Why Are These NatGas Stock Charts So Intriguing?

By
Keith Schaefer
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Many of the leading Canadian natgas/condensate producers have exciting (bullish) short term stock charts—just at a time when one fundamental natgas chart looks ominously bearish.  The Big Play for natgas in Canada is the liquids-rich Montney formation on the BC-Alberta border.

It is the Eagle Ford of Canada, with very high condensate levels.  So all the main junior and intermediate Canadian producers are focused there, and are anywhere from 10-50% condensate along with their natgas production.

But after a bit of research I found–these stock charts are likely heading up because of increasing Canadian heavy oil production. That’s counter-intuitive, but hear me out.

First off, I’ll eliminate natural gas as the likely reason for these bullish short term stock charts. The fundamental bearish chart I mentioned in the lead is the Bloomberg graph below which shows US natural gas pipeline flows in billions of cubic feet per day (bcf/d).

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If my comments in the graph end up being true, then that would suggest the cheaper Marcellus gas will soon be displacing Canadian natgas in the US Midwest—which would  mean a larger discount (lower price) is coming for Canadian gas to stay competitive in North America.  And natgas storage on both sides of the 49th are very healthy; not quite burgeoning but close.

So that’s not really bullish at all.  Now, it’s not all bad news–Canada has been shipping a lot more gas down to the US west coast in the last few quarters due to the drought, which is restricting hydro-electric power generation there.  And the EIA is showing a shallow but steady decrease in natgas production across the 7 major US natgas plays.

My suspicion is these charts are moving up because of condensate pricing.  In the US, condensate (or C5 for short as it has 5 carbon atoms) is a pain; everyone wants oil, and C5 trades at a discount to oil most of the time in the US.  But in Canada, it’s an essential part of the energy complex.

That’s because condensate is a very light oil that  is used to dilute Canada’s heavy oil to make it flow in pipelines, and oilsands production is expected to continue increasing in Canada for 3-5 more years—increasing demand for condensate.  Several new deposits are coming onstream right now, including Imperial Oil’s new Kearl deposit. So Canada has a very large and very close domestic demand source for its condensate.  That’s why I think these stock charts are starting to have some bullish set-ups.

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And right now, my network tells me this increasing heavy oil production is creating heavier demand for spot condensate–and making making supply very tight.  In fact, it will likely get tighter through the winter.

That’s because Canada’s heavy oil becomes even more gooey (or viscous, as the industry calls it) in winter with cold temperatures–so it needs even more condensate to dilute it (That’s why condensate is called a diluent).  My very rough math says that equates to an extra 60,000 bopd of condensate in winter, on roughly 3 M bopd of heavy oil production.

So maybe these stock charts have some room to move still.  I’ll show you a few below:

Tourmaline (TOU-TSX) is a bellwether Canadian natgas/condensate producer, with over 100,000 boepd now.  It has completed a near textbook reverse head and shoulders formation, which is bullish:

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That stock should go first as the leader. Basically, all the leading natgas-condensate stocks have charts that are only a few days behind Tourmaline—think of Dave Wilson’s Kelt Exploration (KEL-TSX), Jonathan Wright’s NuVista Energy (NVA-TSX), and Jeff Tonkin’s Birchcliff Energy (BIR-TSX).

Birchcliff Energy4

Kelt Exploration:5

It’s not all good news for investors–when you step back and look at the longer term 3 year chart, it’s clear that a strong downtrend on these stocks is still in place—but for some of them, they’re not far off a breakout.  And they are all trading back up into a months-long band of consolidation which will act as resistance.

3 year chart on Tourmaline:

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Birchcliff is getting close to breaking its downtrend:

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But Kelt still has work to do:

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So despite some positive fundamentals on condensate demand and pricing, investors may want to beware trading off short term signals.   But when the energy market gets relatively bullish—as it has a bit coming out of the late August spike down—it’s easy to get caught up in the action.

It’s interesting to see that these “almost” breakouts are also happening in the leading junior oil stocks and service companies.  Of course the question is…can this be sustained…maybe a better way to phrase it is…are these stocks leading commodity prices or following them?

In oil, Rick McHardy’s Spartan Energy (SPE-TSX) is also sporting this kind of recent short term action.

Spartan Energy

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And here’s a chart of Secure Energy, which I would consider one of Canada’s Top 2 service companies.

 10

But then swing back to the 3 year charts and the same effect is happening—butting up against strong downtrends and coming into a band of trading that will also act of resistance.

