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Canadian oil patch for sale!


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I own Spyglass, LTS, PWE, Twin Butte, and a few others. Currently have a watch list of 5 companies, and a buy list of 5 companies.

I am in the process of writing up each stock.

 

Doing the same thing for service companies and so far I own 3 and want to buy 1 more.

 

Here is the watch and buy list for the E&P companies, May add Lukoil to the watch list.

 

Holdings Basket - Lightstream Resources, Spyglass Resources, Pennwest Energy, Legacy Oil + Gas, Iona Energy, Twin Butte Energy, Strategic Oil and Gas.

 

Watch List Baskets - Gear Energy, Yangarra Resources, Long Run Exploration, Rock Energy, Manitok Energy, Crocotta Energy, Pengrowth Energy.

 

Lists were cobbled together from http://www.stockchase.com/ and about 8 hours of watching BNN for O&G analyst reviews.

 

---Write up will be in this format, and I will take a basket of 6-8 stocks, INMO the sector is cheap and we have headwinds which may be come tailwinds (raising nat gas, wide differentials which should come down, solutions to transport issues (rail, additional pipelines), and reinterest in Canadian O&G by US investors) ----

 

Company - General thoughts on Idea / Strategy / Quarter / Position / or market update.

 

Why Discounted - Detail why the market is punishing the stock.

Management Plan - What's the plan to eliminate the discount / increase the stock price.

Operating Metrics - liquids %, sustainability, reserve life, PO ratio, IRR, decline rate.

Investment Metrics - Cash flow multiple, Discount to NAV, yield, per flowing barrel .

My Opinion (Opinion) - Why buy, sale, hold, or continue to watch stock. Will the plan work / is it credible.

 

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So, how many of you actually own some Canadian oil producers here?

For those who don't, why?

 

Debt load generally appears too high, given the risks and volatility of the business. To make matters worse, some companies appear to distribute too much of their cash flow. I wonder when some of them, just get the message and deleverage.

 

The Canadian E&p's certainly looks cheap based on price/cash flow metric, but one should look at the EV/cash flow ratio and then the relative valuation advantage to US peers is not as large as it first seems, imo.

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I think it is due to the fact that oil and gas tanked today in New York and that Canadian Natural Resources has decided to stop looking for a buyer of its Montney property or indicating that interest for assets remains too low. PWT and LTS are both sellers of assets so this could not be good news.

 

This market is really manic-depressive. I read just before Christmas or after a record weekly draw of natural gas that if the winter was just normal from that point on or at the average from the last 5 years that we would exit the winter with inventories at 20 year lows. Since then we have had record cold weather. It will warm up a bit here for a few days like it does every winter and now they are trying to push nat gas below $4. Go figure!

 

I also read on Stockhouse that a giant natural gas cavern used by TransCanada is now empty in Saskatchewan and could lead to rationing. 

 

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So, how many of you actually own some Canadian oil producers here?

For those who don't, why?

 

Debt load generally appears too high, given the risks and volatility of the business. To make matters worse, some companies appear to distribute too much of their cash flow. I wonder when some of them, just get the message and deleverage.

 

The Canadian E&p's certainly looks cheap based on price/cash flow metric, but one should look at the EV/cash flow ratio and then the relative valuation advantage to US peers is not as large as it first seems, imo.

 

Capital allocation at PWT, LTS, and SGL make them kind of hard to take seriously.  It would be so much more shareholder friendly to discontinue dividend payments and instead repurchase debt and shares.  A dividend cancellation would likely lead to a swoon in these stocks, allowing capital to really be put to good use.  Hard for me to figure out.  Do these managements maybe worry they would be disenfranchising Chinese investors by taking such an action?

 

http://www.bloomberg.com/news/2013-12-19/sunshine-to-penn-west-hamper-china-bet-corporate-canada.html

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So, how many of you actually own some Canadian oil producers here?

For those who don't, why?

 

Debt load generally appears too high, given the risks and volatility of the business. To make matters worse, some companies appear to distribute too much of their cash flow. I wonder when some of them, just get the message and deleverage.

 

The Canadian E&p's certainly looks cheap based on price/cash flow metric, but one should look at the EV/cash flow ratio and then the relative valuation advantage to US peers is not as large as it first seems, imo.

 

Capital allocation at PWT, LTS, and SGL make them kind of hard to take seriously.  It would be so much more shareholder friendly to discontinue dividend payments and instead repurchase debt and shares.  A dividend cancellation would likely lead to a swoon in these stocks, allowing capital to really be put to good use.  Hard for me to figure out.  Do these managements maybe worry they would be disenfranchising Chinese investors by taking such an action?

 

http://www.bloomberg.com/news/2013-12-19/sunshine-to-penn-west-hamper-china-bet-corporate-canada.html

 

You need to understand their background, they are income trust and they have large shareholder base that are in it for dividend.

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Do these managements maybe worry they would be disenfranchising Chinese investors by taking such an action?

 

http://www.bloomberg.com/news/2013-12-19/sunshine-to-penn-west-hamper-china-bet-corporate-canada.html

 

They were income trusts (LTS and PWE) and have a large shareholder base which expects a dividend.

Also Spyglass is trying a new model with high sustainable dividends. The goal for the model is to trade on yield, perhaps down to 6%-8%. If that happens you can buy private companies and public companies with shares at accretive prices. Tough to pull off but its done wonders for Crescent Point.

 

Also Canadians tend to want a return of capital in a sustainable way. Legacy Oil and Gas has great operations but they have been shunned due to a lack of dividends...

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I have a tiny position in Penn West.  I held it for years when it was a trust.  Then my interest got peaked again by this thread.

