₪ David Pescod's Late Edition 9/08-9/12/08
To receive the Late Edition and be on our daily circulation simply e-mail Debbie at Debbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have you on the list tonight.
_____________________________________________________________________________________________________________________________________
David Pescod's Late Edition September 8, 2008
FANNIE MAE (US:FNM) $0.72 -6.32
OILEXCO INC. (T-OIL) $12.71 -0.50
DELPHI ENERGY (T-DEE) $2.01 -0.03
WESTERNZAGROS RES. (V-WZR) $1.87 -0.23
If you couldn’t feel the fear out there in the markets before, I suspect you could feel it this weekend. With the Fed in the United States taking over Fannie Mae and Freddie Mac, two of the biggest financial institutions on the face of the earth, and putting them under the feds jurisdiction, it’s telling you (in as blatant terms as possible) that things are getting out of control and it’s time to put things right.
So far the global financial system has been battered by $510 billion in credit losses, according to Bloomberg’s calculations and that folks, is an awful lot of money. For those who are shareholders in Fannie and Freddie, it’s ugly, but sooner or later the housing crisis has to be dealt with. In ways, it was being dealt with on its own as housing prices have weakened around the U.S.A. and suddenly...well, the houses are probably worth what they are selling for again.
Now if they could just arrange for financing, things would be ticky-boo.
Mind you, there are still vast areas where what a house or condo is worth is still very much open to debate with such areas as Las Vegas and Miami are two big points of concern, but you just can’t have banks going under everyday such as another bank in Las Vegas last Friday. Sooner or later you have to make the system appear firm.
It has been getting scarier and scarier out there, so we did the obvious thing on a day like today...we went for a little hand holding.
He’s been a perpetual bull, fully convinced that we are in yet another wave of a cycle that’s going to be great for commodities and while we wonder if that theory isn’t being battered a bit, he isn’t. One thing is for sure and that’s that Josef Schachter is an excellent person at holding one’s hand.
If you are looking for something to look forward to that might be bullish for oil and gas, he is suggesting that inventory data coming on Wednesday and Thursday should be a big negative number which could be good for the oil and gas market.
As far as how low oil can go, he can see it dropping to $98 or $99 for a while, but bouncing back quickly and once we get into winter...well, if it’s a cold winter, he can see $120 and $130 oil again. Right about now to most of us, that seems so far away.
Schachter also reiterates “all we really need is $110 for most oil companies around the world to be doing awfully well.” He suggests we don’t need $140 and also we should see gas and oil get back to the 10 to one ratio that would help the natural gas sector that has definitely been clobbered of late.
Schachter is still a believer that the U.S. economy is going to continue to grow, that India and China will grow at a reasonable pace and he is also pointing out to some other statistics worrisome to those following the housing bust and that’s that the inventory of housing in the United States has dropped from 16 to 11 months and Schachter says that once we get back to six months, we are back to normal times again.
While that still feels a long way off, right about now while Schachter is bullish there are a bunch of us that are ready to box up canned goods and candles…
We ask Schachter then, what are the three most undervalued oil stocks at this time? No surprises here folks the three names you can relate to well (at least from Schachter’s past stock picking—the only difference is the prices on them—is a lot less than it used to be).
Oilexco he suggests would be his top pick which when Shelley comes on stream near year end, should be annualizing $9.00 a share cash flow and here it is at this price…
Delphi Energy he believes could be doing cash flow of $1.20 a share and look at its cheap price.
And WesternZagros Resources is currently involved in three high risk/high reward drilling plays in a row in an area of the world that tends to be extremely generous and each one of the plays that are successful, could add $5.00 to $6.00 of asset value to the company.
Meanwhile today, Schachter updates his model on Sterling Resources with their success at the drill bit at Ana. For those who would like to see this report, e-mail Debbie at debbie_lewis@canaccord.com.
Not that anyone cares in this market, but Schachter raises his target to $6.00.
_____________________________________________________________________________________________________________________________________
David Pescod's Late Edition September 9, 2008
ITHACA ENERGY (V-IAE) $1.58 -0.12
ANTRIM ENERGY (T-AEN) $1.94 -0.30
STERLING RESOURCES (V-SLG) $1.79 -0.21
PAN ORIENT ENERGY (V-POE) $6.45 -0.96
We’ve written a couple of times here that there’s several veterans in the oil and gas patch that haven’t seen an oil and gas market turn this bad from that good since 1969. While we weren’t around way back when, but we vouch for the fact that we haven’t seen something this painful in a long, long time.
