They are the industry killers.

When Dr. Andy Robinson and Robert Mintak set out to build a lithium producer together, they wanted a world-scale project, and they wanted it fast.  That meant no chemical risk, no permit risk, they wanted to be in production ASAP to take advantage of the HUGE profit margins that lithium producers are now enjoying (like, think costs of $2500/ton and pricing of $16,000-$21,000/tON).

Dr. Robinson knew every major lithium brine deposit in the world. He also knew the world’s top scientists in getting minerals and salts out of brines cheaply. Mintak is one of the only junior lithium exec to negotiate a deal with Tesla (TSLA-NASD), which he did in his previous company.

They are the perfect match.

And now, in less than a year, they have found a lithium-rich brine asset so massive—and already permitted and producing other minerals—that they can be in production before any of their junior peers.

Dr. Robinson and Mintak have had their finger on the fast-forward button ever since they joined Standard Lithium—just 10 months ago.

They could be the lithium industry killer—producing so much lithium so cheaply and so quickly—that they bankrupt everyone else’s dreams, and send all the lithium juniors (and I mean there are dozens) home to bed.

Because not only do they have big land packages, permits, partners and now buckets of cash–they will also be able to produce lithium in 72 hours from their raw brine.  Contrast that to everyone else’s assets in the Lithium Triangle on the Chile-Argentine border–where it’s a year to build brine ponds and another 18 months for lithium to concentrate via evaporation. 72 hours vs. 18 months.  There’s a no-brainer.

It’s a home-grown asset too—smack dab in the middle of the United States; right under everyone’s noses.

And would you believe that all their talent, experience, their scientific team—and now their industry killing production asset—is all in one small, $2 stock.

It’s Standard Lithium, SLL-TSXv; STLHF-PINK.

I bet you’ve never heard of the Smackover Formation.  But it is one of the largest underground salty aquifers in the world, stretching from the Gulf of Mexico, up through Texas and Louisiana all the way up into Arkansas. And now it’s going to be a big energy producer; soon to be providing enough lithium to help power millions of Electric Vehicles.

Other mineral producers are now pulling up over 350,000 barrels a day of Smackover brine in single operations. It’s bigger than the Permian.  It’s MUCH bigger than the Bakken. But those other operators in the Smackover are after calcium chloride and bromine—not lithium.

And in lithium brine terms, the Smackover is a few hundred percent  bigger than the world’s top lithium producer, Salar de Atacama in Chile.  See the size difference highlighted in the map below:

The Smackover is a monster formation–this map shows you how big it is

Understand what a game-changer the Smackover can be for the global lithium industry.  This massive asset can be producing huge amounts of lithium quickly:

1. Standard Lithium is partnering with a group already in operation
2. So initial permitting is not an issue
3. No traditional pond-building to evaporate lithium on the ground. …this brine doesn’t need to sit on a sun drenched pond for 18 months, and be fearful of rainy or snowy weather (like Salar de Atacama)
4. Management didn’t have to spend 3 years assembling a land package
5. A pilot plant will be designed and probably under construction by year end

Here’s how I think the lithium brine story will develop in 2018:  There are several groups now actively trying to extract lithium from oily, salty brines in North America.  Right now these brines produce many kinds of salts, and the lithium is an afterthought.

It’s like when Edison invented the lightbulb, or when Gutenberg made the first printing press, or when Daimler patented the first internal combustion engine–many groups were working on each of those inventions at the time, building off previous advancements.

The lithium industry is just tweaking current technology to extract the massive amounts of lithium in these brines. It’s a natural evolution…and Standard Lithium has the best and biggest team, with the most money, and an asset and partners ready to go.

I think that when Dr. Robinson and Mintak announce their 72 hour flow sheet in late Q3 2018–that will be to lithium what shale was to oil.  The Biggest Game Changer Ever.  That’s what I mean when I say…the lithium industry is about to get Smacked.

Standard’s deal in the Smackover covers a huge 33,000 acres. It would take years and millions of dollars to assemble that land package now. Just the Arkansas part of Smackover produced 250 million barrels of brine in 2013.

And historical testing shows a very high raw grade of 350 mg/L.

Which lithium producer is the winner in that scenario?

Standard Lithium.  High grade, infrastructure in place and 72 hour processing will make them one of, if not THE low cost producer of lithium in the world.. The low-cost producer in any commodity market always wins.

There’s more–the timing here is perfect for a US asset.  Just last month, US President Trump signed an executive order to streamline the leasing and permitting process for minerals deemed critical to the country—and lithium was on that list.

Of course, if you’re not a low-cost producer, that will only go so far.  But when you don’t spend 3 years and tens of millions of dollars assembling a land package and negotiating permits—when all you have to do is bolt-on a lithium extraction plant—your costs can be very low.

Arkansas is such the perfect place for this operation—local colleges actually have courses on how to be an operator in a brine facility. I am not making this up.  That’s how much brine processing is part of the culture there.  And Arkansas is a very low cost centre for business.

Standard Lithium has MANY near-term catalysts that will increase the company’s audience.

