Oil Enters Bear Market

Brent Falls to Lowest Since 2010 After IEA Cuts Forecast

Brent crude fell to the lowest level in almost four years after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009. West Texas Intermediate slipped for the fifth time in six days.

Futures dropped as much as 3.1 percent in London and 2.1 percent in New York. Oil consumption will rise by about 650,000 barrels a day this year, 250,000 fewer than the prior estimate, the Paris-based agency said in its monthly market report. U.S. crude supplies probably grew by 2.5 million barrels last week, according to a Bloomberg survey of analysts before a report from the Energy Information Administration on Oct. 16.

Oil futures have collapsed into bear markets as shale supplies boost U.S. output to the most in almost 30 years and global demand weakens. The biggest producers in the Organization of Petroleum Exporting Countries are responding by cutting prices, sparking speculation that they will compete for market share rather than trim output. Saudi Arabia won’t alter its supplies much between now and the end of the year, a person familiar with its oil policy said on Oct. 3.

“The IEA report is killing Brent,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “This is the fourth month in a row where they’ve cut their demand forecast. There’s tremendous downside risk for the market.”

Fourth Month

Brent for November settlement declined $2.54, or 2.9 percent, to $86.35 a barrel on the London-based ICE Futures Europe exchange at 10:24 a.m. in New York. It slipped to $86.17, the lowest intraday price since Dec. 1, 2010. The volume of all futures traded was 68 percent above the 100-day average for the time of day. Prices have decreased 22 percent this year.

WTI for November delivery dropped $1.71, or 2 percent, to $84.03 a barrel on the New York Mercantile Exchange. The contract settled at $85.74 yesterday, the lowest close since December 2012. Volume was 72 percent higher than the 100-day average. The U.S. benchmark grade traded at a $1.96 discount to Brent, down from $3.15 at yesterday’s close.

The IEA reduced its estimate for demand growth this year for the fourth month in a row, meaning oil consumption will expand by about half the rate of 1.3 million barrels a day anticipated in June. The IEA cut its 2015 demand growth forecast by 100,000 barrels a day to 1.1 million. About 200,000 barrels a day less crude will be needed from OPEC this year and next than estimated previously, the agency said.

Market Share

OPEC, which supplies about 40 percent of the world’s crude, is raising output as its members compete for market share while seeking to meet increased domestic demand. The group pumped 30.935 million barrels a day in September, the most since August 2013, according to a Bloomberg survey. The gain was led by Libya, where output climbed by 280,000 barrels a day to 780,000, the fifth straight increase.

“The recovery in Libyan oil production has pushed up total OPEC output at a time when demand growth is slowing,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “OPEC has a serious problem.”

Iraq said on Oct. 12 that it will sell its Basrah Light crude to Asia at the biggest discount since January 2009, following cuts by Saudi Arabia and Iran. Middle East producers almost always follow the lead of Saudi Arabia, OPEC’s largest member when setting export prices. The Saudis need to deepen price cuts for Asia by between 70 cents and $1 a barrel to restore a competitive position against other Middle Eastern and West African suppliers, according to JPMorgan Chase & Co.

Divergent Views

Oil ministers from Kuwait and Algeria have dismissed possible output cuts as the price slump prompted Venezuela to call for an emergency OPEC meeting. The group is scheduled to gather on Nov. 27 in Vienna.

The EIA, the Energy Department’s statistical arm, will release its weekly petroleum inventory report on Oct. 16 at 11 a.m. in Washington, a day later than usual because of yesterday’s Columbus Day holiday. Crude supplies rose 5.02 million barrels to 361.7 million in the week ended Oct. 3, the biggest increase since April, EIA data showed.

“The market isn’t expected to get any relief from Thursday’s inventory numbers,” Yawger said. “We’re looking for it to show a substantial build in crude supplies, coming on top of a 5 million-barrel build the previous week. There’s plenty of crude on hand.”

