₪ David Pescod's Late Edition 10/27-10/31/08
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David Pescod's Late Edition October 27, 2008
S&P/TSX COMPOSITVE INDEX 8537.70 -756.40
SUNCOR ENERGY (T-SU) $23.24 -2.96
TALISMAN ENERGY (T-TLM) $9.51 -1.58
HATHOR EXPLORATION (V-HAT) $1.30 +0.07
If you are looking for one bit of good news about the markets
right about now after virtually everyone’s portfolio has
been brutalized, it’s probably time to look at the calendar.
Much has been made of the month of October and how well
traditionally and on average it’s an okay month in the market.
But if there is going to be a crisis, a panic, a debacle, you just
know that this is the month it happens in, whether it’s 1987,
1929 or you-name-it...if it’s ugly, it’s in October.
We are almost out of this month and once we are out of it,
traditionally you are in the months that are a little more generous.
And after a pounding like this, one would hope that
there is a bit of a bounce, particularly when one witnesses the
amount of money governments are printing around the world
to rescue the various financial systems.
You don’t have deflation/depression when that much
money is being printed—now probably $3 trillion and growing
rapidly. But what you expect down the road might just be the
opposite…a little inflation.
Back to the question of why be optimistic? There are a
handful of people out there that did call for this credit crisis,
some of which are now getting more than a little attention.
Avner Mandelman is the President and Chief Investment Officer
of Giraffe Capital in Toronto and the author of The Sleuth
Investor and writes a column for the Globe and Mail as well.
He has been worrisome about the market for much of the last
six to 12 months and basically saying stay out of it and his
concern of course was the credit crisis.
This past weekend (all of a sudden) he is taking quite a
different view. He writes, “Newspapers and TV seem to carry
a daily talking head, warning us we are in 1929 all over again.
That is, we're facing a repeat of the Great Depression. Are
we? Not likely. Rather, an interesting historical comparison
between the 1920s-1930s and today puts us squarely in 1937.
And if the comparison is right, we are about to experience a
rising market quite soon.”
Mandelman ends his article, “I am fairly certain we're not
facing a 1929-32 type depression, as the recent huge moneyprinting
cushions the shock, but rather we'll see a garden
variety 1937-type recession, during which the market - which
looks nine months ahead - could rise strongly into 2009 in the
teeth of much incredulity.”
Another person that has predicted the current mess is
Krishnamurthy Narayanan who goes by Nandu and runs the
CI Global Opportunities Fund which was up 57% in the last
year and 19% over the past five.
In an article by Derek DeCloet, also in this weekend’s
Globe and Mail, he writes, “The Smartest Man We Know
has heard the slurs. When you make your living on Wall
Street, yet hold the opinion that Wall Street is populated
by incompetent fools, you're not going to win a lot of
friends at dinner parties, are you?
And when you bet millions that the American financial
system is going to fall apart, that its economy will be
seized with fear – and when you were doing this and saying
this before there was any hint of real trouble – well,
you couldn't really expect other people to welcome the
message, could you?”
But after predicting the current financial mess, Nandu
is now taking the a definitely different view of the world.
Now he is saying in the current article, “I like the whole
Canadian market. I don't particularly dig the banks because
I just don't know what's in there [on the balance
sheet]. But I'd say virtually everything else is fine.”
“You buy uranium stocks: “Ridiculously cheap.” Gold
miners: “Ridiculously cheap.” Pipelines, too: “How bad a
business is that? It's a fantastic business. You're just
shipping gas. Why are people selling those?” Energy:
“Unless there's an absolute collapse in oil demand, you
really can't see oil plunge all that much [more].”
If you need a little hand-holding and missed reading
those articles this past weekend, just e-mail Debbie at
debbie_lewis@canaccord.com and we can send you both
of the Globe and Mail articles.
Meanwhile, just four more days before we turn the calendar
month over!
OILEXCO INC. (T-OIL) $3.81 -0.47
You couldn’t turn on BNN without hearing people ask
about Oilexco over the last 12 months and it still remains
an intriguing story, but in the middle of the credit crisis,
who would have thought that Oilexco’s banker—the
Royal Bank of Scotland would be one of the banks that
had to be rescued and obviously cause more than a little
grief for Oilexco.