1. They can quickly calculate a resource for the lithium because there are decades of well logs throughout the property
2. The flow sheet for the production will get set in Q3 2018 (this is THE BIG CATALYST)
3. Design specs on a pilot plant will come out around the same time
4. Construction of pilot plant announced later this year

As you can see, there is a lot happening.  I’ve been watching lithium juniors—hardrock and brine—all over the world, ever since I got behind Lithium X at 40 cents in January 2016.

In those two years, I have never seen such a game changing team, process, asset—all wrapped into a micro-cap $2 stock.  And it’s right here in the southern heart of the United States…

…With a huge tailwind from a new US government directive to get all homegrown critical metals developed.

Standard Lithium is now funded, with a $20 million bought-deal financing. Partners and properties are in place.

In every bull market, one or two stocks get to double digits and become the bellwether stock of their industry.  Nobody has a better chance of achieving that than Dr. Andy Robinson, Robert Mintak and Standard Lithium.

Disclosure: I’m long Standard Lithium.  I think it’s THE lithium stock of 2018.

Management at Standard Lithium 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.

END USERS RUSHING TO LOCK UP LITHIUM SUPPLIES
SUPPLY CHAIN BUYING DOWNMARKET INTO
JUNIOR LITHIUM PRODUCERS

Industrial end-users of lithium are nervous about securing lithium supply–at any price–and they are buying into and buying out junior lithium companies.  Demand is ramping and new production is coming on very slowly.

Most recently, Toyota–the first or second largest automaker in the world, depending on the day–bought a 15% stake in junior lithium producer Orocobre (ORL-TSX; ORA-ASE) for US$224 million. Toyota said right in the press release this was to secure lithium supply.  Toyota is the first–and largest–non-Chinese company to move quickly in the face of rising lithium demand and prices.

Last November, Lithium X (LIX-TSXv) was bought out by a Chinese investment company called NextView New Energy Lion Hong Kong Ltd.  Lithium X was in the public markets for less than two years, only raised $50 million and was purchased for $261 million.

There’s more:
-Belgium-based Umicore, committed 460 million Euros in cathode capacity expansion.
-Germany’s BASF signed an MOU with Norway’s Norilsk for 400 million Euros to expand battery cathode production in Europe
–Great Walls Motors–China’s largest producer of SUVs–invested $28 million in Aussie-listed Pilbara Minerals and signed an off-take agreement

Looking at Lithium X, and the fact that Pilbara is not even in production (but will be later this year) is a clear example of Chinese interests locking in supply through the next decade.

China does most of the world’s lithium processing, so it’s no surprise to see a Chinese company be the first to do this—nobody knows how tight the lithium market will be in a few years better than them.

But this trend also speaks to–end users do not trust the major producers to ramp up production fast enough to meet demand—which is The Big Surprise.  There were many “smart” investors sneering when the lithium boom took off in early 2016—saying that the major producers could increase production quickly and easily.

But that hasn’t been the case.

Lithium may be abundant, but getting permits and technical expertise to bring it to market has proven to be exceedingly rare.  Albemarle (ALB-NYSE) has had a very difficult time bringing their new La Negra asset into production.  Orocobre, a junior producer, is just getting through two painful years of delays and under-performance at their Olaroz brine deposit.

Chilean lithium producer SQM (SQM-NYSE) rocked the lithium world recently when they got approval to increase production by 216,000 tons way up in the Atacama Desert.  But that production is YEARS away.  They still have to find the labour, get the permits, build the mines, wait two years for evaporation…this will have no impact for five years at least.

And that’s why investors are rewarding lithium stocks as they get to production. Orocobre’s stock has doubled in just 4 months to $6.70 as they fixed their problems.  Albemarle was a triple in the last 2 years, hitting over $140/share.

Even the near term producers are seeing big stock runs, like Nemaska Lithium (NMX-TSX), saw their stock double in the last six months of 2017, as they develop a lithium production facility in Quebec, Canada.

Yes, the lithium supply chain–from top to bottom–is nervous about securing supply, both inside and outside China as the tightness in the lithium market continues. In 2017, over US$1.3 Billion was committed to or invested in lithium development.

A new lithium mine costs roughly US$400 million (higher for brine, lower for hard rock).  Demand forecasts show at least one new mine is needed per year out to 2025 (around 35,000 tpy at a 14% CAGR), so this pace of funding needs to be maintained and could total as much as $3 to $4 billion USD just in mine development.

And all this investment is upstream, to source raw material supply—I’m not even counting the millions that needs to be spent on refining and processing.
HOW LITHIUM INVESTORS MAKE MONEY NOW:

The physical lithium market is really tight right now, with prices in China over $20,000 per ton, and $14,000-$16,000 outside of China.  SQM’s new production announcement will help lithium supplies in a few years–but the lithium market is, and will remain, hugely profitable in the short to medium term.

That’s why I think lithium stocks stay much stronger for much longer; the industry is now putting its money on the line to guarantee supply for the long term.

The industry majors actually have a poor track record in bringing new production online—hence the Big Home Run in new producers and near term producers like Nemaska (a double in six months) and Lithium Americas (LAC-TSX) which went from $4-$14–a triple–in six months.

But I’m not interested in owning stocks that have ALREADY had The Big Home Run.   I want to find The Next One.

