Half The Oil Price But Four Times The Free Cash Flow

By
Keith Schaefer
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Half the oil price but 4x the free cash flow! Sounds like a pitch from Barnum & Bailey’s circus, doesn’t it–Step right up folks and see it with  your own eyes!

I’m going to show this magic trick–starting with the chart below.  In 2017 at $50 oil, Vermilion Energy (VET-TSX/NYSE) is going to have four times more free cash flow than it did in 2014/2014 when oil was $100 per barrel.

This is the best kind of magic……the profitable kind!

a

Ladies and gentlemen, allow me to walk you through it.

The rising red line depicts Vermilion’s total production by year.  Production starts 2011 at 35,000 boe/day and will be more than double that next year in 2018.

Not bad, but this trick gets a lot better.

I direct your attention now to the dark blue bars of the years 2011 through 2015.  These bars represent free cash flow, calculated as funds flow from operations less all capital expenditures.

When I say free cash flow I’m talking about cash that is available to pay dividends, pay down debt or repurchase shares.  Something that shareholders of a staggeringly large number of producers know nothing about.

From 2012 through 2014 with oil prices bouncing between $85 and $100 per barrel Vermilion still generated close to $100 million of free cash flow per year.

Honestly, in a world where shale oil and gas producers generate no free cash flow ever Vermilion’s $100 million per year even at high oil prices looks pretty good.

Now this is where you need to sit up and pay attention, here is where the magic begins.

Look now to the light blue bars that represent free cash flow for 2016 through 2018.  In 2016 a year when oil and gas prices bottomed free cash flow jumped to $250 million.  This year with $3 natural gas and WTI oil in the low $50s Vermilion’s free cash flow will approach $400 million and rise again in 2018.

There is no illusion or misdirection involved here.

These aren’t one-time blips in cash flow caused by asset sales or weird hedging gains.  This is cash flow that remains after capital spending that has been generated from production with 2016’s actual commodity prices and a recent strip pricing assumed for 2017/2018.

The capital spending that Vermilion is doing will keep production growing at a rate of 5-10% /year.

You have to admit, this is some beautiful magic.  With half the oil price of 2012-2014 Vermilion will be generating almost four times the free cash flow going forward.

Applause is welcomed.

A Look Behind The Curtain – How Vermilion Pulled Off This Trick

If you enjoy watching a magician the last thing you really want is to understand how he pulled off a great trick.

It spoils it!

As investors we should have no interest in a company not being able to explain how it achieved something.  We shouldn’t ever own anything we don’t understand.

Vermilion’s trick is based on three components.  All of them important to achieving this magic.

Some companies have one or two of these components, few have all three.

Component #1 – High Netbacks

This one is obvious.  To generate any cash flow, never mind free cash flow an oil and gas producer must make a decent margin from the barrels that it actually produces.

Vermilion generates terrific netbacks (revenue minus operating expenses) across all of its assets.
b

In 2016 Vermilion’s netbacks were among the best in the industry.  That by itself is good, when combined with the next two components it is even better.

Component #2 – Strong Capital Efficiencies

High netbacks are obviously important, but it involves only how much money Vermilion makes after wells have been put on production.  Most of the spending in the oil and gas business takes place before production starts.

We need to also factor in how profitable Vermilion’s production actually is when consideration is given to the capital invested to bring those wells onto production in the first place.

The way that the industry measures this is referred to as “capital efficiency”.  How much it costs to bring on new production.

c

For Vermilion in 2015 that number was just $9 per barrel.  The company has made huge improvements over the past five years.  I expect when 2016’s reserve report is released we will a similarly low figure.

Equally as important Vermilion believes these capital efficiency gains are sustainable going forward because they relate to improved drilling times, not service cost concessions.

Component #3 – A Low Production Decline Rate

There aren’t any shale producers that I’m aware of that pay a significant and sustainable dividend.  Some of them have high netbacks and even strong capital efficiencies.  What they lack is the third key component that Vermilion has……a low production decline rate.

Because shale production declines so quickly, producers have to continually reinvest all of the cash flow that they generate into new wells in order to offset those production declines.

The chart below shows the difference between Vermilion and a pure-play shale producer like Raging River (RRX:TSX):

d

Raging River’s production is declining at a rate of 45 percent per year.  Vermilion meanwhile has a decline rate of only 13%.  Think of how much less money Vermillion has to spend in order to offset production declines.

There is that free cash flow again.

You will notice that Vermilion shows a “natural” and an “effective” decline rate in the chart.  The reason that the “effective” rate is lower is because Vermilion is restricting production at two of its assets in order to maximize long term recoveries.

With production restricted, these two assets (Netherlands and Australia) have will have no production declines year on year.

e

Something Good Is Likely To Come Out Of This Additional Free Cash Flow

Vermilion’s balance sheet is good, but the company would like it to be a little better.  The effect of spending on development of Vermlion’s Corrib property with extremely low oil prices added some debt over the past few years.

I would expect to see the increased free cash initially go towards balance sheet improvement.  By the end of 2017 Vermilion’s debt to cash flow should be down to only 1.2 times.

At that point I think a dividend increase is likely in order, perhaps as much as a 25 percent increase.

This company already yields 4.7 percent and continues to grow production by 5 to 10 percent per year.   You would think that adding to that already sizable dividend should do good things for Vermilion’s share price.

With a solid balance sheet, nice yield, growing production and an upcoming dividend increase to act as a catalyst…..Vermilion shareholders should find themselves with a seat at a another really good 2017 show.

Not magic at all, just a really well positioned company.

-Keith

EDITORS  NOTE:  I love energy companies–any company–that keeps increasing its dividend.  I found an energy producer that is so profitable–right here and now–that I expect its dividend to more than double in the next two years–and reduce debt at the same time.  Get this stock working for you NOW–click HERE

I Found the Holy Grail of Energy Stocks

By
Keith Schaefer
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I found the Holy Grail of Energy Stocks.

No more volatility.  No more ups and downs.  No more trading.

Just a secure, certain dividend stream that I think will grow every year–for the next 14 years.

In fact, it might even get increased a couple times a year.

How do I know this?  Because this company has locked in its sales pricing until 2030.

And the best part? Each and every year–they have secured a higher price.

It’s incredible.

Their main asset is so profitable–insanely profitable at the prices they have locked in–the management team just started a dividend last year.  And they have already increased it. Twice.

