Every spring the elite of the investment world gather in New York for the Ira Sohn Investment Conference.  It is a Who’s Who of the hedge fund industry.

This year Jeff Gundlach—who oversees $120 billion for DoubleLine Capital—took the stage and pounded the table for buying one thing….

Shares of oil producers, specifically smaller companies.

The reason why Gundlach is bullish on junior oil is so very simple. I can cover his entire investment thesis in just two charts.

The first chart is the price of the commodity itself, WTI crude oil.

Two years ago WTI oil was trading for $45 per barrel.  Today we are getting very close to $70 per barrel. That is more than a 50% increase.

Clearly a good thing for oil producers.

Chart source:  Nasdaq

This second chart is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP)—which is what Gundlach was telling investors to own.

While WTI oil is up 50 percent over the past two years the XOP hasn’t budged……it is essentially flat.

On the surface that doesn’t make much sense.

The share prices of oil producers should follow the commodity price directly.  While oil prices have soared over the past two years the XOP should have done the same.

When you dig even deeper, it makes even less sense.

The XOP is an equally weighted ETF.  That means that unlike most ETFs which are market cap weighted and mostly invested in oil majors, the XOP has loads of exposure to small oil companies……the companies with real leverage to oil price movements.

Gundlach is recommending the XOP to specifically target these smaller companies.

The XOP hasn’t moved for two years.  That is very strange.

Not only should the performance of the XOP follow the price of oil, the leverage that these smaller companies have to the commodity price means that when oil prices rise the XOP should rise a lot more.

Let me show you what I mean.

The smaller operators that are heavily represented in the XOP—by and large—have a large percentage of their production tied to U.S. shale oil.  While the breakeven price for producing shale oil varies between plays, and is a moving target because of service cost fluctuations… it wouldn’t be outlandish to estimate that breakeven price comes in around $50 per barrel.

That means that two years ago when oil prices were $45 per barrel the average small shale producer wasn’t breaking even.

Today those same companies are getting almost $70/b; far in excess of their cost of production.  That means these small companies are generating Big Cash Flow.

Oil prices are up 50% in two years; cash flows are up exponentially.

How then does it make sense that these companies have gone from losing money or breaking even to generating significant cash flow……yet their share prices as represented by the XOP have not even moved?

The answer is that it doesn’t make sense.  That is why Jeff Gundlach pounded the table on these companies at the Ira Sohn this week.

Pricing the small oil producers for $68 per barrel would mean a HUGE revaluation of their share prices higher.

That revaluation is not the 50% move that oil has made…..remember these companies have leverage here.  The share prices need to move more than that to match up with how much their cash flows have increased.

We are talking about multi-baggers here.

That is if oil stays where it is today.  If oil prices go even higher……..there is even more upside.

And that is why this lack of move in the XOP is so strange.

The market is pricing these companies like it doesn’t even believe that $68 per barrel oil is going to last, yet oil inventory levels have hit the bottom of the five year average and are still falling.

If anything the facts suggest that oil is still going to go higher.

Clearly investors have given up on the energy sector….that is the only explanation for why share prices of these companies are so low while the oil price and fundamentals of the oil market are so strong.

If (or should I say when) the market accepts the reality that the oil glut gone and that a shortage is emerging the rally in junior oil names is going to be one for the ages.

To profit from this a person could own the XOP like Gundlach is doing. Doing so would mean that you get exposure to the average oil producer.

But I think there is an opportunity to do much better than that.

You could instead fine tune your investment and own a company that is far better than average…a company that I believe is by far the best way to get exposure to an oil sector rally.
A company that offers:

• A pristine balance sheet (I don’t mess around with anything else)
• A proven management team (why would you ever accept less)
• The widest cash flow margins in the industry (literally the best in the sector)
• A big, fat dividend (I know it is as rare as hen’s teeth in this business)

I’ve spent two years owning, studying and following this company.  I don’t settle for average companies.

Just for today I’m going to share my full company report with you—RISK FREE.  I’ve found something special with this company and it is in my best interests to spread the word.

Just click here and get yourself positioned for what Jeff Gundlach thinks is going to be a fantastic ride for investors.

Now is the time to show that you are smarter than the average investor. It is time to outsmart the market. Click HERE to get the symbol of this highly profitable oil producer NOW.
Keith Schaefer

Could we see $100 per barrel oil in the next 12 months?

