₪ David Pescod's Late Edition 10/14-10/17/08
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David Pescod's Late Edition October 14, 2008
CHESAPEAKE ENERGY (NY:CHK) $21.50 +1.30
CONNACHER OIL & GAS (T-CLL) $1.99 +0.09
Most people that are in the markets are quite aware of
the benefits and also the absolute disasters that buying
stocks on margin can cause. In a good and booming
market like we had several months ago, to buy on margin
gave you that extra little leverage and a chance to make
more on your money than before and then paying a small
interest cost.
But in the market crash of the last while, we’ve been
reminded how badly this can work against you. In a market
that falls as much as all of the markets have lately
and included every phase from finance to oil and gas to
mining to you-name-it, leverage works going up and for
the worst, going down.
Two items of note here in that you would usually expect
leaders of industry to somehow avoid being stuck in
this mess, but apparently not. Chesapeake Energy is the
biggest natural gas producer in the United States and
just a while ago had as many as 140 rigs drilling for this
one company alone. Again, that’s 140 rigs drilling for
this one company alone. They were a huge player in the
natural gas business.
Then natural gas prices weakened and that market
crash came along and the chart shows you exactly how
badly Chesapeake’s stock was clobbered.
Over the last few days we’ve heard about a lot of corporate
executives getting margin calls and Chesapeake
Energy co-founder and chief executive office Aubrey
McClendon said he had to unload most of his 5.8% stake
in the company due to a margin call….5.8% of the company
on a margin call? Ah, yes, one gets the impression
that one was a little over-leveraged, don’t you think?
Meanwhile, the same thing has happened with Connacher
Oil and Gas with chief executive officer Dick Gusella
who had to announce that he sold a significant percentage
of his common share holdings since October 6th in
order to meet margin loan calls.
These are not the only ones as the Wall Street Journal
has a long list of margin calls to senior executives for
Tesoro Corp., XTO Energy, Apartment Investment and on
and on.
As we all know, it’s been ugly out there.
DELPHI ENERGY (T-DEE) $0.95 +0.10
STERLING RESOURCES (T-SLG) $0.72 +0.02
At least for a while in the morning today it looked like
happy times might be back as senior bankers and governments
around the world pushed money in the trillions to the
banking system trying to fix all problems. And the numbers
are huge as we are getting close to $2 trillion in total assistance
at this point in various forms.
Whether it’s going to work, well some people think it just
might—the question is, time. Seeing as we deal mainly in
resource stocks, the question is, what some of those commodity
prices will do because in times of recession, commodities
tend (one way) and that’s not positive.
On the day there were a lot of suggestions by analysts of
what to do and it is interesting to see Goldman Sachs, which
had previously this year had suggested oil was going to
$200, now suggests it could be a third of that. At the same
time, you still have the bulls for down the road and Jeff
Rubin saying $150 for oil the second half of next year. Merrill
Lynch is suggesting that we could be on the way to see
$1500 for gold during three phases. First being the credit
crisis, second being the falling of the U.S. dollar later on and
thirdly, when the economies get back going again and oil
heads to $150 a barrel.
Not all the analysts are that rosy though as Scotia Bank
lays out scenarios for the TSX being either as low as 8000 or
as high as 11,500 for the end of next year.
Perma-bull in the oil and gas sector, Josef Schachter has
now bet us that we will see $120 oil sometime this winter and
he points to the positive yield curve in the financial centers
today, huge cash balances on the sidelines, and bankers
around the world acting to fix problems. He suggests when
we see the energy demand in November and December from
cold weather, we will feel better about the oil and gas patch.
Mind you there is one thing he says we all have to continue
to watch before we realize that things are getting better
and that’s the Libor rate, which is the rate that banks charge
each other banks. Currently above 4%, he suggests we have
to get under 2% before we have signs that the international
banking system is banking like they traditionally do. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 15, 2008
GALLEON ENERGY (T-GO.A) $5.97 -0.53
TRISTAR OIL & GAS (T-TOG) $8.53 -1.62
With the drop in oil and gas prices and the near collapse
in stock prices of many oil and gas companies
these days, one wonders if we aren’t near an era of mergers
and acquisitions according to Canaccord’s Terry Peters.
