Canadian oil patch for sale!

[alertmeipp]

Looks like another big down day with wti still deep in red.

 

The drop in share price is justified if wti continue to be depressed

 

 

[aws]

I bought a little LTS yesterday, my first oil patch stock or any Canadian stock actually.  I bought at C$4.20 and it's now C$3.52 a day later.  That's a nice welcome to Canada - I thought you guys were supposed to be nice.

[Cardboard]

The S&P has now corrected 9.0% from top to bottom as of this morning. It is now rebounding strongly. This could be it. There is no recession on the horizon. No housing collapse. No Euro collapse as in 2011. Yet when you look at so many charts over the past couple of weeks, it is correcting more violently than in 2008...

 

WTI oil was even positive for a little while and is not dropping as much in % terms as the S&P this morning. I take that as an encouraging sign. This whole energy debacle could turn into one of the biggest unfounded panic ever.

 

Cardboard 

[alertmeipp]

Us producers like sd and xco are holding up well.

 

Lts is still treated  like crap.

 

At 80 wti,  we are talking about 400m fund flow vs about 2billions ev.

 

And back up to 3x ff/debt.

 

Not sure when the beating will stop. But make sure sell some when media is talking about tight supply and asset sale was going so quick.

 

At the mean time, continue to enjoy thr slaughter. We paid for this.

 

 

 

[kevin4u2]

That is what they said about shale gas too.

 

I thought I would share.

 

My dad ran into a CEO of a US oil & gas company while hiking in California. My dad asked him about the shale oil boom in the US and he said that it will be over in 2-3 years. He said the wells dry up very quickly and there very expensive to drill.

[yadayada]

if you read back on oil, it seems that every 10-20 years in the last 100 years they said that. They were afraid of running out in the 30's 50's etc.

[kevin4u2]

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

The net present value of the assets will be worth less than the debt at $80, it was borderline at $95 oil.  Bankers will be worried, fortunately for them the credit facility isn't up for renewal until June 2, 2017.  I suspect they will be gone before then. 

 

Applying a multiple to a CF is very dangerous for a business who production and thus CF naturally declines over time.  The CF isn't a perpetuity.

 

The Canadian oil patch earns very low returns.  Here is the government data for Q2 ROE and ROIC by industry.  Only mining is worse than O&G.

http://www.statcan.gc.ca/pub/61-008-x/2014002/t031-eng.htm

 

 

Us producers like sd and xco are holding up well.

 

Lts is still treated  like crap.

 

At 80 wti,  we are talking about 400m fund flow vs about 2billions ev.

 

And back up to 3x ff/debt.

 

Not sure when the beating will stop. But make sure sell some when media is talking about tight supply and asset sale was going so quick.

 

At the mean time, continue to enjoy thr slaughter. We paid for this.

[yadayada]

This site has some fascinating articles. They are just theories but they sound believable

 

http://www.oil-price.net/en/articles/isis-creates-an-oil-shock-but-why.php

[alertmeipp]

Kevin,  2014, they are probably ahead than the reserve report in term of pricing.

 

2015 2016, factor in exchange rate, they are probably on par.

 

2017 and beyond, they are about 10 percent off

 

Dont see how that would cut the nav in half

 

 

[plato1976]

Not sure about LTS

 

but for PWE, as a bigger company it actually has less debt than SD, I also believe it has lower well cost esp. in their kernel regions, yet it's roughly the same market cap now

 

Seems the canadian patch is cheaper than the U.S. patch...

 

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

The net present value of the assets will be worth less than the debt at $80, it was borderline at $95 oil.  Bankers will be worried, fortunately for them the credit facility isn't up for renewal until June 2, 2017.  I suspect they will be gone before then. 

 

Applying a multiple to a CF is very dangerous for a business who production and thus CF naturally declines over time.  The CF isn't a perpetuity.

 

The Canadian oil patch earns very low returns.  Here is the government data for Q2 ROE and ROIC by industry.  Only mining is worse than O&G.

http://www.statcan.gc.ca/pub/61-008-x/2014002/t031-eng.htm

 

 

Us producers like sd and xco are holding up well.

 

Lts is still treated  like crap.

 

At 80 wti,  we are talking about 400m fund flow vs about 2billions ev.

 

And back up to 3x ff/debt.

 

Not sure when the beating will stop. But make sure sell some when media is talking about tight supply and asset sale was going so quick.

 

At the mean time, continue to enjoy thr slaughter. We paid for this.

[alertmeipp]

Yes. No idea why sd chk xco can be up so well while pwe lt continue to get killed.