We’ve written not too long ago that going into the fall, September tends to be an ugly month and if there is a crash, it usually happens in October which is statistically/traditionally a good time. And then you have the good months for natural resources which is traditionally from November to April/May (hence the old saying, sell in May).
While I don’t think we have to worry about that crash in October anymore because we already had that last week when the TSX fell almost 1200 points in almost no time. Now things are getting to levels, at least in the oil and gas patch, one would assume where there is more than a little bit of value, unless of course oil is going to $40 a barrel, not the $60 that the oil and gas stocks seem to be signaling.
We need some hand holding so we go to Warren Verbonac of Octagon Capital fame and he is one of the analysts that has been suggesting now for the last few weeks that there is a disconnect between what oil is trading for and what oil and gas stocks are trading for. When we ask him, just when is this sell off going to end?
He suggests, “when the last hedge fund cowboy blows himself up, that will be the bottom.”
Actually he is starting to think that right about now, there are a few reasons to get hopeful...he points out that with the various hurricanes there’s two weeks of oil and gas from the Gulf of Mexico that hasn’t made it into American inventories, so inventory numbers should be pretty decent. And he points out that we are also getting into winter when demand for oil and gas products starts to rise. But he does reiterate that the relationship between oil and gas stocks and oil prices right now, is irrational.
When we ask again, just when is all this pain going to end? He answers, “just be patient. By the end of the year and the coming quarter, we should have a nice bottom put in and the seeds sewn for the next bull market.”
And yes, he hasn’t seen a correction like this in his professional career either and is suggesting that this just might be the opportunity of his career. We like that kind of talk and it does make a person a little more hopeful and then you look at your screens and go, “my goodness, it’s even worse…”
Verbonac can come up with a few reasons for the ugliness such as we are in the shoulder season for demand for oil and its related products and there is a bit of a world-wide recession or slow-down going on, but he reiterates that the current relationship between oil prices and oil stocks is irrational and many oil stocks are trading at very low multiples of cash flow, which is usually an opportunity.
Where could oil be in the short run? He is not saying, but he wouldn’t be surprised at all to see oil back in the $100 to $125 range in the next few quarters, which would be like sending a life preserver out for the bunch of us.
Okay. So if he had to take opportunity of this irrational market, what stories would he be keying in on and there are four with which he has been relatively constant in mentioning over the last while and those are all four companies that have significant increases in cash flow coming in the coming year.
Three of them are involved in the North Sea being Ithaca Energy, Antrim Energy and Sterling Resources, all of which just seem to be getting cheaper lately and a fourth is Pan Orient Energy, led by Jeff Chisholm, which should be undergoing very significant increases in cash flow production in Thailand with some pizzazzy exploration plays in Indonesia coming up.
For those that would like Schachter’s updated look at Sterling Resources, just e-mail Debbie at debbie_lewis@canaccord.com.
_____________________________________________________________________________________________________________________________________
David Pescod's Late Edition September 10, 2008
STERLING RESOURCES (V-SLG) $1.94 +0.15
WESTERNZAGROS RES. (V-WZR) $1.55 +0.09
OILEXCO INC. (T-OIL) $12.00 +0.61
DELPHI ENERGY (T-DEE) $1.94 +0.14
It’s almost three decades that we’ve been in the stock jockeying business and we admit that we haven’t seen anything quite like what we are experiencing in the resource markets today. hat great sucking sound has been valuations just disappearing off of some good folks that were some pretty blue chip stories not too long ago. And while gold might be under $800, one wonders whether gold companies are being valued at $500 or less and particularly with oils. Are we now getting close to $50 and $60 valuations for oil?
Anyway, the market capitulation/panic has been brutal and it’s been going on for a long time now and one wonders when it ends. We’ve seen different cycles before over the decades, but never one this brutal.
Ironically, it’s Josef Schachter phoning us yesterday, that gives us an idea of how ugly it is out there. He tells us that at the start of the morning, it was the stock brokers phoning for some hand holding, followed by more than a few chief executives of oil and gas companies wondering what the heck was hitting them and then ended up with some other high profile money managers also wondering what the heck was going on. It’s that kind of a time folks!