Peters points out that the big guys in the oil and gas
patch; Internationally—Exxon, Shell, BP, Total and
Chevon have approximately $65 billion in cash and even
at today’s oil price, that number is building.
With many of the big players facing small growth or in
some cases actual drop in production numbers, Peters
points to an article recently in Petroleum Intelligent
Weekly which speculates on which companies might be
subject to overtures made by the biggies with the money
in the bank and has sited five Canadian companies; Suncor,
Encana, Canadian Natural Resources, Talisman and
Nexen as possible candidates.
Peters isn’t the only analyst looking at the same idea
as Scotia Capital analyst Peter Doig also is suggesting
there is potential consolidation activity in the oil and gas
sector. He has highlighted Galleon Energy and TriStar Oil
and Gas according to the National Post as both long-term
picks and also M&A targets noting that they fit the bill for
larger producers looking to acquire assets.
Galleon has close to a million acres in the high-profile
Montney area of northeastern BC while TriStar Oil and
Gas is one of the bigger players in real estate holdings in
the Bakken play area of Saskatchewan.
According to the Financial Post article, Doig ran the
two companies through three oil and gas price scenarios
which produced valuations in the range of 15 to mid-20’s
for Tri-Star and around 11 to the high teens for Galleon.
When one has been beaten up in the financial markets as everyone has over the last few months, one finds oneself
doing a little postmortem…while so many analysts and market prognosticators were dwelling on the booming world
economy and the potential for commodities, there were a few writers out there talking about that little problem of the
sub-prime mess in the United States. Now of course, it has affected markets from Iceland to Brazil and all have been
annihilated to levels not seen in decades, but again, time to look for some of those that might have actually foreseen it
and written about it.
One of them is Avner Mandelman, who writes a semi-regular column for The Globe and Mail and for much of the last
six or eight months, he’s been writing about the bear market we were going into and about the housing bubble in the
United States and the concerns it could cause. Now that we’ve taken the shellacking, his latest article is of interest as
he now talks about “The world economy is comatose. What it will take to rouse it.”
This past weekend he wrote, “…the economy stays stalled and the market keeps falling. Have all these powerful
tools become ineffective? Don’t bet on it.
Deep rate cuts take six to nine months to perk up economic
activity, and the market usually anticipates the economy
by about the same length of time. So we should be
seeing an upward impact on the market quite soon – if we
only got a good catalyst to kick-start it.”
Later he concludes, “…The White House announced it’s
considering taking a direct stake in some banks – yes, a la
1907’s J. Pierpoint Morgan. Will this do the trick? Likely
yes. Long term there’s still pain to go through. But once
this last federal guarantee is in place in anything but name,
the comatose body of the financial system can start working,
the economy should revive near the middle of next year,
and the market will sniff it fast.”
Some of Mandelman’s views are echoed in some Barron’s
article this past weekend that put it this way: “The
lesson in history is this, the average U.S. recession since
the late 1940’s has lasted ten months and stocks typically
hit their low point about three months before the recession
ends.” So if the U.S. entered a recession on July 1st as
many economists now suggest and the recession was to
last until April, 2009, a typical bottom for stocks would occur
sometime in the next few months.
Our course these days it’s a much trickier world than
over the last decades and this smells like it could be a
tougher recession if the changes aren’t made. For a review
of some of Mandelman’s articles, go to www. Globeadvisor.
com and in search, type Avner Mandelman and hit news.
GRAN TIERRA ENERGY (T-GTE) $2.45 -0.42
As we talk with the “unnamed” oil and gas analyst, he
suggests that in this market, you should be looking at
companies with strong balance sheets and cash flow
because any company in this environment that needs
money is probably not going to get in on favorable terms.
Strong management and low costs are also factors that
he suggests you should be looking at.
So when we ask him if he could only buy one oil and
gas stock in this environment, what would it be? Gran
Tierra Energy is his pick because he suggests that Colombia
has great fiscal terms and is still a great place to explore.
That’s the good news.
