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Canadian E&P


SharperDingaan
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It is well past time to put the hate away, and look a lot closer at some of the E&P companies in both the WCSB and Newfoundland.

Canada is not the US, and your wallet will thank you for recognizing that.

 

An oil field is the same as a mine deposit. A SINGLE asset depleted over time, at an NPV as high as possible.

Very simple business model – sell the product as high as possible, force the cost as low as possible, do it as soon as possible, and discount at 10%/year NPV(10).

 

Why NPV (10)? Because financials legally require an independent reservoir re-assessment every year (Reserve Report), the required discount rate is 10%/year, and the IV of that reservoir is the value of the proven plus probable divided by fully diluted share count. Per the value investment thesis - buy when share price is < NPV(10)/FD sharecount, sell on mean reversion.

 

Could care less, re maintenance capex – it’s a depleting SINGLE asset, there’s nothing to maintain.

Could care less, re discount rate – 10% is industry standard. Unless you are a reservoir engineer (and better than industry) you know squat to opine otherwise.

 

The difference between share price and RR value/share, is purely ‘sentiment’.

Could care less as to cause, we care only about direction, and rate of change. Pretty simple metrics.

 

Canadian Q2 E&P reporting has evidenced that despite the worst quarter in memory, a great many companies have a break-even at/below the current WTI price, and many DO NOT need new and ongoing financing to continue operations.

• Alberta and the Feds are slowly moving to net neutral carbon emission. Demonstrate it, and the price discount on ‘dirty oil’ declines. Higher revenue, higher NPV(10)

• WCSB field consolidation is starting to occur. Oerators jointly producing the reservoir, to extract economies of scale. Lower costs, higher NPV(10)

• WCSB egress is slowly improving. Lower differentials, higher volumes, higher revenue, higher NPV(10).

• Sentiment is changing. One additional quarter of similar (or better) Q2 reporting, and it’s hard to justify why a new investment $ into NA E&P DOES NOT go to Canada versus the US or Mexico.

 

Rising NPV(10), and improving sentiment as milestones, continue to be met.

Little to do with what one might think of oil, or its distant future prospects. Very different story to the US.

 

Ideally, this post will serve as a marker. Please add your posts, and lets all see if it pans out.

 

SD

 

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  • 4 weeks later...

 

I don't think oil sands will be going away anytime soon. Those long life assets are doing just fine at the moment, relative to shale peers who are taking it on the chin (again). It is also amazing how Pioneer Natural Resources is talking about sustainable shareholder returns five years after the first oil crash, when Suncor and other Canadian firms have been tightening the ship ever since.

 

Also, who says oil can't be clean?! https://phys.org/news/2019-08-scientists-hydrogen-gas-oil-bitumen.html

 

haha

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It's usefull to think of the Tar Sands as multiple LAYERS of DIFFERENT functional assets.

Surface level open pit mining, primarily for burning. Mid level in-situ extraction for chemical feedstock. Deep level use for carbon sequestration and hydrogen extraction. As almost all deposits include these multiple layers - pretty much any given deposit has a very long life.

 

At current WTI pricing, shut-in tar sands production is again viable. Egress is also no longer the issue that it was - Cushing drawdowns, and price differentials, evidence that there is space in the pipe (& the rail). As some producers have already begun, Q3 earnings should surprise.

 

Tar Sands R&D has long led the world - but it is still very much in its infancy.

Example: We mine the sand at great cost to produce oil (product) and contaminated sand (by-product) that we put back in the hole. As the sand is less contaminated that it was, native grasses/shrubs grow back thicker and quicker. However, we now have the technology to leach the sand with oil-eating microbes to further decontaminate it - put cleaner sand back in the hole and we can now grow trees, and charge for the atmospheric CO2 they remove while growing (carbon trading). Evolution: Microbes + C02 trading.

 

Tar Sands are not the environmental monster they are portrayed as.

They just suffer from awful marketing, and a short-term versus long-term view.

 

SD

 

 

 

 

 

 

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On valuation, I've had a lot of success underwriting based only on PDP (proved, developed producing) - i.e., stuff that's literally ready to be sucked out with a straw and a discount range of 10 - 20%. This can be thought of as a "floor" methodology. Most I know in the industry discount probable reserves and don't give any credit to anything else. Another good rule of thumb is between forward strip pricing and the SEC Final Rule to use the lesser of the two. My experience is limited to DIPs and other rescue financing in the E&P space.

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O&G lending goes through cycles.

If the loans are to stay on the book - the preference is lending to a max 50% of proved reserve at spot; to remain competitive, add 30% of probable when prices are rising strongly. If the loans are to be securitized - higher percentages, P&P valuation at the 3-month strip, and a maximum 30-day unsold loan inventory. Accept the higher risk, to obtain the deal flow - and sell on the 'excess borrow' to investors as soon as possible.

 

Strip price lending to drill, is especially dangerous with O&G.

Price predictions are market driven, significantly inaccurate, and rapidly worsen with increasing horizon - thereafter it implies debt service via a match-funding of the new wells future cash-flow. Treasurer and banker have incentive to match-fund at the strip price - by portfolio, and simultaneously securitise 20-40% of the total obligation.

 

Comes the day oil prices fall off a cliff, the treasurer still has the money, the banker is still within his/her risk tolerance, but the investor is SOL and wears the volatility in the strip price ... so either be nimble, or be dead.

 

SD

 

 

 

 

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It's usefull to think of the Tar Sands as multiple LAYERS of DIFFERENT functional assets.

Surface level open pit mining, primarily for burning. Mid level in-situ extraction for chemical feedstock. Deep level use for carbon sequestration and hydrogen extraction. As almost all deposits include these multiple layers - pretty much any given deposit has a very long life.

 

At current WTI pricing, shut-in tar sands production is again viable. Egress is also no longer the issue that it was - Cushing drawdowns, and price differentials, evidence that there is space in the pipe (& the rail). As some producers have already begun, Q3 earnings should surprise.

 

Tar Sands R&D has long led the world - but it is still very much in its infancy.

Example: We mine the sand at great cost to produce oil (product) and contaminated sand (by-product) that we put back in the hole. As the sand is less contaminated that it was, native grasses/shrubs grow back thicker and quicker. However, we now have the technology to leach the sand with oil-eating microbes to further decontaminate it - put cleaner sand back in the hole and we can now grow trees, and charge for the atmospheric CO2 they remove while growing (carbon trading). Evolution: Microbes + C02 trading.

 

Tar Sands are not the environmental monster they are portrayed as.

They just suffer from awful marketing, and a short-term versus long-term view.

 

SD

 

Some good points. Also, I don't think the sands get credit for how valuable it is to have such a dependable asset with such long life with relatively easy to maintain sustaining capex. If we are in a low oil price environment for a long time, the oil sands can make it work. I heard plenty that they were doomed in 2015 and everything from several market pundits. I just don't buy that argument looking at their business models - growth will be negligible, for sure. But should oil regain its former glory in a few years, the cash will flow like crazy.

 

Former glory might take 5 years, just to have an economy we did at the start of 2020 (US side). Flip side also, with the Canadian E&Ps, if the U.S. dollar does weaken due to its fantastic COVID decisions, you do get Canadian dollar exposure and a slight hedge. Just a minor point.

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