I am so glad I jumped aboard this gravy train.  The good news is, it’s just pulling out of the station–it really hasn’t gone anywhere yet.

This is an energy producer you can find religion with.  Dividend increases for the next 14 years? Get the name and symbol of this incredible find–right HERE.

What Canada Has That The US Doesn’t–Oil Stocks

By
Keith Schaefer
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Investors are trained by analysts and management to talk about oil prices when looking at energy stocks.

But that’s a misnomer; a mistake even—especially in the United States, where the hydrocarbon geology is deeper and gassier than Canada.  And natural gas is worth a lot less than oil.

Investors sadly pay almost no attention to the realized price per barrel that companies receive—the integrated natgas/oil price—just to what the price of oil is doing on the day of the quarterly report comes out, or what the average price of oil during that quarter.

I worked with one of my researchers, studying 37 small-to-mid-tier energy producers in the United States—the names on all the brokerage analyst reports—and discovered some facts most energy investors may not believe:

  1. 65.9% of production was natural gas or low-priced NGLs (Natural Gas Liquids)
  2. Therefore only 34.1% of production was oil
  3. That ratio put the average realized price per barrel of the 37 in December 2016—when WTI was $50 and natgas was $3—at just $28.37/barrel.
  4. We back-tested this to Q3 2014—top of the Market—and found that with WTI at an average $97.37/b, and natgas at $3.95/mmbtu, the 37 companies realized an average price of just $46.30/b.
  5. All-in costs (production + maintenance capex + taxes) were $54.57—so even at $100 oil these producers were losing $8.27 on every barrel!

There is obviously some big variances between companies, but overall it tells three stories:

  1. helps investors understand why “oil” stocks don’t make money (because investors are not looking at realized pricing per barrel). 
  2. How low natgas prices can really drag down “oil stocks” cash flow
  3. Help investors focus in on the best bang for their oil buck—which could be Canada, where a lot more companies have 90% + oil weightings

Now, assuming that 34.1% oil/65.9% natgas split, here is a matrix that suggests what the realized price per barrel would be for our small 37 company universe:

A

 
The black highlighted box in the lower right corner is roughly where these 37 companies were in Q3 2014–$47.00 realized pricing between their oil and natural gas.  The $28.37 box is our guesstimate for realized pricing in December 2016.  The $23.71 box is where Q2 2016 realized prices were, when natgas was really low.  If natgas goes back to that $2.25 price level—and winter now looks to be effectively over with a warm February forecast—the $28.37 realized pricing box that is highlighted is what could be very realistic for the second half of 2017 at $60/b WTI.

Natgas prices have a huge impact on the cash flow for “oil stocks”.

Here is a list of the 37 stock chosen for the study, in order of oily to gassy (primary Permian stocks in yellow; I’ve been focusing almost all my attention on the Permian in the last year):

B

 
The oil ratio drops off quickly in these 37 US E&Ps—only Denbury has over 90%, and only Ring Energy (going after a shallow formation in he Central Platform, is also above 80%. Concho is already down to 61.6% oil.

Both the Permian and the Bakken are “oil” plays, but Continental (CLR-NYSE)–the poster child of the Bakken–was rarely ever over 70% oil.  And looking at the EIA drilling report from last month, new production out of the Permian was only 76% oil–and those wells tend to get gassier as they age (which is why you will see producers add rigs as fast as they can in the Permian to keep their oil weightings higher)

Our little study really shows that investors should take a more integrated view of oil and natural gas prices:  Few investors—or even analysts—appreciate that a decline in natgas prices to $2/mmbtu would offset a roughly $12/b increase in crude oil prices (actually the analysts do realize that, but it would make selling these stocks more difficult to institutions and retail ;-)).

Now, contrast that to Canada.  Canadian geology is shallower, so by definition its production is more oily.  The deeper the geology, the more heat and pressure in the rocks, which “cooks” the hydrocarbons over time into first heavy oil, then light oil, then liquid rich gas, then dry gas—each one being lower down than the previous one.

Obviously the oilsands companies have the shallowest geology—at surface.  Then the SAGD producers (Steam Assisted Gravity Drainage), where two long heated pipes warm up bitumen and collect oil.  Then there’s the light oil producers in southern areas of both Alberta and Saskatchewan.  All the companies in these plays have mostly 90% + oil. 

US E&P share prices will move higher if WTI crude climbs above $60/b in 2017, BUT the rally will be muted if  natural gas prices fall–and I’m one of the more bearish on the Street for natgas–and service costs rise.

EDITORS NOTE: How many energy companies are increasing dividends these days? Precious few.  But I found one that has guaranteed increases coming…for the next 14 years. Stay tuned.  Dividends support stocks like nothing else in good times and bad and….ever notice how expensive this market is?

Remember Poseidon Concepts? It Tanked. Finally An Executive Is Charged

By
Keith Schaefer
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Poseidon Concepts executive Kostelecky Is Criminally Charged

Editors Note:  Calgary’s Poseidon Concepts was a market darling in 2011-2012, rising from $2.65 – $16 on the Toronto Stock Exchange.  The company proclaimed it was so profitable making and selling frac water tanks, it started a dividend.  But doubts in the Market arose after receivables increased quarter after quarter.  On November 15 2012–days after confirming the next quarter’s dividend–the company released financials that showed a $10 million writedown in revenue.  The stock crashed from $13-$6 the next day, and within four months it wrote down $148 million of previous revenue, and the stock went off the board.   The Chairman was Scott Dawson; Lyle Michaluk was both CEO and CFO of the company at different times.

The Canadian executives settled out of court, as you will read below.  The US executive is now being criminally charged.

by Mike Caswell, Stockwatch.com
reprinted with permission

Prosecutors in North Dakota have filed criminal fraud charges against former Poseidon Concepts Corp. senior vice-president Joseph Kostelecky. They claim that he caused Poseidon to book tens of millions of dollars in non-existent revenue. His actions led directly to the company’s collapse, prosecutors say.

The charges come about four years after Poseidon, which was listed on the Toronto Stock Exchange, surprised investors with a massive revenue restatement. The company reported that between $95-million and $106-million of its revenue for the first nine months of 2012 was incorrect. The resulting restatement wiped out most of the company’s $148-million in revenue for the period. The stock, which had traded as high as $16.90 in 2012, hit 27 cents after the news. Two months later the company delisted from the TSX, and it is now defunct.

