₪ David Pescod's Late Edition 9/02-9/05/08
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David Pescod's Late Edition September 2, 2008
CRUDE OIL $110.34 -4.43
NATURAL GAS $7.27 -0.67
GOLD $810.50 -24.70
CORN $569.25 -15.75
SUNCOR ENERGY (T-SU) $55.08 -5.72
CDN. NATURAL RES. (T-CNQ) $84.99 -5.65
OILEXCO INC. (T-OIL) $14.04 -1.01
REECE ENERGY (V-RXR) $2.51 -0.39
TALISMAN ENERGY (T-TLM) $17.60 -1.17
SOLANA RESOURCES (V-SOR) $4.30 -0.53
S&P/TSX COMPOSITE INDEX $13326.89 -444.36
Today we are reminded that September tends to be one of the worst months of the year in the market. Looking ahead we are reminded that October tends to be a pretty good month with a couple of exceptions. If there is going to be a crash and we mean a really big crash—the type of 1929, 1987 and other big years—if there is going to be a crash, it happens in the month of October.
We have to remind ourselves that the natural resource sector tends to have its best months between November and April, hence the old adage, sell in May and go away.
Anyway, on a day like this, it’s time to take a look again at what one thinks about the theories of commodities because everything from corn to oil today got pummeled as the American dollar had one of its biggest moves in eons. We’ve got a couple of theories about oil, one of which is best commented upon by analysts such as Josef Schachter, Don Coxe and others that believe the economies of Asia are just going to keep booming and now is the opportunity (and the emphasis is on the word ‘now’) to make sure you are picking up those commodity-based stocks. So far, that is obviously in doubt on a day like this.
A second theory is that you’ve got about three to six more months to pick up commodity-based stocks as this slow down that we are seeing in the United States and now Europe, is going to take some time to base and maybe even lower energy prices could help some of these economies come back. Anyway, that’s one of the theories.
A third is that oil is going back down to $70 or $80 as demand destruction hits the price of oil as well as other commodities.
We had thought that concept didn’t make sense because when we go back on charts from a year ago when oil was $72 to $74, there is a long list of stocks that had higher prices then, than they do today. The mood has changed that dramatically.
On a day like this, it’s definitely time as Bloomberg’s and other websites are just full of discussion as to whether the commodity boom is over or not, to figure out what your stance is, particularly if you are like us and loaded up on commodity-based stocks. The one concern of course is the United States economy which has been having huge difficulties because of the credit crisis that has cost so many people their houses and their equity. Many of these people just got on board the real estate craze and did themselves big harm. But you can’t deny the effect of all those closures and the credit crisis that has ensued from it and how it has affected the markets for the last year.
The United States sits in a sour mood with the economy slowing, but still there are a couple of statistics that stand out. First of all, this is not a recession and the GNP did grow in the last quarter, much higher than expected. There might be a sour mood, but so far statistically, it’s not that bad. One however, can’t deny the demand destruction for the commodity of oil, which we think over time will still probably be higher.
On the other side of the world, you have very different countries such as China with twice the population of the United States and Europe combined. While the United States still consumes 25% of the oil and is slowly going down, China consumes a mere 9% and is growing rapidly. Their economy is totally different as their economy grows 10% a year, year after year and the only surprises are, to the upside. The Government is sitting on a cash horde of an estimated 1.3 trillion dollars and a budget that can handle huge increases.
The mantra of the Chinese has been ten million new jobs a year and so far, they have been delivering. The Chinese economy which has been booming is desperately short electrical facilities, transportation facilities, all of which need commodities and once they are built, they need fuel to keep those commodities going. Meanwhile in the City of Beijing, 1000 new cars a day hit the streets. The bad news still might be the United States, the good news still might be China, but who are you going to bet on?
On a day like today where oil, because of a hurricane that didn’t deliver the punch to the oil producing areas of the Gulf of Mexico has crystallized a lot of action.
We didn’t see just a drop in the price of oil, but plummeting prices for natural gas and an American dollar that had one of its biggest moves upwards in eons, a big slump in the price of gold and commodities such as corn, soy beans and the like, also got hammered. It’s on a day like this you have to figure out which train you are riding.
The commodity train which has had an obvious stumble over much of the last six to 12 months, or whether it’s just a correction and that trains ultimate journey to huge demand coming from Asia that means down the road, we are going to be okay.
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David Pescod's Late Edition September 3, 2008
ENCANA CORP. (T-ECA) $73.44 -2.21
CDN. NATURAL RES. (T-CNQ) $81.98 -2.75
SUNCOR ENERGY (T-SU) $53.54 -1.37
NEXEN INC. (T-NXY) $30.11 -0.57
So why exactly were we getting a little bit excited about the junior oils over the last few weeks and probably a little bit too much? Well, here’s one of the reasons besides the fact that some pretty smart people such as Schachter, Coxe, Rubin and the like were suggesting one should have energy stocks now, and that is these charts.