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Will increased condensate demand be enough to get these stocks up above their moving averages and through the bands of resistance just overhead?  That’s a tough call–commodity prices are so volatile now.

That’s why I made my largest investment of 2015–in fact the largest single investment I’ve ever made in the history of my OGIB service–into a stock that doesn’t rely on the price of oil.  If anything, lower oil prices help it.  This company is also paying me over 10% yield with a rock solid balance sheet. Read my full report on the company before its next quarterly comes out–Follow this link right now for the full story. 

Keith Schaefer

 

Follow the Money (with our new Keynote Speaker)

By
Keith Schaefer
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My annual Vancouver conference is less than one month away–Thursday October 8.  Besides meeting the CEOs of some of the best junior producers in Canada, I have TWO speakers I’m very excited about:

1. VIVIAN KRAUSE
pic

Ms. Krause follows the money like nobody else in the resource sector–except she’s not following stocks, like me.  She is following the tax receipts of Canadian and American charities who are funnelling money to groups across Canada to explicitly protest against Canadian resource development–both pipelines and oilsands.  It’s a murky world where the moral high ground is actually very shaky ground.  Her research has been quoted in Canada’s Parliament and national media.  And in just 20 minutes on October 8, she will give you enough to think about for several days.

2. Dave Stanford of Shell’s LNG Canada Inc.  Everyone has Petronas as the LNG frontrunner for big projects on Canada’s west coast.  Shell has been a quiet #2. Dave–a subscriber of mine for years–will give attendees a look into their project and the challenges of resource development. (I love the last line in his bio.)

David Stanford is Legal Director of LNG Canada Inc., which is a joint venture that was formally created among Shell Canada Energy and Canadian subsidiaries of Mitsubishi, PetroChina and Korea Gas in May 2014. Calgary born and bred, he graduated from the U of A law school in 1991 and spent many years as a commercial oil and gas and environmental lawyer, moving between a couple of mid-sized regional firms until he joined McCarthy Tetrault in 1997 as an associate in its Energy and Environment Group. He became an equity partner in 2000 and remained at McCarthys until 2007 when he joined Shell Canada Limited, initially as Associate General Counsel, Downstream and later as Associate General Counsel, Upstream.  Most recently, David accepted the role of Legal Director for LNG Canada upon its formation.  Married for 28 years and with five children, David now spends a lot of time paying for university and weddings.

Both speakers will be there all day, and they want to answer your questions (they both asked for a lot more than the 20 minutes I’m giving them to speak…but we have lots of companies attending).

There’s only ONE problem–our conference is almost 80% full already!  So reserve your seat today.  The conference is free to attendees (though this could be the last time that happens.)  Here are the details:

Vancouver Subscriber Investment Summit
Thursday, October 8th, 2015

Pan Pacific Hotel, downtown Vancouver
9 AM – 4 PM, with a cocktail reception to follow at the close – don’t miss out!

The best people often end up with the best projects—either via discovery or acquisition at low points in the Market cycle (yes that would be now). Below are a few examples of companies that you’ll want to meet on October 8th.

CEO Philip O’Quigley (yes, he’s Irish) was given a tough challenge by his board at Falcon Oil and Gas—fund the company, get partners for all of its assets around the globe and make sure they spend all the money.  It took him two years, but he has done it and they are now drilling one of the biggest onshore gas plays in the world (I actually don’t know of any bigger but I don’t know every play in the world) in the Northern Territory of Australia.

The proof will be in the pudding this fall—possibly even by October 8th.  And O’Quigley will also update investors on one of the biggest gas plays that could get drilled in the next 24 months—in South Africa.

CLICK HERE TO REGISTER NOW

Did you know only two oil producers in North America have raised their dividend this year? One is Suncor, a $50 billion behemoth.  The other is Granite Oil – GXO-TSX; GXOCF-PINK, which has a market cap of about $200 million.  Granite CEO Mike Kabanuk—I’m sure you don’t know him either—will be presenting this year.  This is a special story; one of the VERY few oil producers that can sustain and grow production at US$50 WTI.  Meet Mike—who was executive chairman of DeeThree–and hear this story.

CLICK HERE TO REGISTER NOW

Every six months, we ask the CEOs of the best and most intriguing junior companies to educate our subscribers—and face the fire.  We ask them to be available to you, in person, for over two hours above and beyond their presentation.

You get to ask them anything you want—and get a sense of them as people.  Being around winners helps you find winners.