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BISMARCK TRIBUNE
Joseph Kostelecky

 

According to prosecutors in North Dakota, the man behind this trouble was Mr. Kostelecky. On Friday, Jan. 6, they unsealed an indictment charging him with wire fraud and securities fraud. They claim that he caused the company to book the non-existent revenue in part to boost the value of his Poseidon shares and stock options.

The scheme, as described in the indictment, revolved around Poseidon’s U.S. tank rental business. The tanks were used for above-ground storage of the fluids used in hydraulic fracturing. Mr. Kostelecky was the company’s sole executive in the U.S., and managed the U.S. business until his resignation on Jan. 10, 2013. He personally marketed the company’s products and negotiated the contracts with customers, according to the indictment.

Starting in November, 2011, Mr. Kostelecky caused the company to book revenues from tank sales that had not occurred, prosecutors claim. They say that he directed accounting staff to enter figures from purported long-term rental contracts. In reality, such contracts are almost never used in the tank rental business, the indictment states. Customers typically only use the tanks for a short period, and then return them.

Eventually, accounting staff started to question the figures, prosecutors say. They sought documentation that would support the company’s sales. Mr. Kostelecky’s response to such queries, as described in the indictment, was far from a receptive one. On May 23, 2012, a clerk asked for copies of rental agreements to support invoices the company was preparing with respect to a lengthy rental. Mr. Kostelecky’s response, as quoted in the indictment, was: “Why are we waiting on this? Invoice off what I have provided you!!”

Within months, the matter had escalated to Poseidon’s controller and other executives, prosecutors say. On Aug. 24, 2012, the controller specifically asked Mr. Kostelecky for signed contracts. In response, he provided assurances that, according to prosecutors, were entirely false. He said that the contracts were on file, even though he knew they did not exist, the indictment states.

Meanwhile Poseidon’s revenue was growing substantially as a result of the purported U.S. business, prosecutors say. Its second quarter 2012 revenue of $54.8-million was a 568-per-cent increase over the prior year. Other quarters showed equally impressive figures.

Keeping the scheme going, however, was becoming an increasingly complex task for Mr. Kostelecky, prosecutors claim. Among other things, he began instructing accounting staff not to call some customers about outstanding invoices, the indictment states. He told staff members that he would be the only Poseidon contact to handle those accounts. Similarly, he told staff not to mail out some customer invoices at all, instructing staff to book the revenue even in the absence of billing.

Eventually the company’s board hired an outside auditor to look into its revenue. After receiving the findings, the company issued a Feb. 14, 2013, news release, in which it said that much of its revenue for the first nine months of 2012 should not have been recorded. The stock collapsed, and on May 17, 2013, the company delisted from the TSX.

The charges against Mr. Kostelecky are five counts of wire fraud and one count of securities fraud. He entered a not guilty plea in an appearance on Friday before a judge in North Dakota. The judge released him on a promise to appear.
In addition to the criminal charges, Mr. Kostelecky was the target of a similar case filed by the U.S. Securities and Exchange Commission in 2015. He agreed to pay $75,000 (U.S.) to settle that matter. He also agreed to a permanent officer and director ban and to injunctions barring future violations. Mr. Kostelecky did not admit any wrongdoing in settling the SEC case.

In Canada, three of the company’s officers were the target of an administrative action filed by the Alberta Securities Commission. The ASC said that the men should have disclosed the revenue trouble much sooner. Instead they certified false and misleading financial statements. To settle that matter, former Poseidon chief executive officer Lyle Michaluk agreed to pay $150,000, as did former chief financial officer Matthew MacKenzie. Its chief operating officer, Clifford Wiebe, agreed to pay $75,000.

I Called This Trend Wrong in 2016

By
Keith Schaefer
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2016 Themes

When I look back on 2016, what were the Big Themes?  For me, the #1 theme was the same as 2015–Nobody Knows where the oil price was going.  We all guessed how much US production would drop (Market was about right), how tight credit would be (much looser than expected), how and  when OPEC might cut production (it took a whole year but they did it) etc etc etc..

Had OPEC not come to an agreement in November, oil would be mid-40s now and everybody’s energy portfolio would not be looking so good.  The depth of global inventory draw down before this OPEC cut was painfully slow.

The lesson—Be Flexible.  There is lots of economic hydrocarbons in the world.  We will likely never be short energy in the near to medium term…so be on the lookout for the lowest cost producers (generally the companies with the fastest well payouts).

Another theme was that management teams continued to drill marginal wells that lose money–which to me is anything under 75% but certainly under 60% IRR.  Junior producers for sure cannot grow production within cash flow under 60% IRRs, and even the intermediate producers were willing to put growth ahead of returns on capital.  It just kills me to see producers bragging about a huge inventory of 50% IRR wells.  Those are dilutive, value-destroying wells.  It means more debt or more equity is coming.

In one sense, who can blame them?  I mean, they did find investors to fund that craziness.  But in the long run, drilling wells under 60-75% IRRs is a Ponzi Scheme, and destroys shareholder value.

Looking back, another theme was that trading technically worked really well–The Energy Charts were actually pretty good this year.  What I mean by that is, you could have invested in energy stocks based on the charts—the charts of US and Canadian energy ETFs–XLE and XEG–both said energy was a safe place to invest from the February trough onwards.  And they were right.  If I would have just put my brain in Park and stopped agonizing about where oil was going and just bought the charts–I would have made a lot more money a lot more peacefully.

The Trends I Called Right

Ethanol—that margins and valuations would continually increase.  And that happened.  Margins improved steadily through the year, as low oil prices spurred domestic demand for gasoline.  The real kicker was exports to China, which helped absorb some extra capacity.   Even though ethanol production steadily rose through the year, inventories declined as China increased their US ethanol imports dramatically.  US ethanol is the cheapest octane on the planet.  We all thought President-elect Trump would be bad for the ethanol market, but once he saw that all the ethanol counties voted for him…I think ethanol will be ok

The Permian Bubble—the Permian was the last major oil play in North America to go horizontal—but once it did, WOW.  Everything came together for the Permian this year–producers figured out they could get oil from as many as 11 zones.  Parsley Energy said they thought they could spud 96 horizontals in one square mile through those 11 zones!!