Between what happens next with their line of credit
and what has happened to oil prices, Oilexco has been
swacked like everything else. But the analysts are currently
coming up with a wide variety of targets now.
Scotia Bank cuts their target from $18.00 to $6.25 today.
Meanwhile, CIBC has cut their target from $23.00 to
$10.00; Bank of Montreal from $25.00 to $12.00; Genuity
Capital from $29.00 to $8.00; Tristone from $22.00 to
$13.00 and Canaccord from $28.50 to $16.00.
One of them might be right, but which one? _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 28, 2008
AN INTERVIEW WITH DOUG BARTOLE
PRESIDENT OF VERO ENERGY
(As of October 20, 2008)
We are here with someone who is very successfully running
a nice junior/intermediate oil and gas company, Doug
Bartole of Vero Energy and has certainly attracted the attention
of people such as Josef Schachter.
David Pescod: The market has been ugly and Doug, you
were talking about some people in the markets these days
that are really getting affected.
Doug Bartole: That’s right. As an industry I guess we are
up a little bit today, but last week I think most people were
trading at 30% or 40% of their highs in early spring. We’ve
been lucky that we’ve been hovering closer to 40% or 50%
of our highs, but as a whole, we’ve been hit pretty hard.
There are lots of questions going forward with not only the
credit and commodity, but just the overall ability to keep
programs going.
D.P: With your own crystal ball, what kind of assumptions
are you using for down the road for the next few years for
oil and gas prices?
D.B: We are currently working on our own budget and
we’re looking at somewhere between 7.00 and 7.50/mcf
price. As far as oil, we don’t have to worry about it as
much because we are 80% natural gas. I imagine we will
use a $75 or $80 barrel of oil. That’s probably the best way
to look at it to start.
D.P: What you can control, you guys have been very successful.
First of all though, you have two strokes against
you actually. Natural gas prices have been weaker than
people expected and you are in the Province of Alberta
where royalties have been raised and has hurt everyone.
Your comments please?
D.B: First of all, natural gas of course wasn’t expected to
do very well in 2008 with most analysts at the end of 2007
and early 2008 thinking it would be a poor gas year, but it’s
amazing how quickly that changed around come the middle
of February and through the end of June into early July.
Now it has come off in the same way. But, in September
of last year the average price of natural gas was just under
$5.00/mcf, and we are closer to $6.00 this year, so it
wasn’t as bad as it has been in the past. We’ve been
creeping up in the last two or three weeks – I believe it
actually closed somewhere around $7.25/mcf today.
As far as royalties go – that’s correct. I think Alberta is
not the place of choice right now and probably not for a
while as you go forward. At Vero we did get lucky being
our biggest area in Edson has been affected fairly minimally
by the royalties due to the measured depth or the
long, overall depth on the horizontal wells we are drilling.
As we move forward though, the royalty issue will become
even more and more obvious to all the powers that
be and the revenues that they expect to generate from it.
Actually the National Energy Board of Canada just put
out a new report in September which is basically a government
financed organization saying that to generate a
small rate of return of 15%, gas in Western Canada needs
to be around $7.88 per gigagoule, so well over $8.00 on a
mcf basis. Quite different from the numbers that their
royalty review committee put together, and when the industry
was trying to tell them about what they did, they
basically just shut their ears off and listened to what this
committee put together based on old data from 2005 and
prior. Only time will tell and with less cash flow for companies,
less access to credit right across the board, you
will see fewer people putting money back into the ground
and into spending. Even the oil sands and the big oil
which they seem to have put a little bit more emphasis
on to help out as they go forward with increases in government
take due to increased production may not work
out for them. Those companies will have less cash flow
and access to capital slowing down projects and pushing
out time frames.
D.P: As far as what you are accomplishing, you are up to
7300 barrels equivalent a day?
D.B: Just under. We just published our Q3 update at the
end of September and we are over 7200 barrels. Again,
one of our keys as we go forward (which I’ve been saying
for a long time) is our low cost structure. It doesn’t really
matter, in any business, what widget a company is making
and trying to sell ,companies with the lowest cost
structure, and we are in the top few companies amongst
our peers , will get through thick or thin. It’s actually
nice to have low cost structure and some solid production
because I think it’s going to be a cash flow only into
capital spending year and we will show growth. For us to
have solid cash flow in 2009 and not need to look for
credit or equity, is going to be a real benefit. We are going
to be able to show 25%-30% growth, and it’s going to
work out very well for us.