The report will probably show that gasoline stockpiles dropped by 1.55 million barrels in the week ended Oct. 10, according to the median estimate in the Bloomberg survey of eight analysts. Inventories of distillate fuel, a category that includes diesel and heating oil, are projected to have slipped by 1.65 million barrels.

Fuel Prices

Suncor Energy

SU : TSX : C$42.60
Target: C$50.00

Energy — Senior E&Ps/Integrateds
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

BlackPearl Resources Inc

PXX : TSX : C$2.64

Target: C$4.00

BlackPearl (PXX : TSX) is a mid-capitalization exploration
and production company focused on large scale resource
plays: primarily conventional and thermal heavy oil and
bitumen opportunities in Canada.

All amounts in C$ unless otherwise noted. Investment recommendation
Closing of its bought deal equity financing. The update reinforced our positive view of the
stock; our conviction on the story has grown given its improved financial
outlook and growth profile. Given an attractive >50% forecast return to

There are five primary reasons we have a high conviction on PXX:
1) The stock clearly fits our team’s positive view on heavy oil
fundamentals given a 98% heavy oil weighting.
2) A best in class management team with a history of value creation (it
sold BlackRock Ventures to Shell in 2006 for $2.4B).
3) An underappreciated growth profile through 2016 (forecast
production up 60% relative to 2014), with a fully financed plan in
place for development of its first thermal growth project at Onion
(without the need for any new term debt).
4) Two high quality thermal projects with its largest project at
Blackrod de-risked given positive pilot performance.
5) An extremely compelling valuation where investors are currently
paying for only its conventional assets and receive 850 million
barrels of thermal upside for free.
We have maintained our BUY rating and target price of C$4.00 based on
an unchanged 1.0x multiple to NAV and a 13.2x 2014E EV/DACF
multiple. The stock trades at 0.7x CNAV, 9.0x EV/DACF, and
$94,200/BOEPD on our 2014 estimates which reduces to 5.4x EV/DACF,
and $61,400/BOEPD on our 2016 estimates with the contribution of
production from Onion Lake Phase 1.


Canadian Natural Resources Ltd. BUY

CNQ : TSX : C$32.61
Target: C$42.00

Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
We are raising our target price by $3 to $42  on the heels of its Q3 release due to the following:
We believe the large dividend raise demonstrates three things: a) management’s confidence that the Primrose issue is just mechanical; b) where the company is in the spending cycle on the Horizon expansion – i.e., the company sees a path to being in harvest mode and thus ever increasing free cash flow (Figure 1); and c) the benefit of long life oil sands projects.
The company is now changing its tune with respect to acquisitions. In the past management used to highlight how free cash flow would be used to make acquisitions, which would in turn create an overhang on the stock. Yesterday, however, when asked, management stated it has no need to do any acquisitions given there are no gaps in the asset base, thus giving investors greater hope of further dividend increases.
We continue to believe the current WCS differential blow out is temporary and much different than this time last year. While differentials are about as wide as they were a year ago, the difference this time is that there is a clear line of site on infrastructure improvements in less than a year’s time owing to increased coker, pipeline, and rail capacity. As such, CNQ will be the go-to stock given roughly 40% of its production is heavy oil and it lacks downstream operations, which would act as a partial offset. Additionally, it is essentially a household name for non-Canadian investors (the incremental buyer) on this theme given its market cap and liquidity.
Cheapest in the group. At 4.8x 2014E DACF, CNQ is the cheapest among the Senior E&P/Integrateds in our coverage universe, which on average are at 6.1x.

Suncor Energy Inc. Update

SU : TSX : C$37.85
Target: C$46.00

Suncor is the largest Canadian integrated oil company, also with the largest position in the Canadian oil sands industry. Key to its growth is expansion of its oil sands business. The company completed a merger with Petro-Canada in August 2009.
All amounts in C$ unless otherwise noted.

