong kind of oil right now.  The Shale Boom is all about a very light sweet crude.  Light oil produces gasoline really well, but not diesel, distillates and lower quality products that fuel the world outside of Western Europe and North America.

It is heavy oil where all of the market fundamentals are coming together – for both supply and demand.

So on the demand side, refiners along the Gulf Coast and in the Midwest invested billions of dollars in cokers and other heavy-oil processing units over the past three decades – in anticipation that supplies of light oil would become scarce while heavy crude from Canada’s oil sands, Venezuela and Mexico would grow.

Instead, the opposite occurred.

More than half of the world’s heavy crude is processed in the United States and with Trump sanction on Venezuelan oil, the scramble is on to get heavy oil feedstock.

IS THIS ISSUE SHORT TERM, OR LONG TERM?

There is no question what is going to be happening in the shorter term.

The scramble is on for heavy oil.  There is no fix for Venezuela and the lack of pipelines means that there is no increase coming from Canada.  The Saudis seem very intent on keeping production curtailed as well.

Longer term demand for heavy oil is also bullish as emerging economies (where future oil demand growth will come from) are increasingly in need of diesel fuel for trucking and heavy machinery.  Refiners in those countries have invested heavily to process heavy and not light oil.

One complication to the longer term heavy crude bull story are the new International Maritime Organization (IMO) specifications for ocean-going ship fuel that will take effect next year. The rule cuts the allowed sulfur content of ship fuels, making most heavy oil grades useless as a fuel option for those vessels that don’t have scrubbers.

This could be a disruptive event and I’ve seen estimates of demand for heavy oil falling by as much as 1.5 million barrels per day because of it.

However, even with high heavy oil prices, the price spread between Low Sulfur Oil – LSO – and High Sulfur Oil – HSO (which is heavy oil) says most ship owners will buy closed loop scrubbers and continue to buy HSO.

WHAT DOES THIS MEAN FOR HEAVY OIL STOCKS?

It means they are some of the fattest cash cows the energy market has seen in some years, yet valuations are still very cheap – often just over 3x cash flow.

Better still, many heavy oil producers with low production declines (and for oilsands producers – NO production declines!!!) are generating HUGE free cash flow – The Holy Grail that still evades the shale industry.  Understand from this – these companies need to invest very little capital each year to maintain production, so if they aren’t chasing growth they are free cash flow machines.

As this heavy oil bull market continues throughout the year, look for the larger Canadian heavy oil stocks to be one of – if not the – best performing subsector in global energy.

Instinctively, investors wouldn’t expect it to be this way.  Heavy crude is an inferior product and more difficult to refine.  And last year the discount for Canadian heavy oil made headlines around the petro-world – for all the wrong reasons.  No new pipelines.  Huge discounts – Canadian heavy oil traded under US$10/barrel at one point!!!

That’s what most investors who only pay scant attention to oil think about when they hear the words heavy oil – high cost, low price, curtailing production… all negative.

But the facts – and the economics – have changed for Canadian heavy oil stocks. Quickly.

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Keith Schaefer
Publisher, Oil and Gas Investments Bulletin

I LOVE buying a stock that’s going up. And Pareteum (TEU)M-NASD has been one of the best performing stocks of 2019 so far – up an astounding 300%+ in the last two and a half months. (Sure beats oil stocks, and that’s why I’m looking here.)
I’ve watched the run – and the chart has been tempting. I’m not afraid to jump into a run after doing some due diligence hints at a higher valuation a year out. But I couldn’t bring myself to buy TEUM then, and I still can’t.

Why?

I just have too many questions.

And before I sound too self righteous here, I get that in one sense I’m wrong – one of my market lines is: At The End Of the Day, it’s The Tape That Matters. Price.  And the stock has done fabulously well.

But you also have to go with your gut and be comfortable with your stock picks. One of my other lines is… The Market is about Peace First, and Prosperity Second.

I want to step through my thought process and tell you why I decided to take a pass on this stock. I think it’s worthwhile to know why I haven’t participated.

What They Do

Pareteum offers backend software to telecom service providers. Their customers are mobile service providers, IoT vendors, security system vendors and other over-the-top providers of telecom related services.

Most of their customers operate Mobile Virtual Network Operators (MVNO). An MVNO is a company that provides wireless communication to customers but does not own the network infrastructure. They rent bandwidth from one of the big guys, like AT&T or Bell Canada.

One of the larger examples of an MVNO would be a company like Virgin Mobile. But most MVNO’s are much smaller and operate local or regional businesses.

An MVNO often doesn’t want to to develop its own billing, customer service, marketing and sales software (collectively these are called operations support system/business support system, or OSS/BSS). So they purchase those products from a company like Pareteum.

QUICK FACTS

Trading Symbols:                            TEUM
Share Price Today:                           $5.21
Shares Outstanding:                        102 million
Market Capitalization:                    $531.42 million
Net Debt:                                           $5 million
Enterprise Value:                             $536.42 million
2019 Revenue Estimate                  $110 (mid range guidance)
Price/2018 Sales                               4.87x
2019 EBITDA Estimate                   Positive – that’s all they said

POSITIVES

– Enormous $600+ million backlog
– Grew revenues from $4 million in Q1 to $14 million in Q4 2018
– Management forecasts huge revenue and EBITDA growth over next few years

NEGATIVES

– Hard to track down who customers are and how they generate such large contracts from them
– Difficult to reconcile revenue guidance
– Reason for sudden improvement in business prospects is difficult to pin down
– Acquisition forecasts appear to be aggressive
– Management background is murky
– Questions, questions, questions

BACKGROUND

Pareteum was a fledging business as recent as 2016.  In late 2016, facing further losses, they completed a major restructuring that saw headcount reduced from 360 to 60.