VANCOUVER SUBSCRIBER INVESTMENT SUMMIT 2015
Pan Pacific Hotel, Downtown Vancouver
999 Canada Place
Thursday, October 8th, 2015
9 AM – 4 PM, with a cocktail reception to follow at the close – don’t miss out!

You’re going to make the most money out of this market knowing management personally.  This is your best opportunity—register today!

www.subscribersummit.com
 

 

When I Read The Financials, I Blinked. Twice.

By
Keith Schaefer
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0

When I saw this energy company, I couldn’t believe it.  Here is a company with:

  • no long term debt
  • $30 million cash
  • growing EBITDA (cash flow)
  • When I rushed out to buy the stock, it was paying me a double digit yield.

That’s right—over 10%–on a payout ratio of under 60%.

And trading at just over 3x cash flow—when its peers are trading 8-10x?

How can that be?

I went to work.

I dived into this company’s financials. I read all the research from the Street—on it, and its competition.

I talked to the analysts.

I called management, and had a long call with the CEO.

And I’m so glad I did. Because this company checked out as one of my best investments for 2015.

You can read my full report—and the transcript of my conversation with the CEO—before shareholders receive the next juicy dividend.

And I’ll show you how to do it RISK-FREE.  All the details are RIGHT HERE.

Is US Shale Gas Production Declining? One EIA report says YES

By
Keith Schaefer
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If Natgas Production is Falling, Why Aren’t Natgas Stocks Rising?

Has U.S. shale gas production finally stopped growing?  According to the EIA’s August Monthly Drilling Productivity Reports (DPR) the answer is yes—even the monster Marcellus play in Pennslvania is rolling over in production–and that should be bullish for natgas stocks in North America.

But take that info with a grain of salt–for a couple reasons.

One is that because the final production data that comes out of the EIA is good, but their extrapolation (guessing) often isn’t.  Since the EIA doesn’t get its final production data until many months after the fact, most of their publications involve a significant amount of guessing.

That includes the DPR reporting which in fact is all guesswork (forecasting) since it is forward looking.

Secondly, another EIA publication–the Short Term Energy Outlook, or STEO–says that US natural gas production will continue to increase through 2015 to 78.7 billion cubic feet per day, a rise of 4 bcfd–and continue growing another 1.8 bcf/d into mid 2016, peaking at 80.5 bcf/d–and they say most of that growth will come from the Mighty Marcellus. (The discrepancy is that STEO takes into account future infrastructure (and there’s a lot of new pipelines coming out of the Marcellus) whereas the DPR does not.)

The Market is saying the STEO version is more correct.  Witness the main Henry Hub natgas prices remaining stuck in a tight $2.65-$2.95 per gigajoule range.  And the key natgas stocks I watch for a coming turnaround in commodity pricing are:

  1. Southwestern          SWN-NYSE
  2. EQT Corp               EQT-NYSE
  3. Cabot Oil and Gas  COG-NYSE
  4. Peyto Exploration   PEY-TSX

None of those stock charts given any hint that natural gas pricing is about to turn up.

According to the monthly DPRs, U.S. shale production actually started declining in the month of June with a drop of 112 million cubic feet per day.

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Source: EIA June Drilling Productivity Report

In June, natural gas production dropped from lower associated gas production from the oil plays in the Eagle Ford, Bakken and Niobrara.

The DPR for June still showed both the Marcellus and Utica plays growing.

Since June, the EIA believes that all of the shale plays have joined The Decline Party.  (By the way, conventional US gas production has been declining since about 1972.)

As of the August DPR projections every shale play is showing natural gas production in decline in September.

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The last play to roll over was the Utica, with all the DPR showing declines in all other shale plays (including the Marcellus) starting in July.

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The monthly DPRs show that natural gas production from these seven shale regions hit a high of 45.6 billion cubic feet per day in May and will be down to 44.9 billion cubic feet per day in September.

That (IF it comes to pass) is a significant 1.5% decrease to U.S. shale production in just four months.

There is science behind these projections, as the EIA takes the number of rigs operating in a region and calculates new production based on estimates of productivity per rig.  That new production is then matched up with anticipated production declines from already producing wells.

Apparently the EIA’s calculations conclude that the amount of new production being brought on no longer exceeds the rate at which legacy wells are declining.

So no, it is far too early for dancing bulls.

Jack Weixel is VP Analysis at PointLogic Energy, which provides in-depth markets coverage, and trend analysis to oil and gas participants.  He says production will ramp up quickly if natgas prices move higher outside the current tight range.

“Producers have grown so adept at responding to price, that even the slightest indication of a rise in prices would spur on more drilling and more completions, particularly in the Northeast (Marcellus and Utica—ks).