Energy — Integrateds
The key to SU’s guidance release last night, in our view, is that the company’s capex program, cash tax and oil sands operating cost expectations support the potential for another meaningful dividend increase in February 2013 as well as further share buybacks throughout next year. Additionally, on account of a sub $8 billion capex program, we believe the market will look favorably upon the release. As a result, we maintain our BUY rating and $46 target price for the following reasons:
 Still expecting massive free cash flow potential: We expect SU to generate $2.75 billion or $1.84/share next year of free cash flow in 2014 (assuming a $7.8 billion capex budget and US$104/Bbl Brent and US$97.25/Bbl WTI oil prices), which compares to the current $0.80/share of annual dividends. As such, expect another large dividend raise in early February. As shown in Figure 4, SU has by far the largest free cash flow potential next year amongst the Canadian Sr. E&Ps/Integrateds.

 Valuation still looks cheap Shares are trading at 5.9x 2014E DACF vs. the Canadian Sr. E&P/Integrated group average of about 6.3x; and vs. IMO at 10& CVE at 6.7x.
 Next catalyst: 1) Expect the December 4th investor day to be another share price catalyst. SU plans to provide more clarity on its mid-term growth plans including Firebag 5 & 6, which are expected to be low cost de-bottlenecks. We believe the market will be positively surprised by the return potential of these projects; because that is a key unknown. 2) The aforementioned expected dividend raise in February.

Enbridge Inc. Update BUy Target Price $50

ENB : TSX : C$42.44
Target: C$50.00

Enbridge operates the world’s longest crude oil and liquids pipeline system. The company owns and operates Enbridge Pipelines Inc., a variety of affiliated pipelines in Canada, and has a 23% interest in Enbridge Energy Partners LP and a 67.8% interest in Enbridge Income Fund.
All amounts in C$ unless otherwise noted.

Infrastructure — Pipelines
Investment recommendation
Enbridge hosted its 15th annual Enbridge Day, once again highlighting the company’s dedication to the safety and integrity of operations, the execution of its committed growth projects, and delivering on incremental growth initiatives to enable the earnings, cash flow, and dividend growth profile to extend into the second half of the decade. In 2013, the company expects to place into service about $5 billion of projects ($4 billion already placed into service), with another $9 billion slated for completion in 2014. Many of the projects will increase liquids pipeline capacity and generate increased volumes on the Canadian Mainline (among other pipelines) where earnings growth is fueled by volume throughput under the Competitive Tolling Settlement. The company now has ~$26 billion of commercially secured growth projects which are expected to be placed into service over the 2013 to 2017 period. In addition to the commercially secured portfolio of projects, Enbridge has $10 billion of risked opportunities that are unsecured, which are included in the longer term financing plan and earnings outlook (beyond 2017).
With the secured project portfolio currently before them, management expects the company’s EPS growth rate to average 10-12% and has extended the growth horizon by one year through 2017 (previously through 2016) with dividend growth commensurate with EPS growth and potentially higher beyond 2017. Note that about $14.3 billion of the projects have an upward sloping return profile, implying higher returns in later years. As a result, management is comfortable that the potential $10 billion of unsecured risked projects and the tilted returns from more than half of its secured projects will provide support to extend the company’s growth profile beyond 2017 at the 10-12% rate. Enbridge has a very visible and attractive growth outlook with a management team that has proven itself by meeting targeted in-service dates at or below budget. We believe the strong EPS, CFPS, and dividend growth profile combined with the stable and proven business model is compelling, particularly in a rising interest rate environment. We maintain our BUY rating and 12-month C$50.00 target price.

MEG Energy Corp. : Upgrade To Buy

MEG : TSX : C$34.17
Target: C$44.00

MEG Energy Corp. is an oil sands company focused on sustainable in situ oil sands development and production in the southern Athabasca region of Alberta, Canada.
MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods.
All amounts in C$ unless otherwise noted.