At the time Hal Turner took over the reigns as Chairman of the Board. The turnaround that Hal has delivered since is nothing short of remarkable.

In 2017, after shedding ¾ of their workforce, Pareteum went from 2 customers to signing up 50 in 2017. They had signed up 72 customers less than two years later. Over the last year and a half Pareteum has amassed an amazing backlog of business that hit $615 million in February of this year.

It made me wonder how such incredible growth could be achieved on the backs of a bare bones staff?

Q4 18 Results

On Tuesday March 12 Pareteum announced their fourth quarter results. The stock jumped another 25% on the news.

That left with me even more questions.

My problem with the Q4 18 numbers are similar to those I had when I looked at the company a month ago.   I see what I think are inconsistencies and missing pieces to the puzzle. It keeps me out of the stock even as the chart tells me to get in.

Take the 2019 guidance. Pareteum guided from $105 million to $115 million:

The top-line growth looks impressive. But it includes two acquisitions, something that isn’t mentioned in the press release.

But even taking the numbers at face value, I’m left scratching my head. The slide below is from the December 2018 presentation.

In December the company guided to revenue of $144 million in 2019.  Three months later, they drop guidance by 30%.  And the stock goes up 25% that day. Huh?

What does management say about this?

Hal Turner, the Chairman of the Board at Pareteum, addressed it as follows:

“We operate our business daily with a management business case. That management business case significantly exceeds the initial quarter’s guidance that I’ve just given you. Also, we have an extraordinary business case, which incents everybody in our whole company to achieve materially higher revenues than are even contained in our management case.

“Finally, the operating management case and the extraordinary aspirational case, either meet in the case of the management case or exceed greatly in the case of the extraordinary case the SEC required iPass tender offer projections, which were used in setting forth our acquisition of iPass and contained revenue projections’ view that was based upon fairness opinions of our advisors and was used by our Board in the acquisition consideration.

I have never heard of management guidance versus “extraordinary aspirational guidance.” That is not mature CEO language, IMHO, and a Big Red Flag for me.

I believe Turner is trying to explain why guidance is lower than December. He’s saying it is because they have other internal numbers they expect to hit that are much much higher.

That would be okay, I mean plenty of management teams have a separate set of numbers for the Street. But they don’t share them. It’s not an internal forecast if its in the presentation.

Again, it’s a bit of a head scratcher.

Okay so let’s get past that and ask another question – is the difference between the press release guide and the December presentation guide really just a conservative SEC required projection as Turner suggests it is?

It doesn’t look like it to me.

The SEC does require a forecast as part of acquisition disclosure. Pareteum made two acquisitions in the last 6 months.  One was a company called Artilium, which they completed in October. The second was for iPass, which they completed in February.

The forecast for the iPass business is below, from Page 69 of the S-4 disclosure:

A similar disclosure for Artilium and the pre-acquisition Pareteum in the S-4 for that merger from August 3^rd is here:

Adding up the 2019 estimates for iPass, Artilium and pre-acquisition Pareteum gives $133 million of revenue.

Now we have 3 different sets of numbers.  And the SEC numbers aren’t the lowest.

We were told that the “operating” and “aspirational” guidance should exceed the SEC projections.  But that’s not the case – at least as far as I can tell.

It’s a bit confusing, but I’ll go out on the limb here and say this was a lower guide.

Pareteum did layer in a real reason for the lower numbers.  They chalked it up to a lower conversion of the backlog. From the conference call:

The 2019 number will be roughly in the $115 million range and as we look at our guidance relative to that. As we’ve got very good comfort in our ability to close roughly 80% of that, I would say 75% to 80% of that within this year.

They are expecting they can close on 80% of the backlog. That’s low for them. They have previously said that they would convert 100% of backlog.

But it explains the guidance.

Why are they converting less of the backlog?They gave some reasons, risk of implementation on their part (sounds like they are still developing features their customers want) and that of the customer,  speed of customer subscriber ramps, dependency on local network connection, and the potential that some customers will go bankrupt.

THE BACKLOG

The backlog is worth digging into. The lynch-pin of the bull case is the huge and growing backlog.  All the analysts point to the conversion of backlog into ever greater revenue.

It is impressive. Over the last year and a half Pareteum has amassed an amazing backlog of business.  This year the three-year backlog hit $615 million!

The last time Pareteum broke out the backlog by year was in their AGM presentation in September.  It was $375 million at the time.  Here it is:

What is curious about this table is that the 2019 revenue backlog is $84 million.

At a glance that makes sense – the guide was higher than that after all. But wait, Pareteum has made two acquisitions that are included in guidance. This backlog should be for pre-acquisition Pareteum as neither acquisition was closed. What’s more, Pareteum has added more than $200 million to the backlog since that time.  One would think some of that would fall into 2019.

If we take the SEC projections for iPass and Artilium at face value, the 2019 guidance is only forecasting $15 million to $25 million for stand-alone Pareteum.

How does that align with this massive backlog? It’s actually lower revenue than stand-alone Pareteum had in 2018.

Again, I’m left wondering how to make the numbers work.

Who Are The Customers?

When the numbers don’t add up – I wanted to dig deeper. In this case, the details are the customers.

Pareteum typically does not disclose its customers. They tell us about a “UK Telecommunications Company” or a “US based Managed Service Communications and Network Solution provider”.

That’s fine.  Lot’s of companies don’t disclose their customers.

But there were two press releases where Pareteum did give us names.

In the September 17^th press release Pareteum announced the following:

They said they have signed contracts with 6 brands and listed 4 of them by name, including links to their websites:

I decided to check out each of these customers.

