Energy Sector

[SharperDingaan]

Reserve quality, size, porosity, pressure, current/future extraction technique(s), presence of collection/processing facilities, etc. materially affect commercial viability, which radically changes the size of the reserve. The reserve may also be primarily a producer of condensates, and sour/sweet gas, and heavy vs light oil. 

 

Occasionally, innovations will also materially change the numbers (ie: horizontal drilling, long laterals, CO2 flood, etc.), but it's very reservoir specific. Example: Some of the companies drilling Alberta's Clearwater/Seal/Bluesky have produced exceptional results by drilling vertically in closely packed ranks vs by drilling horizontally using long laterals. Should it become mainstream, the innovation will make these reservoirs among the most valuable in Canada - high cold flows of 90%+ heavy oil, < 3% depletion/yr, drilling costs at a fraction of that for horizontal, and local collection/processing facilities already in place .

 

SD

 

 

 

 

 

[LearningMachine]

Thanks@SharperDingaan and @LC.

 

The difference is so huge though. For $100, I could either buy 5 barrels with OXY or 20 barrels with CNQ.

From my rough math some time back, OXY claims to be breakeven at average weighted cost of $40/barrel USD, and CNQ claims lower average CDN cost per barrel even for oil sands and that cost keeps on going down year over year. They are able to get more for synthetic crude compared to OXY for its barrels.

 

Say, in the future, at some point, both sell at $100 per barrel.  

 

With OXY’s 5 barrels, you get back 5*($100 - $40)=$300.

 

With CNQ’s 20 barrels, you get back at least 20* ($100 - $40) = $1200

 

Huge difference. The factors above can’t really explain such a huge difference, right?  Given CNQ’s track record at reducing cost per barrel and not having to look anywhere else for more oil, the difference could end being even bigger.

 

Do you yourself think CNQ barrel should be quarter of the price of OXY barrel?

 

 

Edited January 4, 2023 by LearningMachine

[SharperDingaan]

2 hours ago, LearningMachine said:

Thanks@SharperDingaan and @LC.

 

The difference is so huge though. For $100, I could either buy 5 barrels with OXY or 20 barrels with CNQ.

From my rough math some time back, OXY claims to be breakeven at average weighted cost of $40/barrel USD, and CNQ claims lower average CDN cost per barrel even for oil sands and that cost keeps on going down year over year. They are able to get more for synthetic crude compared to OXY for its barrels.

 

Say, in the future, at some point, both sell at $100 per barrel.  

 

With OXY’s 5 barrels, you get back 5*($100 - $40)=$300.

 

With CNQ’s 20 barrels, you get back at least 20* ($100 - $40) = $1200

 

Huge difference. The factors above can’t really explain such a huge difference, right?  Given CNQ’s track record at reducing cost per barrel and not having to look anywhere else for more oil, the difference could end being even bigger.

 

Do you yourself think CNQ barrel should be quarter of the price of OXY barrel?

 

 

 

The CNQ calculations are off. 

CNQ is lowering its BE/Bbl by using operating leverage; higher throughput dividing into existing fixed cost. However CNQ is also paying the heavy oil differential (WTI - WCS) of roughly USD 17.16/bbl (CAD 23); and will have higher royalties/taxes and transport costs than OXY (assume CAD 22/bbl). 20 * (100 - 40 - 23 diff - 22 royalty/tax) = 300

 

However CNQ also has the tailwind of lower differentials as new pipeline egress comes on line, OXY doesn't. Differentials fall 12/bbl (50%), and you get 540 versus 300 - or 80% more than OXY for no additional capex. And there are TWO pipeline expansions supposedly coming on stream over 2023 ....

 

Of course, when everyone is a hater ... there's no new pipeline egress until the pipeline is actually delivering. Or when driving at 100 km/h, there's no obstruction in front of you until you're 20 meters away. Lot of people are going to get rich  

 

SD

Edited January 4, 2023 by SharperDingaan

[Viking]

6 hours ago, LearningMachine said:

Has anyone looked deeper into why Mr. Market is effectively pricing reserves of oil majors so differently from company to company at $/barrel, even after taking into account operating costs/barrel? 

 

For example, OXY is trading at $21.72/barrel and CNQ is trading at $5.21/barrel.  If you look at the weighted average operating cost/breakeven price of what they report, including provincial royalties, etc., they are not that different, and arguably CNQ now has lower operating cost per barrel than OXY.

