₪ David Pescod's Late Edition August 24, 2007
AN INTERVIEW WITH FRED KOZAK,
SENIOR OIL & GAS ANALYST, CANACCORD CAPITAL CORP.
Fred Kozak has made a career, a very successful one predicting what is next for Oilexco, first at Haywood Securities and we are glad to have him here at Canaccord now.
I guess you have to start off the discussion on Oilexco though, with oil and gas prices. We are seeing quite a correction in the market and metals markets, despite not very big changes in commodity prices you’ve got plunging Uranium stocks and you also have a tad of that in the oil sector. What do you see next for commodity prices in oil and gas?
F.K: Well, first of all let’s look at natural gas, natural gas being a North American commodity. You’ve seen the prices move around through the year. You get hurricanes moving into the gulf, gas is up; but if they don’t materialize gas is off. We’ve said to you before Dave, the natural gas market is always a function of weather and that’s whether or not there's enough or too much gas in storage. Gas storage right now is high, much like last year - it’s generated weakness and of course the market doesn’t like it particularly for the junior gas weighted stocks.
On the oil side, hurricanes moving in to the Gulf of Mexico or was it the bigger than expected inventory draw and you see crude oil back up to $73. We’ve just come down from almost returning to the all time high on crude oil and if you remember why crude oil spiked last year, it was because of world events. This year it was not related to geopolitical events, it was apparently for no particular reason.
It really says a couple of things, tightness in the system for one, supply for crude oil and demand concerns, whether it would be consumption of fuel by China, India whatever. The supply demand system just looks tight.
The one interesting thing that I’ve noticed over the past year or so is that, notwithstanding we have increased the year over year price of crude oil, if you were to look at it on a currency equivalency basis, whether it would be on the Canadian dollar, Euro or other major world currencies, crude oil is nearly flat.
The US price is up but the US dollar is down against most of those currencies, so in actual fact, the purchasing power of countries for instance out of the Middle East is about the same. Without having run specific numbers, I note that producers’ purchasing power is about the same as 12-18 months ago. Sheiks from the Middle East do not spend their money in the US for the most part, they probably spend their money in Europe and other places like that.
Their purchasing power is relatively unchanged, so it’s another reason to look at the increase in the price of crude oil.
D.P: Okay, if you had to make a bet, your prediction for oil prices this Christmas and July next year?
F.K: My sense though is we will see $100 oil before we see $50 oil. The $100 oil spike would be as a result some geopolitical event that we cannot predict.
D.P: Right.
F.K: Absent a geopolitical event, I don't think a hurricane could cause a price spike to $100/bbl. Where is crude going to be in the longer term, maybe a year from now to 5 yrs from now?
We’ve said this before and you’ve commented before as well - the $20 oil is long gone, the $30 oil is definitely gone, the $40 oil is probably gone and the $50 oil is probably gone too. So it looks like we’re in a new sort of price regime that looks like $50/bbl plus. What that number is supposed to be is $60, is it $70 plus? Well the market says today it’s $70 in the next year. And oil prices will remain high if you can call $60 and $70 oil high.
D.P: Well that’s good to hear, having said that many of the oil stocks has definitely sold off in the last few weeks.
F.K: Yes, they certainly have. It brings to mind the infamous quote “sell in May and go away” and I think we’ve seen that in spades this year. A couple of things to note though, is events particularly out of the US. There has definitely been a flight to liquidity and margin calls have seen people forced to sell liquid oil and gas stocks. This has reduced interest and of course reduced the price on oil and gas names. That would be one speculation.
As far the juniors go though, with Canada being more of a gas and heavy oil type basin, there are a lot of gas-weighted companies that haven't met their numbers. Many companies are now over leveraged and there is general contempt for the sector that you see in the stock prices. There are some really ugly charts out there with share prices on a slide for the last 6 to 8 months.
Still, there are quality names to buy, but watch out for grabbing the falling knives!
D.P: Okay, now on to the success story of Oilexco, you’ve been covering this and covering it well since roughly $3.00 a share and it’s a four bagger for you now and production has finally started and it’s a real oil and gas company now.
F.K: It really is. My original investment thesis in Oilexco was that you’ve got some really innovative guys doing things in the UK/North Sea that have not been done this way before and see how they do. Well what will this be now 2 years later they’ve done it and they are generating cash flow on the order of depending on what the oil price is today, somewhere between the million and half and $2 million per day of cash flow.
It’s a pretty remarkable success story. What makes it even more remarkable is that in the intervening 2 year period they’ve gone from just one discovery expected to come on at 30,000 barrels a day, to 2 new discovery this year plus a 3rd field they’re going to tie in and if you look at the production potential, we see them growing to as much as 75,000 barrels a day by the end of 2009.
D.P: Okay, in the one side these assets in the North Sea are ones that can deplete quickly, but on the other hand we hear they have as many as 18 plays on their books?