The Secure Watch link takes you to the www.mysecurewatch.com website, where we learn that it is this operation:

A quick google search of “secure watch” pulls up the instagram of Brandon Clyde, who appears to be the owner of the establishment.  Brandon posted this picture of his new business February 6^th:

The obvious question is: what happened to mysecurewatch?

In case there was any doubt, Brandon posted this back in July:

He branded to SecureWatch in July and six months later rebranded again.

This isn’t necessarily good or bad, but it does add questions for me. (And I’ve only got so much time for due diligence!)

Then there’s Wingtel. Wingtel was a start-up in 2017.  They have raised $1 million in funding over the past two years.

While Wing Tel appears to be a legitimate MVNO, it does not appear to be very big.  This article, written in June, notes “hundreds of happy customers”.

The third company in the list, Eyethu Mobile, (which is misspelled Eyethu Mobuile on their own website below) is an MVNO in New Zealand.  But MVNO might be using the term loosely.

Eyethu was registered May 2018:

It’s a bit hard to read so here is what it says (including spelling mistakes):

“Eyethu Mobuile Network is a private company that is 100% black youth owned. It was registered under the Companies & Intellectual Properties Commission on the 17th of May 2018.”

Eyethu goes on to say says that they will launch their service at some point in 2019.  They aren’t actually a revenue generating busines yet:

Company #4 is ACN Europe.  They are the most likely revenue generating business of the four.  ACN Europe provides telecom services to customers. They are based in the United States but expanded to Europe in 1999.

ACN is also a multi-level marketing business (like Amway, Arbonne and such) and like most of these businesses, they have been accused of being a pyramid scheme (by the state of Montana in 2010).  The New York Times recently linked ACN to US President Trump in an article discussing “usage of the Trump name in sham business opportunities”.

According to a lawsuit launched in late 2018, ACN was one of the companies that secretly paid Trump to promote them.  Evidently, ACN required investors to pay $499 to sign up to sell its products, like a videophone and other services, with the promise of additional profits if they recruited others to join. Please note that ACN is not accused of anything in this lawsuit.

A quick search uncovers that most “independent sales people” that pay the $499 don’t ever make it back.

ACN offers mobile services through its MVNO subsidiary JOi Telecom.  Joi was launched in 2014 and operates in the United Kingdom and France.

JOi offers low cost, entry-level 3G device services.  There doesn’t seem to be much information available on how big JOi Telecom is.  There is zero press on the company since 2015.

Reviews are sparse which is a stark contrast to other UK MVNO’s I looked at, where there were multiple reviews.

The user reviews are full of unfavorable references with the word “scam” used frequently.

Together these four companies are of the 6 making up $50 million of backlog.

On to the second press release.

On October 23^rd Pareteum announced $11 million of new business:

As in the first case, Pareteum only names 3 out of 5 companies.  So we can’t be sure what portion of the $11 million these companies represent:

First, Global Connect.  When I attempt to access Global Connects website I am warned by Chrome:

On to WorldSim.  WorldSim is a sim card distributor that promises worldwide connectivity.  They sell sim cards out of the United Kingdom.

It’s hard to know how big WorldSim is. Their LinkedIn account notes 22 employees. Owler, an online business intelligence service, says their annual revenue is $6 million. While it appears to be a legitimate business, it doesn’t look like it’s very big.

Finally the website for Moby doesn’t work, but redirects you to Mobi.com, which they have apparently rebranded to.

Mobi is a wireless MVNO in Hawaii. They are “proud to help connect thousands of families, friends, and colleagues across Hawaii. They list two retail locations on their website, but one appears to be closed. Their head office on the website is this building:

Does it add up?

As good as the backlog looks, its only as strong as the customers that make it up.

I can only examine a tiny sub-set of the customers that make up the backlog. Even from the two press releases where they did name names, I am only looking at 3 out of 5 and 4 out of 6 customers.

It’s entirely possible that Pareteum has some premium customers making up the majority of the backlog from these two press releases and across the rest of the backlog.

The problem for me is I can’t validate that. Which makes the stock tough to buy.

iPass

Apart from questions about revenue conversion and questions about backlog, the other questions I have revolve are about the acquisitions. Particularly iPass.

iPass has a fairly straightforward business: they provide Wi-Fi access in hotels, airports, convention centers, trains and cafes.

Venues pay iPass for access to the Wi-Fi network. Payment options are either fixed unlimited or pay-as-you-go. The venue embeds the cost to customers as part of their pricing or charges directly based on usage.

Here is iPass revenue since 2015:

The business appears to be in significant decline.

It is not surprising. Customers are getting less fees from their  Wi-Fi platforms. Pay as you go Wi-Fi is being replaced by complimentary Wi-Fi. Data charges from carriers are low enough that users balk at expensive Wi-Fi.

In their disclosures iPass notes that partners and customers are lowering their minimum commitment fees on renewels and even requesting a re-evaluation of these commitments on existing contracts.

Because iPass generates fees by turning wholesale bandwith into retail Wi-Fi, this is a low margin business.

Gross margins were only 26% in the first nine months of 2018. They’ve been in decline since 2012, when they were as high as 50%.

One way iPass has stemmed its revenue decline is by signing customers up to unlimited, flat-rate plans.  Yet they pay network providers based on usage.  This sets up the potential for further margin decline if usage shrinks, and makes it difficult to see how the company ever turns to profitability.

The decline in business has weighed on the stock.  iPass fell from being a $13 stock in July 2017 to trading at less than $2 late last year before being acquired by Pareteum.

Yet Pareteum is expecting a remarkable turnaround in the business.  This is from the SEC projections.  Revenue is expected to increase more than 30% in 2019 and gross margins are expected to rise to 50%.

