Macquarie Reaffirms Target Price and OUTPERFORM Rating for Storm Resources

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Equities research firm Macquarie Equities Research maintained its rating of OUTPERFORM and its target share price of C$5.50 for junior exploration and production company Storm Resources. Storm opened on Wednesday, August 24, at C$4.25 and closed at C$4.10 the previous day. During the last 52 weeks, the stock bottomed out at C$3.60 and peaked at C$5.50.

The junior exploration and production company reported its 2Q 2011 results on August 17, which were in line with Macquarie's estimates. Cash Flow Per Share (CFPS) for the quarter was C$0.03, which mirrored the research firm's predictions. Production was 595 barrels of oil equivalent per day, which was higher than the 575 barrels of oil equivalent per day that was originally forecast. One metric that fell below expectations was capital spending, which was C$2.0 million instead of the C$4.3 million that was originally predicted.

Even though production is expected to decrease in 3Q as a result of weather conditions and 2011 CFPS was consequently revised down to C$0.12 from C$0.10, Macquarie maintained its OUTPERFORM rating, citing management's strong track record of building value.  

U.S. Geological Survey Announces Estimates of Gas Contained in Marcellus Shale

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The United States Geological Survey (USGS) announced Tuesday, August 23, that the Marcellus shale formation contains significantly more natural gas than had been predicted by the most recent assessment which happened almost ten years ago.

Marcellus shale, which exists beneath several states that span from New York to West Virginia, contains an estimated 84 trillion cubic feet of natural gas. The government assessment that happened in 2002 estimated that the formation contained 2 trillion cubic feet of recoverable gas.

The new estimate was perceived as good news by groups in the industry, according to The Associated Press. "While some critics continue to question the viability of responsible domestic shale gas development, it is abundantly clear — as laid out by this new data — that the Marcellus shale will continue to lead the way in meeting American's energy needs for years to come," stated Kathryn Z. Klaber, who is the president and executive director of the Marcellus Shale Coalition.

This new information was made possible by technological advancements related to drilling processes, the media outlet reports. Significant progress in technology utilized for producing gas has been made over the last decade.  

Cequence Energy Downgraded to NEUTRAL and Target Share Price Raised by Macquarie

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Research firm Macquarie Equities Research lowered its recommendation for junior oil and gas company Cequence Energy (CQE:TSX) to NEUTRAL from OUTPERFORM and increased its target share price to C$4.50. The company's stock opened at C$3.28 on Tuesday and closed at C$3.27 on Monday, August 22. In the last 52 weeks, the stock has hit a low of C$1.53 and a high of C$4.24.

The decision to downgrade was primarily based on Macquarie's assessment that a significant portion of the upside potential has already been priced into the stock. The shares are already trading at a 7.7x multiple to 2012 estimated EV/DACF, which is above the average multiple of 5.4x for the company's peers. The high EV/DACF multiple contributed to the increase in Cequence's target share price to C$4.50.

Cequence has been one of the best performers among the small-to-mid-cap oil and gas stocks, yielding 102 percent over the last year. The company has boosted its capital expenditures for this year to C$150 million, and is expected to increase production 22 percent between now and the same time in 2012.
 

How Energy Stocks Act Relative to Oil

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Today’s story on oil, recessions, and energy stocks comes from guest writer Cory Mitchell…

According to the National Bureau of Economic Research, since World War II, 10 out of 11 price peaks in oil have resulted in a US recession.

This suggests that North America is likely to see a slow down, but what should that mean to investors? There are opportunities in such an environment, so the data leaves several questions on the table:

If we do enter a recession, how long is it likely to last?

Are recessions even relevant when picking stocks?

Has oil peaked — and where is it heading?

What can we look for in individual stocks’ price action, and how to know when it’s time to buy?

It is highly likely we will see a recession (based on history) in North America, but I will show how this can be a good thing for stock pickers. By looking at the price movement of individual stocks relative to major indexes, we get a glimpse at which stocks are likely to pose little risk and provide positive returns. While most energy stocks will move with oil prices in some fashion (either leading or lagging), there are always those stocks that outperform.

Recessions and Oil

Given that the global economy is driven by oil, when oil prices continue to push higher it has a dampening effect on industrial production, transportation and even car sales, all which slow down the economy over the long-run. Figure one shows the oil price peaks and the resulting recessions over the last 40 years.

Figure 1 – Crude Oil & US Recessions

Source: Colin Twiggs, http://www.incrediblecharts.com/tradingdiary/2011-08-04-markets.php

The last four recessions have lasted 8 to 18 months, with the average being 12.5 months. With GDP annual growth rates declining so far in 2011 for Canada and the US we could officially be in a recession quite soon. If we do enter a recession it is likely the economy will bottom and begin improving again in a little over a year.

Currently a pullback in stocks and the price of oil has already occurred. These are leading economic indicators; therefore stocks and oil will bottom before the economy does.

This bottoming action is crucial, as we will watch for bottoming patterns in individual stocks which can provide great entry points as the markets begin to recover.

Oil Now

Oil has been in an uptrend since 1999 even with the major collapse in 2008 (marked by line “4” in Figure 2 below). That uptrend I expect to continue. Oil is currently in a downward correction, trading at 87.68, down from a recent high of 115. I believe we are unlikely to see $115 for some time. Given that oil usually bottoms out toward the middle or end or end of a recession, subdued oil prices are likely for at least the next several months.

The drastic decline similar to 2008 is unlikely to reoccur though as the oil market was much less over-bought on the recent rise than in 2008. This indicates the current decline is likely to be more orderly. Figure 2 shows the rise in oil since 1999 marked with analytical trendlines.