The answer is yes.

The reason why is because the only person on the planet who can $100 per barrel oil happen is very motivated to do so.

The Prince’s Plan Requires High Oil Prices

We need to remember that it really is Saudi Arabia who controls the global price of oil.

In 2008 it was Saudi Arabia who cut production in order to create the rapid oil price rebound from $30 per barrel.

In 2015 it was Saudi Arabia who ramped up production into an oversupplied market in an effort to bankrupt U.S. shale producers.

If Saudi Arabia wants to move the price of oil, they can do it.

When Saudi Crown Prince Mohammed bin Salman (“MBS”) assumed de facto power of Saudi Arabia he brought with him a new vision for the Kingdom.  MBS has a vision for a Saudi Arabia that is not dependent on oil exports.

The Prince has seen the writing on the wall.  It says “electric car” and MBS knows that his country needs to get out in front of this threat.

He has a lot of work to do.

MBS calls his plan Saudi Vision 2030.  The Prince intends to build an entirely new economy in less than 15 years.  Whether that is achievable or not is more than a little uncertain.

(By the way, this should be good news for metals and solar companies as well.)

What is certain is that he must spend a ridiculous amount of money trying to do it. We are talking about trillions of dollars.

With Saudi Arabia’s foreign reserves depleted by the oil crash there is only one place for the Crown Prince to get the money he needs for his bold plan. MBS is needs to milk that Saudi oil cash cow for every penny and then some.

That milking needs to start right now.

$100 Oil Would Be Very Helpful In Pricing The Aramco IPO

MBS rolled out his Vision 2030 Plan in 2016.  Not coincidentally, it was in 2016 that Saudi Arabia pushed OPEC to finally decide to cut production and get rid of the oil glut.

MBS doesn’t just need oil prices higher to increase annual Government revenues.  He also needs oil prices as high as possible to maximize the auction price for the Saudi crown jewels that he is selling — a portion of Saudi Aramco.

The IPO price for Aramco is directly related to the price of oil.  With the IPO expected within the next year there is a definite sense of urgency to get oil prices up now.

A bullish tear for oil prices would get investors excited to get a piece of the Aramco action.  MBS needs to make the oil glut a distant memory and create some noise about a shortage of supply.

This week—with oil prices rising thanks to OPEC’s production cuts—the world went looking to get a hint of what Saudi Arabia would do next.  The Market is thinking that since the oil inventory glut has been worked down it would make sense for OPEC’s production cuts to be eased.

Instead, we learned—from multiple sources—is that behind closed doors, Saudi officials are now talking about $100 oil. There is currently no talk of easing back on the production cuts that have global inventory levels falling rapidly.

All of a sudden we have an oil market with a normal amount of inventory that is HUGELY undersupplied on a daily basis.  You can see that daily undersupply from how fast inventory levels have been whittled down over the past nine months.

Inventory levels have normalized and are still falling fast.  Another six months at this pace and you are going to be hearing about oil shortage on a regular basis.

In other words…..it is GAME ON for energy sector investors!

Now here is the rub.  The investing public gave up on the energy sector in 2016.  Companies at this point aren’t even priced for sustained $65 oil — never mind the $100 per barrel oil that may be coming.

It isn’t time to stick your toe into the energy sector.  It is time to jump into the pool.  It has been years since there was an opportunity like this to take advantage.

This is the time to act, but not in a careless manner.  Before you jump you need to make sure you are jumping into the right companies.

I’ve identified the perfect stock to take advantage of oil prices continuing to rise.

This company has everything I look for in an oil business:

1. A pristine balance sheet (I don’t like risk)
2. Best in class assets (that means industry best economics)
3. An ownership group aligned with investors (they eat their own cooking)
4. The widest margins in the industry (that means free cash flow)

I buy energy companies that can do well when oil prices are low and mint money when oil prices rise.  That is why my OGIB portfolio has continued to grow through low oil prices.

I believe this company is the best risk/reward opportunity in the energy sector today.  Better still…..the company pays a significant, growing dividend.

Interested?  You should be.

Just click HERE for a free look at this great company.

Keith Schaefer

Spartan Energy–which I think was the best junior oil producer in Canada (i.e. best free cash flow/low cost producer)–sold itself to Vermillion Energy (VET-NYSE/TSX) for 4.5-5x EBITDA.  I think that’s a very low valuation.  It was a paltry 5% premium over the previous day’s close.