Keystone XL does not matter,  we are going positive on heavy oil fundamentals, we are raising our rating on MEG Energy to BUY from Hold. We believe the company will in the near-term be in a sweet spot where it benefits from both netback improvements and production growth:
 We believe it has the best direct cash flow torque to improved infrastructure due to its rail and barge agreements as well as its commitments on Flanagan South. And it also provides the lowest company specific risk to XL being rejected or delayed given it has no commitments on the line (i.e., it won’t need to scramble to find an alternative route).
 Phase 2B is expected to commence first production later this year increasing the company’s production by 35 MBl/d vs. its Q2/13 average rate of 32 MBbl/d. However, as seen with the company’s current plant, we expect to see rates higher than the stated design due to an outperformance of the SOR and RISER initiatives.
 As such, due to the direct netback impact and expected production growth, we see its CFPS rising roughly 188% YoY in 2014. 

Company-specific key catalysts over the next six months will be:

1)Monthly AER production numbers demonstrating rising production. Of note, July SAGD numbers were recently released showing MEG’s Christina Lake volumes rising 1.1 MBbl/d or a little over 3% MoM;

2)meeting its ‘13 exit rate target of 37-43 MBbl/d; and 3) demonstrating the uptick in its netbacks when it reports Q4 results in early 2014.
 We are raising our target from $39 to $44 to reflect our bullish stance on the stock with respect to our improved heavy oil outlook. Our target price is based on 1.25x our risked NAV estimate. The premium to NAV reflects the company’s high quality asset, excellent operational execution, and direct exposure to the shift change in heavy oil fundamentals given its rail, barge, and Flanagan South arrangements. We are also adding MEG as our  pick for Oil Sands/Heavy oil.


Keystone XL demonstration, White House,8-23-20...

Keystone XL demonstration, White House,8-23-2011 Photo Credit: Josh Lopez (Photo credit: Wikipedia)

TRP : TSX : C$49.14
Target: C$51.00

TransCanada is a North American energy infrastructure company. Its gas pipeline network spans approximately 68,500 km across North America. The company has ~380 Bcf of gas storage capacity and owns or has interest in over 10,900 MW of power generation in Canada and the US. The company also owns the 3,460 km Keystone Pipeline system which began deliveries in 2011 to Cushing, Oklahoma from Hardisty, Alberta


Investment recommendation

TransCanada reported first quarter recurring earnings of $0.50 per share, below the $0.53 consensus and our $0.55 expectation. Earnings per share were negatively impacted by lower than expected availability at Bruce Power, lower hedge prices on Alberta production, and continued throughput decline on the U.S. natural gas pipeline systems. These negative issues were offset by recording a higher allowed ROE (11.5% versus 8.08% last year) on the Mainline, which added about $0.03 to Q1/13 EPS. Importantly, given the company’s revised outlook on the timing of a U.S. Department of State decision for Keystone XL, management has shifted the expected start-up date for the project to the second half of 2015 (versus late 2014/early 2015 previously). With timing delays, the company expects its capital costs for the project to escalate from its current estimate of $5.3 billion, although management will not provide any details on the magnitude of potential cost increases until it receives U.S. Department of State approval for the project.


Our 12-month target is derived from a combination of valuation metrics, including earnings and dividend yields relative to long-term interest rates, a dividend discount model, and earnings multiples relative to its energy utility peers. We value the company on the longer-term potential of existing assets and projects under construction. We note that there is the potential for upside to our target price once more certainty is provided surrounding the timing and likelihood of an approval for the cross-border section of Keystone XL. We also incorporate an approximate 100 basis point increase for our estimate of the future long-term Government of Canada bond yield.

Americas’ Growing Oil Production – Glut May Drive Prices to $ 50

King Abdullah ibn Abdul Aziz in 2002

King Abdullah ibn Abdul Aziz in 2002 (Photo credit: Wikipedia)

( still the U.S. imports 8 million barrels a day)

The U.S. expanded its oil production this year by the most since the first commercial well was drilled in 1859, upending a belief that Americans were increasingly hooked on foreign crude.