“Even the slightest chance to realize wellhead prices above $3.00 or hedge, at say $4.00 in the near term, would be a welcome gift in 2016 for many in the E&P community.”

More time is required however, before we can conclude that the EIA’s DPR estimates are accurate.  If the Marcellus and Utica have both started declining it will be the most bullish news for natural gas in a long time.  Investors often forget that structural demand for natgas has increased dramatically in the last few years, along with the rise in production.

While this news does appear to be as yet bullish enough to move natural gas stocks up–it still may be the very thin edge of the wedge of declining US natgas production.

As an ending aside, there is one group who believes the DPR–US brokerage firm Credit Suisse.  In a September 8 presentation entitled “Markets to Force Production Discipline”, they posit that Year-Over-Year natgas production in the US will be at negative 0.5 bcf/d by mid-November, and negative 4.3 bcf/d by mid March 2016.

And while analysts fret if this fall the US will hit the ceiling of its theoretical storage limit of 4.3 TRILLION cubic feet (Tcf), Credit Suisse is projecting next fall there could only be 1 Tcf by November 2016–when withdrawals from storage will happen.   There’s an outlier (and very bullish) projection for  you.

EDITORS NOTE—Jack Weixel and PointLogic Energy are hosting a FREE webinar on September 23 where they will outline their thoughts on how natgas will trade this winter.  It’s very rare to have a well respected industry consulting group do this for retail investors, for free!  SIGN UP! Here is the link: http://bit.ly/FREE-natgas-webinar

 

EIA Oil Revisions Are Bullish–if You Include This

By
Keith Schaefer
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This week the EIA released the first look at its new method for reporting United States crude oil production.

It revealed two things.

First, the EIA’s prior method had been significantly overstating U.S. oil production so far in 2015.

Second, U.S. production appears to have started declining back in April.  This is what everyone in the industry has been saying for months; the EIA was seriously out-of-consensus on their old numbers.

Both of these revelations are somewhat bullish for oil prices. I say somewhat because OPEC production was up 100,800 bopd in August up to 32.3 million bopd, wiping out the new EIA production drop.

But the EIA does show US production is lower than thought and went into decline way back in April.  Despite the Market knowing these EIA numbers are at best educated guesses, it tends to put a lot faith and trust–and A LOT of trading dollars–in them.  So these numbers are still important.  And as I show below, the trend change is clearly in.

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What Changed In The EIA’s Reporting Methodology

The new reporting method has resulted in revisions being required for the months of January through May.  The old method was….to say it politely…not suitable for today’s rapidly changing environment.

The problem with the old method was a lack of timely information. Essentially, it was an estimate of U.S. oil production based on tax information and other data obtained directly from various state agencies.  The source of the data wasn’t the problem that made it inaccurate.  The problem was that at the time of the EIA report publication much of the information was incomplete.  Therefore the EIA did the only thing that it could do, it made a reasonable estimate based on recent trends.

In its memo detailing the changes that have been made the EIA itself explained the problem.  Under the old method the EIA said that the delay between when production happened and when data was fully complete could be from several months up to an entire year.

Instead of accurate actual data being used in its reporting, the EIA had to rely on a great deal of estimation.  When production levels really weren’t changing much that wasn’t a big deal.

However when at major market inflection points, for example rig counts dropping by a stunning 60% in a very short period of time, those estimations can be difficult to make accurately.

Under the new methodology the EIA is collecting data directly from a sample of operators of oil and natural gas wells in 15 separate major producing states as well as the Gulf of Mexico.  The EIA believes that this will greatly improve the accuracy of its reporting since the survey will cover more than 90% of the oil production in the United States.

2015 U.S. Production Had Been Overstated And Is In Decline

The improved accuracy of the new method has led the EIA to conclude that its prior reports overstated U.S. production from January through May by at least 40,000 barrels per day and up to 130,000 barrels per day.

The biggest overstatement of production was occurring in Texas where the EIA had production down by 50,000 bopd–but now their revised estimate has it down 150,000 barrels per day for the first five months of the year; triple the original downward estimate.

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Under the old method, EIA monthly average production numbers showed 2015 U.S. oil production averaging 9.53 million barrels per day through the end of May.  In its memo this week the EIA indicated that the new methodology reported U.S. production averaging only 9.4 million barrels per day.

More important than the production overstatement itself is–the EIA’s new method shows U.S. production having peaked in April and headed into decline.  There have been some well-informed observers suggesting that this had happened, but the mainstream view was one of U.S. production being very resilient despite the rig count drop.