The trend toward using more sand, and finer sand, in their completions (fracking) continually increased production per thousand feet of lateral.  Then laterals got longer—7500 – 10,000 feet is now normal where land positions allow it.  I saw flow rates as high as 400 boepd per 1000 feet in the Permian (Resolute Energy’s latest).  2016 was a perfect storm for the Permian.

As the Permian went horizontal, it became very clear—with regular results over 3000 boepd from companies—that this play could pay out wells in just 7-9 months at $45 oil.  The Permian was a smoldering fire and the Resolute results were the oxygen to make it explode into investor consciousness as The Place To Be, and the Saviour of Energy Services in the US.

The Big Trend I Called Wrong

Canadian Natgas stocks would be under real pressure all year with low AECO (the Canadian benchmark pricing, the Cdn equivalent of NYMEX) pricing.

But the Canadian natgas stocks traded more off of US natgas stocks (and therefore NYMEX Henry Hub pricing) than AECO.  AECO had bearish fundamentals all year—really high storage levels, increasing production, producers in a fight with TransCanada on their mainline tolls to ship natgas back east…so I didn’t buy the junior leaders, the strong growth stories–like Painted Pony.  It only went from $3-$11 without me.

That also meant I ignored the leading Montney stocks–like Paramount (POU-TSX), Seven Generations (VII-TSX) which had fantastic years–POU was up 500% off the bottom at year end.  But for the most part, all energy stocks rebounded strongly out of the February low through to June and then treaded water until the OPEC cuts.

Natgas stocks were not about natgas pricing in 2016; they were about lowering costs through higher production from better fracking (longer wells, (LOTS) more sand, tighter spacing).

The service sector had much choppier charts, and only started getting some sustained love early-mid Q4.

The other point for me to make is that I don’t add much to these mainstream stocks unless I see something compelling, as the sector is so well covered; it really is over-analyzed. I like shining my flashlight in the dark corners of the energy market to find different kinds of stocks.

Where Did I Get (Abnormally) Lucky

Approach Resources—anytime I invest far down market in quality (which is really saying they’re higher up the cost curve), you are counting on rising commodity prices.  On this trade I had two other things going for me—fast rising excitement in the Permian—The Permian Bubble was just getting underway; and a Big Short Position.

My #1 reason for buying the stock was getting in front of the Permian Bubble that I saw coming—and understanding that once The Street saw it, they would rush in and buy every old, high-cost producer that once traded at much higher levels.

Once that rush started…well, there was a massive short position against the stock…it all combined to make this high-cost producer double in just over a month.  And I sold it there. Luckily I bought $60,000 worth!

Possible 2017 Themes

Service Companies Operating in the Permian—The Trump election win moved the balance of power, IMHO, from the producer to the service company.  What I mean by that is—investors don’t know if OPEC cuts hold, or what the price of oil will be.  But investors do know that all these producers will use all the liquidity they can to drill baby drill.

NATURAL GAS

Natgas Volatility—it’s all about winter weather.  Natgas moves 10% now on whatever the latest far ranging weather forecast is.  Demand has already been 25 bcf/d more in early winter than it was last year.  Structurally, US natgas production is down 3-4 bcf/d, but has a big cushion in high inventories.

Before shale gas really started growing in 2009, there was a real possibility that North America could be short gas.  That is not the case anymore.  Whatever demand is, shales from the Montney to the Marcellus can meet it—once infrastructure is approved.  And even then–for only an undetermined period of time.

But certainly in the short to medium term, any supply shortage will be very short lived—especially under a Trump administration that also has a Republican House, Senate, and most of the States’ governors.

After winter ends, higher gas prices are all about demand, especially Mexican and LNG export demand.  RBN Energy made this point in their #1 Prognostication for 2017:

“And the #1 Prognostication for 2017 is…….

  1. Natural gas, particularly wet natural gas, will be a more attractive market than crude oil.  If you buy our Prognostications about crude, gas and NGLs, this is where you land.  The crude market will muddle along at prices that average somewhat higher than 2016, but no big recovery.  The forward curve for natural gas is mispriced—too low given the coming surge in demand from LNG and Mexico exports.  And NGL prices will be increasing more than both oil and gas, due to the ramp-up in ethane petrochemical demand and ethane exports.  Put all that together and you get a rosier outlook for gas than crude, and an even rosier forward view for wet gas that will be the source for all those NGLs.”

CEO Rusty Braziel and his team have a great track record and are not to be underestimated.   I’m a little less bullish than Rusty; I expect increasing supply should come on quickly now that the gas rig count is at 135, up from 81 off the bottom.  Technology and understanding logistics better (more sand, longer laterals, downspacing) means that each new rig brings on a lot more natgas than ever before.

And there is another 4+ bcf/d of new pipelines coming out of the Marcellus and into service in 2017.  That’s a lot of low cost gas; the differentials in the Marcellus have already dropped a lot (lower diffs=higher prices; closer to Louisiana pricing).

I don’t see natgas being a disaster in 2017, but I see oil stocks making me more money than natgas stocks in 2017.

OIL in 2017

Fundamentally, the 2017 oil price is all about OPEC cuts.  Without significant cutbacks, global inventories come down VERY slowly–I think oil would be capped in the low $50s/barrel, and realistically lower.  But optimism is high and the Gulf States are making sure the world knows they are already cutting production…so I think high 50s are realistic with a spike or two into the 60s this year.

There is precious little spare capacity in the world today, so I think any Black Swan event for oil will be bullish–some MidEast tension or terrorism in an oil field.   The good news for shale producers is that the Saudis are really hurting; I think they will be willing to cut more than anyone thinks…and then maybe pull the rug out again for a month or two maybe to keep the funders of NOPEC (the Shale Lenders) honest.

Technically, the charts of oil and oil stocks say–own as much oil as you can stomach.

The only other thing I would say for 2017 is that service costs MUST come up, potentially a lot in 2017 and 2018.  Not only did service companies not make any money the last two years, but so much of the technical labour has gone.  Roughnecks aren’t just dumb hulky men; most of these rigs require highly technical people on the job 24/7.  Tens of thousands of those people are GONE, and who knows if they come back to this volatile sector–and at what price.

LNG in 2017

The Asian LNG price is back up to $8-$9/mmbtu.  If oil can stay in the $50s, that will help LNG a lot.  I see an increasing number of FSRUs—floating import terminals—in 2017, but FLNGs—Floating Export Terminals—won’t be a Big Story for at least a couple years, and realistically 2020 before there is a critical mass of them to convince investors to pay up for 25 years of cash flow.

