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.

Oil Producers Betting on Price Drop : Goldman Calls $ 40

Photographer: Gabriela Maj/Bloomberg

The oil industry was listening as OPEC talked down crude prices to a more than five-year low.

Drillers, refiners and other merchantsincreased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment.

Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates andKuwait reiterated they won’t curb output to halt the decline.

Oil Prices

“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.”

WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.

OPEC Production

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, has stressed a dozen times in the past six weeks that it won’t curb output to halt the rout. The U.A.E. won’t cut production no matter how low prices fall, Yousef Al Otaiba, its ambassador to the U.S., said at a Bloomberg Government lunch in Washington on Jan. 8.

The group decided to maintain its collective quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Output averaged 30.24 million barrels a day in December, according to a Bloomberg survey.

U.S. crude production was 9.13 million barrels a day in the seven days ended Jan. 2 after reaching 9.14 million three weeks earlier, the highest in weekly Energy Information Administration data since 1983. Stockpiles were 382.4 million barrels as of Jan. 2, a seasonal high.

The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which have unlocked supplies from shale formations including the Eagle Ford and Permian in Texasand the Bakken in North Dakota. Global oil prices below $40 begin to make wells in such places unprofitable to operate, Wood Mackenzie, an Edinburgh-based consultant, said in a report Jan. 9.

Idling Rigs

Rigs seeking oil decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.

Helmerich & Payne Inc., the biggest rig operator in the U.S., and Pioneer Energy Services Corp. said last week that they had received early termination notices for rig contracts.

Producers and merchants boosted their net short position by 21 percent, or 17,577 futures and options, to 100,997 in the week ended Jan. 6, according to the Commodity Futures Trading Commission, the most since Jan. 10, 2012.

Hedge funds and other large speculators raised bullish bets by 7 to 199,395 contracts.

“You have this tension and lack of consensus among money managers of what to do with a price under $50,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Jan. 9. “People tend to think of money managers as a black box where they all use same strategy and march in lockstep, but this highlights that it’s not really the case.”

Other Markets

Bullish bets on Brent crude rose to the highest level in more than five months, according to ICE Futures Europe exchange.

Net-long positions gained by 24,598 contracts, or 21 percent, to 140,169 lots in the week to Jan. 6, the data show. That’s the highest since July 15.

In other markets, bearish wagers on U.S. ultra-low sulfur diesel decreased 12 percent to 23,789 contracts as the fuel sank 7.6 percent to $1.7262 a gallon.

Net short wagers on U.S. natural gas fell 15 percent to 10,323 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 5 percent to $2.938 per million British thermal units.

Bullish bets on gasoline declined 0.4 percent to 44,050. Futures slumped 6.8 percent to $1.3543 a gallon on Nymex in the reporting period.

Regular gasoline slid 1.3 cents to an average of $2.139 on Jan. 10, the lowest since May 5, 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.

The global crude oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates. Only 1.6 percent of supply would be unprofitable with prices at $40 a barrel, according to Wood Mackenzie.

“If you’re a producer and your cost is below the price in the market, if you hedge it even at depressed prices you can still make money,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Jan. 9. “Somebody’s locking in profits even at these low prices.”

Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned

Jan. 12 (Bloomberg) 

Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market.

The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York.

The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day.

Oil Prices

“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.”

West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.


Photographer: Eddie Seal/Bloomberg

A floor hand signals to the driller to pull the pipe from the mouse hole on Orion… Read More

Forecasts Cut

Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively, while its estimate for Brent for the period were cut to $43 and $70, from $85 and $90, according to the report.

“We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.

Goldman estimates there’s sufficient capacity to store a surplus of 1 million barrels a day of crude for almost a year. It expects the spread between WTI and Brent to widen in the next quarter as discounted U.S. crude prices and “strong margins lead U.S. refineries to export the glut to the other side of the Atlantic.”

The Brent-WTI spread will average $5 a barrel in 2016, according to the bank. The gap was at $1.50 today.

 

Oil Companies and Investors In Denial : Portfolio Profits At Risk

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you  ( your portfolio) would have been better off

and now you have to decide for 2015.

No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Two examples drawn from a recent sector review on Seeking Alpha – note that company management and you as an investor are not able to face present prices, trends and the facts of supply and demand . What are the these people thinking – why would you invest here ?

Cabot Oil and Gas (NYSE: COG)

Standing behind its production growth expectations of 20-30% in 2015, Cabot is budgeting $1.53-1.6 billion of capital expenditure for 2015, of which drilling and well completion capital will consist roughly 80%. However, the company is budgeting for $88/bbl oil, which at this point seems rather optimistic. Note that this is an increase from 2013’s $1.19 billion capital expenditure program.

