Energy Investors Cling To False Hopes : The Lost Decade

It has been a very challenging time for investors in the energy space, but we find their resiliency impressive, considering they have endured a decade of little to no returns.

Oil companies say there will be a price to pay — a much higher price — for all the cost cutting being done today to cope with the collapse in the crude market.

Investors haven’t made any money over the past decade with the S&P TSX Capped Energy Index gaining a paltry 0.3 per cent annually while the Canadian dollar-adjusted West Texas Intermediate oil price is up only 0.7 per cent per year. This compares to the S&P TSX Index that has gained just over seven per cent per year over the same period.

Even though it remained fairly flat over the past 10 years, the energy index has experienced tremendous volatility with an average standard deviation of 30 per cent, more than double the TSX’s 14 per cent.

It is doubtful that many investors rode out the entire period, instead we think they pulled the ripcord during some of the periods of excess volatility. It’s even worse for those who purchased at its recent peak in mid-2014.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

FP0623_TotalReturns_C_JR

Looking Ahead

With regards to oil prices, we think there could more downside than upside on the horizon especially in this environment of a prolonged global supply-demand imbalance.

On the positive side, global oil demand has been improving and is up 1.2 per cent from last May. However, this may not be enough as global supply has exceeded demand for the past five quarters and could soon see the longest glut since 1985, according to financial news provider Bloomberg.

Not helping matters is OPEC production growth as the group aims to protect its market share against North American producers that have yet to curtail output despite the oil price being halved in the past year. Over the past four weeks the Lower 48 oil production has averaged 229,000 barrels a day higher than the previous four weeks.

With regard to Canadian oil producers, many companies have implied commodity prices at or near the forward curve and some a little bit higher such as Suncor Energy Inc. and Canadian Natural Resources Ltd.

 

We find this to be a useful exercise at times as a large divergence or disconnect either way can be indicative of a sector bottom like in mid-2012 or the peaks of early 2011 and mid-2014.

But today’s signals suggest more uncertainty and are creating a very challenging environment to make an investment decision in.

The bad news is that this may mean we have not yet seen the final capitulation usually needed before the start of a new bull cycle.  This is because high CAD-denominated forward prices, low interest rates and the large capital flow into the sector are providing an artificial sense of hope for marginal producers.

That said, there are still opportunities in the sector, but one has to work extra hard to mitigate the risks of uncertainty.

We continue to stay away from Alberta oil and gas producers as there is still way too much jurisdictional uncertainty. They could under perform like they did during the last royalty review and as a result have a higher cost of capital.

Instead, we look to own those well-funded, non-Alberta producers such as Crescent Point Energy Corp. that are looking to gain market share in this challenged environment.

Read more on protecting your portfolio and capital at hignnetworth.wordpress.com

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Is SandRidge Energy Built to Last? By Investopedia

When SandRidge Energy (NYSE: SD) announced last month that it was raising $1.25 billion in new debt, the move came as a surprise. This is a company whose CEO readily admitted earlier this year that if the current oil price was the new normal that it would, “probably want to remove $1 billion of debt from the balance sheet.” However, instead of focusing on ways to do just that, the company went out and piled on even more debt. It’s a move that certainly begs the question of whether or not SandRidge Energy is building a company that will last.

Piled high and deep
No matter which way we slice it, SandRidge Energy is over its head in debt. After accounting for the recent debt issuance, SandRidge Energy now has roughly $4.6 billion in net debt outstanding. If we add in its equity market value and its preferred equity, the company’s total enterprise value sits at roughly $5.7 billion.

To put that into perspective, SandRidge Energy now has almost as much net debt as EOG Resources (NYSE: EOG), which is a company roughly 10 times its size, since EOG Resources has a $53 billion enterprise value. Another way to look at it, debt as a percentage of SandRidge Energy’s enterprise value is 81% while it’s only 9% of EOG Resources’ enterprise value.

SandRidge added the new debt as a stop gap measure to boost its liquidity and therefore buy it more time to deal with the situation. However, it’s a move that could be its undoing should oil prices stay weak for the next couple of years. That’s because the company needs higher oil prices to push its cash flow higher so that it can support its debt over the long term.

$60 oil is the new $80, but that’s not enough
One of the reasons SandRidge Energy wanted to buy itself some more time is because it’s working feverishly to get its well costs down to $2.4 million per lateral. That cost represents a 20% saving from last year’s well cost and, more important, would enable SandRidge Energy to earn a 50% internal rate of return at a $60 oil price. For perspective, that’s the same return the company had been earning at a $80 oil price when its well costs were over $3 million per lateral. The problem is the fact the company still has a ways to go as its current well costs are $2.7 million.