@SharperDingaan and @Viking, or anyone else, any thoughts you can provide? 

Why is the difference so huge? 

Could it be that Mr. Buffett and Mr. Market are pricing sub-optimally using FCF yield instead of $/barrel that an owner would be using to price an oil well or oil sands, along with operating costs, to purchase? 

I understand

• Oxy also has other businesses that you could subtract out to get lower value per barrel but that still doesn't account for the huge difference.
• some of the reserves are probably understated for both as technology improves and price goes up with inflation. 

 

@LearningMachine great question. We talk about 'oil' but there are lots of important variables that come in to play when trying to compare oil companies. Too many for me to really be able to comment with any specificity or conviction:

- production method: mined or drilled?

- oil type: light/sweet, light/sour, medium/sweet, medium/sour, heavy/sweet, and heavy/sour

- nat gas exposure?

- geography: Canada, US, OPEC, Russia etc? WCS, WTI, Brent?

- transportation: pipelines or ship?

- refining?

- retail?

- vertical integration?

 

My strategy has been to stick with what I have followed for years... the large Canadian producers: SU, CNQ and CVE. SU at C$40 looks like a gift to me. CNQ under $65 or CVE under $22 would also be sweet.

----------

The big risk for Canadian oil sands oil is it has a big bulls-eye painted on its back. It is hated in Canada (especially Quebec). Public sentiment will only get worse moving forward. What is a 25 year asset worth in such a scenario?

 

What makes sense to me is the big Canadian producers will essentially go into runoff with all of their long life assets and only spend incremental funds on projects that have exceptionally quick/high payback.

 

With this framework, dividends (large base and big special) make the most sense to me. Buybacks may not actually result in a higher share price over time. You might just take out all the big forced sellers - like the big pension funds - who want out anyways. 

 

And all the massive debt repayment might actually be poor capital allocation. Perhaps oil companies should lever back up and throw gobs of cash at shareholders... The dividend yields would astronomical. There is my crazy thought of the day (I am only allowed one of these each day). 

Edited January 5, 2023 by Viking

[LearningMachine]

Thanks @SharperDingaan, regarding pipelines, beyond Trans Mountain Expansion, did you mean the Coastal Gaslink for LNG or another one for crude oil? My understanding was that the Mainline expansion was completed in 2021, Keystone expansion is still halted, and the Express pipeline expansion that was completed in 2021 was very small.

Thanks @Viking, regarding paying down debt, one good thing for shareholders is that it does lower the risk in the low likelihood case there is a long lag again in the future with OPEC+ getting its act together.

Edited January 5, 2023 by LearningMachine

[StevieV]

10 hours ago, Viking said:

dividends (large base and big special) make the most sense to me

 

I don't understand why more companies in the O&G space don't adopt that model if they want to pay a big dividend.  With the volatility in oil prices, it only makes sense to have a variable dividend.

 

I actually think characterizing the dividend as fully variable is most prudent and sensible, but understand the desire for a base dividend.  Presumably investors like a fixed dividend or companies think that investors like a fixed dividend.  Of course, at the end of the day, if oil prices drop enough the "base" will turn out to be variable (gone) as well.

[SharperDingaan]

2023 Pipeline Additions: https://pipeline.ca/wp-content/uploads/PLCAC-Pipeline-Project-Work-2022-1.pdf

The big one is the 300K bbl/day Alberta>BC TMP oil line coming on stream 2H2023 (maybe). Lots of NGTL additions coming onstream in 2023 - not just the TC Energy addition. 

 

Canadian heavy oil refill of the SPR will mostly go south by rail vs pipeline.

A DOT-117 tank car holds 28,600 US Gallons (680 bbl), and a 500K bbl VZ tanker load (small) is 735 tank cars. As trains are typically restricted to roughly 35 tank cars, this is 21 trains - or one train/day for 3 weeks; 23,800 bbl/day (35 x 680) of egress.

 

So what? That 300K bbl/day west coast TNP expansion is 12+ 500K bbl tanker loads every 3 weeks. Enough to permanently move the differential dial downward, and in a very material way.