Yet Pareteum doesn’t appear to be investing in the business.  In fact, just the opposite.

On the Q4 call one of the analysts asked management whether with all the new backlog business they would have to hire more development resources.  Not so, Turner said.  They can use the iPass employees.  Speaking of using the iPass employees, Turner said:

“And this is an extremely important point. We gained 75 developers and network cloud personnel to help deploy and what was at the end of the year was $650 million and growing 36-month contractual revenue backlog is extremely important.”

So Pareteum can allocate iPass employees to their own backlog while at the same time growing the iPass business… is hard for me to comprehend.

CONCLUSIONS

The upside here is substantial – if management meets their “extraordinary aspirational guidance“. I don’t doubt that. If Pareteum is successful with the following, the stock is a screaming buy:

1. Converting backlog to revenue
2. Meeting their revenue and EBITDA growth forecast
3. Meeting their Artilium and iPass growth forecast
4. Realizing anticipated synergies for these companies

The problem I have is believing they can do this. There are so many oddities with this company that I just don’t know. I didn’t even touch on their failed blockchain idea of December 2017 (which took the stock from 60 cents to over $3 in a couple weeks).

The one real thing that Pareteum can hang its hat on is that they did grow revenue in 2018. Revenue was $4 million in the first quarter and up to $8 million in the third quarter.

But even that has questions. Revenue rose again in the fourth quarter to $14.3 million. But $5 million of that came from Artilium.

Look, I can point to 5 brokerages that all believe Pareteum is going to continue to grow and that 2019 will be a break out year.

That may be the case. They certainly have the backlog to do it.

But given the information I have, I have to pass.

DISCLOSURE:  I am NOT long or short Pareteum, but I DID have more fun trying to figure out this company’s story than studying oil stocks.

Keith Schaefer
Publisher, Oil and Gas Investments Bulletin

Mark Papa, the CEO of Centennial Resource Development Corp (CDEV) is known as the “Godfather” of shale oil.

Following the recent release of its Q4 2018 earnings report the share price of the Godfather’s company was taken out to the woodshed.

The company missed analyst expectations… BIG time… and the stock immediately dropped 25%. OUCH.

But in his Q4 earnings call with analysts, the “Godfather” certainly wasn’t apologising to anyone.

Instead Papa pointed his finger in the other direction – at the analysts whom he says were incompetent in building their estimates.

“…if that doesn’t comport with Wall Street’s calculation of what they thought production might be, that’s just not our problem, frankly.”

Papa doesn’t seem to care about not measuring up to analyst expectations. I wonder if his shareholders who have seen the share price more than cut in half have a different view?

Much worse for Papa and his shareholder however….

I believe that the challenges for Papa, CDEV and every other independent Permian producer are only going to get worse from here. (Just FYI, there really is only one Permian producer worth owning, and it’s in the OGIB portfolio right now and it’s making us money!)

I Tried To Warn You That These Kids Were Going To Be Troublemakers!

The hot button topic that caused analysts to overestimate what Permian producers like CDEV are capable of is parent – child wells.

In the horizontal oil and gas business, the first well that is drilled on a piece of land or location is considered a parent well.  These wells are drilled into the best location and have the entire oil or gas reservoir all to themselves.

The drilling that comes later that drills up the rest of the field, called infill drilling, is referred to as the child wells.  As you would expect, the parent wells are more profitable than the child wells. Child wells often have less pressure from the reservoir and sometimes “communicate”, or overlap their drainage areas with the parent wells.

And all that means this: the best Permian wells have already been drilled for many (most?) oil producers. Producers across the Permian are finishing up with the parents and moving onto the children.

I first warned about this looming problem last September and it has now clearly come back to bite CDEV shareholders and all Permian operators.

The chart below is from a study (SPE 194310) completed by Schlumberger.  The chart adjusts Midland Basin wells for lateral length and pounds of sand per foot to make them comparable by year.

This is an “apples vs apples” view of how Permian wells perform by year they are drilled.

What the study shows is that while IP rates have gone up significantly over the past seven years as the wells got longer and amount of sand used increased… the older wells produce more oil, for less money.

The Permian wells aren’t getting better every year… they are actually getting worse.

Papa himself explained the problem in the recent Q4 call as follows:

“The issue for the entire Permian Basin relates to parent-child wells. Every year, every company is drilling a higher percentage of child wells and those wells are simply not as powerful as the parent wells.”

Wall Street analysts have not been factoring in the impact of producers like CDEV moving to drilling child wells. That is why the analyst expectations for CDEV were far too high for Q4 and why the company was unable to meet them.

For shareholders of a company like CDEV – which has gone from $20 at the start of 2017 to under $9 today – the idea that the best wells have now been drilled can’t be terribly comforting.

Papa has been open about this parent-child well issue for a while now. His take on the issue is – this is the reason that Permian production growth is going to hit the brakes hard. He has gone as far as to say that rapidly slowing Permian production growth is going to leave the world facing an oil supply shortfall, and lift oil prices.

His message is that independent producer like CDEV are going to thrive because oil prices are going up as Permian production growth halts.

He is wrong.

Step Aside Children – The Adults Are Ready To Takeover Now

The parent-child well issue got a lot of attention following CDEV’s share price shellacking.

I think the parent-child well issue is a tempest in a tea-pot.

The real Permian parent – child issue is not about wells now.  The bigger parent-child issue in the Permian is actually about the majors (parents) versus the independents (children).

What it boils down to is that the parents have arrived on the scene and the children are about to get spanked.

The talking point for months from Papa has been that the parent-child well issue is going to slow Permian production and do great things for the price of WTI.

