₪ David Pescod's Late Edition 7/07-7/10/08 To receive the Late Edition and be on our daily circulation simply e-mail Debbie at Debbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have you on the list tonight.
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David Pescod's Late Edition July 7, 2008
ITHACA ENERGY (V-IAE) $3.10 +0.23
ANTRIM ENERGY (T-AEN) $3.28 -0.11
We’ve mentioned more than a few times over the past six months or so, how the little guys in the North Sea have been suffering greatly while oil prices have more than doubled. It comes down to one bad bit of news...if you don’t control your own rigs and only have a few projects, there’s not a lot of news flow and with little or no news flow, the market couldn’t care less of what you got going on.
Ithaca Energy and Antrim Energy are two that come to mind and today, Ithaca, which has received an unwanted offer by Endeavour International obviously looking to scoop up something cheap in the North Sea is being rejected by the Company.
Today, the Company says, “It’s Board of Directors has unanimously determined that the unsolicited non-binding proposal received from Endeavour International to acquire all of the issued and outstanding shares of Ithaca is not in the best interest of Ithaca shareholders.”
Meanwhile, what they do do that in a normal market would make shareholders happy is that they announce some additional reserve numbers that help reflect the acquisitions of Beatrice and Stella. According to Ithaca management and Canaccord’s Fred Kozak, “Ithaca sees a modest increase in 2P reserves, but an approximate increase of 66% in its 3P reserves.”
Of course Kozak comments on the new reserve numbers: Impact...Positive. “With this increased reserves as well as the evaluation done at higher commodity prices, we would expect that Ithaca shareholders would reject the non-binding offer for the company.”
Meanwhile, Kozak increases his valuation as he ups the price target on this company that seems to have fewer followers daily, to $5.25 from $4.75 and he suggests, “It is now based on the company’s 2P reserves of $5.30. This is up significantly” he writes, “from previous estimates of $2.53/basic share for 2P reserves.”
And we don’t want you to get carried away, but Kozak writes, “On a 3P basis, we see value as much as $9.40/basic share but are not considering this value in our new target price.”
If those valuations are anywhere near correct in an increasingly bizarre atmosphere for North Sea juniors, one can understand why we might even see more hostile takeover bids in the future.
For those who would like a copy of Kozak’s report on Ithaca, e-mail Deb at debbie_lewis@canaccord.com.
BREAKWATER RES. (T-BWR) $0.355 -0.01
SELKIRK METALS (V-SLK) $0.35 -0.03
BLUE NOTE MINING (T-BN) $0.12 n/c
With oil prices going through the roof lately, there’s been one sector getting clobbered...and that’s new car and truck sales, particularly for the heavier/bigger models.
Companies such as GM, Chrysler and the like, are routinely announcing 25% drop in sales and that’s starting to affect (in a huge way) one metal that has not been having a lot of fun in the last year and that’s lead. Lead is, shall we describe it, as a difficult metal that has seen its usage cut back significantly in many fields, so its major function these days and about 70% of its usage is in car batteries. So if car sales starts dropping off, it’s no surprise that the use of lead is dropping as well.
With the news on car sales, lead has been falling off a cliff lately and supply continues to grow. Inventories tracked by the LME have more than doubled this year to 100,000 tons and there is no end in sight. The chart to the left shows you what lead prices have done and while we have mentioned on more than a few occasions, some of the smaller Canadian-based lead producers (they also do produce other metals, but lead is a big component) and they’ve been getting beaten up terribly.
One wonders how close we are with high costs in many lead mines these days, of seeing a few lead mines being shut down.
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David Pescod's Late Edition July 8, 2008
FREDDIE MAC (NYSE:FRE) $13.07 +1.16
FANNIE MAE (NYSE:FNM) $17.39 +1.65
The real estate mess in the United States is obviously not going away anytime soon and it was big concern in the markets yesterday, created by one analyst that suggested Freddie Mac and Fannie Mae, the two big quasi-government corporations who are the two main players in mortgages in the United States, might have to raise a total between them of an additional $75 billion in capital that spooked the market, big time!