 

Dividend thing. The Gordon dividend model rewards a stable dividend, and the higher it is the higher the 'floor' value of the stock. Of course it is just not valid for a resource company, but so long as the company is public - a market reality. Typically the share value is allowed to collapse when the dividend is eventually cut/eliminated in the down cycle, and the company quietly taken private.

 

SD

Edited January 5, 2023 by SharperDingaan

[Pelagic]

Quick clarification, the Trans Mountain line is already 300k/d the additional line being put in beside it will boost total volume to 890k/d for the two lines.

 

https://www.transmountain.com/project-overview

 

Quote

Currently, nearly all the oil produced in Western Canada goes to one market, the United States Midwest. However, there’s a limit to how much oil this market needs. For much of the last decade, Canada has been selling into the United States at a discount to the world price for similar oil products.

 

The simple truth is that Canada’s oil will fetch a better price if we give ourselves the option of shipping more of it via Trans Mountain’s Pacific tidewater terminal in Burrard Inlet. Canada will earn more on every barrel of oil that’s piped west compared to those sold to our existing customers in the United States Midwest market, a differential that exists regardless of the price of oil. The Project will allow Canadian oil to be delivered to international markets and, as a result, Canada will earn approximately $3.7 billion more per year.

 

[UK]

https://www.economist.com/business/2023/01/01/can-the-north-sea-become-europes-new-economic-powerhouse

[SharperDingaan]

On 1/5/2023 at 10:47 AM, Pelagic said:

Quick clarification, the Trans Mountain line is already 300k/d the additional line being put in beside it will boost total volume to 890k/d for the two lines. 

 

Good catch. The extra 590K bbl/day (890-300 existing) is 24 500K tanker loads every 3 weeks.

Listen to the market, and apparently the only way that Cdn heavy crude gets to US refiners is via pipelines headed south (Keystone, etc.). Shut down Keystone, and you get dirt-cheap heavy crude at Galveston, etc.

 

Little realized is that when TMP comes on-line, Cdn crude can get to Galveston by tanker, or go directly west to Asian refiners with hungrier and much more advanced refineries. Keystone either strands permanently or a deal gets cut to reopen it. And as pipe transport is typically cheaper than boat, and it's a more direct route ....  if/when Keystone ever reopens - differentials permanently drop even further.

 

Also little credited at present is Cdn C02 pipeline sequester displacing the o/g 'windfall taxation' commonly seen everywhere else. Ultimately, it's a nod from environmentalists that will eventually translate into tar sands becoming 'greener', and more egress flowing south. Keystone eventually reopening.

 

All of which adds up to the WCSB being a very good place to be over the long term.

Closely followed by Newfoundland exporting NGL to Europe.

 

SD

 

 

Edited January 8, 2023 by SharperDingaan

[Dinar]

4 hours ago, SharperDingaan said:

 

Good catch. The extra 590K bbl/day (890-300 existing) is 24 500K tanker loads every 3 weeks.

Listen to the market, and apparently the only way that Cdn heavy crude gets to US refiners is via pipelines headed south (Keystone, etc.). Shut down Keystone, and you get dirt-cheap heavy crude at Galveston, etc.

 

Little realized is that when TMP comes on-line, Cdn crude can get to Galveston by tanker, or go directly west to Asian refiners with hungrier and much more advanced refineries. Keystone either strands permanently or a deal gets cut to reopen it. And as pipe transport is typically cheaper than boat, and it's a more direct route ....  if/when Keystone ever reopens - differentials permanently drop even further.

 

Also little credited at present is Cdn C02 pipeline sequester displacing the o/g 'windfall taxation' commonly seen everywhere else. Ultimately, it's a nod from environmentalists that will eventually translate into tar sands becoming 'greener', and more egress flowing south. Keystone eventually reopening.

 

All of which adds up to the WCSB being a very good place to be over the long term.

Closely followed by Newfoundland exporting NGL to Europe.

 

SD

 

 

SD, thank you for the insights.  Are your top plays still Obsidian, Whitecap Resources & Gear energy, or given the moves in the stocks did you change your opinion?  Thank you.

