Stay Out of The Oil Patch Part 2 This Time It Ain’t Different

The U.S. stock market is showing signs of fatigue

iShares S&P/TSX Energy (XEG : TSX : $12.25), Net Change: -0.18, % Change: -1.45%
Canadian Natural Resources* (CNQ : TSX : $33.17), Net Change: -1.07, % Change: -3.13%
Suncor Energy* (SU : TSX : $32.13), Net Change: -0.43, % Change: -1.32%

Another week, another drop in the price of oil, oil sector stocks – As We Forecast , the C$ and Canadian equities.

The S&P/TSX lost another 5% last week and erased nearly all its gains for the year.

To make things worse, the U.S. stock market is showing signs of fatigue, and macro risk indicators that
s are all flashing red. With oil prices becoming a gauge of investors’ risk appetite, it seems that only a bottom in prices could halt the slide in global equities.

But with WTI breaking below the key resistance of US$60/bbl, investors are bracing for the worst. There are not many historical parallels of supply-driven oil shocks. Past periods of price weakness have been demand-driven. That said, the current experience shows :
similarities to the 1986 oil shock, when OPEC boosted production to gain market share. Last week, OPEC cut its 2015 customer
demand forecast by 300,000 barrels per day (b/d) to 28.9 million b/d – that’s the lowest level in 12 years. The downward
revision reflects the upward adjustment of non-OPEC supply as well as the downward revision in global demand. In 2015, nonOPEC
oil supply is forecast to grow at by 1.36 million barrels a day to 57.31 million a day. Growth is seen coming mainly from
the U.S., Canada, and Brazil, while declines are expected in Mexico, Russia, and Kazakhstan.

Separately on Friday:
International Energy Agency (IEA) released its oil market report for December. The IEA cut its outlook for 2015 global oil demand growth by 230,000 b/d to 900,000 b/d on lower expectations for Russia and other oil‐exporting countries.
This is the second consecutive year of growth below 1 million b/d. The IEA believes, “barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.” The IEA adds, “As for demand, oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy, but this time round their stimulus effect may be modest…The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt. Continued price declines would for some countries and companies make an already difficult situation even worse.”


Bankers Petroleum* (BNK : TSX : $2.59), Net Change: 0.09, % Change: 3.60%, Volume: 1,717,990
Bankers Petroleum has reduced its 2015 capital guidance to a maintenance level in order to average 21,000-22,000 b/d, in line with its 2014 average.

The company will spend approximately $218 million in 2015, which is within its cash flow and debt utilization means in a $60/bbl realized Brent price environment.

The company intends to reduce its rig count from six to three rigs by early 2015 but remains positioned to respond quickly when oil prices recover by potentially reinstating drilling rigs.

The three focus areas of the company will be: 1) execution of its horizontal drilling program;

2) acceleration of its secondary recovery program; and

3) targeting capital for operational improvements that will result in reduced costs (with projected cost savings of $2-3/bbl in the next two years).

The company remains well positioned for low commodity prices in 2015 with a reported September 30, 2014, cash balance of $88 million and only $104 million drawn on its $224 million line of credit. With the budget, Bankers continues a theme of fiscal responsibility, cash preservation and maintenance of 2014 production levels. In the interim, the company has the
ability to operate within its means while maintaining current production levels. Bankers plans to release its Q4/14 operational
update Tuesday, January 6, 2015.

the dramatic plunge in oil prices has made some shale projects unprofitable. Investors are waking up to the realization that not all shale oil is created equally.

Drilling for oil is extremely capital intensive. Companies often borrow money to fund the exploration and drilling. Now that oil is sitting at just $55, it’s likely to get much more difficult for shale players to get the financing they need after years of low interest and bond rates.

Investors are betting that at least some of these more speculative shale companies won’t survive if oil prices stay low for a prolonged period.

Don’t take our word for it. Just look at the junk bond market, which has been rattled by the energy turmoil. High-yield energy bonds have tumbled almost 10% this month alone, according to S&P Dow Jones Indices.

“It becomes a vicious spiral. If bonds stay where they are, it’s going to be very difficult for these companies to raise new capital to continue to live,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence.

high yield debt
High-yield U.S. corporate energy bonds have tumbled in recent weeks amid the oil price meltdown.

Cash flow negative: Huge energy companies like ExxonMobil (XOM) and Chevron (CVX)have plenty of financial flexibility to weather low oil prices, but that’s not the case for many smaller, highly-leveraged players.

Some of them are cash flow negative, meaning they aren’t generating enough revenue to offset the heavy investments they are making. Up until now, they’ve plugged those holes by selling stock or raising equity.

But $55 oil has changed that equation. Few investors are willing to provide affordable financing.

For example, the bonds of SandRidge Energy (SD), Midstates Petroleum (MPO) andResolute Energy (REN) are trading at distressed levels of just 50 cents or 60 cents on the dollar, according to FactSet.