U.S. production in June is now reported as being 9.3 million barrels per day which is 100,000 barrels per day less than the revised May production level.  That is a big month on month decline, but the implications of what it suggests on an annualized basis could start to get the oil bulls excited.

You see, not only was the weekly EIA production estimates against industry consensus, they were against their own monthly Drilling Productivity Report (DPR)–which predicts where production in the major shale plays is going.  In recent months the DPR’s conclusions had been very much at odds with the EIA production numbers. The recent DPR reports have been projecting for several months that shale production was already declining.

The DPR in recent months had projected monthly production declines as follows:

  • June down 57,000 barrels per day
  • July down 86,000 barrels per day
  • August down 91,000 barrels per day
  • September down 93,000 barrels per day

The new EIA production reporting shows June production down 100,000 barrels per day which is well in excess of the 57,000 barrel per day decline that the DPR report had projected.  That does not seem out the question given that more than half of U.S. production still comes from sources other than shale (which is all the DPR covers) and that non-shale production could also very well be declining due to the drilling slowdown.

For the following months (July through September) the EIA’s DPR report suggests that shale production alone could be dropping by nearly 100,000 barrels per month.  If true, and non-shale production is also declining—just how much might U.S. production be down by the end of 2015?

If production drops by 100,000 barrels per month from June through the end of the year U.S. production could go from 9.4 million barrels per day in May to 8.8 million barrels per day in December.

Without a bounce back in rigs that decline would continue indefinitely into 2016 although at a slowing rate as shale decline rates lessen over time.

So the question here is…does 600,000 bopd of production make a difference? On 92 million barrels a day of global production?  That works out to roughly 0.67%–not a lot.   If you believe the market is oversupplied by two million barrels a day right now—not really.  US shale is not the marginal barrel if that’s what you believe.

But there are a lot of very smart people—still in the minority—that believe the surplus is not close to that amount.   The EIA admits it can’t account for 1.2 million barrels of demand.

So if demand is dramatically under-reported and the surplus production is actually quite low—at the same time spare capacity is more limited…then that 600,000 bopd of US shale is VERY important to pricing–and could put the actual oversupply at just 200,000 bopd.

EDITORS NOTE–Oil is up or down 2-4% a day lately…but my largest position isn’t impacted much by the oil price.  It’s an energy company with no long term debt paying me a double digit yield.  That’s not a typo. And it just partnered with one of America’s largest companies. (You will be stunned at who this is.) Profit alongside me.  Click here.
Keith Schaefer

 

Will Investors and the Media Finally Pay Attention to This?

By
Keith Schaefer
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Oil moved up sharply at the end of last week–so maybe now the media will start paying attention to a fact it has so far ignored–the fact is that U.S. oil demand has SOARED in 2015.

The sheer magnitude of the American oil demand increase by itself has to have had a significant impact on the global oversupply situation.

Rather than talk about it, let’s instead look at some actual data.

The table below shows the year on year increase in total American oil consumption in barrels per day.  The source of the data is available for all to see by clicking the following link:

http://www.eia.gov/dnav/pet/pet_cons_wpsup_k_w.htm

U.S. Oil Demand – Barrels Per Day
  This Last  
  Year Year Increase
Since Dec 1 19,702,941 18,944,706 758,235
Since Jan 1 19,633,500 18,836,067 797,433
Since Feb 1 19,643,600 18,857,241 786,359
Since Mar 1 19,600,857 18,857,214 743,643
Since Apr 1 19,724,471 18,874,647 849,824
Since May 1 19,883,308 19,020,615 862,692
Since Jun 1 20,067,875 19,033,125 1,034,750

Since the beginning of December, year on year oil consumption in the United States alone is up 758 thousand barrels per day on the prior year. Over the last two months (since June 1), that increase jumps to more than a million barrels per day.

That is pretty incredible folks, the size of this demand response should be coming up in every conversation about the state of the oil market.

To appreciate how surprising U.S. demand increasing a million barrels per day year on year is, we need to go back and look at what was expected from the U.S. in 2015 as recently as last December.

In the December 2014 Short-Term Energy Outlook the EIA forecast that total U.S. consumption would increase by only 140,000 barrels per day in 2015.  Since June 1, we are running at an increase that is 7 times what the EIA expected.

This has to be the biggest surprise in the oil market in 2015 and it sure isn’t getting much attention likely because it doesn’t fit in stories discussing oil in the $40s.

The other side of the oil market story is supply and there are good things starting to happen for oil bulls in the United States as well.