Schachter now admits that obviously he was a little too optimistic in how this sell off could go as he was expecting somewhere between 360 and 380 on the Capped Energy Index before it started bouncing towards ever newer highs. It’s gone the other way with a vengeance and even a few of Schachter’s favorite stories have been swacked.
He admits that yes, if you owned Sterling Resources at $3.20 and it was one of his favorite stories at that level, here it is at $1.75. The thing that saves him he says, is that
he always tries to take a three-year view and so these little ugly things that we are experiencing, are just brief interludes.
Brief Interludes?!! Since when have we had one as painful as this? Our big question of course is what’s going to turn this around and when?
Schachter’s answer is three-fold. First of all, over the next few weeks between Hurricane Ike and Hanna, there’s been a lot of production of oil and gas out of the Gulf of Mexico that has not been harvested and those inventory numbers should start relaying that reality to the markets over the coming weeks.
Secondly, we are getting closer to winter and when snow starts to fall in Ontario and New York City, people will start to care as the seasonal demand kicks in.
A third point he makes and he is referring to some commentary on CNBC yesterday that shows that there is now more cash on the sidelines than people have invested in
equities. We keep hearing about these hordes of cash that are out there and just wonder when people are going to start deploying them. But anyway, nothing has happened to Schachter’s favorites except that they are getting cheaper.
Schachter uses $100 oil for his press deck in figuring valuations and he’s had some of his favorite stories swacked in the last few days. We’ve mentioned Sterling, but he loves the story long-term as in his three-year view, he looks at 2011 and they should be earning $3.00 a share. He can live with that down the road, he suggests. As far as WesternZagros Resources, they’ve come up with some difficulties on their drilling, so that stock has been swacked, but it remains one of his favorite stories.
Meanwhile, Oilexco, once again with the cash flow they are going to be having, he doesn’t appear worried...yet! He also points to the cash flow of a company like Delphi Energy which has hedges on, so its cash flow of $1.20 a share should be relatively firm and suggests that the stock is now trading at 1 1/2 times cash flow. Dirt cheap!
For those who would like to see Schachter’s report on Sterling, e-mail Deb at debbie_lewis@canaccord.com.
PETROLEUM (US:UPL) $56.83 +6.83
(Not a bad day today!)
While we’ve said we haven’t seen a market the likes of which we are experiencing in the last few weeks in our 30 years in the business, sometimes a graph or a picture is worth 1000 words. Take a look at the chart of Ultra Petroleum.
We followed that story now for almost a decade and it has become the ultimate story—a junior stock trading at $1.00 that became $100.00.
One of the first players into unconventional gas and having a bump or two along the way due to financing needs and commodity prices, it has still developed into one of the Cinderella stories of our time. And yet look what’s happened to this stock in just a few weeks. Ultra Petroleum has been halved in just two months as lower oil and gas prices strike it, and everyone else in the sector. You can feel the fear.
_____________________________________________________________________________________________________________________________________
David Pescod's Late Edition September 11, 2008
CONNACHER OIL & GAS (T-CLL) $3.23 +0.01
We’ve been following Connacher Oil & Gas here for a long time and I can’t say that it’s changed our lifestyle much...at least we can say that it hasn’t sold off as much as many other junior oil and gas stories that have seen their prices halved in the crash we’ve experienced in the last few weeks.
Meanwhile, Connacher shareholders have been waiting, seemingly forever, for their go ahead on their Algar project — a decision we have been waiting for on an hourly basis it seems for the last five or six months. Traditionally these decisions are okayed by Alberta Environment and then by the ERCB and then the provincial cabinets themselves, gives it the official blessing.
Obviously, the folks who run Connacher now must believe they are ever-closer to that decision coming because on an update on the Company on September 5th, they write, “At Algar, the company’s second 10,000 bbl/d SAGD oil sands project, discussions with the provincial regulators concerning approval of the project have concluded. Connacher is confident all of the various queries raised by the regulatory bodies have been fully addressed and has received verbal assurance of the same. The company anticipates final regulatory and provincial cabinet approval will be received around the beginning of October 2008…”
Finally….we hope! The only question is, 300 days from the okay and 90 from the starting of huffing and puffing, will the market conditions be better than they currently are?