 

 

[bizaro86]

suncor or cnq?

 

I don't have a position in either, but CNQ has much better management, imo. The company consistently makes the best acquisitions in the business, and has a much better track record than Suncor. (Over the last 15 years they're about a 10 bagger vs about a 5 bagger for Suncor).

 

I've dealt with both companies in various ways, and know people employed at both. CNQ has the attitude of a low cost operator, and makes their decisions in more of a "capital allocation" way. Having an owner-operator (Murray Edwards) at the helm helps with that, I think.

[alertmeipp]

Well, both xco and sd ends up 20 percent for today.

 

At least some oil stocks are going up finally.

[biaggio]

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

 

Kevin I really respect your opinion. You are of the same opinion as value trap, another knowledgable poster here

 

I am just wondering how you go about looking at these reserve reports?

 

For others here, here is a report on reserves starting at the bottom of page 14.

 

http://www.lightstreamresources.com/files/pdf/investor-relations/2013/2013%20Annual%20Information%20Form.pdf

 

It seems that reserves are estimated by Sproule, who seems to evaluate most O&G properties that I have looked at.  Maybe thats my problem I am looking at the wrong properties. Are these professional engineering groups in collusion with management similar to the financial auditor pre 2008.

 

With the way things are working out I am really doubting myself. I have a very small 1% position but was thinking of adding.

 

The whole reserve report seems to have a lot of estimates. Estimate for future prices, operating cost, etc...I understand how the NPV number can be BS .

 

How accurate are the estimate of actual reserves in barrels of oil. i.e. if they say that they "probably" have 176 million of barrels of oil in reserve, do we care if its 125 or 200 million barrels....Ok I care, I would rather it be 200  but if you're buying all 178 million barrels for $2.26B ($1.5B in Debt + the rest in equity), that works out to ~$13 per barrel..that seems inexpensive. If they end up having 125 million barrels then that ends up being $18 per barrel...still ok assuming that they can still turn a profit

 

I had assumed that the estimates were roughly accurate +/- 20%.

 

The way I see it they are too good to be true. Yet I want them to be true. I really appreciate Kevin4u2 and value trap introducing some skeptism.

 

Hoping to learn something. Hoping not to lose money.

[alertmeipp]

Pretty strong showing for pennwest today.

 

We will have our day.

 

Do not look at todays wti pricing and assume this is the price for next few years.

 

You better have a sense about how the pricing will go before putting money in.

 

For example,  if u see 60 oil, go short any oil name out there.

 

If we.need.above 100wti, crap like lts sd pwe xco will do fine.

 

Forget about Saudi will cut production because they need 100 oil.

 

That was one of the biggest bs i have fall into.

 

 

[ItsAValueTrap]

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

 

Kevin I really respect your opinion. You are of the same opinion as value trap, another knowledgable poster here

 

I am just wondering how you go about looking at these reserve reports?

 

For others here, here is a report on reserves starting at the bottom of page 14.

 

http://www.lightstreamresources.com/files/pdf/investor-relations/2013/2013%20Annual%20Information%20Form.pdf

 

It seems that reserves are estimated by Sproule, who seems to evaluate most O&G properties that I have looked at.  Maybe thats my problem I am looking at the wrong properties. Are these professional engineering groups in collusion with management similar to the financial auditor pre 2008.

 

With the way things are working out I am really doubting myself. I have a very small 1% position but was thinking of adding.

 

The whole reserve report seems to have a lot of estimates. Estimate for future prices, operating cost, etc...I understand how the NPV number can be BS .

 

How accurate are the estimate of actual reserves in barrels of oil. i.e. if they say that they "probably" have 176 million of barrels of oil in reserve, do we care if its 125 or 200 million barrels....Ok I care, I would rather it be 200  but if you're buying all 178 million barrels for $2.26B ($1.5B in Debt + the rest in equity), that works out to ~$13 per barrel..that seems inexpensive. If they end up having 125 million barrels then that ends up being $18 per barrel...still ok assuming that they can still turn a profit

 

I had assumed that the estimates were roughly accurate +/- 20%.

 

The way I see it they are too good to be true. Yet I want them to be true. I really appreciate Kevin4u2 and value trap introducing some skeptism.

 

Hoping to learn something. Hoping not to lose money.

 

There are different ways in which you can fudge a reserve estimate.

 

Auditors and reserve estimation is different.  Auditors do not have a duty to find fraud.  Their scope is limited.