F.K: The specific number doesn't really matter because they are the innovators in the UK North Sea. They now have 2 rigs under contract and when taking the first rig under contract 4 years ago it was absolutely unheard of and people thought they were ridiculously irresponsible. Turns out they were smarter by half, given the current market for rigs. They literally have a wealth of opportunities in front of them. If you look at the last report that we put out a couple of weeks ago with their drilling schedule just for this year, they’ve got a discovery on Huntington that was announced earlier this year, they’ve got a discovery at Shelley which is where they were drilling with the Ocean Guardian when they had that little fire last week and right now they’re drilling on a prospect called Constance - that’s on the same block as the Sheryl discovery.
Then they are moving back to Huntington and drilling the block adjacent to the 2007 discovery in which they have a higher working interest. And lastly they also have another exploration well to drill at Moss this year, so those are the exploration wells, count ‘em up. If you look at their website, it has a great presentation of all of their opportunities both development and exploration for people who want to look for themselves. They have a ton of things on the go, so much so that others have slipped off the radar screen.
Blackhorse for instance - I haven't even mentioned it in my drilling schedule because of the potential of Shelley and Huntington have pushed that back. Also, they are going back to Kildare this year to do another delineation well on that discovery. Lots of opportunity here.
D.P: When you talk about exploration in the North Sea and you’ve mentioned several other exploration plays, a rule of thumb of one in ten is still something one should use?
F.K: I'm more of a play specific sort of guy. For example we talked about what my Laurel Valley perspective was. I didn’t even think it was one in ten, of course I can say that in hind site, but I did say that with foresite because I had a quick look at it and said, it begged to be drilled, absolutely begged to be drilled, but I personally didn’t think it was going to be there. When you look at other opportunities for instance, drilling on Shelley, where you have evidence of previous hydrocarbon shows, those are maybe 1 in 2, but no worse than 1 in 4.
It’s really play specific so you cant just go through and say 1 in 10, its specific to each of the exploration opportunities.
D.P: Okay, now when you say you can see them getting their 75,000 barrels a day in 2 years, which plays are you counting on?
F.K: We’re counting on only the discoveries that they have made to date, as we talked about before. If you look at my note on June 12th where I did a Flash Update, you have Brenda/Nicol starting to decline in Q108, you add Ptarmigan in Q2/08 and start bringing Shelly on stream in Q308, I’ve factored in Blackhorse and Kildare in Q109 and Huntington starting production in Q309, ramping up in Q409.
Those are all the known discoveries that they have so far and that’s at 75,000 a day roughly factoring in a 25 to 35% decline in the Brenda/Nicol fields. My Brenda/Nicol forecast is for flat production for 3 quarters and then starting to decline that production being modulated by having 5 wells in the field and very low draw down.
D.P: On the other hand, you are suggesting that there's a chance it could be significantly more than 75,000.
F.K: Not in the short term, the only thing that will drive that would be Huntington at this point in time and Huntington they have 40% of one block and 73% in the other adjacent block they haven’t drilled yet. They have prospects on that block that look similar on seismic to their Huntington discovery, so there is potential upside there. But if it is as successful as their original Huntington Block, then you would have to sit back and revisit the potential for developing 1 or 2 projects at Huntington. For instance, its easy to do a 30 or 60,000 barrel a day stand alone project with a couple of FPSOs, but with bigger results then you have to start thinking about larger production facilities etc, This potentially takes more time to develop, but it means that a little bit later than forecast you have a much higher production potential.
D.P: Okay, now just the one question. Some fans of Oilexco ask, when does Oilexco get a multiple that others in oil and gas business usually achieve?
F.K: They certainly deserve it! We had talked about a couple things - that was getting the London Stock Exchange listing being a catalyst for additional buying because there were European/UK funds couldn’t buy an “AIM” listed stock. Having a production on stream, that’s now another potential catalyst, but I think that despite the lack of interest in the oil and gas sector, Oilexco’s share price has held up relatively well. In fact they’ve seen some stock price appreciation through the summer, with the exception of the last month or so when the whole market has been of sliding. So all in all, they’re probably benefiting from those two catalysts as opposed to having the stuffing kicked out of their stock price.
D.P: As the final question, your target a year down the road is still $19.00 which would be a fair return kind of market?
F.K: That’s my current target price, based on as I said only production from the discoveries that we know. Anything else, anything new, any other opportunities that they might have in the UK/North Sea that are additive to their production base obviously are additives a well.
D.P: And it remains your number one pick?
F.K: Yes indeed.
D.P: Thank you very much Mr. Kozak!
For those who would like a copy of Fred’s update of second quarter results dated August 13th or his update report published after the interview on August 15 (where target price was increased) please give Jenn an email at Jennifer_Lagdamen@Canaccord.com |