Domestic output grew by a record 766,000 barrels a day to the highest level in 15 years, government data show, putting the nation on pace to surpass Saudi Arabia as the world’s largest producer by 2020. Net petroleum imports have fallen by more than 38 percent since the 2005 peak and now account for 41 percent of demand, down from 60 percent seven years ago, moving the U.S. closer to energy independence than it has been in decades.

Seven years after President George W. Bush declared “America is addicted to oil, much of which is imported from unstable parts of the world,” the country has so much crude that it was able to join Europe in choking off exports from Iran without pushing U.S. benchmark prices over $100 a barrel. And refining capacity helped make the U.S. the world’s largest fuel supplier. Even in Venezuela, where Exxon Mobil Corp. (XOM)’s assets were seized, more and more cars run on gasoline made in America.

“The U.S. has a huge lead in the 21st century in maintaining its superpower status,” said Ed Morse, global head of commodities research at Citigroup Inc. in New York. “There was absolutely no way to anticipate the level of growth in the oil supply.”

Faster, Cheaper

America’s latest oil rush was spurred by new technology that has made drilling faster, cheaper and better at unleashing oil from rock formations, even as it has raised alarms among environmentalists about the potential danger to drinking-water supplies and intensifying greenhouse-gas emissions.

Producers, eager to profit from prices that have remained above $75 for more than two years, deployed as many as 1,432 rigs, the most in records going back to 1987. Trucks bearing pipe traversed Wyoming’s high desert plains and Oklahoma’s back highways, geologists pored over well logs from Colorado to New Mexico, and landmen trying to secure mineral rights crowded into courthouse record rooms from North Dakota to the Gulf Coast.

The U.S. will produce an average of 6.41 million barrels a day this year, a 14 percent increase from 2011, according to a Dec. 11 report from the Department of Energy. It’s the biggest annual gain in the number of barrels since the industry began when Pennsylvania’s Drake well ignited the first American oil rush in 1859, department data show. Saudi Arabia pumped 9.7 million barrels a day in November, according to data compiled by Bloomberg. The Paris-based International Energy Agency said last month the U.S. is on track to become the top producer in about eight years.

‘New Thing’

“The shale oil revolution is a new, new thing,” said Francisco Blanch, the head of commodities research for Bank of America Merrill Lynch in New York. “It has come out of nowhere in the last year and a half.”

The nation’s stockpiles increased by a record 13 percent this year, and U.S. refiners are paying less for crude than much of the rest of the world. Landlocked by export restrictions and limited transportation, the glut of U.S. light, sweet crude — cheaper to process than the high-sulfur, sour grades pumped by Saudi Arabia and Venezuela — pushed domestic prices down to as much as $28 a barrel less than Brent, the European blend that sets prices for more than half the globe’s oil.

That discount handed Gulf Coast refiners an advantage over competitors and helped the U.S. become a net fuel exporter last year for the first time since 1949, surpassing Russia as the world’s largest. Venezuela quintupled its imports from the U.S. this year to a record 196,000 barrels a day in September, according to Energy Department data.

Global Clout

Rising output from the U.S. has also increased the nation’s sway in the global market by forcing the Organization of Petroleum Exporting Countries into an unpalatable choice: Increase production to bring prices down and maintain market share; or keep prices high to sustain state spending, and thereby subsidize the competition from U.S. producers, which can provide crude to domestic refineries at a lower price.

The unprecedented gains came so quickly that the industry is rushing to regroup. The 500-mile Seaway pipeline, which was reversed last year and now carries U.S. crude south to Gulf Coast refineries instead of moving imports north, will expand to 400,000 barrels a day as early next year from 150,000 now.