Figure 2 – Light Sweet Crude, Weekly Prices

Source: www.crdtrading.com, August 17, 2011

The chart provides three potential scenarios for the next few months:

If Light Sweet Crude Futures dip below $75 there is potential for further decline to support at $60 (line “3”).

Oil will move between resistance at $105 and support at $75. There is a downward sloping trend line (line “5”) which intersects near $105 and will provide resistance, while the area between $75 and $60 (lines “2” and “3”) will provide support. I see this as the most likely scenario.

A rise above $115 indicates strong demand, a recession is not happening yet and oil will move towards resistance at $130-135 (projected target based on the angle of line “1”). In the short-term this is unlikely, but over the long-term (a year or more down the road) it is highly likely.

Having some insight into what Oil may do is nice, but it’s how individual energy stocks act in relation to oil that’s important.

This is what creates buying opportunities in stocks – if you are selective and wait for the right signals.

NEXT STORY:  Part 2 — What to look for in individual stocks, the phenomen of “relative strength,” and also a great example from the Oil & Gas Investments Bulletin portfolio… a company that has performed better (in percentage terms) than oil and the TSX Composite over the last year.

– Cory Mitchell, CMT

Disclaimer: The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Trading involves substantial risk and may not be right for everyone. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete.

Noble Energy Partners with Consol to Purchase Stake in Marcellus

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Consol Energy Inc. (CNX:TSX) announced Thursday that it will sell Noble Energy (NBL:TSX) a stake of its ownership in the Marcellus shale holdings for $3.4 billion. This agreement will grant Noble Energy Inc. the ability to extract natural gas.

The partnership entails Noble Energy purchasing half of the wells and development rights that Consol has in the Marcellus shale, which is a gas field that reaches from West Virginia to New York, according to The Associated Press.

The $3.4 billion investment will involve $1.07 billion towards purchasing a 50 percent stake in Marcellus, Morningstar reports. Noble will assume 33 percent of the costs involved in drilling for roughly eight years, which should cost up to $2.13 billion.

Consol's chairman and chief executive officer J. Brett Harvey issued a statement saying that "this transaction affirms the value we saw in the Marcellus shale when we acquired Dominion's Appalachian exploration and production business just 15 months ago," according to The Associated Press.

As a result of the partnership, Noble and Consul plan on increasing the number of horizontal drilling rigs existing in the Marcellus formation from four at present to 16 by 2015, The New York Times reports.  

Western Energy 2Q Results Indicate Improved Revenue and Earnings

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Oilfield-service company Western Energy Services Corporation (WRG:TSX) released its 2Q results indicating that revenue increased 142 percent from last year, and EBITDA rose 162 percent during the period. The company released a statement indicating a strong increase in drilling activity over recent years, according to The Canadian Press.

The company reported 2Q revenue of $32.4 million, which was a $19.0 million increase from the previous year.

Western Energy recorded net income of $4.2 million, or 8 cents per share, according to The Canadian Press. This profit report was an improvement over the same quarter in 2010, when the company posted a $283,000 loss.

EBITDA for the quarter was $8 million, which represented a $5 million gain over the previous year. This boost in earnings was largely attributed to company efforts to consolidate drilling operations, which increased the average number of rigs to 28.

The company told The Canadian Press that its "utilization rates have consistently been above industry average, including during the second quarter of 2011."

Western Energy Services Corporation's stock opened at $8.70 on August 18 and closed at $8.95 on August 17. In the last 52 weeks, the stock hit a low of $0.36 and a high of $9.90.  

Emerge Oil and Gas’s Target Price Lowered Amid Ambiguity in Growth and Financing Plans

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Research firm Macquarie Equities Research lowered its target share price for Emerge Oil and Gas Inc. (EME:TSX) to C$2.25 from C$2.75 and reaffirmed its NEUTRAL rating for the company. This downgrade was largely due to the company's ambiguous plans for its future growth and financing. Emerge currently has a market value of C$130.21 million. The company's stock closed at C$1.37 on August 16 and opened at C$1.41 on the next day. During the last 52 weeks, Emerge's stock hit a high of C$3.99 and reached a low of C$1.23.

The junior oil and gas company released its second quarter results on August 15, which stated funds from operation (FFO) of C$0.14 that were above Macquarie's estimates and production of 5.8 million barrels of oil equivalent per day that was slightly below the research firm's predictions. This slight uptick in FFO was created by reduced operating costs and higher-than-expected prices. Declining sales of natural gas led to less-than-expected production.

Emerge Oil and Gas Inc. is headquartered in Calgary, Alberta. The company primarily focuses on East-Central Alberta and Lloydminster.

Development of Niobrara Progressing Slowly, But it’s Still Early, Says Researcher

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A recent report from the Casper Star-Tribune reveals that oil and gas industry insiders believe that while development of the Niobrara shale formation is proceeding slowly, the region presents a number of strong opportunities.

According to the Oil & Gas Financial Journal, the formation – which is situated in the Denver-Julesburg Basin – is primarily located in northeastern Colorado and stretches into Wyoming, Kansas and Nebraska. The news provider reports that some have noted similarities between Niobrara and the Bakken shale formation.

The Star-Tribune reports that there have been ups and downs for companies working in the Wyoming portion of the play, which has so far lacked a discovery on par with EOG Resources' (EOG:NYSE) find in Colorado's Weld County.

"I think a lot of people thought we would ramp up much faster, initially," head of energy research for Global Hunter Securities LLC Michael Bodino told the news provider.

Still, despite the slow start, Bodino believes that there is a long way to go for the Niobrara shale formation.

"It's been an interesting evolution over the last year," he said. "I think we’re still in the early days in this play, and I think there’s still a long way to go."

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