₪ David Pescod's Late Edition November 20, 2007
STERLING RESOURCES (V-SLG) $2.69 +0.14
FREDDIE MAC (US:FRE) $28.00 -9.50
GOLD $803.70 +25.70
CRUDE OIL $98.03 +3.39
This is the time of year you are usually having a lot of fun in the resource sector and with gold flirting with all-time highs of $800 dollars and oil heading ever higher and hitting as high as $95 dollars, we should be having the time of our lives in the resource sector. We’re not! So what’s going on? Some ask, well maybe the markets telling us that down the road commodity prices are going to be lower, others (and we’ll put our name in this group) suggest that we just can’t avoid what is going on in the bigger market and that’s the mess with the housing market in the United States that is causing trouble everywhere from European banks to America banks, brokers, financial institutions of all kinds, Canadian banks, and you name it. And the concern is, it could get worse.
When the refinancing of mortgages peaks probably around March of next year one just wonders how much worse will it be…or is the worst over. Its definitely over hanging the entire markets. Once again, we should be having fun...we aren’t.
Take for instance today’s activity with Sterling Resources. A long time favorite pick of Josef Schachter, on a recent interview he suggested what he thought is ahead for the company if they hit on Breagh. Well they hit and they hit huge.
While Schachter was hoping for somewhere between six and 10 million cubic feet a day of their discovery, it came in at an awesome 14 million cubic feet. Now this is in the North Sea and there is expensive platforms and facilities to be built, but you can tell with the reaction in today’s market that no one cared. One only wonders what would have happened if this had occurred six months ago.
Today Richard Wyman of Canaccord has written “The successful appraisal drilling of the Breagh prospect confirms the presence of a significant natural gas accumulation and reduced the risk for a commercial development.”
He continues, “As important as this drilling result is to Sterling, the prospect of a significant commercial development anchored at Breagh helps to reduce the risk for other prospects on the 11 block contiguous land position that is controlled by Sterling in the Southern North Sea…Sterling has interests ranging between 60% and 100% in the surrounding acreage”… and it’s a big chunk of acreage.
When we caught up with Josef Schachter late in the day for an update on Sterling Resources, needless to say he is pretty happy with that stock selection, but he says he is not going to stick out his neck and say anymore until he gets together with management within the week. His big concern now is exactly when they get drilling rigs to continue exploration and development work in the Breagh field.
As to our favorite question, what would you buy on a day like this? He says he can’t go with a natural gas with the gas stocks where they are, and if he could only buy one—well, he picks two!
Oilexco, which like many oil stocks despite the big move up in oil has actually retreated, would be the oil he would buy today as his new target is $25 (his target on Sterling remains $5.00) and Schachter reminds us that he also loves silver these days and would go with Coeur d'Alene Mines where he has a $7.00 target.
CGX ENERGY (V-OLY.U) $3.35 +0.02
PETROLIFERA PETROL. (T-PDP) $10.75 +0.15
ARGENTA OIL & GAS (V-AZA) $0.40 -0.02
We’ve followed the CGX Energy story closely over the last year and we have to admit that over the last while, it outperformed even our most bullish expectations. At one point, it was flirting with a market capitalization of $600 million for a company with no cash flow, and no plans to drill even until 2009. Mind you when they do start drilling their targets are of the size even majors dream of drilling.
In the meantime, now that the border dispute to the south has been solved, all of a sudden another event that has so far been getting zero coverage in the press, is starting to affect their northern border with oil-rich Venezuela. It looks like the Venezuelan military blew up a barge of supposed illegal miners on the border and told the good folks to get off of another one. This might bring more attention to a border that also is open to dispute—the one between Guyana and Venezuela.
Why should this matter? Well just offshore, in an area between Trinidad, Venezuela and Guyana, some of the world’s biggest natural gas discoveries have been made by companies such as Conoco-Philips/Chevron on their Deltona platform and StatOil/Total on the Block 4 concession. Both of these plays are now estimated to have 7 TCF of reserves. Yes, folks...7 TCF’s, as in mega, mega, mega big.
Of course it’s offshore Venezuela and you’ve noticed the names of the American companies involved, hence probably why everyone is trying to keep it low profile. What happens next there is open to debate.
Not open to debate is the fact that little CGX Energy owns a huge chunk of land in the surrounding area. But this does get us back to Kerry Sully, the former boss of Ranchmen’s Resources and the guy whose been shepherding CGX Energy for the last seven years and it’s a job that requires a lot of patience.
We go to him for his comments on a few stocks that have been clobbered in the last few days, because companies as diverse as Petrolifera Petroleum, Argenta Oil & Gas, Antrim Energy and many others with assets in Argentina have been affected as Argentina has imposed its own version of the Alberta Royalty Review. They are also in his backyard of South America.
And just like it has affected Alberta, the companies involved are going to see cash flow numbers less than expected. Already Petrolifera has seen its target lowered by Scotia from $19.50 to $16.50 and GMP lowered it from $19.00 from $15.00.
When we ask Sully for his comments on some of the players in Argentina he suggests that Petrolifera remains one of his favorite stories and suggests that you are getting all of the excitement next year in Bolivia for free and he figures its one of the biggest plays out there as well as Argenta which he simply says, “it’s got one of the best management teams you’ll find in any oil company anywhere.”
NATURAL GAS:
We’ve probably written enough if not too much about natural gas, but it’s that important in Western Canada. Seventy percent of the royalties that go to the Provincial Treasury go from gas. Conventional oil—15% and the highly touted oil sands, give a mere 15%. So it’s important both to the treasury into the companies that try and find it.
The definitive word has to go Jim Gray, the founder of Canadian Hunter and a very well respected oil and gas man and he was on BNN on Monday afternoon. Listen in to hear his thoughts on gas and he probably has the best periscope on the subject.
One fact remains though he says, and we certainly weren’t aware of it and that’s that “Canada has the highest cost environment for conventional natural gas in the whole world.” He attributes much of that to the boom that’s going on in Fort McMurray and making everything in Alberta, that expensive.
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