[Xerxes]

For those who like Lee Cooperman, he is being going off his energy pick Paramount Resources the whole 2022 and now again on CNBC

 

PRMRF: Paramount Resources Ltd - Stock Price, Quote and News - CNBC

Paramount Resources: Patience Finally Rewarded (OTCMKTS:PRMRF) | Seeking Alpha

[UK]

https://www.bloomberg.com/news/articles/2023-01-09/russia-s-flagship-oil-is-trading-at-half-global-prices-with-tiny-pool-of-buyers?srnd=premium-europe

 

Russia’s flagship oil is selling at less than half international prices — and way below a Group of Seven imposed cap — following sanctions targeting the Kremlin’s revenue from petroleum sales. The nation’s Urals grade, a far bigger export stream than any other crude that Russia sells, was $37.80 a barrel at the Baltic Sea port of Primorsk on Friday, according to data provided by Argus Media. Global benchmark Brent settled at $78.57 on the same day.

 

A key driver of prices has probably been the lost European market, because it put Russia at the mercy of a tiny pool of large buyers, most notably China and India. And with tankers having to sail thousands of miles further to get cargoes from western Russian ports to those buyers, freight costs soared. That forced barrels to be discounted to compete with shipments from the Middle East. 

[SharperDingaan]

OBE is a very good long term growth investment. Unloved, massive torque to higher prices, 20 cent dollars, etc. Three very different o/g plays, each of which could be a stand-alone company by itself, and each with very good rock. Well run, but ultimately we see it broken up and pieces merging into others in 2-3 years.

 

WCP is a core long term income investment. Well run, continually rising cash yield, and we have been adding for years as opportunities present themselves. Ideally they end up with the OBE Cardium at the end of this o/g cycle.

 

GXE is a speculative investment. Above $80 WTI the current dividend remains affordable, but they really need to buy some better assets/do a merger, take on some debt to do it, and cut the dividend entirely in favor of developing the assets obtained. Lots of good opportunities, but an indefinite ongoing dividend isn't one of them.

 

We know these three very well, and as a result can swing trade for incremental alpha fairly reliably. More than offsets the likelihood that they may not be the optimum choices in todays market. Choose your poison. 

 

SD

[SharperDingaan]

1 hour ago, UK said:

And with tankers having to sail thousands of miles further to get cargoes from western Russian ports to those buyers, freight costs soared. That forced barrels to be discounted to compete with shipments from the Middle East. 

 

Welcome to the differential! Net proceeds/bbl = price cap - transport - bribes, and paid in local Yuan/Rupees vs USD.

 

SD

 

[StevieV]

1 hour ago, SharperDingaan said:

GXE is a speculative investment. Above $80 WTI the current dividend remains affordable, but they really need to buy some better assets/do a merger, take on some debt to do it, and cut the dividend entirely in favor of developing the assets obtained. Lots of good opportunities, but an indefinite ongoing dividend isn't one of them.

 

I like OBE and WCP, but I don't see it with GXE.  They just started the dividend.  Not too long in and it is more than they can afford.  If the opportunities are to do some type of growth/acquisition/deal, then they shouldn't have instituted the dividend.  What should make one think they'd pivot so quickly away from dividend and instead to growth/deal?

[SharperDingaan]

2 hours ago, StevieV said:

 

I like OBE and WCP, but I don't see it with GXE.  They just started the dividend.  Not too long in and it is more than they can afford.  If the opportunities are to do some type of growth/acquisition/deal, then they shouldn't have instituted the dividend.  What should make one think they'd pivot so quickly away from dividend and instead to growth/deal?

 

Own opinion....

GXE recognizes that they need to buy something, and that it would go better if they could also issue a block of shares at a much higher price. At the time (Q3 22) they had just come off the high FCF of Q2 22, paid off all their debt, and the market view was that dividends were king. With no debt, and a high dividend, the Gordon model would support a much higher share price, and away they would be. Once the deal was done they could justify dropping the dividend in favor of further development, and maintaining a very strong Balance Sheet. Very rational and hard to fault, but to maintain the dividend it meant committing the company to WTI at a minimum USD 80. Sadly, it hasn't worked out yet.

 

To optimize their WACC GXE needs to take on short term debt, and term it out once they buy something. If you think WTI is going to average > US 80 over 2023 (most people), it makes a lot of sense to maintain the dividend and borrow short term to cover any dividend shortfall; paying the debt  back as soon as they generate excess CF > US 80. As/when the market thinks different ... it's an opportunity with a 10%+ cash yield.

