₪ David Pescod's Late Edition 11/03-11/07/08
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David Pescod's Late Edition November 3, 2008
A QUICK UPDATE WITH ABBY BADWI
CEO OF BANKERS PETROLEUM
(As of October 30, 2008)
David Pescod: We are in quite a financial crisis, the biggest
one we've seen in a generation and we've seen stocks
like Las Vegas Sands drop from $145 to $5; General Motors
from $45 to $5 and many oil and gas stocks are trading at
40, 30 or 20 cents on the dollar. How do you see this crisis
working out over the coming while?
Abby Badwi: By far this is the worst economic crisis that I
have seen in my 30 years+ career; but we always recover.
Timing is the main issue but will it be one or several
months; I am an optimist and will predict stronger markets
by Q2-2009 following the US elections and negative impact
of reduced spending by industries and consumers between
now and then.
D.P: As far as oil prices down the road, we are getting
guesses all over the place. But one thing that seems to be
turning out for the bulls is the incredible cut-backs in exploration
around the world and there are even rumors that
the International Energy Agency is worried about a 7%
drop in production in the next year. Any truth to all this
and what is your bet on oil prices down the road and rationale?
A.B: Yes we will see cutbacks in exploration and mega
development projects’ budgets but also oil is a depleting
commodity and long term demand will continue growing all
over the world. Until we come up with alternate and sustainable
energy sources to replace oil, the curve will continue
to move up with corrections and down cycles keeping
oil prices under control. Expenditures cutbacks are going
to be so severe over the next few months that we should
see movement towards $80 by the second half of 2009.
D.P: You are working in Albania with an incredibly large
reserve of heavy oil. Given the new prices for oil, how do
the economics work out?
A.B: Because of our favorable contract terms and efficient
operation in Albania, we still have positive netbacks at current
oil prices. We also have the ability to reduce our capital
program if these conditions prevail for a few more
months. This will mean a slow down of our of production
growth objectives but will maintain our financial integrity to
weather the storm. We will take appropriate action in the
next few weeks.
D.P: The fiscal regime in an Albania – you find quite
comfortable at this current time. Any changes to your
thinking?
A.B: Just like in Canada and elsewhere, changes occurred
to the fiscal terms in Albania last summer when
oil prices were at a record high $147, but we managed to
agree with the Albanian to mitigate the impact of the 10%
royalty through our cost recovery deductions.
D.P: If you could buy only one other oil and gas stock,
other than your own, what would it be?
A.B: Buy the TSX Energy Index with oil and gas companies
that have a strong balance sheet and no major short
term capital expenditures commitments!
D.P: Thank you for the update Mr. Badwi!
When we go to Peter Salamon for answers on what next for oil and gas, the veteran leader of Accrete Energy and
before that Olympia Energy, now running Argosy suggests that if he could only buy one stock right now it would be
Delphi Energy. So why not go to Dave Reid who runs Delphi for an update on his look/see at the oil and gas market and
the stock market at this time.
First of all his comment on the markets is quite simple—that we (investors and brokers) “are much closer to the
fear than I am and to us, it’s just business as usual” but he does think it’s one of the great buying opportunities in
decades...provided of course one has some cash left. His scenario down the road is that by Christmas of 2009 we will
see oil back to $90 or $95 a barrel and he expects that sooner or later we will be getting through one of the worst recessions/
corrections we’ve ever seen in this generation. He does expect to see some demand slack because of this
recession, but also at the same time, because of lack of spending on developing new resources, sooner or later oil
and gas bounces back.
In the meantime, Delphi is one of those companies like so many that is mainly a natural gas story and he mentions
that we are only about two weeks or so from the start of winter and for Delphi and many other natural gas players,
how cold this winter gets will possibly always affect what next. In the meantime he says, the bouncing up and down
of the Canadian dollar which has been quite positive for Canadian producers so far is what could be very interesting
over the next while.
