David Prescod's Late Edition August 29, 2005
NATURAL GAS $ 11.10 +1.308
CRUDE OIL $ 67.20 +1.07
TSX ENERGY SECTOR $304.91 +4.57
A category 1 storm that was considered to be a little more than a nuisance,
Katrina still hit Florida with more devastation than was expected, and then out of
the blue built up to a category 5 storm that over the weekend had attracted the
press like we haven’t seen in ages.
Sunday night we saw stories on Bloomberg predicting $30 billion in damage, a
28 foot surge that could wipe out much of New Orleans and CNN was quoting
one expert that gave a 50/50 chance that many citizens wouldn’t be back in their
homes for weeks.
Then of course it turned east a bit and the surge was a fraction of what was expected
and the futures that had predicted an absolutely disastrous day for the
Dow Jones on Monday, turned into a relief rally.
It’s not to dismiss the whole event, because it has sparked an enormous run in
natural gas prices and also new highs in oil. There are 4,000 platforms in the
Gulf of Mexico that produce almost 22% of the U.S.A.’s natural gas. Between
those platforms and the New Orleans's super-port, almost a third of all oil and
gas entering the United States goes through this area. Mind you, there have
been a lot of people scratching their heads at oil and gas prices which are $20 a
gallon higher then they were some time ago, while many oil and gas stocks are
priced weaker.
This takes us to Jeff Rubin, the CIBC Chief Economist. He is an economist like
few others—he has been known to make some pretty rash statements from time
to time. It was roughly 15 years ago that he suggested that with a recession then
coming, he expected the real estate prices in Toronto to drop by 25%.
You can imagine the commentary that created. Well he’s at it again, as last
week he predicted in a column in the Globe and Mail that we haven’t seen anything
yet in the energy sector. He comments on the current market, which has
seen the TSX Composite Energy weighting increase from 10% to 25%. “I believe
this is now a floor which the composite is likely to become much more energy
intensive over time.” He adds “These days, that’s a hard sell for most portfolio
managers, many of whom consider the energy sector a bubble in light of the
more than 70% increase in some stock values since last May. In reality, the exact
opposite is true. Despite the recent rise, oil and gas stocks on the TSX remain
significantly undervalued. Today’s valuations still reflect oil prices in the low $40
range and natural gas prices not much more than $5.00, compared to the actual
spot prices of $65 and $9.00. Based on the standard industry multiple of 5 1/2
times cash flow, oil and gas stocks are trading at a 15% - 20% discount on current
energy spot prices. At a standard multiple of 5 1/2 times cash flow, fair value
for the TSX Energy Sector at these prices would be in the neighborhood of 5500
points, or roughly double today’s levels”. Of course he is extremely bullish on
the sector and he is suggesting we will see oil pushing $100 a barrel and natural
gas higher as well. He predicts the TSX Energy sector currently around 3000, will
be 10,000 by the end of the decade or possibly sooner. Sounds outrageous,
but…..
Natural Gas
Crude Oil
TSX Energy Sector
TRANSGLOBE ENERGY (T-TGL) $ 7.55 +0.25
CENTURION ENERGY (T-CUX) $12.03 -0.09
It has definitely been difficult trying to make sense of some of the oil
and gas stocks over the last while. It seems like different sub-species
of oil and gas stocks have done well this year at different times. Earlier
this year it seemed to be the explorers with the big play, although
little cash flow to back them up, that had their day in the sun. Then
oil corrected a bit and we had First Calgary problems. Then it was the
big guys with the big cash flow—the Encana’s and Petro-Canada’s
that had their day in the sun. Lately, despite $65.00 oil, it seems to be
only the oil sands stocks that have created joy.
We ask Bill Powers, the money manager out of Chicago and former
editor of the Canadian Energy Viewpoint, why he thinks two such well
thought of stocks as Centurion and TransGlobe Energy have had such a
poor time recently? We ask Powers as he has often been quoted as
saying that TransGlobe Energy “is his best idea”.
As far as these two stocks in particular, he believes that maybe with
more people realizing that Centurion receives such a low price for
their gas in Egypt—$2.81 an mcf, it is concerning some investors. As
far as TransGlobe, he is concerned about that as well because of his
large holdings in that story. He suggests that for those people following
the TransGlobe story, now would be the time to actually be looking
at its Canadian assets.
While Yemen recently announced even more good results, he suggests
that TransGlobe has about 30 wells to drill in Canada through
the rest of the year and he wouldn’t be surprised to see the Canadian
assets go from 1000 to 2500 barrels a day by year end. That could
add a lot to their totals and he also points out an abnormality in their
trading patterns.
Take a look he suggests, and you’ll notice that the fall, seems to be
the time of year that TransGlobe always has its move. We certainly
noticed that TGL had a spectacular move from September to January,
2003 and last year, between October and February had every bit as
much joy.
Today we caught up with President of TransGlobe, Ross Clarkson
and he can’t explain this mysterious run in the stock in the winter
time and he says that Powers was right—that they do hope to get 30
wells done in Canada by year end. However, he suggests that getting
all the licenses done in time and finding the rigs to drill it, might create
a bit of a problem. As far as commodity prices, Clarkson is thinking
that we are about due for a correction in oil prices, but as far as
natural gas, he figures that looks solid.
TransGlobe Energy
www.trans-globe.com
Centurion Energy
www.centurionenergy.com
DEB’S DITTY:
The number of people watching you is proportional
to the stupidity of your action.
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