Northeastern fuel makers, on the verge of insolvency a year ago, have begun replacing foreign cargoes shipped by tanker from Africa, Europe and the Middle East with cheaper domestic oil brought in by rail. A pipeline shortage has boosted profits at tank-car maker American Railcar Industries Inc. and at BNSF Railway Co., owned by Warren Buffett’s Berkshire Hathaway Inc.

Exports Limited

Even if there were enough pipelines to carry more crude from swelling storage hubs to the coasts, oil exports are limited by rules imposed by Congress following the 1973 Arab oil embargo.

Exports may be necessary to avert a surplus that would depress prices and discourage drilling, said Bank of America’s Blanch. West Texas Intermediate oil, the U.S. benchmark contract, could fall to as low as $50 a barrel within the next two years unless the rules are eased to relieve the glut, he said. Until prices drop, it may be difficult for politicians to persuade the American public to allow expanded exports.

“What I see is basically an inability to go out and explain to the public that we have to change the rules before the prices give us the signal,” Blanch said. “If you’re in the White House, why are you going to change the crude-export rules that the U.S. has right now when the country is still importing 8 million barrels a day of oil?”

Forestalling Glut

At least one member of the Obama administration has begun making the case that the U.S. is building toward a crippling surplus. Adam Sieminski, head of the U.S. Energy Information Administration, the statistical arm of the Energy Department, said limited transactions with other countries may help forestall excess supplies that could undermine prices and hobble the industry.

“That’s going to be a policy decision of the Congress and the administration,” Sieminski said. “It’s just a question of what the economics are.”

The surge in oil output, coupled with record natural gas production, allowed the U.S. to meet 83 percent of its own energy needs in the first eight months of 2012, on track to be the highest since 1991, Energy Department data show. The last time self-sufficiency was achieved was in 1952. While the U.S. still imported some petroleum then, exports such as coal more than offset foreign cargoes.

Overseas Shocks

That interconnectedness means U.S. consumers will still be vulnerable to supply shocks overseas, Sieminski said. An Energy Department forecast shows the country will import 10 percent of its needs in 2035. That doesn’t account for slowdowns because of new regulations, which may tighten because drilling has been linked to groundwater pollution and earthquakes, he said.

Then there’s the problem of how burning all these fossil fuels may contribute to climate change, said Anthony Swift, an attorney with the Natural Resources Defense Council in Washington.

“There’s a real environmental cost to investing billions of dollars in new sources of carbon-intensive fuels when we know we really need to be investing in clean energy,” Swift said. “It’s better for our environment, better for our economy and better for energy security.”

Tightened automobile-mileage requirements helped reduce consumption of petroleum products by 16 percent through September since peaking in August 2005, a drop of 3.5 million barrels a day, Energy Department data show.

Dakota Boom

The U.S. oil boom began in 2004 with a North Dakota well completed by Continental Resources Inc., which confirmed that a combination of two technologies could unlock profitable amounts of crude in pockets deep underground.

Continental paired horizontal drilling, in which the well is bored at an angle to run lengthwise along the richest slice of rock, with hydraulic fracturing. Better known as fracking, the process forces a high-pressure stream of sand, water and chemicals underground to crack apart the rock and free the crude. Since then, North Dakota’s oil production has increased to 728,000 barrels a day, surpassing Ecuador, an OPEC member.

Harold Hamm, Continental’s founder and chief executive officer, has called for expanding U.S. production. The company estimates the Bakken and other formations under North Dakota contain the equivalent of 27 billion to 45 billion recoverable barrels of oil. By comparison, Nigeria has an estimated 37.2 billion barrels of proven reserves, according to OPEC.

Wildcatters Compete

Hamm’s success set in motion an oil rush that spread across the U.S. as wildcatters competed to be first to new prospects. Chesapeake Energy Corp. made a deal in early 2007 to buy a million acres of Wyoming’s Powder River Basin, near the Teapot Dome formation that gave its name to the notorious bribery scandal of the 1920s.