D.P: What kind of numbers are you hoping to achieve in the next year or two and I notice you’ve got close to 150,000
acres of land now. Is that enough to grow to your objectives?
D.B: We are in great shape. We actually have the best drilling program we’ve ever had as a company from the acquisitions
we’ve done in the last three months, coupled with some crown land sales where we purchased some land and
some nice farm-ins that we’ve done. We have what we believe to be a really solid three year drilling inventory and
currently working on that fourth year, so we are in the best shape we’ve been in since our inception three years ago.
D.P: Do you currently have an exit strategy?
D.B: We’ve never set a strategy as far as barrel a day numbers, as far as time frames, and I think that has really benefited
us through these first three years. I mean if you had any short-term strategies through that time frame, I think it
was pretty easy to get burnt. We’ve gone through three commodity-cycle swings in those three years. We’ve gone
through the Federal Governments changing the trust structure. We’ve gone through the Alberta Government fooling
around with the royalties and now we are going through this credit crisis and market collapse. So, in three years we
have seen it all, but we will continue to build a solid company. The quote I heard and I love to use is: “Build a company
to last and it will probably sell. Build a company to sell and it might not last.” We will just keep adding to our
inventory and projects and will take advantage of the opportunity when the time comes.
D.P: Let’s say you had to predict where natural gas and oil prices will be for Christmas of 2009. What would be your
guesstimate?
D.B: With natural gas prices, I still think they are going to hover in the $7.50 to $8.50 range on average, even though
we are going to go through the low of shoulder season and the highs of the winter. Oil by 2009 I still think in the $80
to $90 range. I guess my feeling on the prices of gas and oil is that the world has not found it in a profitable manner in
the last few years. There’s been lots of talk of the big revenue numbers and stuff like that, but the returns on the
money that’s spent have been poor and it really goes to show that we need decent prices to generate returns and to
put capital back in the ground. I think you will see that as capital programs get cut back, production drops off because
of course we are declining generally around 25% a year in the world. We are not going to be able to replace
what’s dropping off and we will see divergence in supply and demand and a rebound in commodity prices. In my
mind, the biggest factor of why prices can’t stay down for any long period of time is that in the last few years the
world has had finding and development costs on the oil side generally between $20.00 - $25.00 per barrel of oil. The
rule of thumb is that you need at least three times that price to get any sort of profitability, so at a minimum, you are
looking at $60.00 - $75.00 per barrel.
D.P: Our favorite question for every interview: If you could buy one stock other than your own (and of course we expect
a double) what would be your pick for the coming year? And remember, no conflicts of interest.
D.B: When I look at these times, I think you have to get back to fundamentals, you have to go back to low cost guys,
you have to go back to people that can grow within cash flow and not need to access the market with either debt or
equity, who are fundamentally sound, and have profitably increased their value in the last few years which has been
difficult. With that said, I would stay Storm Exploration (SEO), for where their current levels are at and where they
have come off of their highs, is probably a company that has very good potential to double in the next year.
D.P: Thank you very much Mr. Bartole! _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 29, 2008
S&P/TSX COMPOSITE INDEX: 9501.56 +349.93
Yesterday’s news out of the United States was abysmal.
The consumer confidence level hit the lowest ever recorded.
Housing prices had the biggest monthly drop in
history as 20 cities saw their average house price drop
16%. Westinghouse announced lay-offs of 5000 people
and Investment Bankers were being laid off everywhere
and it seemed that every newspaper in the United States
was laying off 10% of their staff.
But one itty-bitty piece of news helped the American
markets have their second biggest day in history. That
news as spread by Bloomberg’s was that sales of longterm
commercial paper soared ten-fold as the Federal Reserve
finally got around to buying the corporate IOU’s of
the commercial paper markets. A first sign that the credit
markets might finally be starting to work.