In Canada, I think you see Petronas NOT be the first big project to go ahead, but that first group won’t say yes until mid-late 2018.  LNG is completely dead in Canada if the NDP (the leftist party in Canada) wins the BC election in May, but that is highly unlikely.

LASTLY…a couple things keep me a bit nervous…

  1. The first year of the presidential cycle is rarely a good one for stocks
  2. The market is already extended since the election
  3. Interest rates will come up… I just don’t know how quickly

Regardless, in 2017, I will continue to look for
a) low-float stocks with
b) a business edge that’s
c) underfollowed or
d) has a large or under-appreciated catalyst looming.

That’s what I do.

EDITORS NOTE: Want to know an underfollowed Oilfield Services play in the Permian–one with the most leverage of any company I see there? They have at least major FOUR catalysts to announce in 2017, and I expect the Market to reward this stock for each one.  CLICK HERE for the name and symbol for this Permian winner!

Giant Slayer Short Seller vs. Royal Dutch Shell—Part 2

By
Keith Schaefer
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0

Shell has a 7 percent plus dividend yield and believes it can generate three times as much free cash flow at $60 oil going forward than it did at $90 oil from 2013 through 2015.

If true, that has the makings of a company that you want to own.

Those are clearly some ambitious goals that the company has laid out and not everyone believes the Shell view of the future.

One smart investor is even betting against it.

Wall Street’s True Short-Selling Legend Betting Against Royal Dutch Shell

Being a short-seller is hard, especially a professional one.

First–nobody likes you.  You have made it your job to say things that people don’t want to hear about a stock they own.

Second–making money at it is incredibly difficult.

I mean just look at that chart below….the game is rigged in the favor of The Long Investor!
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Source: Yahoo Finance

When it comes to making a living shorting stocks-Jim Chanos is “The Man”.  He started his hedge fund Kynikos Associates in 1985 and has ever since made his living primarily by picking stocks that he thinks are going to decline in price.

Lots of hedge funds short some stocks.  Very few do it exclusively.

Chanos has had some very high profile successes with Enron, Tyco and several companies exposed to the housing crash. He obviously takes his short positions very carefully and after a great deal of research.

Before owning a stock he is short an investor would be crazy not to at least listen to him.

One of the current short positions Chanos has is Royal Dutch Shell.
b

Chanos Doesn’t Like Shell’s Past Performance

The fact that Royal Dutch Shell currently yields almost 7% tells you something.  The market has some serious doubts about the long term sustainability of that dividend.

Blue chip oil majors aren’t supposed to have dividend yields like this.

Looking backwards, it isn’t hard to understand where those concerns come from.

Last fall at Grant’s Interest Rate Observer, Chanos dedicated a portion of his presentation to his short bet against Shell.  He pointed out just how pathetic he thought the performance of not just Shell, but all of the majors had been in recent years.
c

Source: Jim Chanos Presentation

The table above is from Chanos and lays out the performance of these companies including Shell from the beginning of 2009 through the middle of 2015.

There are a couple of numbers that Chanos would have you focus on.

Ugly Number #1 – Negative Free Cash Flow Post Distributions

Over this 2009 through mid-2015 time period, despite for the most part enjoying the highest sustained period of oil prices ever, Shell (RDS) experienced negative post distribution free cash flow.

Shell outspent the cash it generated by a massive $34.1 billion.

Shell’s dividend was not even close to being supported by the cash the business generated at high oil prices.

Ugly Number #2 – Soaring Long Term Debt

If Shell spent a lot more cash than it generated the obvious question becomes where did that cash come from?

The answer for half of it is debt.

Shell started 2009 $35.9 billion in debt and ended the second quarter of 2015 with $52.9 billion.  As of the end of September of this year Shell’s long term debt had reached $75 billion with its BG Group acquisition completed.

That is a problem.  It gets worse when you consider the next ugly number.

Ugly Number #3 – No Reserve Growth

Outspending cash flow is not unique to Shell.  What is a little more unique is that Shell managed to outspend cash flow by $34.1 billion yet still see a decline in its reserves.  Over the period in question Shell saw its reserves decrease at an annualized rate of 1.3%.

There isn’t much about this stretch of time that looks good is there?

Chanos Has Serious Doubts About Shell’s Future As Well

Shell itself doesn’t hide from its 2013 to 2015 performance or lack thereof.

The company can’t; it is very clear from the numbers.

Shell’s view is that the future is going to look very different.  As I noted earlier the company projects that going forward at $60 it can nearly triple free cash flow from what it was able to generate at $90 oil previously.

As you can imagine given his short position, Mr. Chanos doesn’t expect that to happen.

Instead Chanos believes that Shell has made a major mistake with its $53 billion acquisition of BG Group.  Chanos sees problems with both of the two key features that appealed to Shell about BG.

The first problem is LNG–Liquid Natural Gas. It’s where natural gas is reduced to 1/600th of its volume in liquid form at -160 degrees Celsius.

By combining with BG, Shell becomes by far the biggest non state owned player in the LNG game.  Chanos believes this move is not going to pan out as hoped for.

Chanos points to the fact that LNG demand has greatly trailed what was expected while LNG capacity is about to skyrocket.  Like oil and North American natural gas before it, Chanos sees an LNG glut coming.

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Chanos sees the abundance of capacity continuing to pressure LNG prices which have already taken a beating from the oil slide.  Chanos also notes that any restart of Japanese nuclear power could further suck a great deal of LNG demand away given huge role Japan has in the market.

Problem #2 is offshore Brazil.

Chanos also questions the wisdom of Shell’s interest in BG’s Brazilian assets which basically involves becoming a partner with Petrobras.

Petrobras has been in the center of the biggest corruption scandal in the history of Brazil.

Shell sees these deepwater assets as a clear path to kick-starting long stagnant reserve and production growth.  Chanos sees differently.

Aside from the “lying, cheating and stealing” in the Petrobras, Chanos thinks partnering with Petrobras simply isn’t going to provide the future cash flow and reserve growth Shell is likely hoping for.
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Chanos Is Good But He Isn’t Right Every Time

You have to admit that it takes some guts to go short a company that has been around since 1833 and is currently paying a seven percent plus dividend.