SPROTT INC. (T-SII) $4.83 -0.02
COXE COMMODITY FUND (T-COX.UN) $7.84 +0.94
With what we’ve gone through in the markets in the last few weeks, there is little doubt to any investor that we are experiencing something the likes of which gets written up in history books. It’s been bloody painful, but the real estate bubble in the United States that so many people got involved in has seen its bubble burst and now the bankers, brokers and financial institutions that financed that bubble, are holding the bag. And it’s banks around the world that’s holding that paper.
It looks like the steps are being taken to make certain some of the world’s biggest institutions will still survive such as Fannie Mae and Freddie Mac, but it’s definitely changing the scenario of which bankers and which brokers are going to be left holding the bag.
In the meantime, it has certainly kicked the be-Jesus out of our scenario on what could happen next for the commodity markets and how with booming economies in India and China, we would have fun in oil and gas, nickel, gold, youname-it.
We’ve had an enormous stutter-step and what next for that game? Well there are three people who more than anyone, have been advocating that story of investing in commodities because of booming Asian economies and their names are Jeff Rubin, the CIBC head economist, Eric Sprott of Sprott Asset Management and Don Coxe, associated with BMO.
The charts on a couple of their investments such as Sprott Inc. and Coxe Commodity Strategy Fund tells you how absolutely clobbered they have been over the last while, but then we’ve seen a long list of fundamentally great oil and gas companies lose 50% in a historical sell off and the question remains, what next?
Sometime this afternoon, Eric Sprott will be addressing the troops and anyone who wants to, can simply dial in at 1-888-789-0150 to hear what he has to say.
Meanwhile, Jeff Rubin, because of the weakness in the world economies has had to cut back what he expects and as of yesterday, Rubin has cut back his bullish forecast for oil and equities, but it’s not as if he’s jumping in bed with the bears, according to the Globe and Mail article.
In this Globe and Mail article, he is quoted as saying, “If in a global recession, oil is, let’s say, $93 (U.S.) a barrel, I still think you’ve got to be optimistic on the sector.”
In his most recent forecast, Rubin has now lowered this year’s target on oil to $115 and next year’s to $130. Rubin now expects the TSX to end this year at 13,000 rather than 14,300 and expects the TSX to see 14,000 for next year. In other words, a slightly negative annual total return this year, but a more normal return next year.
He believes that Europe is in a recession as is Japan and the United States is currently borderline. And in the Globe article, they mention that “most of the recent decline in oil prices should be reversed over the next six months.” If so, given that so many oil and gas stocks have been halved in the last while, there could be an enormous spring-back.
Meanwhile, Don Coxe has done a lot in the last few days as he also is expecting to do a conference all today and the Globe and Mail article point out where he has seen his personal wealth damaged more than anything in the last 20 years by what’s gone on recently. He does have to give the U.S. Authorities who engineered the collapse in commodities a big of respect for what they’ve done in that they’ve shored up the global financial system. In the Globe article, he suggests…“It was brilliant.”
According to Coxe, “The feds ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets.” As well as the Globe article on Coxe and his conference call to followers today, he put out his monthly “Basic Points” early and we have copies for those who would like some hand holding.
Some of his typical investment recommendations include his suggestion that “When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US—and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold.”
As far as predicting where oil will be, he writes, “We expect oil to trade in a range of roughly $80 a barrel to roughly $130 a barrel next year, but we have no great confidence in that forecast. We are more confident in predicting $150 oil within the next three years, as the next global economic recovery unfolds.”
One point of interest is he writes, “The biggest nearterm upward surprise in commodity prices could be natural gas if (1) the sunspots don’t reappear, and (2) the historic correlations of gas to oil reassert themselves.”
Bottom line for Coxe of his investment recommendations was this point: “We have no clear idea how long it will be before we can look back to today’s prices for commodity stocks and say, “Wow! I wish I’d loaded up then!” We remain certain that day is coming.”