And I have found it.  I had to work hard to find this one, because this top managment team has been very quietIy building an incredible asset base–right in the USA.  And now I am so convinced  that this company can be in commercial production faster than anyone else I see out there.

There are so many angles here; they have so many big advantages over other companies:

1. Permits in place
2. They can produce lithium from brine in 48 hours vs. 18 months in evaporation ponds
3. This will make them one of the lowest cost lithium producers in the world  (probably THE lowest but I don’t want to get too excited)
4. They will be a home grown US producer–that’s right, this company’s big brine deposit is smack dab in the middle of the USA!!!  And lithium is on President Trump’s list of critical metals.

Being able to produce commercial lithium from brine in 48 hours is an absolute game changer.  The best part is…everything is off-the-shelf technology.  There’s no technological Holy Grail; the industry didn’t try to do this before because it didn’t need to.  But now it does.  Getting SQM’s new 350,000 tons of lithium by 2030 doesn’t help anybody now.

I think The Next One in lithium is a Game Changer.  The speed at which this company will be able to produce lithium will turn everyone’s head.  And they have the technical team and the finance team in place to do it–it’s about to start!

Plans for the pilot plant are already underway.  Their next few catalysts—all within weeks to months from now—will move the company forward so quickly, it will quickly move up the value chain.  And the Big Institutional Money (BIM) will flock to it.

I have never seen a team fast track production like this.  This is the single most impressive technical team I’ve come across in the junior lithium space.  And I’m going to introduce them to you in my next story.

Get yourself ready, as I give you the name, symbol and reasons why my lithium stock will be The Next One to hit The Big Home Run for investors.

In the next wave of Lithium Stock Home Runs—as Big Institutional Money bids up the next round of stocks—having permits, and fast-tracking production, will be key.  And this company has it all.
Keith Schaefer

Investors are nervous about US oil supply…yet I see one of the most bullish charts in this area.

The charts below show the number of days of crude oil supply that the US has in storage.  This tells us how long it would take–at the current rate of consumption–to use up all that crude.

At the start of September U.S. storage had 31 days of crude in storage.  What has happened since has caught a lot of people off guard.

In less than four months U.S. crude storage has shrunk from over 31 to only 24 days of coverage.

Source: Energy Information Administration

The obvious conclusion to draw from this chart is–that the U.S. oil market was significantly undersupplied in the last four months of 2017.

Now I know what you are thinking, because I know you’re smart.

You’re thinking that this is a seasonal thing…..that the days of crude oil supply goes down every fourth quarter.  You are thinking that this graph looks bullish but given the proper context it probably isn’t.

I wondered the same thing so I sent my young underpaid researcher to dig into this data–I wanted to know the change in U.S. days of crude oil supply over the same time period for at least the last decade.

I figured that way I could determine just how bullish this chart really is.

He (as usual) outperformed my expectations…he went back to 2002 and put his results into the chart below.
Does anything stand out to you?

Source of data: Energy Information Administration

Not only is this decline in days of crude oil supply not a regular seasonal thing, but the size of 2017’s decline is also extremely abnormal.

In the analysis of the mid-September to December 31 time period for the past 15 years we have had:

• 9 instances where the days of crude oil supply has increased
• 5 instances where the days of crude oil supply has decreased
• 1 instance where the days of crude oil supply was unchanged

The average change in days of U.S. crude oil supply over this time period before 2017 is an increase of 0.2 days.

Simply having a decline in days of supply is a bit unusual.

There had never been a decrease of more than 1.6 days until this year.

2017’s decrease in U.S. days of crude oil supply of 6.9 days is jolting data point, perhaps the most bullish piece of oil data that I can recall ever seeing.

So what did I do with that information?

I bought a lot of oil producers’ stocks, starting early last October.

While the price of oil has been moving, the stock prices of oil producers have barely budged.  The sector was left for dead long ago.

That is great news–because these E&Ps will report GREAT cash flow, giving these stocks very cheap valuations.

I’m willing to take a Big Swing at these stocks–especially the best-of-breed ones that have barely moved up in price.

Right now, it’s like swinging at a fastball right over the middle of the plate.

I can supply you with that big fat pitch that you want.  There is one oil producer that I’ve told my subscribers that they have to own.

This company ticks every box that I want covered:

• Has more than 90 percent of its production from oil
• Runs its business with an extremely clean balance sheet
• Is founded and operated by a Tier One Management Team
• Has a rock bottom valuation
• Owns a huge land position in a top oil play
• Has critical mass…produces over 20,000 barrels per day
• Can generate IRRs of over 100% at sub-$50 oil
• Is growing by 15 percent per year while living within cash flow at $50 oil

This company is an absolute Free-Cash-Flow-Machine at these oil prices. The horn has sounded.  The game is on.  I am lobbing this pitch over the middle of the plate–click HERE to hit it.
-Keith Schaefer

Do  you buy stocks based on charts, or based on fundamentals?  And how do you invest if the chart is good but research shows the company is not…or vice versa?

That was my dilemma last fall with Ecopetrol (EC-NYSE), the National Oil Company of Colombia.  In late October I loved the chart–it had a beautiful long tight base–but passed on the stock after putting a lot of time and research into the stock.  I saw it having no-to-low-growth–even at $80 oil!–and a short reserve life.