When we ask him, considering how many oil and gas companies have been beaten up so badly, if he had any easy
doubles? His answer is that he can see both Tusk Energy and Terra Energy (mainly gas producers) as potential doubles
and he makes the interesting comment that they both might develop better as part of bigger companies.
Interestingly enough, he is quite comfortable with natural gas prices where they are. We note that of the analysts
following Delphi, Dundee has just cut their target from $3.50 to $2.75; GMP Securities from $4.00 to $2.75; while Scotia
over two months ago raised their target from $2.35 to $3.00.
One of them might be right, but all of them suggest a double or better is possible. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition November 4, 2008
CRUDE OIL $70.12 +6.21
GOLD $764.10 +39.66
NATURAL GAS $7.44 +0.36
S&P/TSX COMPOSITE INDEX $10116.58 +395.32
DOW JONES IND. AVERAGE $9625.28 +305.45
I guess the markets can only get so bad...and then lately
they’ve gotten even worse! But finally you get to a point where
there has got to be relief rally and I guess the excuse being used
today is that, hopes that the presidential election in the U.S.
might give us that relief rally.
Eric Coffin of the Hard Rock Analyst has his own theories and
as far as commodities, he’s suggesting that they’ve been oversold
to grossly oversold for the last while. He suspects with
some of the zinc and nickel producers—if prices don’t maintain
decent levels, mines are simply going to continue to be shut in
and as far as copper, with its cost of production getting evercloser
to what you can get for the commodity, he suggests there
is going to be no new production coming in that industry for a
long time.
Meanwhile, he points once again to China and wonders if we
are going to see numbers out of that country over the next while
and just how soon does that economy turn around. For him, the
important story of the day and what his crystal ball is saying to
be watched is the American dollar as he believes the dollar has
peaked now that much of the credit crisis might be over and that
as the American dollar starts to head the other way, on the slippery
slope we could see commodities that are priced in American
dollars, go up. In other words, it may not be so much oil,
gas or other things going up, as the American dollar going down.
In the meantime, one of the Coffin Brothers favourite stories
today created quite an interest and that was Hathor Exploration as
they reported some of the most beautiful numbers ever seen in
the uranium exploration business on their Roughrider zone on
the Midwest Northeast property in northern Saskatchewan. How
about drill hole #MWNE-08-40 with 23 metres grading 11.23%
U308. (HAT President Stephen Stanley points out that is $18,000
rock). Within that sector was two metres that graded almost
50%. Almost unheard of. Drill hole MWNE-08-37 had 18 metres
grading 4.15% U308 and hole MWNE-08-42 sounded almost meagre
with a paltry 3.5 metres grading 5.9% U308, but at any other
mine in the world, that would have been thought of as unbelievably
generous. There you go!
So how come the stock didn’t do better today? Canaccord
analyst Eric Zaunscherb who follows the story suggests, “As far
as the project, this is just great news” but he cautioned us that
there’s no news now on further drilling results until probably
February as they start drilling from the ice around January 1st.
Zaunscherb also is concerned that there might be some tax-loss
selling.
But as far as exploration stories in the mining sector, this is
the one story to be watching.
COASTAL ENERGY (V-CEN) $2.00 +0.30
PAN ORIENT ENERGY (V-POE) $5.26 +0.46
We’ve been following the fortunes of Coastal Energy over
the last few months, but in the main they’ve been misfortunes
as between the drop in oil prices and the credit crisis,
if you were in the oil and gas patch, you haven’t had a
pleasant journey.
In the meantime, Coastal thought they had some rigs to
get their drilling done offshore Thailand and that wasn’t
the case. But after many delays they have finally got
around to testing their Songkhla A-01 well and I guess it
proves the old saying that sometimes patience is a virtue
as the results have been worth the wait. But then offshore
Thailand over the last while has been very, very productive
for companies such as Unocal, Pan Orient Energy and
Coastal.