Furthermore, even if SandRidge can meet its lofty goal of a $2.4 million well cost, the returns it would earn would still be well below what other peers like EOG Resources are already earning. In fact, EOG Resources is actually enjoying better well economics right now than when oil prices were $95 per barrel. As an example, the company’s after tax rate of return is 73% for wells drilled in the western Eagle Ford Shale while the company’s wells in the Delaware Basin Leonard now earn a 71% after tax rate of return, which are above the previous returns of 60% and 36%, respectively.

Investor takeaway
SandRidge Energy’s mountain of debt alone suggests the company isn’t built to last as it has almost as much debt as EOG Resources, a company nearly 10 times its size. Its problems are further compounded by the fact that the company’s asset base simply can’t produce returns on the same level as EOG Resources. Clearly, the company faces a daunting task as it won’t survive unless the price of oil moves meaningfully higher so that it can better support its mountain of debt.

Read more: http://www.investopedia.com/stock-analysis/062215/sandridge-energy-built-last-sd-eog.aspx#ixzz3dsSG8k

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Iraq About to Flood Oil Market in New Front of OPEC Price War

(Bloomberg) — Iraq is taking OPEC’s strategy to defend its share of the global oil market to a new level.

The nation plans to boost crude exports by about 26 percent to a record 3.75 million barrels a day next month, according to shipping programs, signaling an escalation of OPEC strategy to undercut U.S. shale drillers in the current market rout. The additional Iraqi oil is equal to about 800,000 barrels a day, or more than comes from OPEC member Qatar. The rest of the Organization of Petroleum Exporting Countries is expected to rubber stamp its policy to maintain output levels at a meeting on June 5.

While shipping schedules aren’t a promise of future production, they are indicative of what may come. The following chart graphs planned tanker loadings (in red) against exports.

As in previous months, Iraq might not hit its June target – export capacity is currently capped at 3.1 million barrels a day, Deputy Oil Minister Fayyad al-Nimaa said on May 18. Still, any extra Iraqi supplies inevitably mean OPEC strays even further above its collective output target of 30 million barrels a day, Morgan Stanley says. The following chart shows OPEC increasing output in recent months against its current target.

Defying the threat from Islamic State militants, Iraq has been ramping up exports from both the Shiite south – where companies like BP Plc and Royal Dutch Shell Plc operate – and the Kurdish region in the north, which last year reached a temporary compromise with the federal government on its right to sell crude independently.

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Alberta Election Result Latest Blow to Oil Industry

(Bloomberg) — Canada’s energy industry, already buffeted by low oil prices and stalled pipeline projects, is bracing for more setbacks after a New Democratic Party that pledges to raise corporate taxes was swept to power in Alberta.

The NDP, led by Rachel Notley, ended a 44-year Progressive Conservative dynasty by winning a majority of districts in elections Tuesday, according to preliminary results. The NDP promises to boost corporate taxes, review the government’s take on energy revenue, scale back advocacy for pipelines and phase out coal power more quickly.

“It’s completely devastating,” for energy companies and investors, Rafi Tahmazian, who helps manage C$1 billion ($831 million) in energy funds at Canoe Financial LP in Calgary, said on Tuesday. “The perception from the market based on their comments is they’re extremely dangerous.”

The NDP victory may spark a sell off in Canadian energy stocks and stall investment in the oil patch, which is counting on more than C$500 billion in spending over the next three decades in the oil sands alone. The Standard & Poor’s/TSX Energy Index of 64 Canadian oil and gas stocks fell 1.4 percent Tuesday before results came out, the biggest drop in a month.

Energy producers in Alberta, the heart of the Canadian industry, are cutting jobs, reducing drilling and shelving billions of dollars of new investment because of the oil price collapse. While U.S. crude’s rise to around $60 a barrel from a six-year low in March has injected fresh optimism into the industry, executives are preparing for a slow recovery to levels that would make new projects profitable in the oil sands, the world’s third-largest reserves.

Clear Negative

“Just when we’re starting to look like we’re recovering here, we get another layer of uncertainty,” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel Ltd. in Calgary. Pelletier sold some oil and gas shares as polls ahead of Tuesday’s vote forecast an NDP win, he said. “It’s a clear and material negative.”

U.S. investor clients of Calgary-based investment bank AltaCorp Capital Inc. were also pulling positions in Canadian stocks in the run up to the election, anticipating an NDP victory, said analyst Jeremy McCrea. Energy shares, particularly oil-sands operators, are poised to fall over the threat of higher royalty rates, he said.

Suncor Energy Inc., Imperial Oil Ltd., Canadian Natural Resources Ltd. and Cenovus Energy Inc. are among Canada’s largest oil-sands operators.

“Now is not the time for a royalty review,” said Jeff Gaulin, vice president of communications at the Canadian Association of Petroleum Producers. “The uncertainty that that would create for investment would jeopardize jobs in Alberta.”

Good Partner

The energy lobby group is confident it can nonetheless work with Notley’s NDP, Gaulin said.