The plans that Chevron (CVX) and Exxon (XOM) just rolled out this week tell a very different story. These two companies alone will assure that Permian production growth is slowing down no time soon. Not for years to come.

Chevron and Exxon are playing a different game than the independents. The majors don’t need to worry about where the cash is going to come from to drill. They don’t even care what the price of oil is.

These companies are about to spend tens of billions to drill the Permian into proverbial Swiss chees – no matter how many parents or daughters get drilled. Exxon this week was assuring the world that at $35 WTI they would still be thrilled to drill the “you know what” out of the Permian

Within a couple of hours of each other on Tuesday of this week these two energy behemoths revealed their plan for the Permian. Combined we can expect just these two companies to be producing almost 2 million barrels per day out of the Permian.

Chevron is planning for 900,000 barrels per day by 2023 and Exxon is looking to hit 1 million barrels per day by 2024.

The slide below is from Exxon’s March 6, 2019 investor day presentation. The intended production ramp up isn’t subtle.

One year ago Exxon was planning to take combined Permian and Bakken presentation to 650,000 boe/day by the end of 2025. Now that number is 1.3 million boe/day by 2025 with almost all of the growth coming from the Permian.

Exxon just told us that the company has doubled its shale growth intentions – and we are supposed to believe Papa’s view that Permian production growth is going to grind to a halt? NOT A CHANCE… the scale of what is about to happen with just these two majors will override all Papa’s Permian production concerns for a few years. It makes it hard to be bullish on WTI pricing (even with all the increased US export capacity).

Chevron’s most recent presentation looks exactly the same. It shows Permian growth going from very little today and heading straight up.

The new Chevron Permian target of 900,000 boe/day by 2024 is a 40 percent increase from the company’s stated intentions from a year ago.

Together Exxon and Chevron alone are going to grow their Permian production by close to 1.5 million boe/day within 5 years. The entire Permian current produces roughly 4 million boe/day.

Welcome to the big boy game… it is the long-established way that the oil patch works. Wildcatters and small explorers take the risks and prove up a play, then the majors move in and take over from there.

The independents rushed into the Permian and moved quickly to drive production up fast. The majors meanwhile sat back and took their time to study what was going on not with a focus on fast… but on doing things well.

There is no silver lining here for Papa, CDEV or the other Permian independents. They haven’t generated any wealth for shareholders as of today and the road gets much hard from here.

I see the silver lining is in the Midstreamers – the companies who get paid to move all that oil and gas from well to refinery. After doing A LOT of research, I’ve bought what I think is the best stock to profit from all this increased Permian production.

I have two stocks to show you – one is best Permian upstream stock to own, and one is the best midstream.  If you want to know the one Permian producer, and the one Permian midstreamer that can best take advantage of what’s happening in Permian, click on the link below to subscribe:

Click here for monthly access $59 a month (no refunds)
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Keith Schaefer
Publisher, Oil and Gas Investments Bulletin

Microsoft founder Bill Gates is a man on a mission – he has also founded a billion dollar energy fund with sole purpose of fighting climate change.

Gates is definitely not pro-hydrocarbons.  But he is a realist.

And he’s not optimistic about wind and solar renewable energy as a solution to climate change.

This is obviously a very, very smart man and he is very much on board with the idea that climate change is a dire problem for the world.
Yet Gates has recently offered a harsh reality check on the current state of renewable energy if there ever was one.

As of today Gates believes that realistically solar and wind are still in need of an order of magnitude improvement from where the technologies currently are for them to be a reliable source of power.

In fact, I’ll show you later in this story how the use of renewables is actually increasing the amount of natural gas used – as back up for all that unreliable but politically correct solar and wind based power!

Gates’ full comments on renewables (36 minutes long) are at this link.

Per Gates – “The Concept of Clean Energy Has Screwed Up People’s Minds”

Pay special attention when Gates is asked a question at the 8:45 mark.

It isn’t often you get to see a man with $100 billion get agitated.

Gates is asked if he’s optimistic about the cost of wind, solar and battery storage coming down really extremely fast, and if renewables will soon be ready to assume the mantle of Primary Power Provider?

This question clearly annoys Gates and he quickly says in an exasperated state… “That is so disappointing.”

Gates says putting a carbon tax on businesses will not mean that renewable technologies will quickly improve.

Gates views this as ridiculous. His view is that there is no way that we can rely on wind and solar if those power sources aren’t even close to being reliable enough to do the job.  Even financial incentives in the power sector don’t magically create technology miracles.

And if you listen to Gates you don’t get the impression that wind and solar are ever going to be ready to do the job fully because (he says) battery storage capabilities are so woefully inadequate. (But he’s never met CellCube! CUBE-CSE)

Gates uses terms like “Monster Miracle” and “Order of Magnitude Improvement” for renewables to supplant hydrocarbons.

Unreliable Renewables Need A Backup – That Backup Is Natural Gas

Everyone knows the problem with wind and solar power is that they are intermittent and unreliable. If the sun don’t shine and the wind doesn’t blow… you are out of luck.

Renewables can’t carry the ball alone. They need a backup… a pinch-hitter to come in and do the heavy lifting at crunch time.

That pinch-hitter is natural gas.

The US government’s EIA just detailed that natural gas powered reciprocating internal combustion engines (that’s a mouthful!) are getting a lot more popular. That’s because utility operators that use renewables as part of their power generation are steadily turning to this type of backup generator.

Normally these reciprocating engines are used only for emergencies. Now they are being used on a regular basis to step in when the sun isn’t shining and the wind isn’t blowing.

Advancements in engine technology and scale is allowing utilities to increase the role of these reciprocating engines. Having US natural gas prices cheaper than dirt also helps.

Before 2010 reciprocating engines typically had no more than 9 MW in capacity. In recent years, larger units that range from 16 MW to 19 MW have been installed throughout the United States.