This is a huge negative for other junior and intermediate producers in Canada, who only exist because investors think these junior management teams can grow their business and get bought out for 7-10x cash flow.  It makes me wonder why I own ANY Canadian producers if The Best One goes for a paltry 4.5-5x cash flow.

Vermilion is trading around 7.5x cash flow.  On other metrics, it works out to roughly $61,000 per flowing barrel and $12.33 per 2P barrel.  VET is trading at almost $90,000 per flowing barrel and $22.50 per 2P barrel–so accretive it makes me wonder how the Spartan deal didn’t get done at a better valuation.

I’m not the only one.  Said Canada’s Scotia Capital on Tuesday morning: “we did not expect such a deal to come so soon or at this low of a valuation (the headline price implies ~4.7x SPE’s ’18E DACF on strip; below our target and at no premium to the current multiples for the peer group). We have spent more time thinking through the deal and talking to investors and are still at a loss.”

But there are many reasons Canadian oil stocks trade at  low valuations–anti-resource governments in the federal government in Ottawa, in the B.C. government in Victoria and even the Alberta government in Edmonton…all campaigned on anti-fossil fuel agendas.  There are big discounts for Canadian oil and gas because it only has one market–the US.  And if you haven’t heard, the US is massively growing its own oil and its own gas production right now.

And the truth is, the only possible buyers for Spartan were Crescent Point (CPG-NYSE/TSX) and Vermillion.  And if Crescent Point did one more deal, they will have a lot more than one small activist on their behind.  CPG would have a broad scale shareholder revolt.  Whitecap (WCP-TSX) would have been a longshot buyer, and southern Saskatchewan is not one of their core areas.

Vermilion was the only Canadian company—and no international company wants anything to do with Canada right now, until the current federal, Alberta and BC governments are all changed—with the cost of capital to do this deal.

So to me, that’s why this deal got done so cheap.  Few buyers, tough market (big discounts for Cdn oil and gas, and even Vermillion could not have raised the money to do this deal in cash right now) and governments not really on the industry’s side.

Scotia did mention the fact that management had more than 10 million performance warrants that expire in December 2018 at $2.40 strike price.  These warrants were created when the company was formed–which was in late 2013, at the height of the last bull market in oil and oil stocks.

These warrants appear regularly in Year End statements–here’s the snapshot from the 2017 Year End financials, and this appears on page 27:

What this shows is management has the right to buy 10.1 million shares at an exercise price of $2.40 (this is presented already taking into account the  3:1 rollback; so they were originally 80 cents) that expire in December 2018; 8 months from now.

Now, only the best teams can extract this from their underwriters, and then only in a crazy bull market like late 20131 was.

At a $6.50/share buyout price, that’s $41 million cash for management OR…at Vermillion’s current dividend of $2.76 annualized, a 15% yield (fifteen percent)–which they would get tax free as there is no capital gains if you take the stock.  The premium on the buyout for shareholders was 5%.

This is the team that also gave themselves a huge block of stock at 15 cents when they did a “recap” on this company when it was called Alexander Resources back in 2013—near  the top of the last bull market in oil.  (After Alexander, every promoter & mgmt team in Calgary was looking to do a “recap”; a recapitalization of a dormant shell company on the TSX Venture exchange for a year–it was the hot new thing to do.)

Don’t get me wrong, I love to see people make money.  This team clearly knows how to make money, and I’ll be following them as close as I can into their next deal.

And this team technically did a great job developing their assets.   In fact, when McHardy et al created that big value vacuum back in late 2013–when they formed the company with all that cheap stock (you really pluck a lot of future value from shareholders when you do that)–they filled that value vacuum quickly.

When they took over  Renegade Petroleum in early 2014, they were able to TRIPLE the IP rates & made themselves good on that big block of cheap stock faster than I thought possible.  So good for them.  Few teams do that, that fast.   Their technical ability was why I owned the stock and followed the company closely.

But this 4.5x EV:EBITDA has to be disappointing to corporate finance people, analysts, brokers and investors. It certainly is disappointing to me.  But it looks like that’s the Market we’re in.

I’m guessing McHardy and his team was thinking about antagonistic governments, low valuations and few (just one?) realistic buyers–despite rising oil prices and cash flows.  The team either now gets a huge payday, or keep the Vermillion stock and collect a fantastic pension now with that dividend…it’s a great dividend, and Vermillion is a great company. Being a much larger entity, with some international production, Vermillion will almost certainly move up faster in price than Spartan would have.