“It’s hard to go from cash flow negative to cash flow positive on the turn of a dime when the commodity you’re selling falls by 45%,” said Cutter.


Defaults ahead:

The cash crunch is likely to be exacerbated by pressure from the banks, which may start reeling in credit revolvers currently cushioning shale companies’ balance sheets.

“Banks are not notoriously friendly in these down cycles. The lack of financing alternatives could speed up the demise” of some companies, said Tim Gramatovich, chief investment officer and co-founder of Peritus Asset Management.

Gramatovich predicted a “considerable” amount of defaults among high-yield energy bonds due to the looming cash crunch.

It is human nature to look for bargains – and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

What To Do ?

Here is our recent letter:

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 at 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/ EnergyI 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 would have been better off to follow our advice in 2014 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.

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

You can withdraw your funds monthly if you require an income stream.

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 ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email OR  OR

Call 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://


Lor Loewen's photo.

Canada Heavy Oil Nearing $40 Threatens New Oil Sands Projects : Bloomberg

Canadian heavy crude fell to near $40 a barrel, threatening projects under construction as producers boosted output and space on a pipeline was rationed.

Imperial Oil Ltd. (IMO) is increasing output at its Kearl oil sands project to 110,000 barrels a day after a shutdown last month, Pius Rolheiser, a Calgary-based spokesman said by phone yesterday. Enbridge Inc. apportioned space on the Spearhead pipeline, which carries Canadian crude south to Cushing, Oklahoma, after demand to ship on the line exceeded capacity, according to a company statement.

Heavy West Canadian Select dropped $3.73, or 8.1 percent, to $42.19 a barrel yesterday, the lowest since April 2009, data compiled by Bloomberg showed. Crude has fallen into a bear market as U.S. output surges to the highest in more than three decades. Companies including Calgary-basedCanadian Natural Resources Inc. (CNQ) have said they may scale back investment plans if oil prices remain near current levels.

Any production that’s currently under construction is at risk, absolutely,” Dinara Millington, the vice president of research at Canadian Energy Research Institute in Calgary, said by phone. “Any production that’s currently existing can produce at $40 to $50.”

West Texas Intermediate futures added 20 cents to $61.14 a barrel at 4:04 p.m. Singapore time in electronic trading on the New York Mercantile Exchange. Yesterday the contract closed at the lowest level since July 2009.

Expensive Crude

WCS trades at a discount to WTI due to higher production costs and a shortage of pipelines to move supplies to refineries. Some of the oil from Alberta’s oil sands must be dug out of the ground and upgraded into a lighter synthetic crude before it can be processed by refineries, increasing costs.

The lowest-cost oil sands producers use steam to loosen and pull bitumen from the ground and extract the fuel for about $51 a barrel, a July report by the Canadian Energy Research Institute showed.

Last week, Baker Hughes Inc. reported Canadian drillers cut the number of rigs used to the least for this time of year since 2009 as margins were cut by the price fall.

The last time WCS traded below $50 a barrel was in December 2012.

“We saw prices a couple of years ago that were similar to this,” Jackie Forrest, a vice president at ARC Financial Corp. in Calgary, said by phone. “For existing operations, you need to cover your operating costs. We’re still above those thresholds.”

PrairieSky Royalty

PrairieSky Royalty* (PSK : TSX : $38.77), Net Change: 0.11, % Change: 0.28%, Volume: 279,422
EnCana* (ECA : TSX : $26.33), Net Change: -0.30, % Change: -1.13%, Volume: 3,288,463
Canadian Natural Resources* (CNQ : TSX : $48.57), Net Change: 0.76, % Change: 1.59%, Volume: 5,154,591
Cenovus Energy* (CVE : TSX : $34.16), Net Change: 0.27, % Change: 0.80%, Volume: 3,472,188
A TOUGH ACT TO FOLLOW. PrairieSky Royalty’s market debut has been incredible, shares have now risen nearly 37%
above its initial public offering price of $28.00 per common share. The success of PSK has forced the likes of Canadian Natural Resources and Cenovus to have a second look at their royalty lands.

According to Canaccord , the PSK read-through for CVE’s royalty lands, should the company decide to do a spinout, is ~$2.8 billion and $3.70/share (by land value). It would be $2.3-2.5 billion or ~$2.20/share for CNQ’s royalty lands. Some more “timbits” from both companies this emerged last week.

At its investor day last Tuesday, CNQ President Steve Laut said (as quoted by The Calgary Herald), “Right now we’re in the process to make sure we understand what we have and then we’re going to evaluate all the options including the PrairieSky option…Obviously, it looks attractive but we’re going to evaluate all the options and
whichever creates the most value for shareholders, that’s the one we’ll choose. And we’ll do that by the end of the year.”

With respect to CVE, the company was recently marketing overseas with another Bay Street broker. One takeaway from the meetings was CVE is not in any rush to monetize its third party royalty production. Recall, the company did state on its Q1/14 call that there were no “current” plans to change the nature of how it owns the lands but it has the obligation to maximize value and planned to monitor how other transactions proceeded

Canadian Natural Resources Ltd.