As you would expect – power plants with large reciprocating engines are often located in states with significant renewable resources and in particular wind generation.

Texas, which has the most wind electricity generation capacity in the country has 910 MW of natural gas-driven reciprocating engines. That is 20% of the national total (4,642 MW).

Kansas (564 MW) and California (398 MW) also with large amounts of renewable generation have the next highest capacities of reciprocating engines.

These utilities can’t rely solely on renewables and natural gas is becoming the “go-to” backup.

How Do Renewables Become Capable Of Taking The Starring Role?

Renewables may work at some point, but the business model and the technology is not there right now to make them even close to being economic.

Most environmentalists are ready to simply assume that the order of magnitude change in technology will happen quickly… that is a giant leap based on nothing more than hope.

To a rational mind like Bill Gates, that is a reckless assumption to make.

Gates has actually said that the environmentalists who are convincing the world to believe that wind and solar alone are going be the solution to climate change are more dangerous than the people who deny that climate change even exists.

That probably doesn’t win Gates many friends amongst environmentalists, but he isn’t in this to win friends… he is looking for a solution.

So how do you think renewables can play the most efficient role in North American power markets. Send me your thoughts on what could be done now to include renewables better in our power mix, or even make them the star of this show? Send me an email at editor@oilandgas-investments.com and we will republish a mix of the best suggestions.

If you are not already a subscriber to my Oil and Gas Investments Bulletin independent research service, click a link below to become one:

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To me, investor sentiment the oil market changed last week – to the bullish.

For the last few months, oil has been caught between two opposing forces – (very) fast rising US production vs. Saudi cutbacks.

When the Saudis announced late last week that March loadings would average 9.8 million bopd – under 10 million, and well under what their OPEC cut quota is, the Market finally stood up and listened to what the Saudis have been screaming for weeks: they are willing to do whatever it takes to keep prices high.

Hear my thoughts, straight from deep within the OGIB Mission Control:

For the Saudis to do whatever it takes – it takes a lot, as the US has every bearish stat you can think of:

1. More accurate monthly stats are showing the weekly numbers are UNDER-estimating US production by some 300K bopd… so that 11.9 is really 12.2 million.
2. Rig counts are not falling in any meaningful way (they are falling but just…)
3. US producer budgets are not falling in any meaningful way (they are falling but just…)
4. DUCs at record 4000+

The only bullish thing I see in the US is that Permian gas prices (WAHA) have gone negative a few days and sit around 30 cents/mcf now. This means realized pricing in the Permian should be lower than people think… and at some point, should have an impact (lower) on Permian production… whenever the Market chooses to pay attention to that.

Global demand increases continue to be in the 1.2-1.5 M bopd range, so this potential move in oil price is more supply driven than demand – and that makes this move, IMHO, more volatile.
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Keith Schaefer
Publisher, Oil and Gas Investments Bulletin

Shareholders of First Cobalt – FCC-TSXv/FTSSF-OTCQB are like the Fram Filter man – they can get paid now, or they can get paid later.

I think they could get paid now because FCC owns the only cobalt refinery in the world that’s idle – outside of China, up in the small town of – where else – Cobalt Ontario.

It’s permitted, and has been independently appraised as being worth USD $80 million – which would be $104 million in our discounted Canadian dollars. Compare that to the company’s market cap of CAD$43 million.

CEO Trent Mell believes that for a $30 million investment… this refinery can be quickly cranking out $25 million in cash flow at a USD $30/lb cobalt price – that’s just over a one year payback.

Even at current prices that are bouncing around $20/lb (and viewed as unsustainable) the payback on getting this refinery up and running is just two years… a no-brainer kind of return.

I tell all my OGIB subscribers – juniors in oil and gas must have one year payback on their assets for them to grow within cash flow. Oil wells decline quickly. But this refinery will keep on chugging out huge profits year after year with no decline.

USD $30 per pound is the consensus analyst view for medium term cobalt pricing although some analysts see quite a bit higher.

A lot of mining projects go into production with just 15, 20% IRR. This refinery is going to have like 100% IRR – 50% in the worst case.

So while the numbers work great, the strategic value of

1. having a permitted asset inside North America
2. for a commodity dominated by China and the DRC – Democratic Republic of the Congo (can you say “supply risk”?)
3. in an industry (Electric Vehicles) that’s growing around the world very quickly

adds an incredible amount of intangible value the Market isn’t pricing in.

Investors aren’t recognizing this, but the American government is. They put out a personal invitation for CEO Trent Mell to visit the White House in Washington D.C. to help them better understand what the US could do to secure a domestic supply of cobalt – as they have a growing deposit in Idaho.

That’s what I mean by shareholders getting paid later. Getting the refinery into production ASAP would pay shareholders now – getting the Idaho asset developed & ready for mining – with the strong backing of the US government – means they get paid later.

The White House Is Paying Attention – Even If Investors Aren’t

The US government is clearly concerned about domestic supply of critical minerals – including cobalt. So when Mell told me he took a trip to the White House for a conversation with the President’s national security advisers – I wanted to speak with him right away.

It isn’t every day that I get to speak with someone who has done that!

The obvious question is why is it that the White House is interested in a $50 million company like First Cobalt?

Well, it is for the same reason that Simon Moores of Benchmark Mineral Intelligence appeared before the US Senate Committee on Energy and Natural Resources last week – the US Government is quickly figuring out that the country is heading towards a major problem.

That problem – as described by Moores to the Senate Committee last week – is:

“We are in the midst of a global battery arms race in which the US is presently a bystander.”

The US is woefully behind in getting ready for the future of transportation – Electric Vehicles.