The day after the Spartan buyout, I gave my subscribers 3 new investment reports–all US-listed stocks with US-focused operations.

A low-multiple deal like this might have attracted more attention in the US from shareholders there, but the reality is that Vermillion is a very well run company, with a higher multiple and Spartan shareholders couldn’t ask for a better company to own now.  They just could have asked for a better price.

EDITORS NOTE: My Top US Energy Pick just raised their dividend–again!  This cash cow is rewarding shareholders more and more each year.  Get this Tier 1 Management Team working for you by clicking right HERE.

Keith Schaefer

This has to be the most bullish oil market chart that any of us have seen in years.

Take a deep long look at it and then let’s discuss…

I told you……this is incredibly bullish.

The chart tracks the number of days’ worth of crude that the United States has in storage and compares it to the five year average.

Total days of crude supply is a much more useful figure than just total crude in storage. This doesn’t just look at the storage figure — it also considers how quickly that crude is being consumed.

Which is what matters!

What I want you to focus on is where we are today…..breaking through the bottom of the five year average.  Today we have the least amount of crude in storage relative to demand than we have had in years.

The oil glut is long gone.

What I find even more bullish is how quickly this situation has changed.

Please turn your attention to the line in the chart that depicts 2017 storage levels. Through the first nine months of last year storage levels were at the very top of the five year average.

Then starting in October those inventory levels started plunging and haven’t stopped.

That is the most important thing to take away from this chart……the SPEED of the days of inventory cover shrinkage.

Just because we are at the bottom of the five year average of days of inventory doesn’t mean that the inventory drawdown is going to stop.  The daily supply and demand fundamentals that caused this still exists.

My point is that the oil market is only going to keep getting tighter.

Now the best part for investors.  Energy stocks are still at rock bottom valuations — they are dirt cheap.

So cheap, you don’t need to go down-market to get leverage—you can buy the best companies at historically low valuations.  Buying quality at a discount is what I wait for and why I was buying oil stocks this week.

There is one particular US oil stock that is so good I haven’t just started buying it lately…..I’ve been buying it steadily for months.  That is because this is a company that can thrive in all oil price environments…….and especially as prices rise.

I believe that this company is the best way for all investors to play this tightening oil market.  It just announced ANOTHER dividend increase. (How many oil companies are so profitable they are increasing dividends?)

You can get out in front of this trade by clicking HERE.

Keith Schaefer

Do you know what the Shale Revolution was?

It was a combination of two very old, very well-known technologies—horizontal drilling and fracking, or hydraulic fracturing. It turned the entire global oil market on its head, and the natgas market in North America as well.

They were  put together by the entrepreneurial team at Mitchell Energy, which was quickly bought out by Devon once they had the new combined technology working well.

The lithium industry is about to undergo a similar revolution.

And I have found the “Mitchell Energy of Lithium”.  They are a highly innovative team of PhDs and mineral processing experts who have found The Holy Grail: being able to cheaply extract lithium from underground lakes.

These salty, dirty, brackish brines hold BILLIONS (and likely Trillions) of gallons of water with lithium elements.  Like most metals and hydrocarbons, there’s lots  of them; it’s getting the permits and the capital to get them out of the ground economically that’s the hard part.

There are mineral companies that “mine” these brines now for other elements and salts.  What’s happening now is that some pioneering lithium teams are racing to tweak the current methods to focus on lithium—now that it’s worth US$14,000 per ton.

What’s happening here is—again, several well-known, tried-and-tested technologies are being assembled in a way that will open up a massive new source of lithium.  It will change the global cost curve.

It will create Big Winners—and Big Losers.  For investors willing to do their research, there are millions of dollars on the table here.  You just have to be among the first to reach out and grab them before everyone else does.

You can reach for my full report on this stock—the Mitchell Energy of Lithium–by clicking HERE.

DoubleLine Capital’s Jeff Gundlach doesn’t just like commodities today.  He thinks that commodities have massive gains coming, his exact words being:

“What I mean by massive is not a 30% gain, it is 100%, 200% or even 400%.”
Cha-cha……Ching!

Gundlach is a pretty sharp cookie.  They call him the “Bond King” but he manages money across all asset classes.  His firm DoubleLine Capital currently has almost $120 billion of assets under management.