Concho Resources (NYSE: CXO)

Concho is one rare company that is seeking to execute large increases in production in 2015, budgeting $3 billion for capex in 2015 as of their 3Q results release. To this end they have hedged roughly 42,000 barrels per day for 2015 at an average price of $87.22 per their derivatives information column on this page, or about a quarter of their target output.

Encana Energy (NYSE: ECA)

Encana is banking on higher realized oil prices in 2015 as their projected budget has actually increased this year to $2.7-2.9 billion, up from a previously announced $2.5-2.6 billion. After successfully acquiring Athlon Energy (the transaction closing in November), Encana is making a bullish push to grow business in spite of ominous sector-wide headwinds.

The impending writedowns represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields. The downturn threatens to wipe out more than $1.6 trillion in earnings for producing companies and nations this year. Oil explorers already are canceling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts.

The mid-cap and small-cap operators are going to be hardest hit because this is all driven by their cost to produce,” said Gianna Bern, founder of Brookshire Advisory and Research Inc., who also teaches international finance at the University of Notre Dame.

An index of 43 U.S. oil and gas companies lost about one-fourth of its value since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20.

Have you avoided these sectors – you would have been better off  and now you have to decide for 2015.

No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Jack A. Bass Managed Accounts

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds at the rate of 1 % monthly if you require an income stream.

OR

Looking for Income ?  – Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management , tax reduction,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Telephone  Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

Bellatrix Exploration Ltd. BUY Target Price $14

BXE : TSX : C$6.88
BXE : NYSE
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Bellatrix Exploration is an intermediate sized exploration
and production company with operations in Western
Canada primarily focused on multi-zone opportunities in
west central Alberta.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
ADDITIONAL JV FUNDING BUT NOT SPENDING UNTIL 2016
Investment recommendation
Bellatrix announced another Joint Venture transaction with its existing
partner Grafton for $250 million. We view the announcement positively
in the context that it 1) reconfirms BXE’s existing JV partner is content
with its partnership and looking to expand the relationship, 2) provides
additional promoted capital with which to anchor production and cash
flow growth in 2016 through 2018, and 3) although pro-rata terms were
similar to its prior JV transactions, the working interest reduction in this
deal provides higher working interest volumes (net to BXE) from this
future well stream, which we believe fits better into its future growth
and infrastructure plans. Our BUY recommendation and C$14.00 target
are unchanged based on 1.0x NAV 6.0x 2015E EV/DACF.
Investment highlights
Earn in terms similar to previous JV transaction with Grafton. The
announced before payout earn in terms of this transaction (50% to earn
33%) are essentially in line with its previous terms (82% to earn 54%).
Additionally, the overriding royalty option (10.67%) in relation to the
33% before payout is essentially the same as the 17.5% on 54%. On a
first-year basis, we see a ~34% capital efficiency improvement from its
wells using JV promoted capital.
Partner spend bolsters the long-term plan but no impact to our financial
forecasts. Given the capital is planned for 2016+, we have made no
adjustments to our estimates at this time. However, in our view, the JV
provides further promoted capital that should help bolster growth upon
expected completion of its Phase 1 and 2 gas plant projects.

Valuation

Bellatrix trades at a 0.5x multiple to NAV, 3.6x EV/DACF, and $35,100
per BOEPD based on our 2015 estimates; a substantial discount to its
peer group at 0.8x NAV, 7.1x EV/DACF, and $68,400/BOEPD.

Donnycreek Energy Inc. SPECULATIVE BUY

DCK : TSX-V : C$2.18 SPECULATIVE BUY 
Target: C$4.00
COMPANY DESCRIPTION:

Donnycreek is a junior pure play Montney exploration and
development company with assets in Alberta’s Deep
Basin. Donnycreek trades under the symbol “DCK” on the
TSX venture exchange.
All amounts in C$ unless otherwise noted.

Investment recommendation
Donnycreek released a brief operational update this morning on its
operations at Kakwa. The wells on the company’s three well Montney
pad (the company’s first 1.5 mile horizontals) have been successfully
completed and tested, however no test rates were provided with the
release. The company also announced a plant turn-around at Kakwa,
which will shut in production from the block for ~16 days in September,
and plans to expand the plant on the block from 15mmcf/d to 30
mmcf/d in the spring of 2015.
In our view, a fairly neutral release from the company; however, given
the delays in bringing on production at Kakwa, we have lowered our
production estimates for 2014 . Trading at just 3.1x 2015E
EV/DACF and 0.5x Base NAV (lowest NAV multiple in our coverage
universe), we continue to believe DCK is extremely undervalued relative
to its peers.
We continue to rate the stock a Speculative Buy, and look to November
for IP30 rates on the 3 recently completed 1.5 mile Hz’s (in addition to
the large production bump)as significant potential catalysts for the stock.
Highlights from the release
 Kakwa 3 well pad. DCK announced that all three 50% working
interest wells from the company’s first three well pads have been
completed and flow tested . These wells were drilled with
horizontal lengths of 1,900m, which is longer than wells previously
drilled on this acreage. The wells are expected to come on
production in October.
 Facility expansion. Donnycreek and its partners are currently
designing an expansion for its 16-7 facility to double the throughput
capacity to 30 mmcf/d of natural gas and associated liquids. DCK
and its partners plan to start-up the expansion by spring 2015.