In its second quarter conference call global oil reservoir specialist Core Laboratories (NYSE:CLB) expressed a belief that daily U.S. oil supply had peaked in April and would drop by 500,000 barrels per day by the end of 2015.   Core Labs also anticipates a decline of another 500,000 plus barrels per day in 2016 unless rig counts rebound sharply.

We may have seen the first signs of this the last weekly report from the EIA which showed onshore U.S. oil production dropping by 150,000 barrels per day.  I’ll be eagerly awaiting the next few reports from the EIA to see if that is a “one-off” or the start of a significant decline.

If the demand strength continues and the supply reaction plays out as Core Labs expects it would suggest that the U.S. alone will eliminate virtually the entire global oversupply issue by the end of 2015.

There is more to think about though as the U.S. represents less than a quarter of the global oil demand and a little more than ten percent of supply.  That begs the question….won’t a similar response on both sides of the ball be happening across the globe?

If U.S. demand alone is up 1 million barrels per day, it is very hard to imagine that the other 75% of the world won’t at least provide another million barrels of demand growth.

The global supply side is a bit more complicated as Saudi Arabia has actually increased production so far in 2015 while other countries must surely be struggling.  For example we have recently been put on notice of the huge reduction in production growth expectations from Petrobras in Brazil.   Surely oil basins in the North Sea, Venezuela and elsewhere are also feeling a lot of pain.  So there is a very valid argument that the supply-demand

So the turn in oil prices could be nigh.  But that does that mean I’m rushing out to buy oil stocks?

No.

It just says things are happening so fast it’s hard to keep track of every element and it’s hard to decide what the Market will do with a lot of the conflicting information (which it doesn’t trust as much as it used to).

I’d rather be late and right, than early and wrong.

I was careful with my exposure to oil in 2014 and my OGIB portfolio was able to increase by 18% in a year that oil prices dropped 50%.

I’m going to take a careful approach again now and wait for the crystal ball to become a little less murky before diving in.

EDITORS NOTE–my largest energy position does not depend on the price of oil to make me money, and pay me the double digit yield I’m enjoying.  It has one of the best stock charts in the industry.  And I sleep great at night owning it–even in this market.  Click here to profit while you sleep.

Keith Schaefer

It’s Murphy’s Law for Canadian Oil Producers

By
Keith Schaefer
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Murphy’s Law Is Alive And Well In The Canadian Energy Patch

Despite oil being up today, it’s ugly for E&P companies across the globe.  But I think Canadian producers have been hit with Murphy’s Law worse than anyone.

After a decent Q2–because of the low Canadian dollar and forest fires reducing supply–virtually everything that possibly could go wrong, has gone wrong.  Look at this list:

Murphy’s Law #1 – Oil, Gas and Natural Gas Liquids Prices Collapse

Oil, natural gas, propane……it doesn’t matter which product a Canadian operator is producing today because they all have virtually the same thing in common.

Pricing stinks.  Propane prices in Canada have been negative for weeks.  Yes, that means producers have to pay to have it taken out of their gas stream.  One of the smaller natural gas hubs in Canada has had negative pricing–as much as $2.50/mcf!!–for a couple weeks.

For a while companies were able to avoid the challenging natural gas price environment by focusing on producing oil and liquids rich gas.  Encana (ECA) for example had rolled out a strategic plan to shift its production base from a heavy gas weighting to a more profitable liquids focus.

Now it doesn’t matter.   Drilling for oil or liquids in a shale play today is just as futile as drilling for natural gas.
At these commodity prices the model is broken.

Murphy’s Law #2 – Canadian Oil Prices Collapse Even More

Everyone knows that the price of oil is in the tank and that natural gas is a lost cause.  Not everyone knows that for Canadian heavy oil producers the situation is worse–much worse.

Canadian heavy oil prices (Western Canadian Select) are now sitting at $25 per barrel.  Twenty-five. That is not a misprint, that’s the bleak current reality.  As I wrote last week, the cause is the simultaneous start-up of phase 2 of Imperial Oil’s (IMO-TSX/NYSE) 110,000 barrel per day Kearl Project, and 230,000 barrels of production coming back online that had been shut in from forest fires.

The really concerning part is that unlike shale production, heavy oil production has a very slow rate of decline.  Canadian heavy oil production isn’t supposed to stop growing until 2020.

Murphy’s Law #3 – Mexican Competition

The bad news is coming from so many directions it makes a person’s head spin.  Canadian producers are even being impacted by things that are occurring not just south of Canada’s border, but south of the southern U.S. border.