But oil kept on rocking up and look what the stock did!

But then Brent crude–the international benchmark–went to $70.  And Ecopetrol’s chart went vertical…and has stayed there. That was more than a 50% move in weeks.  That’s what I hope for in juniors, not a big NOC like Ecopetrol!

I had this one in my sights, I aimed, put my finger on the trigger……but refused to pull.

Chartists look at that long tight base and know–the longer the base, the bigger the move.  Ecopetrol came to my attention via my newsletter colleague Donald Dony, who is one of the best Technical Analysts (TA) on stocks ever.  It had just hit a new high last October and he suggested Ecopetrol’s chart looked interesting. Donald has brought my attention to some great trades before, so I hit the books and started researching.  I’ve enclosed a brief precis of it below.

The good news was that, besides the chart, the balance sheet was in good shape.  It had a low multiple. So it had three positive attributes.

But you have to know who you are as an investor.  And I’m a growth investor; first, last, always.

And after a fat couple days of research, I didn’t think Ecopetrol was worth my money. I think the chart below puts it in perspective.

From 2016 to 2020 they can grow by 6% in total at $50 oil.  At $80 oil they can grow by 22% in total; not annually–in total!  And these are the targets they are proud to display…that’s underwhelming to say the least.  Imagine what some of the other companies I follow could do at $80 oil?  From a fundamental investment perspective Ecopetrol couldn’t hold a candle to other, better opportunities that were available elsewhere.

I thought investors could get some multiple expansion here if they operate well and oil does well.  You aren’t going to get any growth driving share price returns.  I thought…limited upside and plenty of risk.

I think fundamentally I was right…but that doesn’t matter.  All that matters is the tape. And the tape said I should have paid a lot more attention to the chart…or at least kept the stock on my screen after November. It is too late now.

ECOPETROL ADR; EC-NYSE
COMPANY ANALYSIS – NOV 1, 2017

QUICK FACTS ECOPETROL ADR (EC:NYSE)

Share Price:                                         $11.25
Basic Shares Outstanding:                   2,056 million
Market Cap:                                         $23.13 billion
Net Debt:                                             $13.03 billion
Enterprise Value (EV):                        $36.16 billion
2017 EBITDA:                                    $8.3 billion
Ent Value / 2017 EBITDA:                 4.35 times
Net Debt / EBITDA:                            1.56 times
Dividend:

POSITIVES

– Exposure to Brent oil pricing
– Leverage to oil prices
– Have made significant operating cost reductions
– Significant oil exploration opportunities (both conventional and shale)
– Cheap valuation allows for upside

NEGATIVES

– Very short reserve life, needs to find more oil/gas quickly
– Colombian focus, pipelines regularly attacked
– Lacks an entrepreneurial operating culture

THE CHALLENGE – GROWING RESERVES

Created in 1951, Ecopetrol is a publicly-owned Colombian company that operates in the production, refining and transportation of oil and gas, as well in petrochemical activities.

Ecopetrol produces more than 60 percent of Colombia’s oil and has presence in Brazil, Peru and the United States and Mexico. Ecopetrol’s producing fields are located in central, southern, eastern and northern Colombia.

It has Colombia’s two largest refineries (Barrancabermeja and Cartagena) and three ports for the export and import of fuels and crudes on both coasts (Coveñas and Cartagena on the Caribbean Coast, and Tumaco on the Pacific Coast).

It also owns most of the country’s oil pipelines and multi-purpose pipelines, which connect production systems with the major consumption centers and marine terminals.

This company is the Colombian oil industry.

The 800 pound gorilla that overhangs Ecopetrol’s valuation is the company’s extremely limited reserve life.  Ecopetrol is running out of oil and gas, especially oil.

Ecopetrol’s proved reserve life is just 6.1 years for oil & gas combined and only 4.8 years for oil.  This isn’t just a critical issue facing the company’s E&P operation but also the sustainability of its midstream segment (35% of EBITDA).

It is mostly Ecopetrol’s oil and gas that flows through its midstream pipelines.

 
BUSINESS UNIT #1 – EXPLORATION AND PRODUCTION (55% of EBITDA)

At the end of 2016, Ecopetrol produced 668,000 boe/day; (552,000 boe/day of crude and 116,000 boe/day of natural gas).  That was down 5.5% vs. 2015.

Most–94%–of production was concentrated in the Chuchupa, Ballena, Cusiana, Cupiagua, Pauto, Floreña and Gibraltar fields.

One of my issues was that Ecopetrol wouldn’t be able to grow reserves to a level to sustain company operations.  There have been no major oil discoveries in Colombia since the Camon-Limones field in 1983 and on top of this the Andean nation only has proven reserve of 2.4 billion barrels.

This was the reason behind the decision for Ecopetrol to assume full control of the Rubiales field in June of 2016, stripping Pacific Exploration and Production of its 43% interest. The move boosted Ecopetrol’s production by roughly 60,000 barrels daily and will see its proven reserves grow.

BUSINESS UNIT #2 – TRANSPORT/MIDSTREAM (35% Of EBITDA)

Since 2013, the Ecopetrol Group’s transport business has been led by Cenit, a subsidiary company.