“Our government will be a good partner” for the energy industry, Notley, 51, said in her victory speech.

There’s a precedent for a stock sell-off based on Alberta energy policy. Canadian oil and gas stocks lost ground to their U.S. peers around October 2007 when the Progressive Conservative government raised royalty rates. The shares traded about 14 percent lower for more than a year, until early indications the government would consider reversing the hikes, according to an AltaCorp analysis. In 2010, the PCs led by Ed Stelmach retreated from most of the royalty boost.

Investor Concern

“If you are invested in energy stocks, you should be concerned,” McCrea said. Drillers already face higher costs to extract oil and gas in Alberta than in many jurisdictions, so an increase in royalties would make the province even less competitive, he said.

The number of oil rigs deployed in Canada’s biggest energy-producing province is at its lowest since 2009 after oil lost half its value last year, according to Baker Hughes Inc. data. Already, Western Canada’s oil growth is poised to slow by 59 percent next year, according to the Canadian Energy Research Institute.

Oil growth in the region will slow to 17,000 barrels a day by next year from 41,000 barrels a day in 2014 as conventional production from drilling declines and stays below last year’s levels through the rest of the decade, according to CERI.

Keystone XL

While not in the party’s official platform, Notley has said she will not advocate for the Keystone XL and Northern Gateway pipelines, oil export projects that have come under fire from environmental opponents of the oil sands and communities fearful of spills along their paths. She has said that Kinder Morgan Inc.’s Trans Mountain line and TransCanada Corp.’s Energy East project are worth discussion.

The Alberta government has been a champion in Washington of Keystone XL, TransCanada’s $8 billion pipeline awaiting a decision by U.S. President Barack Obama. Previous provincial leaders have joined the Canadian government in raising awareness about oil-sands development and regulation to try to win U.S. support for Keystone, a line proposed in 2008 that would transport Canadian crude to the U.S. Gulf Coast.’’

Under the NDP, the corporate tax rate will increase to 12 percent from 10 percent. Notley will form a committee to review royalties and has said she will support more refining of oil in the province, despite a commonly-held view by investors and companies that it isn’t profitable.

Minimum Wage

The new premier will also increase the minimum wage to C$15 an hour and impose stiffer environmental standards and monitoring, according to the party’s election platform. In addition, the NDP leader will ban gas drilling in urban areas. The NDP would phase out coal-fired power plants more quickly than federal regulations that limit them to a 50-year life.

Coal is the biggest contributor to the electricity supply in Alberta, where Westmoreland Coal Co., TransAlta Corp. and Teck Resources Ltd. are among producers.

Alberta and Saskatchewan lead the country in the use of coal for electricity, and both provinces have the highest per capita carbon emissions in Canada, at more than 60 metric tons, compared with 12.5 tons in Ontario, according to Environment Canada figures.

Still, Notley’s platform is a general guideline and the new premier will probably move carefully on economic policies, said Jim Lightbody, chair of the University of Alberta’s political science department in Edmonton. She wouldn’t be able to govern the province and make moves detrimental to the energy industry, he said.

“I would project that she moves carefully, cautiously, sensibly,” Lightbody said.

Half of U.S. Fracking Companies Will Be Sold OR Dead This Year

Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.
There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.
There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.
Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.
Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.
While many large private-equity firms are looking at fracking companies to buy, the spread between buyer and seller pricing is still too wide for now, Alex Robart, a principal at PacWest, said in an interview at CERAWeek.
Fulks declined to say whether Weatherford is seeking to acquire other fracking companies or their unused equipment.
“We go by and we see yards are locked up and the doors are closed he  said. “It’s not good for equipment to park anything, whether it’s an airplane, a frack pump or a car.”

Oilpatch Casualties : Price War Enters The ‘Market Death’ Phase

The battle for market share has reached the stage where the weak will start dropping out, warns energy economist, a global cull that could go on for another year.<br />

The “market death” phase of the oil downcycle is about to commence as margins of many producers are starting to dry up, according to an energy analyst.

Claudia Cattaneo: With the Canadian dollar depressed and share prices of some companies at bargain levels, the odds are high that well-known Canadian names will disappear.

“We are in the midst of a price war and one of the key elements of a price war is that producers start to raise production to elbow out the competition,” Peter Tertzakian, chief energy economist and managing director of ARC Financial Resources told a business audience at a conference in Toronto Thursday.

Last November, Saudi Arabia and OPEC allies decided to maintain output despite falling oil prices, triggering a global oil war that has seen prices cut in half.

“First thing you do [in a price war], is you crank up capacity. You have to pay the bills, employees and banks. You crank it up, till you can’t crank it up anymore.
Until you hit Phase 2, ‘Market Death’, which sounds very ominous. Market death is when some of the participants can no longer produce and start dropping out. It’s starting to happen, not enough yet.”