In an effort to remove some its light oil glut, the U.S. has granted approval for a swap of up to 100,000 barrels per day of U.S. light oil for a similar amount of Mexican heavy.  The almost-certain loser in that trade is Canada, where 100,000 barrels of Canadian heavy oil will likely be displaced.

Murphy’s Law #4 – Refinery Down

A little closer to home BP’s 413,000 barrel per day Whiting Refinery has had almost 240,000 of that capacity shut-down after a malfunction.  That leaves another 240,000 barrels of Canadian production stranded and making matters worse no one knows when the problem might be rectified.

Murphy’s Law #5 – Not One, but TWO Pipeline Closures

Incredibly there is more, as not one but two major Canadian pipelines were recently closed for different reasons.  The Enbridge (ENB-NYSE/TSX) Spearhead pipeline was closed due to a leak and the Alliance Pipeline was closed because sour gas had contaminated it.

Murphy’s Law #6 – Rockies Express Pipeline Reversal

The pipeline and refinery issues will be resolved with time–but some of these problems are permanent.  Count the reversal of the Rockies Express (REX) pipeline as permanent.

Soaring natgas production from the US northeast–the massive Marcellus formation and the Utica directly underneath–has made Kinder Morgan decide to reverse part of its $5 billion REX pipeline.  Instead of shipping gas from Wyoming to Ohio and farther, it now sends Marcellus natgas–which has the lowest cost in all of North America–into the Midwest, which is one of Western Canada’s biggest remaining markets. At some point, this reversal has the potential to displace 1 billion cubic feet per day of Canadian natural gas that used to be sent eastward (but that’s not happening yet).

Canada produces 14 billion cubic feet of gas per day, so having 1 billion cubic feet of that now looking for a new place to go is going to be very bearish for AECO pricing.

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Murphy’s Law #7 – El Nino

Even the weather is getting in on the act of kicking the Canadian E&P sector when it is down.  El Nino is a weather pattern caused by warmer than normal ocean temperatures in the eastern Pacific.  Generally that brings a lot of stormy weather to California, and mild winters to the rest of North America.

This winter is expected to be the biggest El Nino since 1997-98.  Now, California does need rain badly.  But Canadian gas exports to California have soared to help make up for the loss of hydro-electric power.  El Nino will likely mean reduced exports, just as Canadian natgas production rises for the first time in five years.

And everybody understands that a mild winter across the eastern two-thirds of North America will mean dramatically less natgas usage for heating.  Each of the last two Februarys have been record cold months that saved natgas prices from falling well below $2/mcf later in the year.

Murphy’s Law #8 – The Political Climate

After 44 years in power, the ruling Progressive Conservative Party of Alberta finally lost a provincial election earlier this year.  They were a centre-right party.  The newly elected New Democratic Party (NDP) is politically positioned considerably to the left. Climate change is a big issue for them, and the oilsands–the bulwark of the provincial economy–is obviously vulnerable to new legislation.

The NDP’s first move was to hike corporate income taxes.  They are also committed to a royalty review, with the new Premier Rachel Notley saying “When times get tough, those who are profitable should be paying just a little bit more.”  READ: higher royalties. Industry is holding its collective breath over the ongoing review of Alberta’s royalty structure.

Making matters worse the Conservatives also appear to be in trouble on a national level with the NDP again leading in the polls.  A federal NDP win would create much concern over the timely building of desperately needed pipelines–to both the east and west coast of Canada. (And it would delay west coast LNG development by a year.)

Let Me Show You How To Profit From Canada’s Tough Spot

To make money investing in this sector you need to be flexible and know where to have your money at each point in the business cycle.

Last year my OGIB portfolio went up by 18% as oil prices plunged by 50%.  Today I’m not running from this second oil collapse; I’m embracing it because I know exactly where to invest my money.

My latest report details the one company–which is listed in the US–that is the best positioned to profit from Canada’s tough spot.  They just announced their second consecutive dividend increase (somebody is making a lot of money off cheap Canadian crude!) Just click here and get ready to profit…..

Keith Schaefer

Heavy Oil’s Week from Hell–and How to Profit From It

By
Keith Schaefer
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Low prices, high discounts and high condensate prices are conspiring to make this The Week From Hell for Canadian heavy oil producers.  Heavy oil prices are now at the bottom of the barrel.

And not to sound like a traitor, but there is a very simple way for investors to profit from this, which I’ll explain below.