In 2016, Cenit transported a volume of 1,133,000 barrels per day which was a 9 percent decrease from 2015.  Of this 867,000 barrels were oil and 266,000 barrels were refined products.

BUSINESS UNIT #3 – REFINING (10% Of EBITDA)

One of the largest investments made by Ecopetrol has been in expanding and upgrading its refining business. This includes upgrading the aging Cartagena refinery–now complete–and has entered testing phase which will run until 2017.  This should increase production volumes a lot, and increase revenue and profit margins. Utilization rates at the Barrancabermeja refinery have also increased.

Nevertheless, refining margins are falling despite the reduction in operating costs predominantly because of higher input costs.

Overall while Ecopetrol’s downstream business has helped it to weather the prolonged slump in crude, refining tends to be a marginal business and not particularly profitable during times of higher oil prices for marginal operations such as Ecopetrol’s.

In December, the country’s refining record was reached, with a load of 380 Kbcd.

ADDRESSING THE CHALLENGES

In 2016 Ecopetrol changed the majority of management to implement important changes for the company.

Priority #1 for the new management team is to stabilize and then grow production and reserves.

The plan laid out by the new management team is to grow production by between 6-22% by 2020.  How much growth depends on what the price of oil is.

At $50 oil we are talking about 6% growth.  That isn’t 6% annualized, that is 6% in total.  The high target point is 22% total growth which can be achieved at $80 oil.  Not all that impressive when you consider what some North American shale producers could do with $80 oil.

The specific plan to achieve this growth comes mainly from increasing recoveries at existing properties.  The company breaks it down as follows:

“Basic” represents existing production after declines by 2020.  So the 715,000 boe/day of 2016 production drops to 340,000 boe/day by 2020.

New production comes from to get to 760,000 boe/day

• Infill drilling 314,000 boe/day
• Secondary recovery 39,000 boe/day
• Tertiary recovery 18,000 boe/day
• Successful exploration 49,000 boe/day

The good news is that despite the lack of major oil discoveries in Colombia and the country’s declining reserves, it has been estimated that only 30% of Colombia has been explored for oil.

This along with it being estimated that Colombia has oil potential of 47 billion barrels or more, indicates that there is the potential for considerable exploration upside (like what GPRK-NYSE and PXT-TSX have been able to do at Tigana-Jacana in the Llanos Basin).

There is also the growing push for shale oil and gas exploration with Ecopetrol examining how to best exploit its shale acreage

Ecopetrol has recognized the company’s main problem is with its short reserve life and struggling production.

Ecopetrol has doubled its spending on exploration and production in 2017.

Exploration and production spending which represented 59% of spending from 2014-2016 will become 90% of spending from 2017-2020.

Another issue facing Ecopetrol are the high operational costs associated with operating in Colombia.

Overall, upstream E&P cash costs are around 10% higher than for North America and 30% higher than U.S. light-tight oil production. Ecopetrol has been working hard to reduce its upstream costs.

New management is putting effort in the right areas; in 2016, the company realized improvements, such as:

1) reducing lifting cost to ~US$6.1/bbl in 2016 from ~US$11/bbl in 2014;
2) significantly decreasing days of drilling in its main fields to ~21 in 2016 from ~35 in 2014;

One potential solution to Ecopetrol’s (and Colombia’s) lack-of-onshore-oil problem could be (unconventional) shale exploration. According to recent statements by the company’s CEO, Mr. Juan Carlos Echeverry, shale formations in the Magdalena Medio basin could boost production by 200k-300k bpd (28%-42% of total).  They would bring partners for that–a boon for intermediate sized North American E&Ps.

Separately, Ecopetrol has high expectations of entry into Mexico after winning two blocks in June to explore and produce hydrocarbons in shallow water in partnership with Petronas and Pemex, he said.   They already have a discovery in the Caribbean Sea with Anadarko

FINANCES/PROJECTIONS/VALUATION

Following improved cost saving efforts and higher oil prices Ecopetrol has put itself into pretty solid financial position.

Debt to EBITDA is a solid 1.5 times, so no balance sheet concerns.

The real concern is Ecopetrol’s low oil reserve lifetime which is going to make maintaining production a challenge.  If production declines that worsens the balance sheet.

CONCLUSION

Ecopetrol is going to have to work very hard to maintain production let alone grow it.  We have seen that the company’s optimistic oil price scenario ($80 Brent) sees the company only growing production by 22% between 2016 and 2020.

And that is if the company hits its numbers.

Back in October 2017, before the oil price REALLY moved up, I thought Ecopetrol’s cheap valuation of 4.3 times cash flow was warranted.  No growth, nothing to get excited about here–except leverage to $68 Brent.  And that’s where the chart took off.

The only upside I see from here–because I don’t see oil going a lot higher from this price–is if the company hits on a huge exploration success or really gets the shale oil side of things rolling.

Keith Schaefer

Ding-dong, the Cushing oil glut is gone!  Yes, the Wicked Witch for oil investors–absurdly high US oil inventories–is dead.

This is a cyclical business so we knew it would happen eventually.  But I am certain that nobody expected the Cushing glut to drain in the two months since November 3, 2017.