CNQ : TSX : C$40.63

BUY  Target: C$46.0

COMPANY DESCRIPTION: 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.

COMPANY DESCRIPTION: 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 ADDING SIGNIFICANT PRODUCTION AT A LOW COST

We reiterate our BUY rating on CNQ post yesterday’s announcement to acquire Devon Energy’s (DVN : TSX| Not rated) Canadian conventional asset package (ex- Horn River basin and heavy oil properties) for $3.12 billion for the following reasons:
While, we were surprised by the move, CNQ did take advantage of the “buyers” market in Canada. It is evident there are plenty of asset packages on the market; recall CNQ retracted its own Montney package on 1/9 due to lack of sufficient interest. To that end, the company paid ~$36,000/boe/d unadjusted ($30,300 per boe/d adjusted for infrastructure), which looks like a steal compared to precedent transactions of ~$51,700/boe/d especially given the higher gas price environment.
The transaction is also accretive on a cash flow basis. To that end, we estimate that CNQ is paying 4.5x 2015E DACFs (when adjusted for infrastructure), which is a discount to the 5.4x that CNQ was trading at prior to yesterday.
Potential spin out of royalty assets. The company plans to either monetize or spin out the combined $140-$150 million annual cash flow royalty free lands post acquisition. Based on Freehold Royalty Trust’s (FRU: TSX | Not rated) current trading multiple, this asset is worth an estimated $1.2-1.3 billion or $1.08-1.16/share.
Balance sheet still looks strong post acquisition. At our price deck, debt/EBITDA is estimated to be 1.13x vs. the peer average of the same level, and CNQ’s pre-acquisition metric of 0.93x.
Still the torque play in the Sr’s space on our positive heavy oil thesis. We estimate the company will still be ~40% levered to heavy oil in H2/14 (down slightly from the prior ~45%), and thus will continue to benefit from our thesis on narrowing differentials.
We are increasing our target by $1 to $46 to reflect the accretion from the acquisition

Canadian Natural Resourses Target $47

Canadian Natural Resources Limited
Canadian Natural Resources Limited (Photo credit: Wikipedia)

Canadian Natural Resources Ltd. 

May 17 2012

CNQ : TSX : C$29.33  Buy , Target C$47.00 

  • Investor Day Highlights 

1)    the improvements seen at Horizon due to the 3rd Ore Preparation Plant (OPP); 

2) an improved outlook for production growth in Primary Heavy Oil and North American Light Oil vs. what the company disclosed at last year’s event (albeit it included higher capex); and  

3 )increased coking capacity in the US that is expected to come on line in 2013.  

Seeing improvements at Horizon since the recent re-start: The 3rd OPP has increased availability from 72% in January to 98% in April (March was 96%). As a result, May month-to-date has averaged 116 MBbl/d, which is up from the 111.4 MBbl/d average for April. Of note, CNQ sees the ability to meet or exceed the top end of its 2012 guidance range of 85-95 MBbl/d. To meet low end, Horizon needs to achieve only ~80% reliability (97.9 MBbl/d based on a 123 MBbl/d stream day rate) for the rest of the year. To meet the high end: Horizon needs to achieve ~90% reliability (111.2 MBbl/d) for rest of year.

CNQ updated its 4+ year production growth outlook by area, and net/net there was a positive revision (with increased costs due in part to increased well count, but a part that shows up in thermal is unidentifiable to us): CNQ raised its production growth expectation for North American Light Oil to 11% CAGR (to about 85 MBOE/d by 2015) from the 7% (to ~65 MBOE/d by 2015) stated last year.

For Primary Heavy Oil, CNQ increased its expectations to where it sees the potential to reach ~150 MBbl/d by 2016 vs. the 130 MBbl/d to be reached by 2014 (and decline thereafter) stated at last year’s Investor Open House. For Pelican Lake, however, it appears CNQ sees ultimate potential to 60 MBbl/d vs. the 70 MBbl/d minimum discussed last year.

For 2013, it looks as if CNQ is guiding for about 715 MBOE/d, which is ahead of our ~700 MBOE/d estimate but in line with the Street’s 713 estimate. Gas prices are a swing factor in the 715 MBOE/d.

2013 will see 310 MBbl/d of incremental heavy oil refining capacity: Specifically, Marathon is adding at its Detroit refinery 80 MBbl/d of Heavy Oil Capacity (while displacing 70 MBbl/d of light capacity) and BP is adding at Whiting 230 MBbl/d of heavy oil capacity (displacing 230 MBbl/d of light capacity). Combined, this adds ~20% new heavy oil capacity to existing total Canadian heavy oil markets, per CNQ.


Our $47 target price is based on 4.75x ex-oil sands 2013E DACF plus over $25/share of estimated risked oil sands value. Our target implies the stock could  ultimately trade at 7.2x 2013 EV/DACF. The stock currently trades at 5 x