Crude Observations

Meanwhile in Canada…

Last week I went off a bit on the burgeoning over-investment in the Permian Basin in Texas and shared some observations about the state of the financial markets and hype associated with that particular play.


Arguably, some of the statements made were provocative, but intentionally so as I felt it appropriate to point out the short term memory issues and blindness that can develop when a herd mentality sets in. It’s always the same in manic markets and asset bubbles – money pours in in an accelerating fashion as no one wants to be left behind and it piles on until it collapses under its own weight or some external factor causes the cataclysm, such as a collapse in demand or price.


This is what we saw in 2014 and that is the fear now with the rush back into US tight oil. While perhaps I was a trifle over-dramatic about the scale of the rush, it can oftentimes appear that way, particularly in a rough and tumble market like the Untied States where capital is so easy to come by.


Realistically though, given that OPEC and their non-OPEC pals – Saudi Arabia in particular – was able to dial down production by a supposed 1.8 million barrels a day over the course of a month or so (and can just as easily dial it back up), the 400,000 to 600,000 barrels a day that US tight oil might add is probably not that big a worry, unless it affects the valuation of the Saudi Aramco IPO expected in 2018. And not to state the obvious – oil and gas companies are valued higher when the price of the underlying commodity is higher so it is hard to imagine any plausible scenario where the Saudis allow the price of oil and US tight oil producers to depress the value they receive given the vested interest they have in maximizing proceeds. Just sayin…


So I guess what I am saying is that the current rush to produce in the US is likely to continue, for now, as it appears that the Saudis have decided they can better control the market by managing supply and that ultimately they may believe that all of us yahoos in North America are more likely to shoot ourselves in the foot than crater their IPO. Which kind of explains the bizarre chatter at CERAWeek from Saudi Arabia about them and OPEC co-existing with tight oil and, as if, Canadian oilsands! Supplenmted of course by dire warnings about “free rides” (a page from the Trump book) and the need to have managed growth.


All of this of course begs the question, what about us yahoos in Canada? Where do we fit in? How do we go about getting a little bit of that hypey type action, because I don’t know about you, but I’m feeling a little left out and could use a little Canadian bacon pop and sizzle. After all, while the headlines talk incessantly about how the US rig count is up 100% since this time last year and Permian production is expected to rise to 100 gazillion barrels a day goddammit, very little airplay is given to the same jump in rig count and (slightly more conservative) production profile playing out up here, in America’s hat. Even though, since we are on the subject, while the US may indeed conceivably have those hundreds of billions of barrels of “as yet to be discovered” oil (mentioned last week), the reality is that Canada has a lot of those barrels already, with no need to invent them, or even find them!


Interestingly, and this is the reason I deliberately avoided Canada in last week’s polemic, as many are aware, Canada is a very different market, less prone to the hype and frenzy typical south of the border, even though we are nothing short of an energy powerhouse.


Part of the reason we are “different” relates to scale, but in addition to that our hydrocarbon mix is different, our weather sucks and we are constantly challenged on the infrastructure front. Plus we’ve got that mix of oilsands versus conventional that very few non-energy analysts, politicians and media types seem to be able differentiate between. It all gets mixed up in a poorly delivered and even more poorly understood oil gas horizontal heavy tight deep basin LNG shale tar dilbit liquids rich NGL slurry.


For the record, what we do have is world class gas, liquid and tight oil assets spread across a massive geographic region (Western Canadian Sedimentary Basin) that can compete with any comparable US assets in scale and cost and these are in fact being actively developed, we just don’t hear enough about them. It’s far too easy to forget that before the oil sands investment rush, the WCSB was a major producer of conventional and unconventional hydrocarbons and that notwithstanding the oil sands investment rush and subsequent pause, the WCSB remains a major producer of these same hydrocarbons.