Yet that is what transpired–and the oil market has sat up and paid attention.

The chart below from Mason Hamilton of the EIA tells the story very clearly.

This chart shows crude storage levels at Cushing now vs. the five year average.  Cushing Oklahoma is the largest oil hub in the US, and WTI is quoted from this hub–so it’s very important to oil prices. Over the past three years Cushing has been 20-30 million barrels above the five year average virtually all of the time.

That’s huge, given that at 70 million barrels it’s operationally full.

For the last three years, the world has been massively oversupplied with oil; at the end of 2014 the Saudi’s stopped propping up the market, and ramped production.  For over two years, daily oil supply far exceeded demand.  You can see that play out in the chart above in early 2015 as Cushing storage levels soared higher relative to the five year average over just a few months.

After that sharp move, the level of storage at Cushing relative to the five year average bumps along at roughly the same level until late 2017.

Then inventory levels fell as fast as they went up three years ago.

Let’s use our powers of deduction to try and figure out what that means.

Well it isn’t rocket science is it?

If the inventory action in early 2015 signified an oil market glut, then the inventory action now is screaming at us that daily oil demand is exceeding supply by a similarly large margin.   The opposite of a glut would be a shortage.

Having deduced that, the next question becomes–what is going to change over the next six months that is going to change this shortage?

Consider these facts:

First – Oil demand in 2018 is projected to continue to be very strong.  The IEA sees 1.3 million barrels per day of demand growth and we have to remember that they chronically underestimate that figure by a shocking amount.
Here are the IEA projections:

https://www.iea.org/oilmarketreport/omrpublic/

Here is the Wall Street Journal detailing the IEA’s chronic demand underestimation:

https://www.wsj.com/articles/why-oil-demand-may-be-higher-than-expected-1489730400 – and this really is startling. The WSJ research shows that the annual EIA figures have been revised up by an average of 2.3 million barrels a day for the last seven years.

Second – The IPO of Saudi Aramco is scheduled for late in 2018.  That means that the young Saudi Prince who is calling the shots needs oil prices to be very strong in order to maximize the cash reaped from the public offering.  Crown Prince Bin Salman has big plans for Saudi Arabia and he is going to need to milk the oil cow for every penny of cash that he can (as fast as he can).

Do not look for the Saudis or OPEC to back off from their production constraints.

Third – Key oil producing countries are falling apart after years of underinvestment on the back of low oil prices.

Venezuela in particular is crumbling with 2018 production expected to hit levels not seen since 1989.  In 2017 they dropped 649,000 bopd, or 29%.

Fourth – The obvious source of oil production growth is U.S. shale which will no doubt do well in 2018.  Expectations for year on year shale growth range from 500k to 1 million barrels per day.

The problem is that there is shale–and then there is nothing else. 

Since oil prices crashed investment in new supply has collapsed.  The lack of the commissioning of new deepwater, oil sands and international exploration projects is just starting to show up.  We have still had pre-oil crash commissioned projects coming on-stream up until this point.

Shale alone can’t keep up with expected global demand growth and with other sources of production declining……

A global oil market that is already undersupplied is going to get further undersupplied.  That is going to make 2018 an extremely rewarding year for investors positioned to profit from this opportunity.

If you are looking to be one of those I’ve got a free company report on North America’s most attractively valued oil-weighted producer.  The returns on investment that this company makes drilling wells at current oil prices will blow your mind…click HERE to get it working for you.

Keith Schaefer

2017 had the largest reduction in global oil inventories since data became available 33 years ago according to data driven firm Cornerstone Analytics.

I bet you didn’t see that coming!

Source: Cornerstone Analytics

Stop for a moment and think about what that means.

If inventories are declining, that means that daily global oil consumption is exceeding daily global supply.  It really is as simple as that.

And based on Cornerstone Analytics inventory decline data, that daily supply shortage experienced in 2017 is the largest in recorded history.

That would include the disturbingly tight oil market of 2007 and early 2008 that sent oil prices shooting towards $150 per barrel.

The Cornerstone chart below shows what the normal changes in North American oil stocks looks like in the fourth quarter of the year:

Source: Cornerstone Analytics

The chart shows that Q4 normally sees an inventory reduction of 15.8 million barrels.  Got it?

Now you need to get a load of what 2017 looks like.

In 2017 the decrease (with one week of data remaining) was 80.6 million barrels…..vs the normal 15.8 million decrease.

We have had the equivalent of five years’ worth of Q4 inventory draws in this year alone.

Source: Cornerstone Analytics

These numbers don’t require much explanation on my part.  The numbers are extremely bullish for oil prices.

I think that 2018 looks even more bullish.

Think about it….here we are with inventories already shrinking extremely fast and the massive post oil crash capital spending cutbacks really just starting to impact production.

Remember, global energy research company Wood Mackenzie has estimated that those cutbacks exceed $1 trillion.  We have had large mega projects (offshore and oil sands) that were sanctioned before oil prices crashed coming on-stream over the past couple of years.

That pool of new sources of oil production is about to dry up completely.  Spending on mega-projects has been shelved.

So what is an investor to do?