Bloomberg reported 1511 units sold for $67 billion, versus
$6 billion in the market for most of last week. The Fed
began buying to help reduce rates, lure investors and help
unlock the market. It was the first sign of a real thaw in the
credit crisis and the markets applauded. Once the credit
crisis is taken care of, the economic crisis is looming, but
the big question for the Toronto market is was that the bottom?
REECE ENERGY (V-RXR) $1.29 +0.14
TALISMAN ENERGY (T-TLM) $10.93 +0.93
NEXEN INC. (T-NXY) $18.79 +2.54
As we continue our search amongst those handful of analysts
and prognosticators that were worried about the credit
crisis before it hit, for some idea of what they might expect
next in oil and gas, we have once again come to someone
who was raising cash and selling oil and gas stocks back in
the Spring. And he has an interesting take on the sector
now.
Short-term pain—long term-gain. He won’t let us print his
name, but the former oil and gas analyst/now fund manager,
didn’t get it perfect. He still had beliefs in some stocks such
as Reece Energy and in hindsight, like all of us, he wishes he
just simply sold everything. But for now he says, “we are in
a recession, have been for a while and will probably come
out of it (at least he hopes) with forward-looking markets
sometime this spring.”
In recessions, he says, “it’s not good for commodities” so
he suggests for this Christmas his best guess for an oil price
is a mere $60.00 a barrel. But for next Christmas, he sees
$100.00 because of “supply destruction.”
He admits that there has been some demand destruction
as in the U.S.A., some have simply been turned off by
the high price of oil and found alternative modes of transportation
that cheaper oil might not affect.
But it’s the credit crisis and what it’s done to the oil
patch around the world that has him bullish longer-term.
Suddenly oil companies have trouble with lines of credit,
have to work within their cash flow, and it means exploration
budgets and grandiose schemes are being slashed or
put on hold.
In the meantime, the same old...the world finds smaller
pools that are usually more expensive to develop and deplete
faster. And he points out that while OPEC currently
has spare capacity, that could change with low prices and
can help demand.
In the meantime, he points out that only four countries
in the world will have higher productive capacity next year
and several areas of the world such as Mexico and the
North Sea in particular, could see huge drops in production,
he suggests.
Meanwhile, “Ch-india” remains part of his theme as
every year 50 million Chinese, Indians or Asians join the
middle class and want a fridge, stove, or air-conditioning
and usually a scooter and possibly a car. So when does
the good news start in the oil and gas sector? His theory
is that it starts when the “Big Sisters” - the Exxon’s Chevron’s
or BP’s of the world currently sitting on close to $80
billion of cash and some of the few entities in the world
that have access to credit, start buying other companies.
He also suggests to start watching the Shanghai Index
as a barometer of feelings in China. And when that Index
has put in a bottom and starts heading aggressively the
other way, that also would be a sign of potentially building
strength for oil.
He also suggests that the bottom of a bear market usually
has a wash-out capitulation and could also see a significant
four-day rally afterwards to show that we finally
put in a bottom. But sometime this coming spring/
summer he suggests we will be starting the eighth bull
market in the energy sector in the last 20 years.
We are at the point now where it’s cheaper to buy many oil and gas companies than it is to drill for oil and gas yourself.
When the Big Boys start buying he suggests that means that they think we’ve seen a bottom for oil and it will be
time to plunge into the oil and gas patch in a big way, starting with the big stocks and then working your way down to
the juniors. Some of the stocks that he figures are on the potential take-over list include Talisman Energy, Suncor Energy,
Nexen Inc…
One thing our man does point out is that many of the big sisters and the biggest companies all face one thing in common...
declining production. And one other thing he expects while we are bottoming...volatility. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition October 30, 2008
A Q&A WITH A.J. (JEFFERY) TONKEN
PRESIDENT and CEO of BIRCHCLIFF ENERGY
(As of October 27, 2008)
David Pescod: This is a historic time in the financial markets
courtesy of the credit crisis and market calamity we
are going through and we have people suggesting we
might have only six months more of troubles to get
through and others worry that it could be 18 months of
ugliness. Some even say that we are having an opportunity
of a lifetime here. What are your thoughts?