The bad news is look at the chart and it shows you
that Gran Tierra has suffered just like everyone else. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 16, 2008
PAN ORIENT ENERGY (V-POE) $3.64 -0.11
GRAN TIERRA ENERGY (T-GTE) $2.78 +0.33
ANTRIM ENERGY (T-AEN) $0.57 -0.06
STERLING RESOURCES (V-SLG) $0.63 -0.03
TALISMAN ENERGY (T-TLM) $10.42 -0.43
As we search for someone who just might have a handle
(or at least a thought, or better yet, a crystal ball) on what
might next happen in the markets, we end up visiting with
Jeff Chisholm, the veteran oil and gas guy with Pan Orient
Energy who just happens to be a gold bug. We must have
caught him in one of those contemplative moments too,
because he had a definite idea of where the world has been
and where he thinks it’s going and while he worries about
the general economy and what for the world, you will be
glad to know that he assumes that commodity prices will
rebound over the next year as inflation rears its head.
First of all, he is in the oil business, so what next for oil?
He suggests that we will probably put in a bottom here
sometime in the next seven to ten days and he suggests
that the numbers just out show that the Chinese imported
10% more oil in September than they did the same time last
year. He suggests that points out that we are not quite at
the end of the world as we know it.
He also expects OPEC to do something in the next couple
of weeks to help defend $70 to $80 oil. He also suggests
that over the next quarter when you see new reserve
reports, they are not going to be what some people suspect,
showing that the world’s reserves just aren’t that high
and he also points to the dwindling productive capacity of
some of the world’s bigger oil fields such as Ghawar in
Saudi Arabia and Cantarell in Mexico.
“We are at or near the bottom” he suggests and if it
holds, he would expect to see/hope to see $85.00 by this
Christmas and higher next Christmas.
But a lot of this has to do with his view of what the politicians
have to do to get things going economically. He
suggests folks in Washington, London and elsewhere had
a choice of either deflation, which could be disastrous or
inflation. So they are pumping money to revive economies
and that’s why he wouldn’t be surprised to see most oil
and gas stocks 50% higher a year from today.
He also admits to being a gold bug and that’s why he
believes with inflation continuing he would expect gold to
once again, test $1000 an ounce on its way to $1200, although
he admits to being a little leery of gold stocks and
more prone to be the actual owner of the bars.
He cautions that while he expects commodities to go
higher in this inflationary environment, they will move, but
not like the run they had last year. “We won’t see the easy
money that was made last year, but it will be there.”
The inflation he expects to start showing up in figures in
the next three to four months, but again he reiterates that
governments were stuck between a rock and a hard
place...high unemployment and the disastrous economy or
a less disastrous economy and inflation.
As far as what stocks to be playing in the oil and gas
sector if he is correct about oil stocks bouncing back over
the next 12 months, he suggests the most important thing
is going to be cash flow as we are in an environment where
the ability to raise money is rather tough.
Ironically, one of his previous picks of Oilexco has found
itself exactly in that predicament as its banker, the Royal
Bank of Scotland has had to be rescued and Chisholm suggests
that Oilexco should be finance-able, but if not and if
they have to do an equity issue, the dilution would be extreme.
He does point to some of the other junior players in the
North Sea though, such as Antrim Energy and Sterling Resources
and suggests that these are some companies that
will become targets for either cash or paper take-overs as
mergers and acquisitions starts picking up, particularly for
smaller companies that just might have financial problems
down the road.
As far as the larger companies that are sitting on piles of
cash, he suggests that it has now hit the point where it’s
cheaper to buy companies than to drill for. And as far as
companies he sees might become obvious take-overs—
Talisman Energy (TLM) is one that would be his top pick for
that idea.
As far as other stocks he would be following once again,
he emphasizes cash flow and good projects and mentions
Niko Resources (NKO), Gran Tierra Energy (GTE), and Petro
Andina Resources (PAR).
Meanwhile, as far as his own company Pan Orient, he
points out that they are sitting on dramatically rising production
with an NPV of $5.40, $1.00 cash and yet they are
trading currently at $ ???.
Editors Note: Mr. Chisholm of course, is entering the great
debate about what next for the markets as we are facing on
one side—deflation...with the huge de-leveraging of American
financial assets which is causing the crash versus the
printing of currencies, loans to banks and the likes that is
inflationary. Who would have ever thought that inflation
might be on the good side? If Chisholm is right and there
are others that believe this is going to happen, things could
be better once we get out of the worst month of the
year...October. Today OPEC announces they are moving
their meeting ahead to next week which helps oil a bit today
and of course Chisholm is giving a bullish stance for oil. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 17, 2008
He’s become the world’s richest man by doing something
that sounds so easy...buying low and selling high.