During his testimony Moores revealed that he is now tracking 70 lithium ion battery megafactories under construction across four continents. Forty-six of those are based in China with only five now planned for the US.

When Moores last provided testimony to the Senate in October 2017 the global total was at 17 – so it has increased fourfold in 15 months globally while nothing has happened in North America.

Why is this a big problem?

Because right now it looks more and more like the 21^st century will belong to lithium ion batteries. The power in the auto and energy storage industries is going to belong to those who control both the raw lithium ion battery materials and the manufacturing know how.

China is miles ahead in securing the supply of lithium, cobalt, nickel and manganese to produce lithium ion batteries. As of today the US has a minor to non-existent role in most of the key lithium ion battery raw materials and only has a presence in lithium ion battery manufacturing via Tesla and its Gigafactory.

The U.S Government is recognizing that country is almost comically behind in this critical race… and that this has to change and it has to change fast.

A Domestic Source Of Cobalt Is Mission Critical

Cobalt is a critical safety component of the lithium ion battery. The US currently has virtually no control over the entire cobalt supply chain.

In his presentation to the Senate Committee Mr. Moores said that cobalt… “is the highest risk lithium ion battery raw material, both from a supply structure perspective and a geopolitical one.”

Mining of cobalt is dominated by the Democratic Republic of Congo (DRC)… YIKES!!

Refining of cobalt is currently dominated by China which is increasingly looking like an enemy of the US.

When it comes to cobalt the US currently has nothing… NOTHING!

The scorecard is…

Cobalt supply… Zero.

Cobalt refining capacity… ZERO.

China has locked down the supply from the DRC and has developed the refining capacity of its own.

Developing domestic cobalt supply and refining capacity is nothing less than a national security issue for the United States… hence the reason that First Cobalt’s CEO Mell found himself at the White House speaking to the President’s National Security Advisors.

Mell told me that during his visit at the White House he started to walk the President’s advisors through the global supply and demand situation for cobalt specifically but was cut-off with…

“Look. We understand that. What do you have in America?”

The Government seems to now see the problem. The good news is that the US has an opportunity to develop its own domestic supply of cobalt. It just needs to get moving to do it.

The Idaho-cobalt belt is globally known as being a cobalt rich jurisdiction and presents one of the few opportunities for US cobalt supply security.

You Will Excuse My Shorter Term Thinking In This Case

It was most certainly First Cobalt’s important Iron Creek cobalt project in Idaho that had CEO Mell visiting the White House. That huge asset will definitely be First Cobalt’s long term driver.

But that’s where FCC shareholders get paid later.

Where they likely get paid now is First Cobalt’s $100 million Ontario refinery that has my short term interest… both for the fact that it is hugely mispriced in the market today but also for the economics it offers.

First Cobalt last reported $11 million of cash in the bank and no debt so they can get this refinery producing cash flow with a reasonable debt financing.

Or… somebody smart figures out that this unique asset is selling at a third of replacement value in the market and takes this company over before the market corrects its absurd valuation mistake.

Sources:

1. https://www.newswire.ca/news-releases/first-cobalt-initiates-study-on-refinery-restart-requirements-680227893.html
2. https://www.energy.senate.gov/public/index.cfm/files/serve?File_id=9BAC3577-C7A4-4D6D-A5AA-33ACDB97C233

To subscribe to my Oil and Gas Investments Bulletin independent research service, click HERE:

Click here for monthly access $ 59 a month (no refunds)

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Keith Schaefer
Publisher, Oil and Gas Investments Bulletin

Thunderbird Entertainment (TBRD:TSXv/THBRF-PINK) and their shareholders are laughing all the way to the bank as streamers, big studios and traditional networks pay big bucks for content.

Every big business in any kind of media has – or is launching – a subscription video service. That is creating an epic supply/demand imbalance.

These companies are spending big money on content – and will for years to come – tens of billions each year. It’s the biggest tailwind I see for any sector anywhere in the Markets.

The Biggest Mistake that the new streaming companies can make: is not having enough content. Paying too much for that content is not the concern. The billions these companies are pouring into streaming services is wasted if they don’t get subscribers fast – they need high quality content.

Netflix spent $12-13B in 2018, Amazon $5B, Hulu $2.5B, Apple $1B… next year all of those budgets are going up.

Netflix alone is expected to spend $18 billion and are especially desperate with Disney yanking its content off of Netflix to build their own streaming service.

The timing for Thunderbird Entertainment could not be better–nor could the timing for buying shares in the company.

That’s why I got long! Because while investors don’t know about it….

Everybody in the industry is chasing T-Bird’s creative team in this race to build paying subscriber bases. You can’t make $5 billion at the flip of a switch like Netflix when they jumped rates by $3/month – without a lot of subscribers!

And you need high quality content to do that!

All this frantic action is showing up in T-Bird’s financials – look at these EBITDA numbers for the last three years:

2016 – $2.2 million

2017 – $5.1 million

2018 – $10.1 million

AND… they have a potential $170 million backlog on shows for next year – much of it with The Big Boys – what’s called the OTT – Over The Top content majors like Netflix.

EBITDA will keep growing with that kind of backlog. And I get to buy all that growth at half price, as their valuation is half their peer group. That’s mostly because T-Bird only listed in November 2018, it really isn’t on anyone’s radar screens yet.

I want everyone to understand the leverage here. This industry is now GLOBAL. Netflix has 80 million international subscribers. If you get a hit show, EVERYBODY in the world will have a chance to see it now. Asia, Europe, Australia, South America… you can get BIG in a hurry here and make HUGE money.

And where that really pays off is in animation. If you create a cartoon character the kids love, you could have another Paw Patrol, a Canadian-made animation that brings in as much as $300 million in annual sales from merchandising   That would have an incredible impact on T-Bird’s $2 stock.