Well it isn’t rocket science this time around.

Oil prices have moved but they are still only $60 per barrel…..so they have lots of room to run.

Meanwhile the stock prices of oil producers that have been beaten down for years have hardly moved.  The stock market has been slow to believe what the oil market is telling it.

That will change quickly.

Now is the time to take advantage of this next up-cycle that is shaping up.

The best oil stocks are still remarkably cheap. Sticking with best-of-breed companies has always worked for me—and my subscribers.  I can’t believe this company—with very low debt and best-in-class assets—still has a rock bottom valuation.  And management has built and sold THREE junior producers before for huge shareholder wins.

Right now is the time to get positioned to profit from this rapidly tightening oil market and this is the company through which to do it.

2018 is going to be the year that the oil bull roars again.

To start making money from it, get the name and symbol of this stock by clicking HERE.

Running Off a Cliff at Full Speed?

Western Canadian natgas prices are lower than a snake’s belly in a wagon rut.

And while most stocks are pricing that in, there could be another big leg down this spring.

The main natgas pricing hub in Canada is called “AECO” which is an old acronym for Alberta Energy Company. Consider it another “hub” like Henry Hub in the USA.

And despite the Polar Vortex across North America recently, AECO prices have actually being going down with Feb – Dec ’18 now sitting around $1.20/GJ. In US dollar terms, under a buck.  It’s a huge difference from US prices; and the discount of Canadian gas prices vs US is only getting bigger–see this chart:

Folks, there is NO positive cash flow for management or investors at these forward strip prices.  Most analysts put the supply cost for western Canadian natural gas north of ~$2.00/GJ and in many cases well above this mark.  Once again, in 2018, I expect Cdn natgas pricing to go negative on several days this summer.

(Last year there were days when natgas was as low as NEGATIVE $7/mcf!)

It means that Canadian natgas producers will lose HUGE money again this year with every molecule they produce.

So why is Canada producing natgas at a record pace? Western Canada produced a decade-high 17.14 bcf/d on December 23, and after a brief time when some production froze off, it is now back over 17 bcf/d.

Storage levels remain high in Alberta, and with weather forecasts now warming, consensus is for an average storage level come spring…which sets the stage for weak pricing through the rest of the year.

Of course, part of the problem is that the Canadian industry ramped up to get ready for LNG–and so far nobody has committed to a $10-$20 billion project on Canada’s west coast.

The US has the Gulf Coast LNG as a relief valve for their natgas production…and US natgas production is up 4 bcf/d over last year already to a record 77.5 bcf/d, and is expected to grow 5 bcf/d in 2018 and again in 2019. (LNG exports are only increasing at 1-2 bcf/d per year).

This is obviously not good for producers or their investors. Really high production, really low prices…anybody see a problem here? And nobody is cutting back that I can see…I cannot find ONE formal announcement of a production decline…several have said they won’t grow as much as they originally said they would.

Producers like Painted Pony (PONY-TSX)have said they will match spending with cash flow…but they have hedged a lot of their production.

Canadian natgas stocks have predictably been taken out to the woodshed. Low cost senior producer Peyto (PEY-TSX) is trading at $14, a level not seen since the financial crash of 2008. Mike Rose’s Tourmaline (TOU-TSX) is back near its $20/share initial trading range from seven years ago.

Almost all the intermediate natgas producers—Birchcliff, Painted Pony, Crew Energy among others—are all at or barely above 10 year lows (Jim Riddell’s Paramount (POU-TSX)being the notable exception).

But it could get worse for investors this spring—when reserve reports come out.

Reserve reports are done by independent reservoir engineering companies—they are the accountants—or more like the auditors—who determine what amount of economic hydrocarbons are actually in the ground.

Of course, economics is based on price.  One of the Big Four in reserve reports is Sproule Inc. of Calgary.  Last year they thought AECO would average $3.25, $3.35, $3.50, $3.55 and $3.90 for 5 years

It will be interesting to see what reserve engineers use this year, as the current deck on Sproule’s website is $2.85 AECO in 2018, $3.11 in 2019, $3.65 in ‘20 and, $3.80 in ’21 and $3.95 in 2022.

Spot pricing in Canada now–in the coldest weather since the Polar Vortex of 2014—is $1.60ish.  The strongest pricing of the year is generally right now.

To me, that’s a pretty bloated price estimate.  Do reserve reports have any use with pricing that out of whack? (On the same note, if you are silly enough to go bottom fishing in this sector and you start reading a company’s powerpoint–check to see what kind of outlandish gas prices on which they base their projections).

Maybe reserve engineers do use that inflated deck – because things will look awful for producers if they don’t.  Investors could see some HUGE asset writedowns, which then impacts their borrowing base/credit lines (though banks do use their own price decks).  It can be a vicious downward spiral.

The other thing that may happen with reserve reports this year?  Costs go up; specifically what’s known as FDC—Future Development Capital.  Experienced frac crews in particular have been tight this year and that has driven up costs more than the average.

In their year reserve report, producers get to report what is called 2P reserves–Proven and Probable.  Think of 1P–Producing–as the amount of oil or gas that they are producing now AND what is about a stone’s throw away from producing wells.