So when people tout the Permian in Texas, which, I get it, is massive, that hype drowns out the potential of plays such as the Montney, the Duvernay, the Viking and the Bakken and the massive amounts of heavy oil and natural gas spread across a fairway starting in the Northwest Territories and ending in Manitoba (yes, Manitoba). Never mind the beast that is the oilsands.


Anyway, soapbox, right? Anyone involved in the sector or who follows my raving knows Canada’s potential and issues – massive resource, not enough pipe, isolation, seasonal drilling season, carbon tax, Mordor and an indifferent population that wishes the sector would just go away.


All this means that our great plays and great companies/operators don’t attract, in my opinion anyway, anywhere near as much interest and attention as they should. So, accordingly, less hype and less frenzy. Nor, when they do something aggressive, do they get much positive attention. Case in point, on Thursday morning, home-grown CNRL bought the oilsands assets of Shell and Marathon for about C$13 billion and I spent my morning deflecting twitter comments decrying the loss of an over-leveraged, indifferent and gas-focused international as opposed to celebrating the bold move by an Canadian industry heavyweight.


Another difference in Canada is that we don’t have the leverage model that seems to permeate the US basins and thus we create more companies that rely on cash flow to fund their operations than the largesse of strangers. So the companies tend to have less of a growth orientation to them (although really, try to explain that to Crescent Point, Seven Generations and Tourmaline). Part of the reason we are less leveraged is because of the notoriously “risk averse” Canadian banks that are holding back lending out of an abundance of caution (BTW, we know that’s all crap right? They’d be just as aggressive as American lenders if they could. Want proof? Take a look at the mortgage and housing market). So is it prudence or panic? I don’t know, but Canadian lenders pulled in their horns sharply in the downturn and have been slow to come around.


Of course all of the above is likely OK because, by and large, Canadian E&P companies were less leveraged in the first place than their peers and the de-leveraging that happened in Canada over the last couple of years was driven less by insolvency and write-downs and more by prudent balance sheet repair, equity raises and asset sales.


What it all means is that coming out of the downturn, Canada’s E&P landscape is more than ever characterized by lean and mean operators, access to world class assets and low cost capital and an emerging level of regulatory support (we can only dream of popular support of course) and likely offtake capacity that will solve a lot of problems that have plagued the industry for years.


What does it all mean? Well, an offshoot of this conservatism is that Canadian energy and service companies are often discounted to their more brash and growth oriented US peers and, while in many respects that can be justified for reasons of scale and opportunity when you look at the prospects available, the valuations and the balance sheets you can’t help but be struck by how on a relative basis the Canadian oil patch starts to look more like a classic value play while the US more resembles a NASDAQ like growth play.


So it’s an interesting decision as an investor, do you chase shiny baubles and growth or buy home-grown value? In the short term, one is no doubt going to make you a pile of money. In the long term? You decide.




This past week anyone energy-focused has been subjected to the annual navel-gazing gab fest that is CERA Week. This annual conference in Houston, let’s call it the Davos of the energy world, is where the who’s who and assorted wannabes and shouldabeens of the energy sector get together and spout platitudes about the state and future of the industry, attend events and otherwise add costs to the bottom line. Notable attendees from a Canadian perspective included Alberta Premier Rachel Notley,  Federal Minster of Natural Resources Jim Carr and our very own energy savant, Prime Minister Justin Trudeau. I don’t know that anything monumental or of substance was accomplished or said in Houston, but overall there was a much higher sense of optimism pervading the sessions and coverage. Until of course reality intruded and the market punished everyone there for that very same higher sense of optimism. Oil below $50? Who woulda thunk it? I think that’s a good thing though, right?