The news announced this morning is that “Following
the initial flow test, an extended production test began on
3 November, 2008 and is expected to last through December.
The well is currently producing in excess of 4500
barrels of oil per day with no water production...The oil is
a medium sweet grade with API gravity of 29 degrees and
0.24% sulfur content and will initially be marketed to a
local Thai refinery.”
In the release Randy Bartley says (he is currently in
Thailand as we speak) “We are very pleased with the results
of the Songkhla A-01 well. We logged 65% greater
net pay than the original Songkhla well. The current flow
rate is significantly higher than the rate we were using in
our financial presentation. The extended production test
will continue while we drill additional wells on the
Songkhla main structure.”
For the next several months and possibly the next two
years, Coastal’s work offshore Thailand makes it probably
(now that they are finally at it) one of the stories to be
watching in oil and gas, particularly if oil might finally be
looking for new signs of stability (or at least that it won’t
crash).
Meanwhile, Canaccord’s oil and gas analyst Fred Kozak
has done an update on Coastal and has a $6.25 on the
stock. For those wishing to receive a copy, e-mail Debbie
at debbie_lewis@canaccord.com. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition November 5, 2008
CRUDE OIL $65.40 -5.13
NATURAL GAS $7.49 +0.04
One thing about being in an oil and gas stock right
about now is figuring out what next for oil prices down
the road. If oil is headed to $50, this sector that has been
so beaten up could still take another hit on the chops, but
on the other hand if we’ve seen the bottom…
So it was interesting on Monday to see two reports hit
the desk of most oil and gas watchers. The first was a
pretty in-depth look by Credit Suisse on China suggesting
that “the economic data out of China suggests a much
more severe economic slowdown is underway. And they
suggest that hopes of even a slightly decoupled China in
2009 are fading fast.” Credit Suisse has reduced its expectations
of Chinese GDP growth to just 5.8% for 4Q08;
6% for 1Q09; 6.3% for 2Q09 and 8.5% for 2010. “This
would be the lowest levels of economic growth in China
for many years” the report notes.
Because of this, they have reduced estimates for Chinese
oil demand growth from 4% to near zero and then
seeing recovery in 2010 back to 5.4%. They suggest, “The
global oil market is oversupplied by 1.8 MBD for FY2009,
which is meaningful but not unprecedented. However, the
market looks oversupplied by 2.6 MBD for the first half of
the year.” Because of this, Credit Suisse has lowered
their WTI oil forecast to $60.00 for 2009 (from $75) and is
now $80.00 a barrel for 2010 (down from $100).
We should point out that the oil analysts all seemed to
chase expectations up during the oil boom and are now
racing to lower expectations and how much help has been
afforded…
Also being released Monday was a report by Raymond
James in their “Stat of the Week” which asks the question,
will escalating oil sands costs in Canada support a
$70 to $80 a barrel floor for oil price?
Their report concludes, “The already high—and potentially
still rising—cost of Canadian oil sands projects reinforces
our thesis (mainly premised on OPEC’s market
influence) that $70 to $80/Bbl should be viewed as the
intermediate-term floor for WTI oil prices. Keep in mind,
our 2009 forecast is still $90/Bbl despite the fact that current
oil prices are nearly $25 lower. Of course, rules like
this can—temporarily—go out the window in the midst of
a commodity market meltdown of current proportions…
More broadly, rising finding and development (F&D) and
operating costs can be seen not just in Canada, but in
many other producing regions, including the Gulf of Mexico,
North Sea, West Africa and Russia.”
Meanwhile, Jeff Rubin, the CIBC economist whose made some pretty varied predictions on oil over the last few
years (many of them correct) is now being quoted in Macleans Magazine suggesting that oil should be given part of
the credit for creating this recession as he suggests four of the past five global recessions have been related to some
sort of oil shock and he suggests this time is nothing different.
In the article, Rubin suggests that if triple-digit oil prices were what started the recession, $60 oil prices are what
would help end it.
Raymond James adds, “Over a 6-12 month time frame and beyond, we think current prices are unsustainably low
to encourage the necessary level of investment in new production.”