 

It is amazing how much flux there is in this industry.  Everyone is in a constant state of over buying followed by rationalizing their balance sheets. 

 

I dont know how Penn west will play out.  However, Rick George ran Suncor for a long time, successfully.  Rick is the Chairman of Pennwest and has bought a ton of shares.  Looks to be close to 10 million invested.  If anyone really knows how to straighten up Penn west it would be him.  He probably knows as much as anyone about what's under the ground, and how to get it to market. 

 

The new CEO is no slouch either.  For Resource companies subject to booms and busts, I absolutely want the dividend.  The dividends impose capital discipline that is sorely lacking In this industry. 

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Has any one looked at CVE? This integrated E&P seems to have a huge runaway in terms of production growth in front of them, which so far has been financed internally.

I think they have done some smart moves in the past,like spinning of ECA and swapping upstream assets for a stake into COP (now PSX) refineries, which sort of hedged against WT/bitumen brent spreads. They pay a modest dividend too. Despite good production growth in the past, the stocks trades at a multi year low. Anybody own this or is looking into this stock?

 

I think it could be a long runaway kind if stock.

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As of 11:59pm ET January 17th, 2014FilingDateTransactionDateInsider NameOwnershipTypeSecuritiesNature of transaction# or value acquired or disposed ofPriceJan 17/14Jan 13/14Wright, John DavidDirect OwnershipCommon Shares10 - Acquisition in the public market50,000$1.85

 

wright continues to buy SGL  - received first dividends on shares purchased in Dec - not hard to take- price of natural gas has to help

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50 cents increase in AECO price will only translate to additional $16 millions cash flow... (current 4.09 vs 3.6 budget) strip so it's not helping much unless it goes to much higher.

 

For example, 5 cents forex will translate to 81 million and 10 dollar "Light Differential" will translate to 193 million.

 

If we assume 2014 WTI, FX, AECO price will be where they are now, they are ~$110 million ahead. The one I don't know how to approximate accurately is the "light differential" (they are getting various prices like edmonton par, heavy which I don't know where to get), I just assume they are on target for that one.

 

One thing I was hoping to see through out 2014 is how good they will be on reducing cost, they have high cost and thus low netback before, the new management is changing that.

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Another one I am "re-"looking is ECA.

It has good leverage on NG as well and on top of that it's a gas to oil story (couple yrs behind CHK but must better balance sheet)

 

ECA is my second largest holding - i am in the natural gas price recovery camp - major producer ,great assets , new management, rising gas price due to  gas drilling pullback,  high decline rates in shale , future lng exports, cold weather effect on gas storage this and next year,etc - wasn't crazy about cut in dividend since it was bringing in a fair bit of cash but  i like the NG story

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how do you like their capex plan? Do you think they put too much on unproven asset

 

they are concentrating on 5 areas and in the market to divest some non core assets - i thought the areas of concentration were proven assets ( enough to spend the cash) either by themselves or others in the area - which asset are you referring to or is it just ng in general

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50 cents increase in AECO price will only translate to additional $16 millions cash flow... (current 4.09 vs 3.6 budget) strip so it's not helping much unless it goes to much higher.

 

For example, 5 cents forex will translate to 81 million and 10 dollar "Light Differential" will translate to 193 million.

 

If we assume 2014 WTI, FX, AECO price will be where they are now, they are ~$110 million ahead. The one I don't know how to approximate accurately is the "light differential" (they are getting various prices like edmonton par, heavy which I don't know where to get), I just assume they are on target for that one.

 

One thing I was hoping to see through out 2014 is how good they will be on reducing cost, they have high cost and thus low netback before, the new management is changing that.

 

If this is for Spyglass - The increases will also give them quite a bit of optionality. They can sale gas assets, and can now drill high IP gas wells (1000 BOED). With these Noel wells they can now show production growth. All and all sky high differentials, dropping loony, and increasing gas prices / cold winter are all great tailwinds to have.

Differntials will only get better as pipeline / rail options improve.

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how do you like their capex plan? Do you think they put too much on unproven asset

 

they are concentrating on 5 areas and in the market to divest some non core assets - i thought the areas of concentration were proven assets ( enough to spend the cash) either by themselves or others in the area - which asset are you referring to or is it just ng in general

 

I think I saw the comments on some of the article.. can't remember. But from my read, Duvernay, San Juan for example is quite new and TMS, they are spending money on appraisal.

 

So, the concern raised was some of those can be a bit higher risk.. but of coz, if everything go well, all of the sudden, they have very valuable oil assets on book.

 

Hope the whole oil export thing will get some traction. What worry me the most is WTI pricing.

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50 cents increase in AECO price will only translate to additional $16 millions cash flow... (current 4.09 vs 3.6 budget) strip so it's not helping much unless it goes to much higher.

 

For example, 5 cents forex will translate to 81 million and 10 dollar "Light Differential" will translate to 193 million.

 

If we assume 2014 WTI, FX, AECO price will be where they are now, they are ~$110 million ahead. The one I don't know how to approximate accurately is the "light differential" (they are getting various prices like edmonton par, heavy which I don't know where to get), I just assume they are on target for that one.

 

One thing I was hoping to see through out 2014 is how good they will be on reducing cost, they have high cost and thus low netback before, the new management is changing that.

 

If this is for Spyglass - The increases will also give them quite a bit of optionality. They can sale gas assets, and can now drill high IP gas wells (1000 BOED). With these Noel wells they can now show production growth. All and all sky high differentials, dropping loony, and increasing gas prices / cold winter are all great tailwinds to have.

Differntials will only get better as pipeline / rail options improve.

 

What do you think about WTI pricing going forward? We are talking about 30$ swing if Canadian oil is going to be priced like Brent.

 

 

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