Today, many other analysts are saying that that’s not the case at all and they have rebounded a bit from a big hit yesterday. But take a look at the chart. It almost makes you glad you are in oil and gas stocks that are down 20% or 25% in the last few months, versus those big blue chip stolid mortgage companies that are down what, 70%? 80%?
Oil prices have only dropped a couple of dollars and yet many oil stocks, particularly the juniors, look as if they’ve either been nuked or oil has dropped to $80 a barrel. What gives?
For more than a little hand holding, we go to Josef Schachter who a year ago when gas prices were in the toilet, he bravely took some bullish stances that proved to be more than correct. So back to Josef today for a little hand holding and he reveals one of his secret weapons. It’s called the Point and Figure chart that he uses on the
energy sector, and it measures what percentage of folks following a sector are bullish (excited as heck) or bearish (head for the hills). You notice the big swings from bullish to bearish on the take on the energy sector. Basically it shows that people get over enthusiastic about oil stocks and then they get the exact opposite.
The chart over three years shows that there have been some huge swings and maybe if you just bought at the bottom on these charts and sold at the top, it might be the only indicator you need?
Schachter points to this recent big drop and compares it to some of the other drops we’ve seen in bullishness on the sector and tells us that we are almost at the bottom and the chart makes that pretty obvious.
So supposedly, we are very close to a significant buying opportunity...we hope!
CDN. NATURAL RES. (T-CNQ) $89.00 -3.34
RYLAND OIL CORP. (V-RYD) $1.68 -0.07
CONNACHER OIL & GAS (T-CLL) $4.03 +0.09
STERLING RESOURCES (V-SLG) $2.60 -0.10
As we mentioned earlier, we hopefully have an interview ready to run tomorrow with Josef Schachter, who we phoned earlier today for a little hand holding on this oil and gas sector which without any apparent reason, seems to have been absolutely clobbered.
Sure oil had dropped a couple of bucks, but considering that most oil and gas stocks are being priced as if oil was $90 or maybe $100, is it not an over-reaction?
While we do admit there is fear in the market, real estate continues to be a concern in the U.S. and now it’s starting to hit Canada where prices from Edmonton to Toronto have weakened and now it looks like Vancouver is about to experience the same joy.
But with oil prices at these levels? We do a couple of charts showing that it doesn’t matter what kind of oil stocks you’ve been involved in—whether it’s the bluest of the blue chips such as Canadian Natural Resources or a spec play like Ryland Oil with enormous holdings in the Bakken and its potential in Saskatchewan, or dull/boring Connacher with its heavy oil plays, or even Sterling Resources—has also been clobbered in this market. Nothing that we can find has escaped the ugliness, whether it makes any sense or not.
Meanwhile, Schachter’s latest monthly for Maison Placements is out, so if you would like to receive a copy, just e-mail Debbie at debbie_lewis@canaccord.com and she will get it out to you in about two days.
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David Pescod's Late Edition July 9, 2008
A HAND-HOLDING WITH JOSEF SCHACHTER
(As of July 8, 2008)
We are here with Josef Schachter and of course a year ago, he was the lone bull out there (or at least that’s what it looked like) and he was even brave enough to go on BNN and say natural gas actually had a future and energy was going to fare well. Well, he was bang-on and if anything, he was one of the few that actually under-stated the case! Now however, we are going through one heck of a correction, oil has only dropped about $5.00, and yet most oil stocks are acting as if oil has dropped to $80.00! Time for a little hand holding, so we go the master himself…
David Pescod: Josef, what the heck is going on and how worried should a person be? You used to be the Chief Market Strategist at Richardson Greenshields, so what would you say to people at these difficult times?