All energy investors know the oil price has been hammered, though few realize that only a few North American producers—basically Texas—actually gets WTI pricing.  Almost every other producer on the continent gets a discount to WTI—which is often just the price to transport the oil to Cushing Oklahoma. (So it’s really worse than you think out there.)

The industry word for discounts is “differential” or diffs. And the diffs for Canadian heavy oil—Western Canada Select or WCS–are huge now, due to refinery shutdowns, pipeline closures and just plain old more supply.  Higher “diffs” = lower prices.

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Source: ARC Financial Energy Charts Aug 18 2015

Heavy differentials were arguably tighter/lower than they should have been in June and July as several forest fires in western Canada took as much as 230,000 b/d of heavy oil production off line for several weeks.  Reduced supply = higher prices; simple economics.

But this was a temporary situation and The Street knew differentials would “normalize” when production came back on line.

But putting the flames out coincided with Imperial Oil’s (IMO-TSX/NYSE) Kearl project starting Phase 2 production in late June.  It will likely take up to a year to add the full 110,000 b/d–but by the end of August it’s estimated that at least a quarter of that volume will be on production.

And that production number is climbing daily.  And there’s more supply coming.

ConocoPhilips’s (COP-NYSE) Surmont Phase 2 and Husky Energy Inc.’s (HSE-TSX)Sunrise Phase 1 both of which started the steaming process in the past couple of months and could see incremental production coming on before year end.

The massive scale of these projects more than offset declines in the conventional heavy production.  It won’t be until you see one of these major projects shut in that you will see heavy production start to flatten or decline.

Now…queue the refinery shutdowns.  On August 8th heavy oil producers suffered a big blow with an unplanned outage at BP’s Whiting refinery near Chicago.  This refinery,which runs almost 10% of all Canadian heavy crude production, lost 240,000 barrels of its refining capacity of 413,000 barrels a day after a malfunction.

In an already illiquid market for Canadian heavy oil, losing a primary consumer of your supply can be devastating to prices–and it was.  Almost overnight the “diff” for WCS widened US$2-$3 per barrel. No one knows when this capacity is coming back online, casting a further pall over the market.

The week from hell continued for heavy producers with Enbridge (ENB-NYSE/TSX) suffering a leak on its Spearhead pipeline on August 11th resulting in the pipeline shutting down, adding another US$2-3/bbl onto the WCS “diff”.

Spearhead is one of the primary means for Canadian heavy crude to get to alternative markets—like the Gulf Coast.  After BP Whiting went down, losing access to the main alternative market was a serious blow.  Granted, the Spearhead Pipeline shut down only lasted two days, by then the damage was already done.

And to top it all off, condensate pricing is high again.  In the ground, condensate is a gas that condenses on its way up the well bore and is produced as a very light (50 API) oil.  Heavy oil producers use it to dilute/blend with their gooey product so it will flow in a pipeline.  As a rough rule of thumb, producers use 70% bitumen and 30% condensate to get their oil into a pipeline.

This was made even worse when the Alliance Pipeline shut down for six days because sour gas mistakenly got into the system. This 3700 km pipeline sends 1.6 billion cubic feet of gas from Alberta to the Chicago area—it’s one of Canada’s biggest export pipelines.

The shut down of Alliance forced several condensate producers to curtail all production for six days. Seven Generations Energy (VII-TSX) alone produces over 20,000 bbls/day of condensate which can dilute almost 50,000 bbls/day of bitumen production (assuming a 70% bitumen/30% diluent blend ratio).

As heavy differentials widen and condensate strengthens—this lowers profits for heavy oil producers.  Since July, the higher differentials and higher condensate price has shaved just over $5 per barrel profit for producers.  That doesn’t even include the lower oil prices from which those diffs, or discounts, are based!

So…heavy oil production is increasing.  The industry is its own worst enemy there.  This increases condensate prices—and then supply got even tighter with the pipeline shutdown.  Unplanned refinery maintenance in their major market.

While some of these issues are temporary, a couple are not.  The longer term realities are:
1. oilsands production will continue to increase for another 3-4 years
2.  refineries shutdown every fall and spring to do maintenance, reducing demand
3. in winter, North America uses less heavy oil

As investors, we don’t make the rules.  We just owe it to our families to profit from them.  There is one stock that profits from all of this.  Since I alerted subscribers to it earlier this year, it’s up almost 20%.  They increased their dividend last quarter.  I expect them to increase it again this quarter.

I’m definitely saying a prayer for Canadian heavy oil producers.  They need it.  But to profit from it right now—CLICK HERE

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