We should add that the Credit Suisse report writes, “Behind the headline-grabbing shocks to the oil demand curve,
however, is the steadily building story on non-OPEC supply, which remains far from robust. When oil demand eventually
recovers, non-OPEC supply is likely to be falling faster than market consensus expects, we think.”
In the meantime, the suggestion remains what will help oil prices down the road is people around the world spending
less money to look for the stuff and at some point down the road when economies bounce back and oil is suddenly
not as abundant, prices could once again have a good day in the sun.
321energy.com is a great site for finding information on oil and gas stories or natural gas around the world and
they have some fairly interesting stories based on Gazprom, the huge Russian oil and gas company that people simply
don’t know that much about with all the various political wheeling and dealings in Russia that aren’t all that transparent.
Gazprom has announced that their oil output forecast for 2008 has been lowered from 232 million barrels to
229 million barrels, which isn’t much of a difference, but it shows the direction and over the last ten months, Gazprom
production seems to be steadily down.
Of interest is the announcement by Gazprom that investment in 2009 will decline by 20% to 25% and they suggest
that if oil prices fall further, the reduction in the investment program will be even larger. Spend less and you find a lot
less and meanwhile, you still have those big depletion rates.
So just when do we see the bottom in oil and how high can it bounce?
SHANGHAI COMPOSITE INDEX:
Our “Mystery Oil and Gas Guy “ from a few days ago,
suggested that the time to get really excited about oil
and gas will be a couple of quarters down the road,
when the world economies have put in a bottom.” But
he suggests “the most important sign that we’ve seen
that bottom is by watching the Shanghai Composite Index
in China and when things look like they’ve finally
bottomed there, give it a few months and then it’s time
to get aggressive as heck about oil and gas” he suggests.
One look at the Shanghai Index tells you that it’s
been brutal the last year as it has dropped almost 70%.
Means an awful lot of Chinese new to the stock market,
probably won’t have a lot to do with it until things definitely
look better. _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition November 6, 2008
CONNACHER OIL AND GAS (T-CLL) $1.84 -0.02
Somehow I thought this day might have seen a little
joy, maybe even some celebration...not hiding in a bunker
wondering how many 400 point down days the Dow
and TSX might have for us and worry if oil even has a
future!
We are referring to the long, anticipated final announcement
by the Alberta’s Cabinet that Connacher’s
Algar SAGD project has been given the go-ahead. Estimates
suggest that $120 million of the $350 million project
has already been spent or committed, but now they
go full-boar ahead.
Jenny Mikhareva of Macquarie Securities writes in a
report today, “Connacher now has all the necessary
regulatory approvals to proceed with construction of
Algar, it’s second 10,000 barrel a day SAGD project at
Great Divide.”
“We expect the company to begin preparing the site
for construction immediately….and to start construction
of the plant around year end 2008.”
She writes, “The plant should take roughly 300 days
to build and about one month to commission and then
three months for steam to be going into the ground with
first bitumen production anticipated around March
2010.”
She points out something very important given the
credit crisis, “The project is fully funded, with the company
having roughly $395 million available in cash and
credit.”
Mikhareva has a $5.00 target on the stock writing,
“The company is an attractive investment due to its existing
production and cashflow base; significant, welldefined
growth going forward; its risk mitigating integrated
strategy; and a track record of successful project
execution.”
Meanwhile, GMP Securities has a $4.50 target on
Connacher (down from $6.25) and Raymond James has
a $5.75 12-month target (down from $7.25).
Oh, please! Let one of them be right...any one of
them... _____________________________________________________________________________________________________________________________________
David Pescod's Late Edition, November 7, 2008
POTASH CORP. (T-POT) $95.82 +1.57
SUNCOR ENERGY (T-SU) $25.50 +0.75
It sounds simple enough...buy low, sell high. But we’ve
just gone through one of the biggest stock market crashes
in generations and what did people do? Well, in Canada
over $8 billion was withdrawn from mutual funds in that
month alone, showing that when it looks like the sky is falling
and the world might be ending, some folks actually do
sell low...Mind you, you had to have the bravery and courage
of “I don’t know who” to have stepped into the mess we saw
in October.