Suncor Energy

SU : TSX : C$42.60
SU : NYSE
BUY 
Target: C$50.00

Energy — Senior E&Ps/Integrateds
SCREAMING FOR VENGEANCE!
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
U.S.
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.

Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

BUY 
Target: C$2.25

COMPANY DESCRIPTION:
Pine Cliff Energy Ltd. is a junior oil and gas producer
focused on dry natural gas, with assets in Alberta. Pine
Cliff trades on the TSX Venture under the symbol “PNE”.

All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
TIME TO GAS UP
Investment recommendation
We are initiating coverage of Pine Cliff Energy with a BUY rating and a
C$2.25 target price. PNE has had a great run over the last year,
increasing its share price by ~60%, but in our view, this is just the
beginning. Driven by accretive acquisitions and a rebounding gas price,
we expect this stock to go materially higher over the coming year, as
reflected in our forecast return of 58%. Our valuation is NAV based and
maps to a 2014E EV/DACF of 14.7x.
Why we believe this stock is set to outperform:
 Gas Leverage to the Extreme. Simply the best way to gain
exposure to rising gas prices, in our view, given a production
base that is 95% dry gas with no hedging in place. As
highlighted in Exhibits 1 and 2, PNE is the most levered
company to natural gas prices in our coverage universe, with a
$1 increase in AECO prices driving an increase to estimated
CFPS of ~40% and an increase to NAV of over 40%. In our view,
if you want to own gas, you want to own Pine Cliff.
 Acquisitions to drive performance. PNE has taken a contrarian
approach by purchasing dry gas while others chase oil and
NGLs. The last two significant acquisitions by the company over
the last year have resulted in share price bumps of 46% and
36%, respectively. PNE currently trades at 9.0x 2014E
EV/DACF, but as we walk through in Exhibit 3, if the company
were to buy $100 million in assets at 5x cash flow, this multiple
would be just 6.8x 2015E estimates. Use a 5$ AECO price and
it’s at just 5.4x.
 Our Call? Give this management team your money. George Fink
is well respected as an excellent steward of capital, and for
good reason. Early investors in Bonterra Energy (BNE: TSX: Not
Covered) have been handsomely rewarded over the last 16
years, with a CAGR of 45% since 1998. In addition to the energy
space, Mr. Fink has also had success in mining, where at
Comaplex Minerals he provided investors with a CAGR of 21%
over a 15 yeear period.
Our C$2.25 target price is based in part on our assumption that the
company will be successful in completing $150 million in acquisitions
over the next year and post transaction its multiple will return to the
natural gas peer group average of 9.0x EV/DACF

Bankers Petroleum Ltd

BNK : TSX : C$4.04
BNK : AIM
BUY 
Target: C$6.00

COMPANY DESCRIPTION:
Bankers’ operations are focused on developing heavy oil
assets in Albania, which include rights to develop the
Patos-Marinza and Kucova heavy oil fields (both 100%
interest) during the 25-year licence period. Bankers has
an opportunity to unlock immense potential from its 7.7
billion barrels oil-in-place Patos-Marinza field by applying
modern techniques to optimize recovery factors, expand
its resource base, and increase production.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
FOCUSED ON BOTTOM LINE IN 2014
Investment recommendation
Bankers Petroleum announced its 2014 budget, projecting capital
expenditures of $313 million and production growth of 10-15% over
2013. The budget reflects a 27% increase over the 2013E program and
is the largest in the company’s history. Approximately 90% of the budget
will be directed toward development work, while the remainder is
earmarked for enhanced recovery initiatives and new ventures like
horizontal wells at Kuçova and 3D seismic on Block F. We have revised
our estimates to reflect updated guidance, resulting in a 2014E NAV of
C$7.05 (from C$7.15). With numerous cost-cutting initiatives planned
for the coming year, we believe 2014E operating funds could surprise to
the upside (although we have not yet incorporated a reduction in
operating costs). With a 12-month target price of C$6.00/share and a
potential return to target of 47%, we reiterate our BUY recommendation.
Investment highlights
 The company has doubled its budget for enhanced recovery
initiatives, which if successful, should generate lower decline rates
and a higher overall recovery factor.
 We expect that operating funds will outpace capital expenditures by
~10% based on a 2014 Brent price of $104/bbl. At $100/bbl, we
forecast a balanced budget.
Valuation
We use a DCF model to value Bankers. Based on our 2014E estimates
Bankers is trading at a multiple of 0.57x our risked NAV, 2.9x EV/DACF
and $46,840 per flowing barrel. This is significantly below the domestic
junior averages of 0.8x NAV, 5.6x EV/DACF, and $73,200 per flowing
barrel, despite Bankers’ better-than-average netbacks and favourable
debt levels. With a 12-month target of C$6.00 and a potential return of
49%, we reiterate our BUY recommendation.