As a short seller, Chanos has to provide the cash to pay the dividend on those shares that he has shorted.  I’m sure he is aware that Shell hasn’t cut its dividend since 1945!

Like all of us the man isn’t perfect.  It could very well be that the oil crash has sparked a drive to cut costs that can transform Shell going forward.

Plus those gentlemen at OPEC could also have a major impact here in helping boost Shell’s cash flows.

Once again we are reminded why this investing business is never easy.

Keith

Is This Energy Giant Cutting Its Dividend? Part 1

By
Keith Schaefer
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In the current age of low interest rates you aren’t supposed to be able to get a decent yield from a blue chip stock.

With a $0.94 per quarter dividend each Shell (RDS.A: NYSE) American Depositary Receipt today yields almost seven percent.  That is a very good yield.

Maybe a little too good.

Shell’s current yield is almost three and a half times the yield on the S&P 500.

That high a yield says the majority of investors don’t think that Shell’s current dividend is sustainable.  History agrees;  Shell hasn’t sported this kind of yield in decades.

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Source: Bloomberg

Maybe the doubting investment community should give the company some credit; after all, Shell hasn’t had a single dividend cut since 1945.  That is more than 70 years ago.

Since then the company has raised its dividend many times over and has navigated through a cold war, single digit oil prices in both the 1980s and 1990s and almost every other scenario that you can imagine.

Seventy years of delivering should buy a little faith with investors shouldn’t it?  Perhaps in this case the market is wrong.

The Oil Price Collapses – But Free Cash Flow Rises?

Do you remember in the movie Rocky 3 when Mr. T’s character–the up-and-coming fighter Clubber Lang gets a title shot and gives Rocky (the champ) a serious beating?

Rocky was the longstanding champ who had lost his drive.  Rocky was complacent while Clubber Lang was hungry.

Rocky needed a wake-up call from Clubber to help him get focused and realize his full potential.

In the rematch the story was very different.  Rocky teamed up with his former rival Apollo Creed who got Rocky into the best shape of his life so that he could win back his title.

The wake-up call that Rocky received reminds me a bit of Shell today.

From 2010 through mid-2014 the company had things pretty easy with $90 per barrel plus oil prices.  Those high oil prices took away the motivation needed for Shell to squeeze the most out of every dollar spent.  Budgets became bloated as everyone believed that a new era of high oil prices had arrived.

The oil crash in 2014–that forgot to end–has been Shell’s version of Clubber Lang.

Investors doubting Shell’s ability to maintain its dividend might be surprised at what the company believes it can accomplish over the next few years.

The slide below comes from Shell’s latest corporate presentation.  It shows what the company accomplished from 2013-2015 with $90 oil and what it plans to accomplish from 2019-2021 at $60 oil.

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Source: Shell Corporate Presentation

The line that I want you to focus in on is the bottom row which shows total free cash flow.  Free cash flow is money that is left over after all capital expenditure spending is completed.  That is the money that is available to pay dividends, repurchase shares or reduce debt.

From 2013 to 2015 with $90 per barrel oil Shell generated on average $12 billion of free cash flow per year.  For 2019 to 2021 at $60 per barrel oil Shell is projecting that its free cash flow generation is going to increase to $20 to $30 billion per year.

Just as Rocky became a different fighter for his second bout against Clubber Lang–it seems that Shell is becoming a very different company to combat lower oil prices.

Based on Shell’s numbers the current dividend certainly appears to be very safe going forward.  Given the radical transformation that the company is projecting you can see why the market is skeptical.

Why should we believe that it can do so much at $60 oil when it did so little at $90?

How Exactly Is This Possible?

The increase in free cash flow that Shell lays out–at a much lower oil price–is impressive……kind of.

If I was a shareholder and saw this plan my first question would be–how hard the company was really trying before?  Isn’t the idea to always make the most money possible for shareholders?

Those would be fair questions.

When I am selecting companies for my OGIB subscriber portfolio the management groups that I am looking for have a couple of clear characteristics:

  • They have proven in the past that they can create shareholder value
  • They are aligned with me by having a significant percentage of their net worth invested in the company

What I’m looking for are the Clubber Lang’s of the oil and gas business.  Hungry, motivated entrepreneurs.

At the big integrated oil companies like Shell that isn’t what you are going to get.  These companies are run by career employees, managers who are there to put in their time and cash a nice fat paycheck.

That is why when forced to do it, the management of Shell is able to find fat to be cut.  It is because it was there all along.

We can see that as we walk through how the company is going to generate more free cash flow at $60 oil than it did at $90 oil.

Step one is to trim some of that fat by reducing operating costs.
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Source: Shell Corporate Presentation

Shell had an operating cost run-rate of $50 billion per year in 2013/2014.  By the end of this year Shell will have already shaved $10 billion from that.  That is a HUGE amount of money.

These reductions would be in the obvious places.  Eliminate expensive third party contractors and getting salaried employees to pick up those tasks.  Take a hard look at staffing levels.  Get each line manager to finally take a look at each and every cost that is under his control.

There will be a lot of low hanging fruit here to be picked.

Even bigger cash savings will come from a MASSIVE reduction to capital spending.

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Source: Shell Corporate Presentation

From spending nearly $60 billion in 2013 Shell plans to keep capital expenditures within a $25 billion to $30 billion range going forward.

That is $30 billion per year of cash that isn’t going out the door and it doesn’t seem to have any impact on Shell’s future production plans.

Again it begs asking…..wasn’t the company trying before???

Service costs that have plummeted across the industry will obviously play a big part here.  So will the fact that reduced revenues now has Shell and everyone else really holding line managers accountable for what they are spending.

Spending can be reduced becase the spending that was done from 2013-2015 is related to long lead time projects.  There was no return on this money being spent initially as those projects were completed.  That is now changing with these investments showing up with a wave of production, that will only benefit future years–not the years in which they were spent.

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These big free cash flow improvements do leave me shaking my head about Shell’s performance when oil prices were much higher.

However, as investors we need to look forward and not backwards.  Today what that forward view (according to the company) provides is a 6.9% dividend that based on the company’s projections looks very sustainable.

But hold on a minute…have I been fair or am I looking through rose-coloured glasses?

In my next article I take a look at Shell through the eyes of a very accomplished investor.  His view is much less  favorable.