Image Source: Barron’s

You don’t get that big without also being good.  He is.  Gundlach has outperformed 92% of his peer group over the past five years.   That is why when he speaks, people listen.

These days he is talking a lot about commodities.

History Is Convincing – So Is The Valuation Next To Stocks

At the core of Gundlach’s super-bullish view of commodities is the fact that we are now very late in the business cycle.

He can’t prove that we are late in the business cycle, but given that we are in the ninth year of an economic expansion — I’ll suggest he might have a solid case there.

What he can definitely prove is that every recession in the U.S. since 1970 has been preceded by a massive commodity rally.

Going into each of the last five recessions, commodities as an asset class have experienced a truly massive rallies, sometimes by as much as 400 percent.  During those rallies commodities have vastly outperformed the stock market.

Gundlach finds it almost unbelievable how repetitive commodity outperformance late in the business cycle has been historically.  “Eerily repetitive” was his actual description.

Valuation would also seem to support his bullish case.

Today the S&P GSCI Total Return Index-to-S&P 500 Index ratio is at its lowest point since the dotcom bubble, meaning commodities and share prices of producers are highly undervalued relative to large-cap stocks.

Gundlach believes (and his chart above shows) that commodities today are as cheap relative to stocks as they were in the 1970s and during the dot-com bubble of the 1990s —- both of which are periods that were followed by an incredible outperformance by commodities.

With the relative value shown in that chart it is very hard not to think that commodities today are exactly at the valuation where you want to be buying them.

If history repeats, we should be set up for commodities (and commodity equities) to outperform the overall stock market by up to 800 percent in the near future.

The Fundamental Case For Commodities Is Also Strong

Gundlach is clearly a student of history.  His argument for commodities based on history is convincing.
He also likes the fundamental case behind commodities today.

Four fundamental drivers that he specifically points to as being bullish for commodities are:

• Increasing global economic activity
• The recent U.S. tax cut boosting growth
• “Absurd” stimulus policies from the European Central Bank
• A weakening U.S. dollar

As for specific ways to profit from the massive commodity rally that he expects, Gundlach made one recommendation to Barron’s earlier this year.

Pointing to the fact that energy has been one of the weakest sectors of the S&P 500 for a multiyear period, Gundlach recommended The Energy Select Sector SPDR [XLE].  XLE is an exchange-traded fund that invests in energy which has underperformed the S&P 500 by something close to 100% in recent years.

Making the case even move convincing is that Gundlach is not the only legendary investor making the case for both commodities and energy companies specifically today.  GMO’s Jeremy Grantham wrote this:

By some valuation metrics, resource companies appeared to trade at their cheapest valuations relative to the S&P500 in almost 100 years, and if history is any guide their future returns may well significantly outpace the performance of the broader market.

I’m starting to feel that this isn’t a particularly tough one to get your head around.

The overall stock market dominated by the big valuations of the big tech companies (Facebook, Amazon, Netflix and Google) is expensive by any historical metric.

Meanwhile Gundlach and others (like Grantham) are showing us that commodities and the share prices of commodity producers are as cheap as they ever have been.

So cheap, you don’t need to go down-market to get leverage—you can buy the best ones at historically low valuations.  That’s what I wait for…and I was buying oil stocks this week.

You readers know I do my research.  This US oil stock is so good I’ve been buying it steadily for months…and they just had news that I think sends the stock to new all time highs…which is why I bought more this week.  Get it working for you right now, by clicking HERE.

Institutional investors are desperate…..

Investors managing billions of dollars are DESPERATE to find a way to get exposure to rising lithium prices.

The reason that the institutions want exposure to lithium is no mystery.

Electric car sales are about to explode higher.

This is incredibly simple math.

Today there are 1.4 billion automobiles being driven on the roads across our planet.  As of the middle of 2017, less than 5 million of those cars were electric.

At this point the electric car is a non-event yet the lithium market is extremely tight.

This isn’t a case where demand for lithium isn’t going to double or triple.  Demand for lithium will be increasing exponentially……by thousands of percent.

Getting long lithium is a no-brainer for institutional investors.

What is driving the institutions crazy is that there are no attractive direct ways to get exposure to lithium.

The commodity isn’t itself isn’t traded on an exchange and there are zero pure-play lithium producers.