For those looking ahead and needing a little hand holding,
Canaccord’s Nick Majendie has some thoughts on
where we are in the market cycle. First of all he points to the
huge increase in money supply showing that governments
around the world not just in the U.S. are throwing money at
the problem and sooner or later that will have an effect.
Meanwhile, he points out several features of a market
bottom being in place such as volatility as being measured
by the VIX has now declined; there is huge insider buying of
stocks both in Canada and the U.S. at all time-highs and the
ratio of bears to bulls as measured by the American Association
of Individual Investors has shown extremely negative
sentiment.
Also, U.S. housing starts and consumer confidence are at
levels that last were seen around the time of market bottoms
in 1974 and 1982. He also points out the immense holdings
of cash in the U.S. which is now at about one-third of the
value of the S&P 500 and will provide fuel for the next bull
market.
Bottom line to Majendie is: “If the deep negative current
reading is any indication, this recession could well turn out
to last as long as the 1973/75 recession or 16 months. If it
turns out the be the same duration, that would put its end
about April 2009.” He points out that historically, North
American equity markets turn up on average four months
before the end of recession. In other words, if Nick is right,
we aren’t far from the bottom.
Some of his favorites include Potash Corp., SNC Lavalin and
Suncor Energy.
THE ROYAL BANK OF SCOTLAND
OILEXCO INC. (T-OIL) $4.95 +0.03
The chart on the next page shows that of the Royal Bank of Scotland and a rather aggressive bank by banking standards
and they paid for it in the last while. First the Bank of England has had to shove $20 billion plus just a few weeks ago and
now it looks like they are looking for another $9 billion plus, of equity. The chart shows you that it looks like a sad story
on the Venture Index instead of being a major international bank. It’s now about eight cents on the dollar from where it
was two years ago.
The problem of course is that it’s the banker to several
major corporations and one of them is Oilexco and
the question remains, will the Royal Bank of Scotland
have to call a note for $200 million on Oilexco, sometime
in the first quarter next year? If it does, that could be
ugly for Oilexco, unless of course they have alternatives
lined up and the suggestion by some is that they do.
Which gets us to Josef Schachter. The seemingly
perma-bull on oil and gas has just come up with his
monthly report from Maison Placements and it’s entitled,
“Generational Buying Opportunity”. In the introduction
he mentions “The recent stock market collapse has
reached climactic conditions—with blood running in the
street, we are not heading into a depression. Once winter
is here, energy prices will lift materially and energy
stock prices will follow.”
He has quite an update on two companies in particular,
Canadian Superior Energy and Oilexco, but his top picks
for the month are (on the domestic scene) Delphi Energy
and (internationally) WesternZagros. You’ll notice that
many of the targets he has for the companies he follows
are aggressive. Make that ultra-aggressive!
We keep wondering if we shouldn’t tap Josef on the
shoulder and mention there is a credit crisis and an economic
crisis, but just in case he’s right…
Which gets us to something else. With oil prices
down, and stock prices devastated, it’s unfortunate that
many brokerage firms reach a point where they have to
up margin standards and we note an interesting collection
of almost 200 stocks are suddenly facing tougher
margin requirements.
Birchcliff Energy, Bronco Energy, First Calgary Petroleum,
Greystar Resources, Horizon Beta’s, Kirkland Lake
Gold, Niko Resources, Norsemont Mining and Oilexco
Inc. (These are just a few amongst the group).
You’ll notice Oilexco firmly on that list, but there is
also a former collection of stock market darlings making
that list and one is hoping that Canadian billionaire Seymour
Schulich has no problem with margin on Birchcliff
Energy.
For those who would like a look at Josef Schachter’s
latest Maison Monthly and his ultra-bullish look/see at
the energy sector, e-mail Debbie at debbie_
lewis@canaccord.com. |