These are four of the bluest of the blue chip of oils out there—Encana Corp., Canadian Natural Resources, Suncor Energy and Nexen Inc.—their charts show you that all of them were starting to base and starting to head up for a change, which would give one hope for the sector wouldn’t it? After all, where the seniors lead, usually the juniors follow.
However, two days of even worse oil prices including a huge drop on Tuesday, has suddenly made all of those charts look very much different today and so much for the basing and heading up theory.
Our backup position? Well maybe we have to count on the statistical average that says natural resource stocks have their best time of the year between November and April.
Needless to say, we are counting on that and by March, our margin account had better be looking a lot different.
POTASH CORP. (T-POT) $164.53 -8.17
It’s not just oil, gas and gold that has stumbled lately, it’s been virtually almost all commodities and one that has raised more than a few questions is potash. You do need food, particularly in areas of Asia with huge populations and the argument is whether potash prices can remain where they are and whether they are being hit by demand destruction.
We talked to a few Alberta farmers who suggest that they are cutting back a bit, buy many suggest potash prices will remain near record levels.
RBC analysts Fai Lee who has a target on Potash Corp. of $375.00 suggests we should “look for significant potash price increase in China as negotiations with Chinese potash buyers begin next week.” The suggestion is that contract prices of around $640 a tonne, could come much closer to spot prices which are currently around $1000 a tonne. Lee’s suggestion is that Potash Corp. “is currently trading at an implied flat realized potash price of $430/tonne, well below current spot prices which range between $900/tonne and $1100/tonne.”
The chart on Potash Corp. shows where it has gone, like most other Toronto stocks in the last month or so.
COASTAL ENERGY (T-CEN) $2.79 -0.08
Back on August 27th, before Hurricane Gustav did its disappointing blow which hit all oil and gas stocks, we did an interview with Randy Bartley, CEO of Coastal Energy and got hit with the surprise that they didn’t have their drilling rigs lined up as they had thought.
On August 29th, Coastal finally announced their second quarter financial and operating results and Fred Kozak, the analyst with Canaccord who follows Coastal updates us on his idea of their future. He writes, “Due to the delay in deploying the previously contracted offshore drilling rig, drilling is approximately one quarter behind schedule. As a result, we have adjusted our production estimates for the company to reflect the delay in production start-up, which we now estimate will occur around the end of 2008. However, this delay does not impact our valuation of the company.” He adds that drilling should commence around the end of September.
Meanwhile, his target remains $7.50. For a look at Fred Kozak’s recent report on the company, just e-mail Debbie at debbie_lewis@canaccord.com.
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David Pescod's Late Edition September 4, 2008
QUESTERRE ENERGY (T-QEC) $3.10 -0.43
JUNEX INC. (V-JNX) $2.59 -0.30
Ah! Do you remember the good ole days? Wasn’t it just a few months ago when natural gas prices were $12.00 and $13.00 an mcf and people had hopes that energy would be a sector to be in? The good ole days!
There still can be good results in the oil and gas sector and Questerre Energy along with partner Talisman Energy, certainly had some of that type of news yesterday when they announced interim results from the recompletion of its Gentilly shale gas well in the St. Lawrence Lowlands of Quebec.
They announced that the well flowed more than 800,000 cubic feet per day on a sustained basis. Interestingly, Talisman agreed to add another frac to the testing program according to the Company’s news release and that this second fracture stimulation is now underway. “Following an evaluation of the results of the second fracture stimulation, two additional fracs of the Lorraine shale will be conducted. Results of these tests are expected in the fourth quarter.”
For those new to the play, the Lorraine shale sits on top of the Utica and can be up to 6500 feet thick. The Utica shale ranges between 300 and 1000 feet.
Meanwhile, there has been lots of shale discoveries made in North America over the last while, some of them in the southern States are suddenly making a significant boost in production of gas in the U.S.A.
One should remember that shale gas tends to be more expensive, needing more technology to be used and fracing to recover the gas and shale gas production can start with big numbers and peter out quickly. Still, if we get a cold winter…
One benefit for Questerre and Talisman is that there’s lots of built in infrastructure and gas pipelines in Quebec and they are not that far away from the very rich New York and Boston markets.
Meanwhile, Junex, another of the juniors involved in shale plays in Quebec, did an update on their St-Antoine-sur-Richelieu #1 well suggesting that the $10 million program evaluating the natural gas potential of the Lorraine and Utica shales. Drilling operations started in late June and the primary target according to the release was to test a fault-bounded “sag” zone in the Trenton/Black River that was identified on seismic. The bottom line was natural gas shows were recorded and they are currently testing to see what it is they may have. For those with a technical bent, there was lots of information in the Junex release, so it’s going to be interesting to see what they analysts write in the coming time. Of more interest of course, is what can natural gas price do this winter and will winter be cold or warm?