For evidence of how lacking in lithium investment opportunities we are all we need to do is just need look at the best option that investors currently have – The Lithium And Battery Tech ETF (LIT : NYSE).

The top ten holdings of LIT currently are:

Some analysis of these supposed lithium focused investments provides from startling results.

The three big lithium producers in the bunch (FMC, Chemical Mining Co of Chile and Albemarle) are actually diversified chemicals businesses that generate a small percentage of revenue from lithium.

These producers are the three largest holdings of LIT (more than 40 percent of the ETF’s assets) and none of them get even 20 percent of their revenue from lithium.

Other major holdings of the ETF like Tesla, Samsung, BYD and Panasonic don’t benefit at all from rising lithium prices — in fact they are actually hurt by lithium prices rising since they are consumers of lithium ion.

That is absurd!

Yet investors continue to pump money into this flawed ETF because they are DESPERATE for exposure to lithium….

LIT currently has almost a billion dollars invested in it.  Just imagine how much institutional money is on the sidelines waiting for a real lithium investment opportunity to reveal itself!

Institutions Are Going To Need To Own This Company

For months and months and months I turned over rocks looking for a good lithium investment.

Note that I said a good lithium investment, not just a lithium investment.

It took a long time but late last year I finally found one…..a good, attractively valued lithium focused company that I actually really wanted to own.

This company has all of the elements that I look for when investing.  Proven management, quality balance sheet, valuable assets.  A solid investment.

But then something happened……literally days ago.

This company provided an operational update that caught me by surprise.

Sometimes you are lucky and sometimes you are good…….the operational update from this company has turned what I thought was a good investment into something much better.

Something much bigger.

The result is that I have now made a sizable investment of my family’s nest egg into this company.

I believe that this is the single best way to profit from lithium —- to profit from the certain growth in electric cars.

Based on the operational update just released by this company I believe that by the end of 2018 shares of this company is going to be in the portfolio of every institution that is interested in getting exposure to lithium.

As you can imagine that is going to have a dramatic effect on the share price of this company.

Now you need to do something for me……

I want you to read my full report on this company —- for free.

Like all of my company reports this one explains the operations of the company, the background of management, the value of its assets and the state of its balance sheet.

What I’m offering is a win-win opportunity or both of us.

THE WIN FOR YOU – If I’m correct in my assessment of this company you are going to get a risk-free introduction to the lithium company the market is DESPERATE FOR.

THE WIN FOR ME – Whether you end up owning this company or not – you are going to remember that Keith Schaeffer found this opportunity before the rest of the market did.  That is good for my business.
The entire investment world is DESPERATE for a really good company that offers pure play lithium exposure.

I don’t just have a good company for you….I have a great one.

Click here to read my full free company report…

The vast majority of the natural gas produced in Canada comes from the Western Canadian Sedimentary Basin (WCSB).  Here AECO is the primary benchmark for natural gas prices.

AECO stands for Alberta Energy Company, and is the Canadian benchmark price for natural gas. Consider it another “hub” like Henry Hub in the USA.

Investors are (somewhat rightly) scared that Canadian natgas will get boxed out of the North American market. As a minimum, WCSB producers will (again) suffer much lower prices than their American cousins.

And then over the last two years, Canada has botched its LNG opportunity.  It all makes for a black cloud over gas-weighted WCSB stocks.

The result is that nobody wants to own gassy WCSB producers.  Doesn’t that make you think that it is probably time to seriously consider owning some gassy WCSB producers?

Surprisingly, quite a few are breaking their downtrends right now and some lucky ones are actually above all their moving averages right now.

Here are three reasons why there is some merit behind that contrarian impulse you are feeling.

#1 – Results Are Smoking Consensus Estimates

Like it or not, the reality is that momentum matters when it comes to share price performance.

We live in an age where the majority of buy and sell decisions are being made by computer algorithms and high frequency trading programs.  These robots do not for a second consider the fundamental business performance of a company.

They do however focus intently on momentum.

That is why beating analyst expectations is more important than ever.  Nothing sucks the life out of a stock like a big earnings miss.

WCSB producer stocks as a group crushed Q4 2017 analyst cash flow estimates.   The table below shows that the WSCB large cap group on average beat cash flow per share estimates by 11 percent.

Source: NBF Economics

Those Q4 2017 cash flow results have even given many of these stocks the first signs of life that we have seen for months and months.  Even better news is that next quarter the group is likely to soundly beat analyst estimates again.