EDITORS NOTE: There is one over-riding theme for energy investors in 2017–that the Permian Basin will get drilled like Swiss Cheese. Every service company in the Permian will be 100% capacity, with pricing power.  I can show you the company which will have the biggest jump in cash flow of all the Permian service players–RIGHT HERE.

Lithium Producers Can’t Expand Fast Enough To Meet Demand: An Interview With Orocobre Ceo Richard Seville

By
Keith Schaefer
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THE ONLY JUNIOR LITHIUM PRODUCER IN THE WORLD:
OROCOBRE LIMITED (ORL-TSX)

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I’ve been studying lithium all through 2016.  Lithium and lead are the key to renewable energy like wind and solar.  These “clean” power sources need enough power density in battery storage to make them economic on a large scale—and that will come from lead and lithium.

Orocobre is the only junior lithium producer in the world.  They went public in December 2007, and made the leap from explorer to developer to producer in seven years, when their Olaroz lithium facility came onstream in Argentina.

They are now very focused on expanding the successful Phase 1, and have targeted a 2019 timeframe for Phase 2.  Phase 2 will involve a duplication of the current plant with some enhancements for 17,500 tonnes of lithium carbonate production and a possible lithium hydroxide plant in Japan.

Being focused on production, they farmed out their key development and exploration assets to Advantage Lithium (AAL-TSXv).

I was able to grab 75 minutes of CEO Richard Seville’s time on Skype as he rested in London England after a long flight.

We had a GREAT chat—which you can read below—on

  1. The challenges of getting the Olaroz mine into production
  2. The challenges that current industry producers will have expanding production
  3. How they wanted to joint venture their best development asset and top exploration projects
  4. Why they chose Advantage Lithium
  5. The synergies between the Olaroz Lithium Mine and the Cauchari deposit that was joint-ventured to Advantage

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Keith:          Richard, you’ve been producing lithium for 18 months at the Olaroz mine in Argentina and you must be happy with the way the lithium market price has evolved for you guys. Your timing has proven to be really fortuitous. Was your team expecting this kind of price rise in lithium or hoping for it? How close to reality has it been to what you expected when you were building Olaroz?

Richard:      First, I acknowledge it’s been a great benefit to us and life would have been a lot tougher if—it was tough enough as it was Keith—but life would have been a lot tougher if the market hadn’t got tight. And outside of price, it meant customers were patient as we disappointed (in development/construction timeline). If it had been an over supplied market then it would have been very difficult to maintain a relationship with customers. e.
But because the market was so tight and they needed our product—then everybody was patient and that’s a very helpful dynamic to be ramping our plant up.

Keith:          Sure.

Richard:      Of course, it makes a lot of difference if you’re running $10 million a month (revenue) rather than $6 million a month.

Keith:          Oh yes.

Richard:      So that’s been a great benefit. And we actually had a good feeling for where this (lithium price action) was going after we did the research in 2013 into the so-called over-supply that was going to be coming on. And we did detailed research into the permitting in Chile and concluded there was no new product coming on for a long time.

We concluded that pending approvals would not be coming for some operators, and so although they were promising product for the coming year for their customers it was never going to arrive. .

So we changed our strategy on contract negotiations and deferred any finalization. Consequently, we didn’t have to get or give any discounts in the market.  And we deferred as much as we could because we felt the market was going to get hot—which it did—based on our analysis.

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth  is being over estimated  and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.

Keith:          Wow that’s great for you guys. And your Olaroz mine expansion will be ready when?

Richard:      We’ve just completed the scoping studies and we are looking at doubling lithium carbonate production to 35,000 tons per annum and potentially building a lithium hydroxide plant in Japan, integrated with down-stream manufacture of cathode. We move into design then and all being well we’ll have first  meaningful production in 2019.

If we weren’t there with Phase 2 at Olaroz, it (the lithium market) would be impossibly tight. I mean you need everything to be going well to deliver (global) 10% CAGR in lithium production. There are more of existing committed expansion on things and to do better than the 10% CAGR you need projects to come on. So you need to keep up with 10% CAGR, Mt. Marion, Mt Catlin, Albemarle—you need them all to work. If they start to slip then we have a lot more tension.

And to do anything better than that you need to start to provide some relief or better than 10% for 2018/2019/2020. You need rapid development of other projects.

Keith:          So there really is a window here for the Cauchari asset that you joint-ventured with Advantage Lithium. It’s right in the wheelhouse.

Richard:      There’s a real window there, exactly.

Keith:          Now you said you had some issues getting Olaroz up and running, some delays. What were the lessons you learned in the delays you’ve experienced in getting to full production capacity?

Richard:      Well we learned that expertise doesn’t rely necessarily on the engineering houses you rely on. If you look around the world you’ll see lots of examples of projects that didn’t go quite right for whatever reason.  It might blow out cost wise or take longer and that would be more  an implementation matter.  But if you don’t reach  production rates according to plan smoothly that’s often an engineering design issue. We had lots of compounding minor engineering issues.

Having said that Keith, we beat ourselves up about our ramp up because it wasn’t what we desired. The funny thing is when I’m comparing it against other projects  our own progress  wasn’t bad on a comparable basis but it wasn’t as fast as we wanted or expected.  I thing we underestimated the complexity.

Keith:          Right.

Richard:      Now the reasons for this is—there is a level of complexity in the plants that needs to be worked through. You have new components and new process routes ; you’ve gone from small scale to sophisticated modern scale…It’s not easy. When there have been 20 (modern lithium facilities ) built and you know all the issues then your results will be more predictable but at the moment that’s not the case.

There’s nothing earth shatteringly challenging, but the application of well managed engineering in new situations is where you underestimate the challenges. So I think it’s more a matter of underestimating rather than being able to learn anything magic.

Keith:          Right and that makes sense. This is a relatively new industry that’s just getting its first global scale push and so that makes total sense to me.

Richard:      It was hard work. As having to deal with the normal things of any project development the technical challenge and needing success on exploration, driving feasibility studies, etc. we also had to deal with delays in our permitting due to the provincial government wanting to negotiate a return on its mineral resources and hence why we have the government as our partner.

Then we had to deal with all the difficulties of a national regime that was restricting imports and access to US dollars to pay for them during construction. Then we had to deal with the challenges of building a plant at 4,000 meters on top of the all the challenges when things haven’t been done before. And then you have to consider the level of experience of the work force.  There has been a lot of learning over the last 18 months.