Prices as at March 10, 2017 (March 3, 2017)

  • The price of oil took it on the chin during the week ending down sharply as the market let US shale producers know exactly what they thought of them.
    • Storage posted a big increase
    • Production was up marginally
    • The rig count in the US continues to grow, although at a slower pace
  • Natural gas was weak during the week on milder weather but rallied toward the end of the week
    • WTI Crude: $48.49 ($53.22)
    • Nymex Gas: $3.008 ($2.826)
    • US/Canadian Dollar: $0.7430 ($ 0.7476)


  • As at March 3, 2017, US crude oil supplies were at 528.4 million barrels, a increase of 8.2 million barrels from the previous week and 37.6 million barrels ahead of last year. High import volumes and refinery turnaround contributed to the big spike. Inventory draws typically begin this time of year
    • The number of days oil supply in storage was 34.2, ahead of last year’s 33.0.
    • Production was up for the week by 56,000 barrels a day at 9.088 million barrels per day. Production last year at the same time was 9.078 million barrels per day. The change in production this week came from a small increase in Alaska deliveries and increased Lower 48 production.
    • Imports rose from 7.589 million barrels a day to 8.150, compared to 8.048 million barrels per day last year.
    • Refinery inputs were down during the week at 15.492 million barrels a day
  • As at March 3, 2017, US natural gas in storage was 2.295 billion cubic feet (Bcf), which is 19% above the 5-year average and about 8% less than last year’s level, following an implied net wiothdrawal of 68 Bcf during the report week.
    • Overall U.S. natural gas consumption was up by 4% during the week on modest demand increases across all sectors
    • Production for the week was flat and imports from Canada rose by 12% from the week before
  • As of February 28, the Canadian rig count was 270 (44% utilization), 188 Alberta (43%), 33 BC (44%), 48 Saskatchewan (42%), 3 Manitoba (20%)). Utilization for the same period last year was about 26%.
  • US Onshore Oil rig count at March 10 was at 617, up 8 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 5 at 151.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 2 at 20
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%


  • CNRL announced it was buying oilsands assets from Royal Dutch Shell and Marathon Oil for an aggregate of C$13 billion
    • There was lots of teeth gnashing about this deal, raging about the carbon tax and Canada being unattractive as an investment destination. Look I get it, but when the dust setlles, what a deal by CNRL, right?
  • With Savannah Energy Services’ agreement to sell to Western Energy Services for $533 million. they have successfully fought off the hostile bid from Total Energy Services. I suspect that we probably haven’t heard the last from Total, as their management team will most undoubtedly set their sights on other targets to pursue their consolidation and growth plans and stick it to the
  • Seven Generations Energy Ltd. announced it had nearly doubled production in 2016 to 117,800 barrels of oil equivalent per day (boe/d). Funds from operations increased 77 percent to $733 million, or $2.30 per share – up 50 percent per share compared to 2015. Capital investment in 2016 was $978 million
  • The CEO of Pioneer Resources, a major Permian operator who has announced plans to double its output this year, says oil will likely drop to $40 if OPEC doesn’t maintain cuts for a year. Umm, hypocrite much?
  • Trump Watch: Leaks, tweets and travel bans aside, it was a relatively quiet week in Trump land. Instead the spotlight was stolen by Paul Ryan who introduced the World’s Greatest Mega-Cool Awesome Health  Care Plan of 2017 to replace Obama Care. As I understand it, the new plan will end up dropping about 15 million people from health care rolls, raise costs, give a tax break biased to wealthier Americans and make the insurance companies perform interpretive dances of joy. Which is I guess what the outcome of the election said was going to happen. As an aside… Personally, I don’t really get the health care system in the US or people’s attitude towards it. I totally understand the desire to keep government out of your health care decision-making process as much as possible, but a system that is set up to transfer that supposed government power to a profit-seeking corporation (insurers) that considers paying your costs to be a “loss” just seems a bit self-defeating, it’s like tossing out communist rulers for oligarchs… Socialized medicine, or, more appropriately termed, universal health care as we have in Canada may not be ideal, but in essence, it’s a system where taxpayers act as insurers for their fellow citizens so that everyone has access to health care, people don’t go bankrupt from being sick and profit-seeking insurance companies don’t rule our lives.  Is that really such a bad thing?
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