We are still in the first phase, with market death about to occur.

“And at some point there is capitulation. I would argue that it is coming in the third and fourth quarter, but it could drag on for a year,” Tertzakian said.

The OPEC meeting in June is unlikely to see the Saudis retreat from their determined position of raising production and gaining greater market share at the expense of their competitors.

“I don’t think they [the Saudis] would have felt that enough market death has happened yet. The objective in price wars is to put the weak out of business.”

The silver lining for Canadian and U.S. producers is that tight oil is more responsive and nimble compared to the inelastic conventional global supplies. This is evident from the financings of Canadian oil producers, which have been almost at the same pace as the first quarter of 2014.

“Light oil is going to be winner in the global price wars and the investor sentiment shows that. But the money is going to be very selective and backing winners – perceived winners.”

“The longer [low oil prices] persist, the more you will see companies’ financial situation become more precarious, and potentially looking at being acquired as the best outcome,” said Scott Sharabura, associate principal at McKinsey & Co.’s Calgary office.

At the same time, their businesses remain attractive, he said. “Everything about the logic of investing in Canada — lots of reserves, a safe environment from a geopolitical perspective, low risk, lots of long-term investment potential — still holds.”

Among the larger companies, oil sands producer Cenovus Energy Inc. and oil and gas producer Encana Corp. saw the steepest stock price declines since the beginning of the year. Cenovus issued $1.5 billion and Encana $1.4 billion in equity to soothe the bite of low oil prices. But Cenovus still has a $1.3 billion “funding gap” and Encana is digesting acquisitions it made at high prices as part of its transformation to become a balanced oil and gas producer before oil collapsed.

Penn West Exploration Ltd. is among those struggling with high debt and has been in discussions to ease terms.

“Companies will doubtless feel the squeeze as time goes by and Q2 2015 will inevitably be a time when we see an increase in distressed sales as debt-laden companies have their hands forced by the need to furnish debt,” Eoin Coyne, of research firm Evaluate Energy, said in a report Wednesday.

The most talked about potential acquirers are Canadian Natural Resources Ltd. and Suncor Energy Inc., which saw the largest stock price increases over the same period.

Canadian Natural has been acquisitive throughout its history, particularly when industry conditions are weak. Suncor became acquisitive in the last oil price crash, when it purchased PetroCanada.

Husky Energy Inc., whose stock has been relatively stable, has signalled it has appetite for a “transformational” deal.

But global companies are also likely on the hunt, and in some cases have the benefit of stronger currencies and deeper pockets. In addition to Shell, Petronas, ExxonMobil Corp., Chevron Corp., BP PLC, PetroChina, ENI, Total S.A, Lukoil and Statoil ASA have the financial capacity to make acquisitions, according to Evaluate Energy. With the exception of Lukoil, all have operations in Canada. The Shell-BG merger could push others to do their own deal to keep up, or because by eliminating competition they can reduce costs.

The 1998 oil crash pushed Exxon to purchase Mobil, and BP to acquire Amoco. Chevron later scooped up Texaco Inc. and Conoco took out Phillips.

Junior Oil Spec Pick – Penn West Petroleum Jim Cramer Review

NEW YORK (TheStreet) — Shares of Penn West Petroleum Ltd. (PWEGet Report) are up by 5.96% to $1.60 in mid-morning trading on Monday, as some stocks in the energy sector rise along with the price of oil, which is moving higher a result of the decline in the dollar.

Crude oil (WTI) is gaining by 0.46% to $46.78 per barrel and Brent crude is climbing by 0.72% to $55.72 per barrel this morning, according to the CNBC.com index.

The dollar is lower by 0.47% today, according to the Wall Street Journal dollar index.

In recent sessions currency markets have been volatile as investors consider the prospect of higher U.S. interest rates coming later this year, the Journal noted, adding that when the dollar declines oil becomes less expensive to those acquiring the commodity using foreign currencies.

“At this point, the U.S. Federal Reserve…will have as much of a role in determining the path of crude oil as will Tehran and Riyadh,” industry newsletter The Schork Report said, the Journal added.

Separately, TheStreet Ratings team rates PENN WEST PETROLEUM LTD as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

“We rate PENN WEST PETROLEUM LTD (PWE) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company’s weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.”

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • PENN WEST PETROLEUM LTD has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, PENN WEST PETROLEUM LTD reported poor results of -$3.49 versus -$1.66 in the prior year.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 162.5% when compared to the same quarter one year ago, falling from -$675.00 million to -$1,772.00 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, PENN WEST PETROLEUM LTD’s return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to $120.00 million or 63.52% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm’s growth rate is much lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year: it has tumbled by 81.92%, worse than the S&P 500’s performance. Consistent with the plunge in the stock price, the company’s earnings per share are down 158.69% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock’s sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.