₪ David Pescod's Late Edition January 10, 2008
ACCRETE ENERGY (T-GZ) $4.63 +0.12
TRUE ENERGY TRUST (T-TUI.UN) $3.30 +0.02
BIRCHCLIFF ENERGY (T-BIR) $7.85 +0.09
We’ve done a lot of writing over the last while about the debacle in the natural gas business in Western Canada. The compounding problems of a Canadian dollar that has flown and suddenly made revenue 30% less for the same production, costs going through the roof for everything from rig rates to skilled labor, land costs also escalating and gas prices dropping dramatically over the last two years has not made for good times.
And the biggest problem of course is that most oil and gas companies in Western Canada are mainly gas. The vast majority of them are between 50% and 75% natural gas component and times have not been good.
We show the chart of Accrete Energy, run by Peter Salamon and his crew which many analysts consider one of the better run companies, but so what. When natural gas is going this much against you as well as industry fundamentals, things are that bad.
True Energy Trust was one of the more significant trusts, but like the others, has a big natural gas component. It’s been somewhere between ugly and brutal. If those factors weren’t big enough, this past year has been a real eye opener as to the significant impact of liquid natural gas (LNG) on the North American markets. And that’s a component that could become an even bigger negative down the road as big discoveries off Trinidad, other discoveries of an immense nature offshore Venezuela could simply compound the supply excess.
Which brings us to the biggest problem right now ... we have record inventories and so far no sign of winter. Are we looking at a crash in the natural gas business this coming spring? We are already seeing mergers in the business for survival, but a few things might be changing. With increase in royalties by the Provincial government which has made things even much worse, suddenly we are seeing land costs drop precipitously and drilling costs drop which may be good for the producers, but is certainly hurting the service companies.
How come Birchcliff Energy, a mainly natural gas company has been going up lately? Well, much of it has to do with Canadian billionaire and philanthropist Seymour Schulich.
When you look at the news releases on Birchcliff over the last few months, about the only changes in the company seems to be Schulich owning ever bigger interests in the company.
In October, the news of the day was Schulich owns 13% of Birchcliff shares and on November 8th, the announcement was the he increased his ownership to 16% of the company.
Lately the news has been that on December 11th, he increased his stake to 17%, on December 13th to 18% and the latest, January 7th, Schulich now owns 19.9% of the company. You get the impression he likes it!
There is a cute little article in the Globe and Mail Streetwise where Andrew Willis writes about Seymour Schulich and he notes that “not too many years ago, Seymour Schulich told my colleague Eric Reguly to do what he was doing, and buy Canadian Oil Sands Trusts. Units were around $5. Eric didn’t listen to one of Canada’s most successful investors. Canadian Oil Sands is now at $38….”
He writes, “Now I’m in the same position. Mr. Schulich, who has given away more money than most of us will make in 10 lifetimes, put out a short news release this week announcing he’d raised his stake in Birchcliff Energy. He now owns 19% of the junior.”
He then goes into why Schulich likes the story and writes, “Schulich respects the management team. Birchcliff CEO Jeff Tonken has had his ups and downs, but Schulich admires the fact that he founded Stampeder Exploration in 1987 and sold it a decade later for $1.3 billion. Second, Schulich sees an angle. Birchcliff is starting to drill natural gas wells on properties adjacent to fields owned by EnCana, Canada’s biggest player in natural gas…” Schulich thinks gas could easily go sideways for some time, but three years out, he sees natural gas fetching far more than it does today.
An intriguing line of the piece is, “Birchcliff closed Tuesday at $7.49 on the Toronto Stock Exchange. Mr. Schulich fearlessly predicts it can hit $50 over the next few years, as gas reserves are proven and commodity prices rebound…”
While there is always a chance, but what do the brokers think of Birchcliff? Here at Canaccord, analyst Wendy Liu has just upped her target to $8.00, but calls it a hold (and if you would like a look at the piece, e-mail Debbie at Debbie_lewis@canaccord.com). Raymond James has moved their target from $7.50 to $8.25 and GMP raised their target from $6.25 to $7.00.
Somebody certainly doesn’t go along with this story though. Look at what Genuity Capital has as their target?! Also look at research out by Haywood Securities today where the concern remains for natural gas in general and they write, “Q3 writedowns of $723 million was a warning size of more to come, but also concern regarding sustainability of growth—or the possibility of negative growth…”
They add, “We estimate that there are potentially 8 producers and trusts that could be booking a goodwill writedown totaling between $300 and $400 million in the fourth quarter.”
Companies at risk of large writedowns included Advantage, Daylight and Anderson.
It’s interesting as Alan Knowles writes, “By combining a high gas weighting and high book value per flowing boe we have estimated the risk of companies having to book an impairment (writedown) relative to their book assets on the balance sheet.
Companies that we estimate to have a high risk of a writedown include Ember, Birchcliff, Great Plains, Cinch, Alberta Clipper and Anderson.
Well, there you go folks! There are those that think that if you’ve got a three-year time frame, you should own Birchcliff, and others that say in the short-term… Oh well, that’s what makes markets!
OILEXCO INC. (T-OIL) $12.77 +0.03
We caught up with Canaccord oil and gas analyst Fred Kozak at quite an opportune time the other day to ask the question we traditionally ask this time of year ... if you could only buy one stock, what would it be? When we get a hold of Kozak, BNN happened to have technical analyst Bill Carrigan on the show, looking at different stocks and definitely of the mood that we are going into a recession.
Just when we are both watching the BNN show, Carrigan takes a look at his charts and suggests that at this time, he would not be buying Oilexco’s stock and in fact, wouldn’t be surprised to see it significantly lower.
This being a “family newsletter” we can’t say exactly what Kozak had to say about that, because the answer to the question if he could only buy one stock right now, what would it be? His answer is Oilexco.
His published report gives a target of $24.00 (anyone who would like a copy, e-mail Deb at Debbie_lewis@canaccord.com) and if given a second pick, it would be Petro Rubiales. With the changes in the Alberta Royalties and the natural gas sector in the pits, Kozak has to spend an awful lot of time on the road these days checking out different plays around the world to try and make a buck in the oil patch.
As to his crystal ball about where oil and gas prices will be a year from today, he figures $100 for oil and $8.00 for natural gas.
We add to our position in Oilexco.
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