The merchandising of these cartoon characters can absolutely dwarf what the show is worth – to the point where truly, the show is just a commercial for the toys, games, consumer products etc that surround a winning character.

Get this: Toronto based eOne was offered 1 billion pounds (US$1.3 billion) in August 2016 just so they could have the rights to the animated Peppa Pig. Over 1 billion dollars!!!!! (By the way, that would be $21.73/TBRD share)

It’s the most un-appreciated part of the studio business by investors, yet it has been happening for years.You know why Star Wars director George Lucas is a multi-billionaire? Because he chose a paltry salary of $150,000 but wanted the merchandising rights. That decision made him one of the richest men on earth.

T-Bird’s stock has a huge tailwind with massive studio spending, and the leverage that ONE hit show or character can create a worldwide merchandising deal. Given the talent and focus that T-Bird has on this (they just hired away a Pixar animator!) on animation, and only 50 million shares out – the leverage for investors is very real.

Now, an animation homerun is the sizzle for investors.

But honestly, the main reason I’m buying the stock was the Chairman, Ivan Fecan. Fecan (pronounced Fees-an) is the Ted Turner of his time. It’s always about management.

The media business is one where small companies came become multi-billion dollar juggernauts – provided the right entrepreneur is calling the shots.

Ted Turner took over his father’s billboard ad company in an emergency… the elder Turner had tragically took his own life.

The company was tiny, nothing. Turner had a vision to build a giant media conglomerate. He renamed the company Turner Broadcasting and went to work, building it from scratch to selling it to Time Warner for $7.5 billion in 1996. (T-Bird only has 50 million shares out, so that’s about $152/share if Ivan & team can do it.)

Ivan is a great builder, manager, and seller of content.  He has been the creative or executive head of THREE national TV networks, and sold two of them.

In other words Fecan is at the very top of the food chain in the entertainment industry. And this is the first time he’s working for himself, with a BIG stock position.

Joining Fecan as the lead director of Thunderbird is the founder of Lion’s Gate Entertainment, one of if not THE largest independent studios in the world – Frank Giustra.

Lions Gate also started from scratch, and now has an $8 billion enterprise value.  These two men have built BIG media companies. T-Bird just listed four months ago! They’re just starting out and shareholders get them today at half price by any valuation metric.

Their smartest move to date was promoting the head of Atomic Cartoons, Jennifer McCarron – to CEO. This amazing woman built up Atomic from 60 to 600 employees, and developed their key relationship with Netflix. McCarron was the executive producer of Beat Bugs, an animal cartoon series built around the Beatles’ songs.

Thunderbird pitched Netflix, and they bought it right away. Not only did they pay tens of millions for the show – they wanted a two year exclusive. McCarron produced that show – it was one of Netflix original shows – and was their top family hit for years. Netflix even has one of their main boardrooms in Los Angeles covered in Beat Bugs!

She is now definitely IN with the OTT–Over The Top-crowd, and that is key for us shareholders. Since then, she has literally walked into Netflix and walked out of there with another T-Bird deal worth tens of millions – same day. SAME DAY. Cha Cha Cha!

Yoda and Obi-wan have their Skywalker.

This threesome’s experience, connections and financial discipline is why T-Bird’s EBITDA is up 500% in two years. And that backlog will keep it growing.

Their involvement is why Thunderbird is attracting top quality creative talent like no other studio this size (they just hired away an animator from PIXAR!)

Their involvement is why I expect this little company to one day – and not too far away – have a valuation in the billions – more 10x what it’s trading at today. That has happened with every other company these two men have been involved with, and this  time it should be so much easier now that content is going  into (desperately) short supply.

The stock has only been trading for four months. A full, new set of financials have not come out yet. I think investors get a pop when the first couple quarterlies come out, and then steadily build as the studio gets bigger.

And they’re already in with OTT crowd I spoke to earlier; The Big Boys. In fact, studios like Disney and Netflix ask T-Bird to produce their shows!

That sure makes it easier to get same-day, multi-million dollar deals – the OTT crowd has the confidence to push work onto T-Bird, so no wonder they can land big contracts.

This stuff is happening all the time now. They just signed a distribution deal for one of their half-hour comedy shows (Kim’s Convenience) across all of Asia. Their top ranked reality show, Highway to Hell, is sold in over 170 countries, and has spawned TWO more reality TV series spinoffs.

They’re firing on all cylinders. And nobody in the investment world knows this T-Bird story. Like I said, it trades at half the value of its studio peers, even the small ones. And T-Bird is growing much faster.

Of course, when they make their own shows, whether it’s the cartoons from animation or the reality TV series, they own the rights to those shows. The merchandising revenue alone from a hit show could make T-Bird stock a multi-bagger… and Atomic Cartoons is having great success. And the distribution rights can be re-sold time and again, creating a recurring revenue stream for the company over time.

T-Bird is growing revenue and cash flow like crazy. They’re making top-rated shows. They’re attracting both high quality creative talent (PIXAR…) and being given shows to make by The Big Boys. They’ve got the two best media builders in the country who are just starting out on their big growth curve – right when the studios begin spending billions… could their timing have been any better?

And the stock is trading at half price; half its peer-valuations. Whenever you can buy best-of-breed management already generating huge growth AND positive cash flow – at half price – I make that trade all day long.

I think my timing is great, owning the stock right now. Quarterlies are coming, more analyst and institutional attention is coming, and as that potential $170 million backlog gets firm announcements, I think the stock moves up steadily.

That’s why I’m long.

Management at Thunderbird Entertainment has reviewed and sponsored this story.
The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.