Also, they often aren't colluding with management.  They might overlook aggressive accounting.  However, it would be extremely rare for an auditor to overlook clear evidence of fraud.  They will usually (almost always) resign before they sign off on an audit that will get them into trouble.  While there are some crooked auditors out there, and sometimes they have conflicts of interest, they aren't as godawful as the engineers who inflate reserves.  Being bad at finding fraud is not the same as participating in it.

 

The engineers who inflate reserves must know that what they're doing is messed up.  But they also know that they won't ever be going to jail.  Anybody prosecuting them would have to prove beyond a reasonable doubt that they broke the law.

 

Of course, the real world isn't always black and white.  There are a lot of shades of grey.  Sometimes estimates are a little optimistic but not unreasonably so.

 

2- Take a look at the ATPG thread:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/atpg-atp-oil-and-gas/?nowap

 

3- I've never researched Light Stream.

[biaggio]

Valuetrap, thank you for your response. Much appreciated.

[Cardboard]

Another deal goes down in the oil patch:

 

http://finance.yahoo.com/news/chesapeake-energy-corporation-announces-sale-110100527.html

 

This time it is for U.S. gas assets at a whopping $96,000 U.S./boe/day.

 

If one is to look at the recent EnCana-Athlon deal, Chevron-Kuwait and this one, they have all been done at pretty high prices. It is hard to imagine that some of the beaten up players that we keep talking about have not been approached with offers. I suspect that because they are in a perceived weaker position due to their debt and recent share price plunge that prices offered were too low and rejected. This may change with some tweaking from both sides.

 

Cardboard

[alertmeipp]

They dont just look at short term pricing.

 

Hope LTS just sell Bakken off and do a huge buyback.

 

90 percent oil with low decline rate and generating free cash flow.

 

In good old days, they play alone should worth more than the EV.

 

 

 

 

 

[kevin4u2]

Hi Biaggio,  I'll respond but I simply do not have the time right now.  Valuetrap raises a few good points.

 

For me I would suggest looking at the balance sheet and compare the "cost" to the "value" in the reserve report.  Second what is the value the company has created?  The bankers could care less about the cost, they want to know the value of the proven producing reserves are.  Reserve reports are accurate, based on the assumptions made.  You just need to understand the make up of the assumptions. 

 

More later. 

 

 

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

 

Kevin I really respect your opinion. You are of the same opinion as value trap, another knowledgable poster here

 

I am just wondering how you go about looking at these reserve reports?

 

For others here, here is a report on reserves starting at the bottom of page 14.

 

http://www.lightstreamresources.com/files/pdf/investor-relations/2013/2013%20Annual%20Information%20Form.pdf

 

It seems that reserves are estimated by Sproule, who seems to evaluate most O&G properties that I have looked at.  Maybe thats my problem I am looking at the wrong properties. Are these professional engineering groups in collusion with management similar to the financial auditor pre 2008.

 

With the way things are working out I am really doubting myself. I have a very small 1% position but was thinking of adding.

 

The whole reserve report seems to have a lot of estimates. Estimate for future prices, operating cost, etc...I understand how the NPV number can be BS .

 

How accurate are the estimate of actual reserves in barrels of oil. i.e. if they say that they "probably" have 176 million of barrels of oil in reserve, do we care if its 125 or 200 million barrels....Ok I care, I would rather it be 200  but if you're buying all 178 million barrels for $2.26B ($1.5B in Debt + the rest in equity), that works out to ~$13 per barrel..that seems inexpensive. If they end up having 125 million barrels then that ends up being $18 per barrel...still ok assuming that they can still turn a profit

 

I had assumed that the estimates were roughly accurate +/- 20%.

 

The way I see it they are too good to be true. Yet I want them to be true. I really appreciate Kevin4u2 and value trap introducing some skeptism.

 

Hoping to learn something. Hoping not to lose money.

[bizaro86]

It seems that reserves are estimated by Sproule, who seems to evaluate most O&G properties that I have looked at.  Maybe thats my problem I am looking at the wrong properties. Are these professional engineering groups in collusion with management similar to the financial auditor pre 2008.

 

I've never been a reserves evaluator, but I have argued with one that my property deserved more reserves...  :D

 

Seriously though, Sproule is one of the the three consulting firms generally used in Canada. The other two are McDaniel and GLJ. They care about their reputation, so they're not likely to outright lie. However, the assumptions that go into their evaluations are highly maleable. I like looking at proved numbers, because in my experience they're (evaluators in general not Sproule specifically) much less willing to move on proved numbers than they are on probable.