Jeff Tonken: At Birchcliff we are focusing on our two key
resource plays, making sure each capital dollar spent ,is
spent effectively and adding value to the Company. As
credit market’s tighten more opportunities are becoming
available however Birchcliff will only spend it’s cash flow,
which is substantial in relative terms, on those opportunities
which gives us the greatest returns. Birchcliff remains
focused on its resource plays.
D.P: You mentioned that you are a little concerned that
tax-loss selling might also affect oil and gas stocks as we
get closer to year-end. Please explain your thoughts
there.
J.T: I continue to hear that people are selling their energy
stocks to create tax losses which can be used to shield
both past and future capital gains. All of the energy stocks
have lost significant value, this situation has never existed
before and hence institutions, individual shareholders and
mutual funds can buy most energy stocks cheaply, which
is causing people to look at tax loss selling.
D.P: Getting to oil and gas, you have some rather bullish
targets for oil, suggesting we could see $80 this Christmas
and $110 by next Christmas. How is this possible in a recession?
Is this just not another oil and gas guy trying to
be positive?
J.T: People eat, drink and use energy. With commodity
prices falling and no access to capital markets, energy
companies will quit spending money, supply will fall
much faster than demand. This will cause prices to rise.
D.P: Jeff, you and Birchcliff Energy have attracted
rather high profile investors – Seymour Schulich, the
billionaire investor/philanthropist who now owns almost
20% of your stock and it looks like he paid much
higher than current prices for his stock. Any thoughts
on your association and what he finds attractive on
your team?
J.T: Mr. Schulich and I have an excellent business and
personal relationship. Mr. Schulich provides excellent
insight to myself and our management team respecting
sound financial business decisions. In fact with his
support we can make sound business decisions in a
very difficult market and not be worried that our shareholders
do not see eye to eye with us.
Mr. Schulich has said publicly that he likes our management
team because we have a very large personal
financial investment, a proven track record, a company
with two focused resource plays, one oil and one natural
gas, with very high working interests, significant
oil and gas development drilling locations which surround
our core producing properties where we have
significant undeveloped land and control, ownership
or access to infrastructure. We operate 85% of our production
and drill almost all of our wells 100%.
D.P: You are 70% natural gas with core holdings in the
Montney areas of Alberta and production is expected
to be close 14,000 barrels a day equivalent by year
end. If you could give some details on your major areas
of operation and what next?
J.T: We have in excess of 400 possible horizontal drilling
locations on the Montney/Doig natural gas trend in
NW Alberta. As well we have one large oil pool with
booked reserves of some 20 million barrels of light oil.
We see significant upside potential on both of these
plays and have some $2.5 billion of development drilling
potential in our company. Currently we have in excess
of a 15 year reserve life.
D.P: Being big in natural gas, what should one be
watching or worried about these days where worry
seems to be big on the agenda?
J.T: Commodity price is our number one concern. It is
difficult to plan a drilling program when your commodity
price changes every day.
D.P: Cash flow is now all-important these days as the credit crisis hits every business and ability to access credit is
not as easy. How do you sit in this situation?
J.T: We have significant credit facilities available to us and with expected year end reserves we continue to expect to
increase our credit facilities. If we live inside our base cash flow we expect to be able to grow., however growth is tied
to cash flow. The more cash flow the more growth. However we can stand a major downturn in commodity prices and
still maintain a flat growth profile because we are a low cost producer with a long reserve life.
D.P: Why don’t we just ask this question…what are you most worried about in the oil and gas business these days?
J.T: My wife.
D.P: What’s the key to being ahead of the game in oil and gas today?
J.T: Quality asset base with sound technical teams and committed management teams who have experience in tough
financial market’s, and shareholders who are confident with all of the above.
D.P: Thank you very much Jeff! _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition, October 31, 2008
HATHOR EXPLORATION (V-HAT) $1.80 +0.04
It’s probably about the only junior mining exploration
play that anyone is watching these days. With commodity
prices from copper to lead to zinc heading down and gold
showing no conviction and most mining stock prices at a
fraction of where they were, the one story that seems to
be attracting speculators interest these days is Hathor
Exploration and their ongoing exploration on their uranium
play on the Roughrider zone.
We had the first blip up in uranium prices last week
which might help a bit, but the main attraction here is the
hopes by many that they’ve already discovered 40 million
pounds of uranium and hopes springs eternal that when
the lake freezes and they start January 1st on a $7 million
drilling exploration program with 40-some holes, they can
add significantly to that number.