But as the world experiences one of its biggest panics
ever, we realize it’s so easy in theory and so tough in fact.
It would be hard not to be one of the many people who
have been cashing in their mutual funds and heading for
the hills, stuffing any hard-earned cash underneath the
mattress at a time like this—thanks to those buffoons on
Wall Street that created this credit crisis, but that is the
mess we are in.
At a time like this, you would expect Warren Buffett to
be walking in while everyone else is panicking and that
apparently is what he is doing.
Today he writes a little Op-Ed piece in the New York
Times and we thought you would want to read the first
four paragraphs: “THE financial world is a mess, both in
the United States and abroad. Its problems, moreover,
have been leaking into the general economy, and the leaks
are now turning into a gusher. In the near term, unemployment
will rise, business activity will falter and headlines
will continue to be scary.
So ... I’ve been buying American stocks. This is my personal
account I’m talking about, in which I previously
owned nothing but United States government bonds. (This
description leaves aside my Berkshire Hathaway holdings,
which are all committed to philanthropy.) If prices keep
looking attractive, my non-Berkshire net worth will soon
be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others
are greedy, and be greedy when others are fearful. And
most certainly, fear is now widespread, gripping even seasoned
investors. To be sure, investors are right to be wary
of highly leveraged entities or businesses in weak competitive
positions. But fears regarding the long-term prosperity
of the nation’s many sound companies make no
sense. These businesses will indeed suffer earnings hiccups,
as they always have. But most major companies will
be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the shortterm
movements of the stock market. I haven’t the faintest
idea as to whether stocks will be higher or lower a month
— or a year — from now. What is likely, however, is that
the market will move higher, perhaps substantially so, well
before either sentiment or the economy turns up. So if you
wait for the robins, spring will be over.”
BANKERS PETROLEUM (T-BNK) $1.26 +0.03
VERO ENERGY (T-VRO) $5.89 +0.42
SUNCOR ENERGY (T-SU) $26.20 +2.00
Thank goodness for Warren Buffett’s message earlier today
as the markets opened ugly and then Buffett’s comments
seemed to get circulated to everyone in the financial
business and gave the market a bit of a boost. With an
OPEC meeting being scheduled for next week, there was
also hope in the oil patch that if OPEC does anything right,
maybe we might be looking at a bottom in oil at around the
$70 level. Of course on the other hand, if OPEC doesn’t do
something rational…
Today we have what looks like a tradable rally in oil
stocks and if oil does hold at $70 there are many oil stocks
that have been grossly oversold.
Our own scenario after a shellacking the likes of which no
one could have ever dreamed of (or had a nightmare of) is to
expect that the next year is going to have some big bumps,
but a year from today, oil will be $90 a barrel. If oil is $90 a
barrel at that time, there are many oil and gas stocks that
have dropped, 70% or 80% and all they have to do is double
from these levels to get us a good return by next Christmas.
In the meantime there’s been a huge change in the oil and
gas environment. Three months ago with oil at $100 a barrel
and anything possible, a big high risk/high reward play had
the market’s attention and real estate plays and growth stories
had front page. Not today. Not with the credit crisis. All
of a sudden if you don’t have access to money, what are you
going to accomplish? If you have cash flow and something
to build on, then you are in the drivers seat because getting
financings done at this point are next to impossible and if
they are accomplished, it seems to be at extortionary rates.
We thought we would do a couple of charts at this time of
different size companies to show how beaten up they’ve
been over the last while and we have to admit that many of
these are currently some of our favorites, but the charts
show that some of them only have to go back to half of
where they previously were over the next year, to give you a
decent rate of return...assuming of course, the world doesn’t
fall apart in the meantime.
Our bullish case of course is predicated on a few things
happening...such as in the next few weeks, the money from
Washington working its way through the banking system and
easing the credit crisis and actions by governments around
the world helping to revive the economy.
Indecision by OPEC next week, failure by Washington to
get the money moving and lack of international cooperation,
means oil is going to $60.00...at least in the short-term. |