Exploration intensified in Oklahoma’s Mississippi Lime, the Eagle Ford Shale in Texas, Ohio’s Utica formation, Louisiana’s Tuscaloosa Marine shale and New Mexico’s Bone Springs.

Competition grew heated as oil prices above $75 encouraged more drilling. In one Wyoming courthouse, the county clerk brandished a cattle whip to keep order among the crowds of landmen packing in to research mineral rights. Joe Thames, a Denver-based contract lease buyer who has worked for companies such as Chesapeake, said rivals once followed his best landman from his motel to try and find out where he was buying.

‘Big Gamble’

When results of EOG Resources Inc. (EOG) 2009 Jake well in northeastern Colorado leaked, lease prices quintupled in less than two months, said Bob Coskey, a Denver geologist. That play, called the Niobrara, turned out to be smaller than people thought, Coskey said. Overnight, acreage outside the best zones became almost worthless.

Hanging over this activity is the specter of past busts. The last boom in the late-1970s came crashing to a halt in 1985 when Saudi Arabia, in an effort to regain declining market share, flooded the world with crude and sent prices to $10 a barrel in 1986. U.S. production fell for 21 of the next 22 years.

“It’s a big gamble,” said Mike McDonald, an Oklahoma wildcatter and president and co-owner of Triad Energy Inc. “Everyone thinks it’s Beverly Hillbillies: You shoot a gun and oil comes out. It’s not.”

It was unclear until this year whether producers would be able to replicate Hamm’s results outside of the Bakken. The answer is yes. Texas pumped the most oil since 1988. Output from Wyoming grew 7 percent, the biggest jump in records going back to 1981, Energy Department figures show. New Mexico’s increased by 13 percent, and Oklahoma’s by 18 percent.

Morse, whose bullish predictions of U.S. energy self- sufficiency early this year met with skepticism, said North America will be able to meet its own needs by 2020. The pace of growth and the potential for worldwide gains driven by ever- improving technology toppled the theory that the world supply of oil had had peaked and begun an inexorable decline, he said.

“Peak oil is dead,” Morse said.

Canadian Oil Sands Ltd.

Canadian Oil Sands

Canadian Oil Sands (Photo credit: Wikipedia)

Canadian Oil Sands Ltd. 

COS : TSX : C$20.43
HOLD Target: C$22.00

eld on November 30 at 10am ET: 888-231-8191 or 647-427-7450. We don’t expect anything meaningful to come out of the call.
 2013 production guidance of 106-116 MBbl/d net (with a single point target of 110.4 MBbl/d net) is in line with our 109 MBbl/d estimate and the Street’s 111 MBbl/d forecast. As expected, it incorporates a planned turnaround of Coker 8-1 in H2/13.
 2013 capex budget of $1.33 billion is in line with our $1.3 billion estimate and only slightly below the Street’s $1.4 billion forecast. This is also up roughly $200 million YoY. Unit opcost guidance of $36.67/Bbl is in line with our $36.62/Bbl forecast.
 COS plans to maintain its $0.35/share quarterly dividend (we weren’t expecting a cut), equating to a total annual dividend payout of roughly $678 million. However, of note, at our US$90/Bbl WTI price deck we estimate that COS will outspend cash flows (before dividends) by almost $190 million. Nevertheless, at 9/30/12, the company had $963 million of working capital, $1.5 billion of unused credit, and a net debt to total net cap of only 6%, which is why the company has confidence in the sustainability of its dividend.
 2014 is expected to be the last year of the multi-year major project spending. Specifically, COS reiterated that major project spending is
expected to be roughly $800 million in 2014. Therefore, adding an estimated $400 million of maintenance capex on top of this would
yield a total 2014 capex budget of roughly $1.2 billion. As such, post 2014 is when investors can look forward to a potential significant
increase in dividends.
Reflecting some minor adjustments, we are slightly raising our 2013 CFPS estimate to $2.43 from $2.41. We maintain our $22 target,which is based on 0.9x our risked NAV estimate.


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