Despite the significant Q4 2017 cash flow outperformance analysts did not revise 2018 estimates higher at all.  No change on average across the group.

The lack of updated estimates probably shouldn’t be a surprise.  In a bear market –like what Canadian natural gas is in thanks to US production being up 10% year on year — analysts tend to err on the side of caution.

An analyst can’t be the lone bull voice in a bear market…..being wrong would result in a major loss of credibility with the Canadian buyside…..that would be career suicide.

The result is that at this point I believe that sets these stocks are set up to beat analyst estimates through the remainder of 2018 — or at least until those estimates are revised upwards (which would also be good for share prices).

#2 – Exposure To AECO Misunderstood/Overestimated

You may have noticed that in the prior table analysts underestimated cash flows of the group by 11 percent, yet they got their production estimates bang on.

What analysts have struggled with for these companies is accurately estimating the actual selling price that these companies are getting for their natural gas.  Analyst estimates are driven by the AECO price but companies have done a terrific job of diversifying where they sell their natural gas away from AECO.

Seven Generations (VII: TSX) provides a perfect example.  In Q4 2015 Seven Gen’s realized natural gas price (see the table below) was approximately $2.75/mcf.  That was pretty much smack on the average AECO price for that quarter.

For analysts to estimate Seven Gen’s cash flows all they had to do was take the AECO price and multiply it by expected production levels.

Source: Seven Generations Corporate Presentation

Now take a look at Q3 2017.  In Q3 2017 Seven Gen’s realized natural gas price wasn’t even close to matching AECO.  It was more than $1.50/mcf higher than AECO pricing — a huge percentage difference.

I spoke with one of my buyside contacts about why realized prices are drifting away from AECO and why analysts can’t figure it out:

“I don’t think analysts are purposely missing cash flow numbers.  I just think that analysts have not done a great job adjusting their models for changing liquids prices and different gas hubs.

It is becoming impossible to figure out some of these gas prices as producers have flexibility when to sell into certain hubs – so you are trying to estimate how much gas was sold into a hub and then compare that to quarterly price at that hub – another issue is companies will sell more gas on high days and less on low days making it hard to track.” 

Tourmaline (TOU: TSX) provides another example of just how well companies have lessened their natural gas exposure to AECO.  Despite being a WCSB producer, in 2018 only 28% of Tourmaline’s natural gas production is going to be exposed to AECO prices.

Source: Tourmaline Corporate Presentation

#3 – Hidden Liquids Growth Stories

Inside of some of these large natural gas-weighted producers are some of the best liquids production growth stories in the business.

Again Tourmaline provides a great example.  Over the past 15 months Tourmaline has doubled the amount of liquids it produces.  From Q2 2017 to Q4 2019 liquids production is going to double again from 36,000 barrels per day to 72,000 barrels per day.

Source: Tourmaline Corporate Presentation

With each barrel of liquids production generating multiples of the cash flow that an equivalent amount of natural gas production generates – cash flows grow much faster than headline production numbers.

Condensate in particular which is currently selling for $85 per barrel in Canada is especially beneficial to cash flows.

Another one of my very smart buyside contacts told me that he thinks there is a “HUGE opportunity” in Canadian energy names today specifically because of their stealth liquids growth.  He also believes there is a “MASSIVE disconnect” on what is happening at the companies and in the market.

The “ALL CAPS” in both instances are his, not mine by the way.  He is pounding the table.

Perhaps Even A Looming Catalyst—LNG Is Back?

The short answer is that fear still wins the day for now, as nobody wants exposure to stocks that have exposure to AECO and everyone knows the WCSB is gassy.  The Q4 cash flow beats of analyst estimates helped a little but there still isn’t much interest.

That could change in a hurry.

Should Shell or Chevron announce positive FIDs—Final Investment Decisions—on their LNG projects, then Canadian natgas stocks will rock; probably some 30-50% from their lows.

But it may not even take that.  Reuters reported on March 5 that Tourmaline and Seven Gen may buy into Chevron’s project.  Tourmaline’s stock chart in particular is looking better.

Positive LNG news might not help cash flows for the next couple years (they take 4 years to build), but it will potentially generate some M&A activity and give Canadian natgas stocks an emotional—if only temporary—boost.

That would mean that now is the time for investors with a taste for being contrarian to move.