Josef Schachter: I think the data that we are seeing from the U.S. government on demand destruction in terms of the utilization of energy is part of the thesis and we are seeing that number is about 550,000 boe’s below where it was a year ago. So it’s like 20.16 million barrels down from 20.7 and that, plus GM announcing closures and the auto industry talking about car sales at one point had a high of 18 million and then said it could be 10 or 12 million cars. Boone Pickens on TV today saying let’s go to wind power, let’s go to more natural gas fueled vehicles, we are importing energy and our deficit $700 billion a year of which most of that is energy related. So there is a lot of fear about the economy. The jobs losses we had last month showed the economy is still in recession in the United States and if the demand destruction continues, then of course prices don’t need to justify the $140-$150 level that people were talking about.
The offset to that though, is that we are heading into the summer driving season and historically during the summer, we use between 30 to 50 million barrels more than is available and this must come out of inventory. In other words, total demand world-wide is greater than supply, so inventory becomes the balancing act. Inventories in the United States are at the bottom of the five-year band from the data we saw last week – about 977 million barrels. Normally at this time of year, inventory should be around 1.05 billion barrels. So they are way below where they need to be. So if we do see a pick up in the summer driving season which the next few weeks of data will show us, then the inventory picture tightens up and of course prices can’t go down a lot.
Again, a lot of what we are seeing is the fact that the fears because of the GM announcement and concerns about bankruptcy in the auto industry, the fact that the hedge funds quarter end came and they were long the commodity trade and now they are saying let’s get out of the commodity trade, so we could see prices back off to $110, maybe $120 on WTI which is still a fabulous price, but the stocks still could have some more erosion. I showed you that S&P bullishness chart and if you put that in, you will see that we’ve had a decent correction, but there still could be another third of a leg down.
In terms of putting that in context the S&P/TSX Energy Index is currently at around 400, we could see 370 to 380 as a target before the correction is over. We were at a high of 470 in January – we’ve taken off 70 points, so there is still maybe another 7-10% left on the downside. So we are recommending in the monthly piece that we are just putting out (in the new Maison Monthly) we are saying on the top of it – “Buy Favorite Ideas on Market Weakness”.
D.P: Now I am glad to hear you say that we are very close to a bottom and the chart that you talked about – the Point and Figure View, that must be one of your secret weapons, is it?
J.S: It is a measure of what’s going on in terms of greed and fear and then you go in and look at the individual stories and then you look at the S&P/TSX, see the individual commodities, WTI’s, natural gas and of course you watch the currencies because they are very important as part of the picture too. So when you look at all of it, we were telling people to take profits in a lot of areas including the Quebec stocks that we thought had gotten a bit ahead of themselves and of course the Colombian oil stocks. So there were things that got ahead of themselves and of course they are now correcting savagely. Gran Tierra was $8.90, now it’s $6.63. Solana Resources was $5.87, now it’s $4.82 – so we had this material correction in certain sectors, especially the Quebec ones, which had really gone euphoric.
D.P: Using the Point and Figure chart, does this give you some buying ranging for some of your favorites stories such as Oilexco and some of your other favorites?
J.S: Oh yes! Right now, anytime you see Oilexco under $17.00, it’s a table-pounding buy especially now that they have Moth having announced a discovery and we are now waiting for the announcement of the Fulmar zone test in the next week or two from Art Millholland plus the D-5 well coming on and also second quarter results. With the commodity board being so strong, their second quarter results should be very healthy even though maybe they don’t have the volume that we were hoping for because of the Forties pipeline shutdown.
So while they may not have the volumes we were hoping for, once D-5 comes on, that’s the first material increase in volumes and then of course in October/November, we will get the big Shelly-Sevan floater and that will increase production north of 40,000 boe/d. So as production ramps up and they announce those productions and of course they have three rigs working, so there’s news potentially there, so we used to say a table-pounding buy under $15.00 – now we say table-pounding buy under $17.00. We have a $30.00 target, but that does not include anything from Moth. So once we get some definitive news on the upside value, time line for bringing it on, if they have any impact in the next 12 months, we would probably increase our target again over $30.00.