This is a lot harder than building a regular gold  plant.  These things are one-of-a-kind and the last one was built 20 years previously with FMC and SQM at about the same time.

And the pitfalls that we’ve had to deal with because of the intellectual property of these plants lies within the operating companies and not within the engineering houses and so all that nuance of design that avoids errors you shouldn’t make exists within the operators rather than the engineering houses.

So Phase 2 for us will be very de-risked compared to Phase 1 because we now have that learning of that IP.

That said, we are now in a position where we are consistently producing at around 80% utilization rate with cash margins in the order of US$6,500 per tonne and we expect our production rates to increase while we are seeing product prices increase, so things continue to improve.  It is satisfying to see the business move from a development phase to one where we are being judged on revenue, cash generation and margins.

Keith:          What would the lessons be for you if you’re talking to other companies like Advantage Lithium and giving them some feedback on how to do business in Argentina? What would you say? What lessons would you impart to other companies moving forward to production in Argentina?

Richard:      That’s a good question . Well, stick to your principles especially those which are immoveable, be constant and don’t flip-flop around.  Be patient and get used to a noisy environment with lots of volatility.

Keith:     You’re a producer; you want to focus on production and on the mine expansion.  So tell me about how you accumulated your development and exploration assets that you are joint venturing—was it over time or all at once…?

Richard:      We were there with Olaroz in 2006 and the core assets in it and then again in 2008 we created this joint venture exploration company with Miguel Peral  to go and acquire more assets.

Keith:        Right.

Richard:      We spent a lot of money acquiring good properties on a number of open stakings as well before it became popular.  So we put together this very good portfolio.  When the market slowed we dropped anything we didn’t really like and held onto the good stuff.

So the things we’ve dealt with David (Sidoo, CEO of Advantage Lithium) are all the things we can see the potential for a real prize.

Cauchari is obviously the first, but the other 2 – Inchausi and Antofalla, are properties that are on the salar, and there is lithium there.  But they are longer development timeframes obviously because we haven’t drilled it yet.  We have no idea what the geology or hydrogeology is, or depth of basins.

But we do know the brine is a bit different and will require the development of another processing route compared to what we have at Cachauri and Olaroz.

That is why Cauchari is up there, up front, and we have already worked on brine chemistry and the mineral processing is already determined. We’ve built a plant around the same brine chemistry already.

And because of its proximity (to the Olaroz mine) it has the potential to piggyback on the capital we we’ve already put into Olaroz either just on infrastructure or potentially to use Olaroz through another expansion as the processing plant for the brine pump at Cauchari, or Cauchari could be independent. We have to see how it goes. There is certainly a lot of optionality which could result in a fast track.

Keith:     OK, those are the assets…how did you decide to get value out of them?

Richard:      So we have these wonderful assets but no way of advancing them when they want to be advanced. I mean we don’t  want to sell them either.

So we went through this year (2016) being hounded by people all the way through the year…and that kind of refined our response as a reaction to circumstances.

The best way to create value and maintain exposure was to find the right people to rapidly push these assets along without it being a distraction or a corporate management time suck being the key thing.

Keith:     You would have had a lot of people to choose from—everybody wanted these assets.  I assume you were getting lots of calls over the last 9 to 12 months? Did it reach a crescendo at some point?

Richard:      Well it was getting pretty intense from July/August to October where I think we landed in October.

Keith:     How did you choose Advantage Lithium as your partner?

I’ve only known David Sidoo at Advantage a little bit, maybe about six months, but I liked him immediately.  I think he’s a good guy and I think he does business in the same way we do.  I like his nervous energy and I like the people who come with him—Callum Grant and Ross (McElroy).  And Miguel Peral, who will move across to work with Callum gave them a big tick.

And when you start to look at the team, and the ability to create a company, rather than just a transaction—David was the obvious group for us to work with, out of all the people who approached us.

When you start to look at all those things that make partnerships work and companies grow. I have to say that just from the little time I’ve been running around the world with him, Toronto or Hong Kong; I still maintain that position.  I’m sure it’s going to be a very good relationship.

Keith:          Tell me a little bit about some of those things that make partnerships more than just a transaction. In your experience in doing business what are some of those things?

Richard:      You have to be able to get on. You have to have the same kind of principles and values and you don’t want big egos around the place.  And you have to be able to have an honest exchange of views without taking offense…all those things. If you’re going to have a partnership it’s about being able to work together in let’s say harmony and you can have moments of disagreements but you move on and solve it rather than playing politics and the factoring of egos or where things become dysfunctional.

All of our shareholders I have spoken to are very supportive of the transaction. And there’s a number who can invest outside Australia who will be participating in the (Advantage) fundraising. So they don’t just like it from the Orocobre point of view but they like it to put their money into it too. And these are smart guys.

Keith:          Were the other suitors just like Advantage in the sense of junior companies are actually industry players or commodity players…what was the breadth of people looking at those assets?

Richard:      There was one large industry player and there have been 6 or 7 if not more junior players either are up and running or want to be up and running.

Keith:          Okay. Let’s talk about the lead asset in the Advantage Lithium deal, Cauchari.  What kind of timeline and cost to get that asset to pre-feasibility and bankable feasibility?

Richard:      I think you can do a scoping study or ‘pre-feas’ within 15 months. The permitting is just done and ready to go and we started that some time ago. It’s fortuitous that the EIS approval for the exploration program is imminent and so AAL can get drilling there in March and that will provide all the detail.

The biggest thing that needs to be done, of course, is to set the direction on the mineral processing. If you do the scoping pre-feas in 15 months and  your feasibility could be done in say 12 months after that.

Let’s say you can have your feasibility done in 2 ½ years potentially and that’s shorter than in the presentation. The reason for that being the presentation numbers were down in isolation which is a very busy time as we finalize that and the presentation is done without our input and when I say “our” I mean Orocobre input.

Keith:          Right.

Richard:      So I think that can be done faster.

Keith:          Richard, thank you—anything else you want to add?

Richard:      We’ve been looking for the right way to advance these projects and that’s where Advanced Lithium comes on with all those very important things we talked about with David and his character and other people and how we can partner.

I’m pretty confident it’s going to be a good relationship that will add value.

Keith:          Thanks again for your time today Richard.  God Bless

Richard:      Cheers Keith.

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