_____________________________________________________________________________________________________________________________________
David Pescod's Late Edition September 12, 2008
ULTRA PETROLEUM (US:UPL) $60.25 +3.33
WASHINGTON MUTUAL (US:WM) $2.70 -0.13
LEHMAN BROS. HLDGS. (US:LEH) $3.32 -0.90
Two days ago we did a chart of Ultra Petroleum and what it’s done over the last year and this is truly one of the “Cinderella” stories in the natural resource sector over the last decade. An amazing story of the discovery of unconventional gas in a grand scale with proper management being brought in and over the years, surmounting the obstacles of money problems, new technology, you-name-it, became that story that starts at $1.00 a share and becomes $100.00 a share.
The chart shows you that in the last two months, it’s dropped from $105 to under $50.00. It’s been that kind of market particularly for the natural resource sector. Something that has been leading the way down has been the mutual funds of resource sector-based stocks that have been hurt and then with redemptions adding up, have made the situation even worse.
One fund that seems to be attracting attention is the RAB Fund out of London England which is considered one of the cities most prominent hedge fund. The suggestion is being made that RAB Capital, which has a book of 400 junior mining explorers, many of which are listed in Canada (and with each additional redemption of shares that means some of those stocks have to be sold into an already weak market) and reports are suggesting that for the sake of survival, RAB may be having to make a proposal to make sure that the Fund is still around.
The suggestion is that if investors back a plan, it will see management fees cut to 1% from 2% a year and performance fees dropped to 15% from 20% and the trade off being that investors won’t be able to redeem their funds until October 2011.
As we had mentioned yesterday, some of the most prominent advocates of the commodity bull market have been clobbered in the last two months, but that doesn’t mean that in the long run, they are wrong.
If you want to listen in on the Don Coxe conference call, dial 1-800-408-3053 (pass code: 3270557) and if you would like a copy of his latest monthly Basic Points, which takes a look at what next for the commodity markets down the road, e-mail Debbie at debbie_lewis@canaccord.com.
Meanwhile, also trying to soothe concerns of worried investors is Eric Sprott and his team who took calls yesterday from anxious investors that have seen the Sprott Fund decimated like other resource sectors in the last while.
When you listen to Eric Sprott, he’s one who has a decidedly not that bullish view of the world, always thinking that the American financial system was a mess and not necessarily looking for booming economies...but on the other hand, very much betting on Asia and the commodity boom to reassert itself at some point….as well as gold to once again regain its lustre and oil prices to regain its peak oil theme.
To hear the Eric Sprott interview from yesterday, dial 1-888-789-0150. If you don’t have time, some of his points: First of all, isn’t it ironic that silver has dropped so significantly in the last few weeks Sprott says, as well as gold, but you can’t obtain silver or gold coins from the American mint because they supposedly have run out supply.
Meanwhile, Sprott suggests that there are plenty of coin dealers that can supply all the coins individuals want, albeit at much higher than current prices. Sprott maintains that if the U.S. continues to print money the way they have (and they certainly are printing a lot with all the rescues of financial institutions) ultimately, precious metals will have to respond to the inflationary printing of money.
The Sprott Fund so far has not faced net redemptions, Sprott reports, probably because if you own shares in this fund, you share in a certain belief or a picture of what happens next in the world. The funds also have lots of cash between 14% and 20%, which is probably good considering what’s going on in the world. Sprott is not too hopeful about other financial entities and what happens to them next such as Lehman Brothers, Washington Mutual, AIG and a few others.
What happens after the American election? Oil prices go up he suggests. He remains a big advocate of peak oil theory that sees some of the areas of the world continue to drop production, such as Mexico and the North Sea. He admits that while high prices have cut into a bit of demand, supply is continuing to be the major problem.
Meanwhile, if you are a believer in commodities, you are a believer that it’s Asian demand that will continue to drive those problems and if economies in Europe and America are weakening, what will continue to keep China going?
Sprott points out that they are already starting to loosen some banking situations in China designed to slow down their economy and the point remains, will the Chinese who have been able to develop such a huge economy in under a decade, be able to continue to grow that economy based on its own domestic demand now that they have a middle class and tons of dough in the bank?
Sprott also makes a point that while three commodities have been brutalized in the last short order (silver, gold and oil) many others such as nickel, lead, zinc and others, have actually been bottoming and uranium is one commodity that was brutalized close to a year ago that he has huge hopes for, down the road as ever more governments and countries decide they need the uranium option.
To receive the Late Edition and be on our daily circulation simply e-mail Debbie at Debbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have you on the list tonight. |