But the whole key to this play is the fact that AREVA is
in the neighbourhood and needs feed for their processing
facility. With an obvious buyer, Stephen Stanley the
President of Hathor is more than willing to admit that at
some point in price, he is definitely a willing seller.
When we caught up with Stanley yesterday he tells us
one concern the company has at this time is with the sad
state of the markets—he just wonders if Hathor is going
to be negatively affected by tax-loss selling. He also adds
that they are expecting additional drilling results from
their summer program any hour, any day.
***********************************************************************
THE HEADLINE IN THE FINANCIAL POST was: “Slump
Could Cost Ottawa $3 billion in Revenue...Tax-Loss Selling.”
As mentioned in the above piece, suddenly tax-loss
selling is on a lot of people’s minds and particularly for
those in junior mining stocks that many of us worry how
many will be around in six months time, might be considered
for just such an event. Time to be talking to one’s
accountant about where one stands for tax-loss selling
whereby you can go back over your last three years trading
and maybe take advantage of this tax situation.
Again, we worry that many of the junior miners won’t
even be around in the next while, but also, there are lots
of people as we notice from the interview with Jeff Tonken
yesterday that may well take advantage of the tax situation.
Sell a stock today that even if it’s one that they
might like, to grab the tax-loss advantage, to get back into
the stock 30 days later hoping that there is a future down
the road.
ITHACA ENERGY (V-IAE) $0.47 +0.225
OILEXCO INC. (T-OIL) $5.08 +0.55
Today Ithaca Energy, by way of sale of assets, has secured
financing to bring 7500 barrels a day of production on
stream within a matter of months.
Octagon analyst Warren Verbonac writes, “With the high
possibility of cash flow climbing to $2.21 in 2010 (and possibly
higher in later years, with the contribution of Stella production),
we see a long-term investment opportunity.”
Oilexco also bounces today as the market hopes that
they too, can find a financing solution to their problems.
MGM MIRAGE (US:MGM) $15.96 +0.59
FORD MOTOR CO. (US:F) $2.19 -0.09
DELTA PETROLEUM (US:DPTR) $9.25 +0.15
If you’ve been in the market in the last while you’ve
been butchered. There is no other way to describe it than
that and probably the only comfort you might have is
knowing that you are not alone. Suddenly there are an
awful lot of billionaires out there that are not nearly as rich
as they used to be.
Take Kirk Kerkorian now at age 91 and still one of the
high-profile investors that magazines still love to talk
about, particularly Forbes. Of course where he stands on
the Forbes 500 List now is probably very much open to
debate, although I suspect all the other billionaires have
been clobbered too.
Kirk Kerkorian is very much a high-profile investor and
you know what most of his investments have been doing
lately. He is very much tied in with MGM Mirage and Las
Vegas and with the market crashing, the people on the
news talking about the recession and the like, people have
cut back big time on their trips to Vegas and some suggest
the town is close to empty. All of a sudden if you do
want to go to Vegas, shop around, there are bargains galore.
The chart on MGM Mirage shows you how one of Kerkorian’s
biggest holdings has fared and some of worst hit
stocks around have been Vegas-based stories. If you
want to see an ugly, ugly one, take a look at the chart on
Las Vegas Sands.
Another one of Kerkorian’s high-profile investments is
Ford Motor which he has admitted to selling many shares
of over the last while. And the chart shows you once
again, it hasn’t been a happy time. Mind you, over the last
12 months, General Motors has slid from $45 to $5.
Another story that Kerkorian invested in with a large
stake was Delta Petroleum (where he owned close to 35% of
the Company)...oh, the good old days when people
thought oil and gas was a good sector to be into. When
Kerkorian invested and interestingly it was when he put a
good slug of money into Delta, that the company gained a
lot of respect and shortly thereafter doubled.
Meanwhile, a Dow Jones story on Kerkorian suggests
that his 54% stake in casino giant MGM has fallen in value
by more than $12.8 billion and his 148 million shares of
Ford acquired for just shy of $1 billion, had lost nearly
two-thirds of its value.
Yes folks...most of us have had a bad year! |