There’s a 90% chance of the oil and gas in that area actually being there (I mean, we are guessing about stuff that’s a mile underground).  This means the reservoir engineer is really confident there’s no geologic fault that stops the reservoir or the geology doesn’t change or the productive formation doesn’t thin out etc.

2P resources are for an area a lot farther afield (and that distance varies company to company) from where the wells are producing.  The reservoir engineer only gives a 50% probability to the oil and gas actually being there, that far away.

2P resources can be a wonderfully BIG number, very good for promotional powerpoints and luring investors in.

But management teams also have to say how much it would cost to develop those 2P resources—that’s the FDC.  (Funny how this # often doesn’t make it into those powerpoints.)

Management teams divide that BIG 2P resource # by the FDC to tell the Market how much in it will cost per barrel in the future to get the undeveloped oil and gas out.

Let’s say that big number is 20 million barrels, and the cost to get it out is $100 million; that equals $5/barrel costs.  That’s really good!  If natgas is trading at $20/boe, analysts can model future cash flow of $15/barrel.
But well costs have gone up in 2017, and natgas prices have gone lower.

I’m going to use Birchcliff as an example here, not to pick on anybody but as a general example of what may happen to many natgas producer stocks this spring.

In their 2016 reserve report they booked 511 (502 net) potential drilling locations in their reserve report.
On an undiscounted basis those future locations had capital requirements (FDC—Future Development Capital) of $2.5 billion on a 1P basis and $4.2 billion on a 2P basis.

Boutique energy brokerage Peters and Co recently estimated that BIR would have about $250 million of funds flow on strip (before funding dividends) in 2018.  This time last year, Peters had them at $360 million in cash flow for 2018—a 44% difference. (Birchcliff gets roughly 50% of revenue from liquids, despite it only being 20% of production)

Due to low prices, producers like Birchcliff will likely have to reduce the number of locations they have booked, at the same time well costs went up…you can see the potential for a HUGE drop in indicated future cash flows.

If management and the reservoir engineers think that technology has increased the amount of oil and gas per well (the EUR, or Estimated Ultimate Recovery increases from a well)—that would slow the drop in future cash flows.

For management teams who have aggressively booked future locations, this increase in FDC with higher well costs could be a big hit–on paper.

It looks like that wagon rut is about to get deeper.  Investors beware.

EDITORS NOTE: This story is why I have been telling my subscribers to stay with the OILIEST producers for the last year.  I want to invest in producers with rising EBITDA, rising Free Cash Flow and Rising Stock Prices…click HERE to get the OILIEST profits!

In 2017 the global oil industry recorded a dreadful level of new discoveries.

You read that correctly.  I said dreadful.

Global energy consultant Rystad Energy of Norway just reported that in 2017, producers made enough discoveries to replace just 11% of what was produced during the year.

That means that for every 100 barrels consumed, only 11 were discovered.  That kind of math isn’t sustainable for very long.

2016 wasn’t much better.

Total discoveries in 2017 amounted to 6.7 billion boe.  On the surface that sounds like a big number but—next to what the world consumes every day—it isn’t.   At 95 million bopd of global demand, we use 1 billion barrels of oil every 11 days.  6.7 billion boe is just 70 days worth of demand.

To replace what was consumed, discoveries needed to be 5-9 times higher.

This problem—replenishing reserves—will only get worse.  You see, with lower oil prices the industry is now spending even less looking for new reserves.

Huge drops in exploration now = huge drops in production later.

Now I bet you are thinking that there is no reason to worry about these abysmal levels of reserve replacement because we can now count on shale oil.

That just won’t cut it.

While it has been a massive success (and will continue to be), today shale oil represents only five percent of total global oil production.  Growing that five percent won’t compensate for finding just one barrel out of every ten that are consumed—at least, for very long.

Clearly, the price of oil is already indicating that something is going on.  I believe that oil market players are now remembering something foggy in the back of their minds…this industry is very cyclical!

What happens in a cyclical commodity industry like this is: after several years of massive underinvestment, it sets the stage for a powerful, extended bull market.

My subscribers and I are ready to profit from this up-cycle.  We aren’t going guns a blazing chasing every oil producer under the sun however.  We are positioned for this by being very selective.

I don’t want to own oil producers that only do well in a raging bull market.  I only want to own producers that will do well no matter what commodity price gets thrown at them.

The reason that I’ve pounded the table on this particular company to my subscribers is that it is different.

When oil was under $50 per barrel this company’s core oil play was generating IRRs of over 100%.  That isn’t just good, it is off the charts good.  Most companies don’t have assets that can do that at $70 oil.

That high rate of return play is how this business was growing production by over 15 percent per year with oil at or below $50 per barrel.

With a pristine balance sheet, huge core land position and oil prices that are now surging above $60 I can’t wait to see what kind of growth this business will generate in 2018 and beyond.

The kicker is that the market still has this stock at a valuation level that lumps it in with mediocre producers that are priced for what they are……mediocre.

I can assure you that this company is not that.

Small valuation, big growth, and a surging oil price that makes the stock worth more every day.  This one has all the makings of a 2018 (and beyond) success story.  Get the name and trading symbol by Clicking HERE.

Keith Schaefer