[Cardboard]

I think guys that we need to go back to the analogy that Buffett has highlighted previously and sorry if it is not exact wording:

 

"When someone enters a room, you should be able to tell right away if he or she is fat or not."

 

The names here have been beaten up to death. There is room for more than a little bit of reserve inflation even if none of them have been accused of it other than by certain posters here.

 

Cardboard

[alertmeipp]

Also both cardium and bakken are not new plays. There are lots of info out there.

 

And these two assets are generating net cash.

 

 

[WideMoat]

I think guys that we need to go back to the analogy that Buffett has highlighted previously and sorry if it is not exact wording:

 

"When someone enters a room, you should be able to tell right away if he or she is fat or not."

 

The names here have been beaten up to death. There is room for more than a little bit of reserve inflation even if none of them have been accused of it other than by certain posters here.

 

Cardboard

 

So Lightstream is... not fat?

 

I see proved reserves--after tax and discounted at 10%--having a NPV of $2.56 billion (p.18).  Those reserves assume Edmonton par of $92.64 per barrel in 2014 and $89.31 in 2015.  They assume nat gas at $4 per MMBtu in 2014 and $3.99 in 2015.  They assume an exchange rate of .94 USD/CAD.

 

Let's assume that we time travel back to March and rewrite the reserve report using today's prices.  Crude is lower today, nat gas is roughly similar, CAD is lower.

 

 

[kevin4u2]

Hi Biaggio,

 

Here is the rest of the information. 

 

I recommended the stock back in January this year, it started the year at $5.9ish.  At the time (looking back at 2012) they had spent just over $320 million in capital, added net proved reserves of 27 mmboe, and the cost looked very reasonable at around $12 per BOE.  Netbacks were much much higher than this, so a decent recycle ratio.  If you do a quick and dirty 1P NPV-10 BT you come up with a rough NAV of about $9.  This has been the NAV for a while, ever since I said it was crap on my blog back in 2010 (there are several other posts on there about PBN & PBG, If you want some fun reading... do a search as I had some interesting debates on the topic with a few guys).

 

http://canadianvalueinvesting.blogspot.ca/2011/04/petrobakken-2010-annual-review.html

 

Despite recommending it, I should add that I never purchased it because management is pathetic.  I also know a few things about the company from people who work in the field, and all I will say is it wasn't good. 

 

Anyway, then as the reserve report and annual financials were released in late march/april and became clear LTS was still crap.  First of all they spent $719 million in CAPEX in 2013, and had a net reserve add of 12.3 mmboe for a F&D cost of over $70/boe.  That was the start.  Obviously they spent a pile of cash and generated NO value.  This can clearly be seen in the annual report where they wrote off the $1.4 billion in goodwill they were carrying.  I also realized how they justified the carrying amount to the auditors as the report said this...

 

"In addition to discounted cash flows, the Company also considered a range of market metrics in assessing fair value less cost to sell for certain CGUs. Market metric information was obtained from recent transactions involving similar assets."

 

Oh so they use "market metrics" to justify the fair value, not the reserve report which is as close to reality as you can get given the assumptions.  Basically you take the production profile and multiply by the forecasted price, reduce it by costs, and discount it back to today.  Anybody looking to acquire the property would do the same analysis and also adjust for drilling opportunities.  Market metrics is exactly what most of the people who invest in oil and gas do to justify the value of properties.  In reality every property has different cost and netbacks so blanket metrics do not work well. 

 

Basically they had a pile of technical revisions to their reserves and it really made you question the competency of the company.   

 

Next if you do a quick and dirty NAV it comes out to approx. $3.8/shr.  My conservative quant model gives a sub $2/share NAV (down from $6, and it takes into account other assets and liabilities).  So basically the company destroyed 60-70% of value with a terrible return on a huge capex.  It's gone, the company is nearly worthless for equity holders.  This was also in a time of high oil prices. 

 

For those who own this I wish you well but these are the facts.  The company is just as terrible as many other O&G companies at generating a profit.  Hope this helps. 

 

Hi Biaggio,  I'll respond but I simply do not have the time right now.  Valuetrap raises a few good points.

 

For me I would suggest looking at the balance sheet and compare the "cost" to the "value" in the reserve report.  Second what is the value the company has created?  The bankers could care less about the cost, they want to know the value of the proven producing reserves are.  Reserve reports are accurate, based on the assumptions made.  You just need to understand the make up of the assumptions. 

 

More later. 

 

 

LTS is crap.  I completely changed my mind after reading the last reserve report that came out in Mar/Apr.

 

 

I am just wondering how you go about looking at these reserve reports?