 

The reality of course is that small resource companies (o/g, mining, etc.) can only pay special dividends, and only as business permits. And if there aren't many shares outstanding ... it often makes more sense to invest the cash flow surplus in M&A/production versus share buybacks. There is a reason why smaller o/g servicing companies typically grow through M&A and do not pay a fixed dividend on common.

 

However, if Mr Market wants to be manically depressed, we're happy to oblige 

 

SD

 

[Spekulatius]

Hilarious chart for European NG prices. my guess is that they will go below 50 Euros and then stay there. i think before late 2021, the prices were below 25 Euros. They unlikely will go back to this level, but i don't think they will be 3x that former level either. For reference 55 Euro (3.412 conversion factor* 1.08 EURO/USD) is still 17$/mmBTU and US prices are around $3.6/mmBTU.

Edited January 16, 2023 by Spekulatius

[lnofeisone]

I view it as a positive for the European energy operators. Industry can adjust. Europe won't go into total industrial collapse. They'll work off their storage.  Prices will stay elevated to make a profit but not so high that they will bump into WFT and politicians' "rage." 

[Spekulatius]

29 minutes ago, lnofeisone said:

I view it as a positive for the European energy operators. Industry can adjust. Europe won't go into total industrial collapse. They'll work off their storage.  Prices will stay elevated to make a profit but not so high that they will bump into WFT and politicians' "rage." 

Yes, I see it the same way. I think prices will drift in the 30 Euro range over time. That's about $10/ mm BTU.

[Sweet]

4 hours ago, lnofeisone said:

I view it as a positive for the European energy operators. Industry can adjust. Europe won't go into total industrial collapse. They'll work off their storage.  Prices will stay elevated to make a profit but not so high that they will bump into WFT and politicians' "rage." 

So many pundits predicting economic catastrophe in Europe this Winter and in 2023.  We are only a month in to be fair, but those predictions are already looking sour.

[Spekulatius]

11 minutes ago, Sweet said:

So many pundits predicting economic catastrophe in Europe this Winter and in 2023.  We are only a month in to be fair, but those predictions are already looking sour.

Yes. I think this winter is done. Storage levels in Germany are ~90.5% and often, the winter in Germany is over by late February. At least one and soon another LNG terminal went operational this winter, which partly replaces the Russian NG.

 

Putin lost his NG gambit. Game over. His NG is now stranded and he has to move it to other sources  - Turkey and China which is going to take years to get the expensive infrastructure ready. Once ready, he will have to sell it for way cheaper than he was able to do to Europe, even compared to pre- invasion prices.

Edited January 16, 2023 by Spekulatius

[Viking]

27 minutes ago, Sweet said:

So many pundits predicting economic catastrophe in Europe this Winter and in 2023.  We are only a month in to be fair, but those predictions are already looking sour.

@Sweet There is always new news. That is why forecasts are usually always wrong. And that is not because people making forecasts are stupid. Investors need to attach probabilities to forecasts and expected future outcomes. Tail events can happen. 
 

Bottom line, record warm temperatures in Europe in winter have impacted the accuracy of forecasts from 3 and 4 months ago. That is a wonderful outcome for Europe. 
 

Does Europe (and the world) no longer have energy issues? Of course we do. How will it all play out? Not sure. Oil stocks are a 20% weighting for me today. I remain bullish on the sector (especially looking out a year or two). Happy to collect close to a 5% dividend and wait and see what happens. I expect we will see wicked volatility. 

Edited January 16, 2023 by Viking

[JRM]

21 minutes ago, Spekulatius said:

Yes. I think this winter is done. Storage levels in Germany are ~90.5% and often, the winter in Germany is over by late February. At least one and soon another LNG terminal went operational this winter, which partly replaces the Russian NG.

 

What % of Germany's energy needs in an average winter are met by full storage capacity?  

[Spekulatius]

19 minutes ago, JRM said:

What % of Germany's energy needs in an average winter are met by full storage capacity?  

I believe the German NG storage capacity is ~240 Terrawatt and the annual consumption is ~1000 terrawatt. Of course consumption is higher in winter. However, I think there is no way that Germany can run out of NG this winter any more. Russian NG was almost 50% of the supply at peak but the two newly operational NG terminals should take care of ~12% of the total already with a couple more coming online. There are is additional supply from North Africa and Norway coming.

 

It's not just the warm winter either. The first month in November/  early December was way colder than average and then it got warmer.

Edited January 16, 2023 by Spekulatius