Peyto Exploration & Development Corp.

Simply a great company year after year.

PEY : TSX : C$30.82
HOLD 
Target: C$32.00

COMPANY DESCRIPTION:
Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
TURNING ON THE VALVES
Investment recommendation
Peyto released third quarter results which were generally neutral as Q3/13 volumes and capital spending were pre-released. It has eclipsed its previous exit rate guidance ahead of schedule and increased its exit target this year to 71,000 boe/d; however, in doing so it has also increased its 2013 capital spending by ~$65 million. Using the midpoint of its initial 2014 capital budget provides YoY growth (Q4/14 over Q4/13) of ~17% on our forecasts. The higher capital spending profile maintains D/CF at year-end 2014 below 2.0x on our estimates and 74% utilized on its bank facility. We maintain our HOLD rating and C$32.00 target price based on 1.2x NAV and 11.1x 2014E EV/DACF.
Investment highlights
Surpasses exit rate guidance in November as expected. It expects to grow production from 70,000 boe/d currently (up from the Q3 average of 56,300 boe/d) to 71,000 boe/d by year-end on higher 2013 capital spending of $565 million (up $65 million). Despite higher spending, its implied cost of adding production in 2013 is ~$17,000/boepd.
Another aggressive year in 2014 spending ~$600 million. It forecasts adding production in 2014 at a cost of $18,000/boepd in line with our prior forecasts, resulting in Q4 average growth on our estimates of 17% YoY. Its D/CF reduces to 1.9x (from 2.2x) next year on our forecasts.
No Brazeau well update but spending in 2014 implies positive results. Results from its new wells are still not public; however, its intention to expand processing capacity by 20 MMcf/d implies positive results.
Valuation
Peyto currently trades at a 1.2x multiple to CNAV, a10.7x EV/DACF multiple, and $77,000/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.4x EV/DACF, and $71,800/BOEPD.

TORC Oil & Gas Ltd.

TOG

TSX : C$8.54

BUY 
Target: C$13.75

COMPANY DESCRIPTION:
TORC is a dividend paying junior oil & gas company with assets in Alberta and Saskatchewan. TOG is listed on the
TSX under the symbol “TOG”

All amounts in C$ unless otherwise noted.

Valuation:
Our target price of C$13.75 is NAV based and implies a 2014E EV/DACF of 9.2 x

Energy — Oil and Gas, Exploration and Production
CATALYSTS EXPECTED; TIME TO GET
IN: ADDING TORC TO CG FOCUS LIST
Investment recommendation
We are reiterating our BUY thesis on TOG, as we believe the stock is
well positioned for a strong run through Q4. In addition to a compelling
valuation, solid balance sheet, and motivated and proven management
team, TOG has several potential catalysts on the horizon that could
boost the stock as we head into year end. As a result, we believe the
current share price represents an excellent entry point into the stock,
and we are adding TORC to our CG Focus List.
Catalysts on the Horizon
 Catalysts Expected: Time to Get In. TOG has several potential catalysts on the horizon over the next three months, which we believe makes now an excellent entry point into the stock. These include:
 Guidance Increase with Q3? Our current model incorporates TOG’s 2013 exit rate guidance of 9,500 boe/d, with a 5% increase in production through 2014.
Given the company’s Q2 production level of ~4,300 boe/d and the asset acquisition of 5,700 boe/d, we believe TOG may be in position to raise its guidance, particularly given an active drilling program through the back half of the year. By our estimates, TOG may be in position to increase exit rate guidance by +5%.
 Upward revision in oil price decks. With the continued strength in the oil price, we believe many investment dealers will be revising their 2014 oil price decks higher in Q4. Given TOG is 85% weighted to oil, its valuation and payout ratios should look even more attractive in industry comp tables in the coming weeks

 

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