₪ David Pescod's Late Edition September 28, 2006
TRUE ENERGY TRUST (T-TUI.UN) $10.80 -0.28
NATURAL GAS $5.392 -0.27
CRUDE OIL $62.76 -0.20
There’s more than a few eyes these days on Paul Baay, the President of True Energy for some rather significant decisions that are going to have to be made. Notice the lofty position the trust had roughly a year ago, compared to today’s level and the major difference affecting the company is natural gas prices.
A year ago prices were at historic highs, today they are near historic lows, at least for the last four years and that is the difference because True Energy is 67% natural gas.
Paul Baay points out that currently the trust is paying out the equivalent of almost 170% of its cash flow and the business doesn’t last long if it continues to do that. As part of their trust agreement, he suggests they can’t pay out less than 18 cents a quarter, so a decision to drop the payout from its current level of $2.88 per year (that’s a 25% yield) to a lower level, may be in the offing.
Baay lets us know that over 30% of their gas production is currently hedges in the $8.50—$9.00 range and while the company has a pretty good balance sheet and production numbers are good, the real issue right now is the payout level, he suggests. Over the last while, they’ve let investors take the option of taking stock instead of cash, but just a few days from the end of the quarter, decisions will be coming up shortly.
Which gets us to quiz Baay about the oil and gas business right now, with emphasis on gas. They seem to be giving it away these days. “I haven’t seen it this bad since 1998” he says, but he seems to be rather aggressive on the resolution of the natural gas price in short order. When he looks at his crystal ball, he wouldn’t be surprised to see natural gas prices as high as $7.50 by Christmas. “It’s not just one big event that could get it there, it’s a series of events” he says.
“First of all, you certainly haven’t had much addition of LNG usage in North America and you have seen a big shift in exploration from natural gas to oil. You’ve had huge cutbacks in the exploration from gas and coal bed methane, plus you’ve got the usual cyclical changes such as big depletion levels”. He also points out that in the United States, Chesapeake, the third largest producer has just shut in 6% of its natural gas production. Also he suggests, “you just can’t have this big of a disconnect between oil and gas prices”.
Which gets us to the price of oil which he feels will see a hard bottom on oil of $60 and a trading range for the next while of between $60 and $70.
Can OPEC actually make a difference we ask, as it seems to have been thought that OPEC can actually trim production that has moved oil prices?
He suggests that OPEC is committed to large capital commitments, particularly by the Saudi’s and they will therefore, have to participate in cutbacks or else their capital programs will be buggered considerably.
Meanwhile, we point out to him the idle talk in Calgary and gossip that there’s somewhere between 50,000 and 60,000 barrels a day of production mainly by junior companies that may be for sale given the current hard times. He doesn’t doubt that and we point out that part of the problem may be unmotivated management.
There’s lots of management teams that have made a lot of money in the past few cycles and may not simply want to go through another ugly time and would rather sell what they have and count their money in Phoenix or Mexico.
Baay says, that first of all, he’s definitely not a seller and as far as the oil and gas patch goes, “this is my life” he says. He also points out that he isn’t one of those teams that had an easy past before (which brings up the old Remington story, which had its ups and downs).
As far as the True Energy Trust right now, he points out that over the last year plus, it has grown considerably from 9000 barrels a day to 20,000 barrels a day equivalent and now has almost a million acres of undeveloped land in its inventory. He also suggests that it might be a good time in this market for a company to be able to take advantage of sales and even build a company bigger.
When we ask, aren’t people looking for cash these days instead
of paper, he points to several of the recent deals such as Rider Resources (RRZ) and the like and obviously some people aren’t afraid of paper yet.
If True does lower its distributions it will be interesting to see the market reaction. This also brings us the fact that this correction we are having is probably good for the market Baay says, “as it’s weeding out a lot of projects that might not or should not have been considered in the first place.” “No, it doesn’t mean the end to coal bed methane projects, shale gas plays or the like, the economics just separates the good projects from those that shouldn’t be looked at” he says.
When we ask Baay the hard question of being a stock picker and suggesting an oil and gas play that could double for us over the next while, he goes with Capitol Energy, a story we’ve talked about from time to time. Monty Bowers used to be the Vice President of Exploration for him at Remington and he’s up to snuff on the story.
Only a double we ask? Well, he suggests, “if gas prices do turn around and the market regains its brilliancy, maybe a triple... as we’ve mentioned we written up Capitol many times and we will be following their waterflood project closely over the next 12 months, hoping that Baay’s predictions come true!
CRUDE OIL: $62.76 -0.20
Oil looks like it might have put in a bottom of sorts yesterday, but considering the huge inventory that is swirling around out there, one might wonder why this price level might be a magical number.
For those who are looking at new sources of demand, once again the story is China. China is already the world’s second biggest user of oil at almost seven million barrels a day and that demand is expected to rise by about 8% a year. Needless to say, that dependency has made Chinese officials nervous and they’ve started building strategic oil reserves the first of which will be opening in the next week or two and needless to say, they are going to need oil to fill that first reserve base in Zhenhai in east coast province of Zhejiang.
The facility has 52 storage tanks costing half a billion U.S. and can store 5.2 million cubic meters of oil, or in English, 33 million barrels. Yes, that will take a lot of oil to fill.
Meanwhile, China is building three other sites along the eastern seaboard which will require something like 102 million barrels of reserves in the next five years to fill these facilities. This should give China about a 30-day reserve, just in case something goes wrong (and in this world, something always seems to want to go wrong).
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Meanwhile, we would like to thank all those who regularly contribute jokes to Deb for her “Deb’s Ditties” and she receives almost 30 great jokes to chose from every day. Special thanks to Bill L. in Edmonton, Bill C. in Edmonton, Jack J. from Whitehorse and Dwayne M. from Edmonton. |