NATURAL GAS $7.34 +0.078
COMPTON PETROLEUM (T-CMT) $8.41 -0.06
One factor that has definitely affected markets, particularly in the U.S. and in Britain has been the redemption of mutual funds and particularly those that are based in the resource sector.
Yesterday we had another example of that as Ospraie Management has decided to shut down the Ospraie Fund which ran $2.8 billion at the start of August and has been swacked recently because of investments made in the natural gas sector.
According to Bloomberg’s, the Fund has lost 39% this year based on bad bets on commodity stocks and in particular, holdings in natural gas related companies which made up almost one-fifth of Ospraie’s investments.
According to Bloomberg’s, one of their biggest holdings was XTO Energy, accounting for 13% of its assets; Gastar, in which Ospraie was the third largest investor and Compton Petroleum, the Canadian gas company. The chart on Compton shows just how badly Compton has faired over the last while. Mind you, there are other natural gas stocks that have done just as poorly, but when you see natural gas prices plummet as we’ve seen before, it just shows you the volatility in this one commodity.
The concern of course is that now that Ospraie has decided to liquidate its fund, that means that there is going to be downward pressure on many of the other holdings that is has as they hope to send cheques out to fund holders as Ospraie hopes to return 40% of the funds assets to investors by the end of September and another 40% by year-end.
One thing about natural gas prices at this low level is that many of the shale plays that have created such a boom in American production such as the Fayetteville, Haynesville and Barnett areas have very high costs of production because of all the fracing and other technological work that is needed to recover the gas from the harder rock.
We should also point out that these gas plays also have huge production levels at the start that peters out very significantly, within the first year.
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David Pescod's Late Edition September 5, 2008
S&P/TSX COMPOSITE INDEX $12858.98 +44.84
REECE ENERGY (V-RXR) $2.75 +0.32
Yesterday started pretty good for those market players, many of whom are hiding in bunkers these days. The National Post had a great lead article on the front page of the business section quoting several oil and gas analysts, all expecting oil to sell of to $100 and then rebound (according to some analysts) to the $115-$120 level and others suggesting it could bounce back to $140 or better. Which of course was the good news.
The bad news was yesterday, Bill Gross, who runs the enormous Pimco Funds in California with almost $850 billion in assets wrote a commentary that shook up the markets worldwide. In that commentary (if you would like to read the whole piece yourself, go to www.pimco.com) he wrote; “This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage….if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.” He painted a rather scary scenario and because of that article, the financial and banking stocks in the United States fell almost 5%, an enormous drop from already depressed levels and took markets around the world to new lows.
One thing we were counting on is that we’ve been in a bear market now for almost 12 months and sooner or later these things get scary, but they do end. The obvious question is when? It’s getting incredibly ugly.
One of the things we are hoping is true is the statistical averages that show September is not a good month and we’ve already lost more than 1200 points in just four days on Toronto. And October is historically a very good month...except that if there is going to be a crash, it’s usually in October. On the other hand, if you are in the resource sector, statistically the best months for the resource sector are November to March/April.
GOLD $801.92 +5.58
YAMANA GOLD (T-YRI) $9.83 -0.02
GOLDCORP INC. (T-G) $31.03 -0.22
JP Morgan, one of the big investment houses in New York is in the news yet again, this time concerns with some derivative business. We could whine again about the problems caused by the big New York City brokers and bankers and the credit crisis that ensued and how it’s definitely put the markets in a tailspin for much of the last year, but let’s get beyond that.
We all know it’s ugly out there and market historian Bob Hoye suggests he hasn’t seen a market this bad until he goes back to 1969. Yes folks, it is that bad and the good news is that we will probably live through it to fight another day.
JP Morgan still puts out some research from time to time and I guess some of it could be listened to. Of interest was yesterday’s news as one of their mining analysts takes a look at gold and the significant interest that the Indian market has on the precious metal. On the report, analyst Brendan James writes, “We have undertaken an analysis to determine whether speculation surrounding the effect of the Indian wedding season is real, or simply an urban legend. Our analysis indicates that the Indian wedding and festival season has had a positive effect on the gold price since 2002. This suggestion that we could see a strong recovery in the gold price in the last four months of 2008.”
The chart to the left shows you how gold has suffered like all other commodities over the last few months, but the Indian wedding season can make that much of a difference.
“Over the past decade” Brendan James writes, “gold has risen by an average of 10.1% from September through to December, according to a study by the broker. India, the world’s bigger buyer of bullion, increased gold imports 56% last month, the first monthly gain in 11 as price declines boosted jewelry sales….”
“Indian demand typically rises in the wedding season, which runs from late September to December. Jewelers also buy the metal from the Hindu festival of Diwali, or the Festival of Light.”
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. |