D.P: As far as the general market, this is a new kind of market for most people out there. They haven’t seen it, it’s been absolutely brutal, they are seeing real estate go down, and the stock markets are down. That’s what they are worried about. What are you worried about right now?
J.S: I think those concerns are valid because we’ve had so much money in the system that there’s been too much liquidity in the system. Interest rates are probably too low relative to inflation. If you believe inflation is 4% or 5%, interest rates should be above that and remember, you are also taxed on your interest income. So if you are a debt-investor, you are being penalized right now. So until we see interest rates go to a rational level, we are in an inflationary cycle. And they can’t raise interest rates because of the housing difficulties and the re-sets mortgage that are continuing to go on. Of course the banking system in the States, articularly more so than Canada is very fragile because of the hits they have taken on all the different CDO’s and credit instruments that have been a disaster for them.
The brokerage industry is very vulnerable. Even Merrill Lynch is talking about now selling a part of Bloomberg and even selling Blackrock to get the capital they need because they don’t want to do equity shares at these levels. So they can’t raise interest rates, which means we are in what’s called stagflation, which is low growth in
economy but with a lot of inflation and it’s like the 1970’s, so those investors who remember the 1970’s, will remember that the markets were flat for about 12 years, but
the commodity board went nuts to the upside. The one that I remember well is of course the energy one of the TSE Oil and Gas Producers at that time and that index went up 12 times in seven years. So in 2002, we were 100 in the new S&P/TSX Energy Index, even with the shellacking we’ve taken from the high. That’s four times better than that with the index at 400. Our view is that before this energy cycle is over, the S&P/TSX Energy index will bust through 1000. So from 400 to 1000 in the next 3-5 year is not bad.
D.P: You were suggesting recently that you though 11,000 would be the bottom on the Dow, that things have gotten oversold. Is that still your hope?
J.S: Again, I don’t spend as much time on the Dow, but the 10,700 to 11,000 is what I’m hearing from some wiser folks than me. I spend most of my time on the energy/ resource area, so that’s our focus here, but if those guys on the technical side are right and the indices in terms of that same chart that we just talked about are showing very oversold conditions both for the Dow and the NASDAQ. Those data points you could pull out on that same base to draw and if you pull up the Dow, you can see there – the S&P, the NASDAQ, the materials – all of them are heading down into the bottom quartile of the shake out. So again, imminent potential for resolution of the pain on the downside.
D.P: That’s nice to hear. How close do you think that is for happening?
J.S: My fearless forecast is that we will have a bottom this month.
D.P: There will be a whole bunch of people that will be glad to see that happening! Back to oil and gas, if you had to own three stocks, obviously Oilexco is one of them and you call it a table-thumping buy under $17.00. What would be your other two or three stocks and what would be the prices you would pick as an entry point?
J.S: I have to pick Sterling Resources. They have three high impact wells over the next three months.
Later this month, they start offshore UK with the drilling for gas, extensions of the Breagh discovery that’s East Breagh which is a well that if successful would have an aerial extent plus depth that could add another $5 plus to NAV.
In the end of July they will get a jack-up rig offshore Romania and they will start drilling to expand a discovery they previously made. They will be going after satellites there that threshold they need for the pipeline. If a good discovery comes there, we will know that probably sometime in September. And then in September they go after one of the big scores for them, potentially, a play called Block 210, which is a North Sea oil target which there onside reservoir consultants think could do 300 million barrels of oil in place. They own 39.9% so that alone could be worth more than $10.00. Anytime between this range of $2.60 is a very, very good buy.
