₪ David Pescod's Late Edition September 29, 2008
S&P 500 INDEX 1123.94 -89.33
S&P/TSX COMPOSITE INDEX 11402.53 -723.47
CRUDE OIL $95.88 -11.01
Back on September 2nd, we mentioned how September is usually one of the worst months of year for the Canadian markets...boy, if we had only known! As we go into the close of the month, this is going to be one of the worst September’s ever in the history of the TSX, but on the other hand, when you pick up the financial press, there are already people ... hopefully ... pointing out that for the resource-rich Toronto market the time from October to April/May tends to be a very generous time of the year ... usually. Oh yes, one little tidbit — if there is a crash in the markets, it always tends to be in October. But it looks like we’ve already had that so while we won’t dismiss it, we suggest there is less chance of that than before.
On the other hand when you look at what could possibly be getting the commodity-rich Toronto market going given what all you’ve seen in the markets today, oil is down $11.00, copper is stumbling beneath the psychologically significant $3.00 level, and natural gas is now trading at almost half of where it was back in July and with concerns of the international economy slowing, what could possibly ever make commodity prices stabilize, let alone recover? And on a day like this where you note some of the biggest banks in Europe (Bradford and Bingley) are nationalized in Britain and Fortis is bailed out in Belgium and in the United States, Wachovia shows that yet another enormous American bank is rescued. All this is not good.
For those looking for what could possibly turn things around, there are a few points that right now seem to be fading, but are still there. First of all, the bailout in the U.S. should be re-jigged and eventually passed, will suddenly give financial markets that have zero liquidity (make that absolutely no liquidity and panic abounds) some sort of liquidity that’s certainly better than what we have today.
Secondly, is the view of governments around the world is suddenly changing dramatically. Up until a few weeks ago, the sub-prime crisis was a “Made in the United States” problem that everyone would assume the Americans should take care of. Not anymore, as economies around the world are suddenly being affected as well as their banking and credit systems. All of a sudden you see governments in Britain, Europe, Japan, Australia and Southeast Asia whose big concern has been inflation a few weeks ago, suddenly going economic stimulus.
We are probably on the verge of governments around the world dramatically lowering interest rates which would spur house purchases and big ticket items as well as governments actively spending money on projects to provide employment. At least that’s the bullish case.
SEA DRAGON ENERGY (V-SDX) $0.245 n/c
BANKERS PETROLEUM (V-BNK) $2.99 -0.50
The last thing a person should probably be looking at right about now with so many decent oil and gas stories at half price, is yet another lottery ticket, but there are some people involved in Sea Dragon that probably make it worth your while paying attention. Plus, it’s been trading some big volume.
The name Said Arrata is known immediately by anyone who has been in the oil and gas business for the last decade as he was the former Chairman/CEO of one of the success stories of the past decade—Centurion Energy. They successfully came up with enough in Tunisia and Egypt to see themselves sold for just shy of $20.00 a share and put more than a few smiles on some speculators faces. There was a bump or two along the way, but the story ended the way it should ... with happy investors.
Said Arrata is the Chairman and doing the hard work is David Thompson who is the President and CEO with Sea Dragon, another story out of Egypt except this folks, is wildcat. The difference suggests Dave Thompson is rather than the traditional wildcat odds of one in 10 or one in 14, he somehow believes that Sea Dragon’s odds are about one in three because of all the seismic work that has been done offshore Egypt in the Gulf of Suez. This is an area of the world that has been rather fruitful for search over the last while and Thompson is hoping what has been discovered at the Warda oil field, may be found right next door in Sea Dragon’s Dahab NE, Dahab North and Dahab South. And the prize they are looking for is big. Like half a billion barrels big, but that’s the most opportunistic expectation and let’s be realistic folks ... there haven’t been many lottery tickets cashed in the last few years of high risk/high reward plays.
Sea Dragon completed a financing at $0.60 not too long ago to help put a total of $35 million in the till so they can drill three high risk/high reward plays in the Gulf of Suez on the Dahab targets and prove that something really, really big is there...or not. Spud date is sometime in the last quarter of this year and needless to say, they are doing their best target first. So the question is, how lucky to you feel pilgrim?
One thing about the ugly markets of the recent time is that the stock itself, like many others, is trading at a two-for-one sale price.
Key in this package of course is the team because in Egypt (like other areas of the world) the group of people you have involved is important to getting anything accomplished.
Along with Said Arrata whose Centurion Energy hit 40,000 barrels a day, David Thompson has experience at Larmag Energy Trading and rounding out the team is Ahmed Moaaz, the country manager and director for the company with 30 years experience in the Egyptian oil and gas industry and on the board of something like 27 different ventures in the country.
Meanwhile, the brokers are getting a little more hopeful though as Jeff Rubin at CIBC still maintains that oil and the TSX Index will bounce back after the bailout goes through in the United States; RBC Capital Markets suggests that “following the recent market volatility, many equities in our coverage universe are trading at attractive levels” and meanwhile, Goldman Sachs looks at market troughs going back since 1950 and suggests the S&P 500 Index will bottom or trough at 1070 sometime in the coming quarter and then they point out that rebounds from those troughs tend to be sharp—averaging 15% in the following three months. Don Coxe reiterates on Friday “overweight commodities.”
Between the respect that Said is accorded in the country, the connections of Ahmed Moaaz and the basic skills of David Thompson, you’ve got an interesting team put together. Now the question is, do they actually hit on one of their three targets and is it as big as they think it could be?
To us, one of the interesting parts to this story is the people behind it, not the least of which is David Thompson whose experience in the oil business seems to be around the world. After all, it was back in the 1990’s when Russia was breaking up that he was there with Larmag doing some of the first joint ventures in the bust-up of Russia into countries such as Kazakhstan, Turkmenistan and the likes. That was his area of expertise in the 1990’s. He tells us “when oil was $14.00 a barrel and it cost $8.00 a barrel just to get the oil out of the country, margins were thin.”
So what does he think, seeing as he’s got an economics degree about what next for oil and gas. In the short term he tells us he can see oil dipping to as low as $90, but his economics degree tells him that demand is such, that by this Christmas it will be back to $100 a barrel and Christmas the year after $150. That $100 a barrel might be a sweet spot for oil and gas companies should he be correct. As you shouldn’t be in the oil and gas business if you can’t make a lot of money at that price. And yet at $100 oil, it doesn’t exactly kill demand for the commodity.
Meanwhile, Thompson himself exemplifies the international nature of some of the oil and gas patch these days having worked in the old Russian Republic, now living in Bermuda, moving to Calgary for a TSX listed stock that will be drilling in Egypt. It’s interesting the history lesson he gives us about some of the excesses we’ve gone through over the last few years that maybe we ignore in the oil patch. He tells us that at its peak, the AIM Exchange in London had more than 190 oil and gas stories, many of which never saw the price they were issued at by the brokers and some of which were one hole wonders basically financed to see if one hole had the goods, or didn’t. The ultimate of too many lottery tickets.
Oh, well, if he is right about where oil prices will be down the road, we will have some joy yet in the field, and we asked him to do a nice favour for us and picks some stocks to watch. In the seniors, he’s a big admirer of Apache and its management team, but in the junior sector he is a big admirer of Bankers Petroleum and the former Rally team currently working on the Patos Marinza Project in Albania. He says “they are a smart bunch of cookies with a lot of good ideas that have delivered in the past.”
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