(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AAV.TO, CPI.TO, VLE.TO, POE.V and IKM.V).
As the market awaits the Fed, I thought I'd pass along something I saw on Bloomberg.com regarding associated gas… this is the gas that is produced along with oil in most "shale oil" regions.
Last December, we flagged the potential for the oil price drop to crimp gas supply as something to watch for (http://hydracapital.ca/2/post/2014/12/oil-wtf-and-what-could-it-mean-for-gas.html)… link through to the Hydra article to see a more detailed discussion.
Now here's a Bloomberg article to the same effect that I saw today:
So far it's still early days, and just because it's on Bloomberg doesn't mean it's any more pressing of an issue… but the EIA has indeed reported that roughly 0.5 Bcf/day of gas supply has dropped off in the major shale gas regions over the last two monthly reporting periods (Aug-Sep volumes were projected to be down by 261 mmcf/d and Sept-Oct volumes are projected to be down another 208 mmcf/d), so that's in line with the basic thesis, but 2 months don't exactly make a trend. Going forward, you can track the monthly data for yourself on a region-by-region or consolidated basis here:
To take a quote from from the December 2014 Hydra article, "If I start seeing discussions in the news about how the reduction in shale oil drilling is going to hurt gas supply, I'd like to have my homework done ahead of time because it's possible that while the sun sets on the North American oil boom, it may just be rising for well-positioned gas producers. Time will tell."
I'm not saying that I'm going to go bet the farm on gas, but I think this is a sector to watch as we head into the winter heating season. So far, supply growth has kept up with the significant demand growth in the U.S., so gas inventories remain healthy, but we all know that can change in a hurry if Old Man Winter decides to flex his muscle and rig counts stay low. AAV, LXE, and IKM are among my favourite Canadian gas names and PNE is widely regarded as having some of the best leverage to a positive move in gas prices. In the U.S., I tend to play the FCG for sector exposure south of the border.
Quick Update on POE, CPI, and VLE
CPI released news today that they are through the salt section and have about another 700 metres to drill to total depth. Condor reports that the company has positive working capital of $50 million and no debt. I would expect the KN-501 well to reach TD by around the last week of September or first week of October and the size of the prize is north of 50 mmboe (an internal company estimate in the June 2015 slide deck pegs it at 67 mmboe of prospective resources).
VLE is expected to start drilling in Turkey in the newly completed Banarli 3D survey area near the end of October. With a market cap of $26 million as of yesterday's close of $0.45 and $10 million in positive working capital and no debt, VLE trades at roughly 1.3x EV/CF, which seems incredibly cheap to me. I've said it many times before, but this is probably one of my favourite names at the moment going into the drilling on its 100% owned Banarli block… with a mega-shale-gas option (multi-TCF potential) literally on Europe's doorstep to boot. VLE might be small now, but I think it could grow up in a hurry with just a little luck.
POE is expected to release an update on its Indonesian activities next week. The stock still trades at about a 20% discount to its cash + working capital (with no debt), so I think the risk-reward is pretty skewed here as well.