The last one I would go after would be a gassy named Accrete Energy. Accrete is at $5.30 and we have a target on this one that is $10.75. The company is doing about 3100 boe’s a day of oil and liquids right now. We believe that this oil play that they are working on, could go to 4000 boe’s a day by the end of the year and we think the NAV the end of last year was worth over $7.00, so it’s trading at a material discount today. We think they may work on ways to resurface the value on some of their more mature assets, so we are big fans of Accrete with a $10.75 target – so from where it is today, that’s almost a 100% upside.
D.P: Time to visit your crystal ball. If you had to guesstimate where oil and gas will be a year from today, what would be your answer?
J.S: I would be happy if they were right where they are right now! Right now the market is discounting maybe $70 or $80 crude in the stock prices and if were sitting at $130 a year from now and the market is willing to pay $100, there’s the value increase to the company.
With individual companies showing volume growth and at the same time if the stock markets start paying $30.00 higher per boe for reserves in the ground, you can see prices 30% to 50% higher than they are today.
D.P: Do you see an active hurricane season in the horizon?
J.S: Outside of owning oily-focused exploration stories like an Oilexco, you want to be focused on natural gas stocks now particularly because the commodity board ratio is very cheap (oil to gas). Secondly, with the clean air issues that the Americans are talking about, you need to use the cleanest burning fuel which of course is natural gas. Third, hurricane season activity is August and September. It peaks in September. The first hurricane is on its way called (Big) Bertha, and that could drive natural gas prices to maybe $18 or $20 per mcf on a spike during the summer and of course versus $12 today, which would drive the stocks materially higher.
D.P: Thank you very much Josef!
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David Pescod's Late Edition July 10, 2008
High Impact Drilling Watch List:
UK North Sea.
STERLING RESOURCES (V-SLG) $2.80 n/c
We probably shouldn’t be dwelling on Josef Schachter like we have the last few days—but then few have been as accurate on the oil and gas sector over the past year like he has. And now that he has correctly predicted the current setback in the sector, he is suggesting it’s time for bargain hunting and on Tuesday, we added to our holdings in Sterling Resources and Ryland Oil (RYD).
On the previous page we printed a copy of his new addition to his monthly issue and that is the “High Impact Drilling Watch List” which looks at the significant plays for the North Sea. For those that have more greed than they should, they will key on what leverage these plays could have on its stocks performance. And for those who key on common sense—he gives his estimate of the chance of success on these plays. He might be a tad generous.
We did everyone a favor by not printing his watch list for Continental Europe (as his comments on Sterling might have affected those with potential greed problems) nor did we print his watch list for North America as some comments on Delphi Energy (DEE) might also have affected ones rationality should greed be luring in the background.
For those who are long common sense and have no problem with greed, we have copies of Schachter’s latest monthly effort . . . e-mai l Debbie at debbie_lewis@canaccord.com. Remember to watch Schachter’s favorite weapon—the S&P Energy Sector Bullish Percentage Index.
HATHOR EXPLORATION (V-HAT) $2.84 -0.01
We’ll call them the “Josef Schachter of the Mining Sector” and that’s of course the Coffin Brothers of the Hard Rock Analyst fame. The junior mining sector is in malaise... no, it’s a lot worse than that—it’s a total mess! Uranium prices have gone off a cliff, zinc and lead have seen their prices trading at a fraction of what they used to be, plus we are going into the summer malaise.
Of course the brokers have brought to the market more mining companies than we need and with many just to survive having to print millions of shares these days, the
leverage is being devastated.
The Coffin’s have however, come up with two of the only plays it seems worth following. First of all Goldsource Mines (GXS) and their coal play in Saskatchewan and the only mining play they said you have to watch and that's Hathor Exploration.
Yesterday, Hathor comes out with a hole that if you are a uranium explorer—you just dream of finding. How about 69.2 metres of uranium mineralization. This play now has to be followed.
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David Pescod's Late Edition July 11, 2008
To receive the Late Edition and be on our daily circulation simply e-mail Debbie at Debbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have you on the list tonight. |
