By: Malcolm Shaw
(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 VLE.TO, CPI.TO, SDX.V and POE.V)
Opportunity Knocks Even When No One is Home
Valeura Energy, Pan Orient Energy, and Condor Petroleum all reported last week without much ado in these dog days of energy. And when I say dog days, boy do I mean it. Just a few days ago I read a Bloomberg article that ended with a reference to a Gary Shilling interview in which he had prognosticated oil prices as low as $10-20 per barrel, so the bear camp is alive and well... and why shouldn't the bears be growling their loudest? Oil just keeps making new lows, global oil production remains high, China seems to be on the ropes, and the U.S. dollar shows no signs of weakening any time soon. In the midst of all this the market seems to be tripping over itself to sell oil and oil stocks to ever-lower lows… and to quote the Bloomberg article linked above, "U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986." This is historic stuff. I went on further to read another article yesterday discussing how the Shale Oil Genie isn't going to be very easy to put back into the bottle in light of the fact that he apparently lives in the middle of the cost curve (with service/drilling costs dropping all the while). It would seem that oil was too high for too long and that North American companies have now become too good at exploiting it.
Sure I could make some kind of bull case for oil here, but would it matter? Not one bit. To take a zen approach, the crude market will resolve itself when it resolves itself. Swimming against tides like this is ill-advised, but in the long run I think it's probably a little late to be piling into the bear camp. Even if oil prices just stayed where they are, that would probably be a bearish enough outcome for most. Having said that, the market probably needs to see some high profile bankruptcies (and/or high yield debt implosions) in the oil sector to really put the icing on the cake of crude's demise, but it's times like these when indiscriminate selling can result in some real bargains if you can see through the fog, which leads me to highlight Pan Orient, Sea Dragon, and Valeura. Sure there are lots of cheap oil stocks, but none of these companies are really "oil stocks" in the traditional sense of the word...
While everyone is awash in oil, there is still the subject of natural gas… remember gas? Domestic gas prices fell off a cliff well before oil did and North American production and supplies appear to be adequate at the moment, leading to a subdued market and minimal investor interest at home, but go to some foreign jurisdictions and the gas scene can be a lot different. Egypt is in a full-on gas crisis at the moment… I kid you not… Egypt is literally starving for gas. Read a bit about it here: (http://www.thenational.ae/...resolving-egypts-energy-crisis and http://www.theoilandgasyear.com...Egypt_2015_Preview.pdf). Tiny Sea Dragon Energy could be sitting on a gassy gold mine if South Disouq clicks for them. Meanwhile, Turkey imports 99% of its gas supplies even though domestic pricing is multiples of those in North America… again, I'm not making this stuff up: (http://www.eia.gov...analysis.cfm?iso=TUR). To drive the point home, Valeura reported netbacks of C$45.90/boe in Q2 thanks to an average gas price of C$9.89/mcf… how many other energy companies do you know of that have $46/boe netbacks these days? Finally, for Pan Orient, current gas prices of USD$6.50-$8.00/mcf in energy-starved Indonesia ($9-11/mcf if exported to Singapore) could be a boon for investors should the upcoming Akeh exploration well proves to be successful, as it is likely to be gassy. I'm sure you get my point by now. Not all energy companies are created equal, but they are all being treated the same in the Great Flush that characterizes today's oil market. Call me crazy, but in the chaos, I still see opportunity.
In order for me to be proven right, I still need these companies to get lucky with the drill bit, but with Pan Orient trading at a 15-20% discount to its cash value, Valeura trading at 1.5x EV/CF, and Sea Dragon trading with just a $5.6 million market cap (with no net debt and some low-cost production in its pocket), I think I'm getting some pretty good optionality in some pretty well-positioned companies… particularly in light of their respective energy market fundamentals.
As always, time will tell.
(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 VLE.TO, CPI.TO, SDX.V and POE.V)
Opportunity Knocks Even When No One is Home
Valeura Energy, Pan Orient Energy, and Condor Petroleum all reported last week without much ado in these dog days of energy. And when I say dog days, boy do I mean it. Just a few days ago I read a Bloomberg article that ended with a reference to a Gary Shilling interview in which he had prognosticated oil prices as low as $10-20 per barrel, so the bear camp is alive and well... and why shouldn't the bears be growling their loudest? Oil just keeps making new lows, global oil production remains high, China seems to be on the ropes, and the U.S. dollar shows no signs of weakening any time soon. In the midst of all this the market seems to be tripping over itself to sell oil and oil stocks to ever-lower lows… and to quote the Bloomberg article linked above, "U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986." This is historic stuff. I went on further to read another article yesterday discussing how the Shale Oil Genie isn't going to be very easy to put back into the bottle in light of the fact that he apparently lives in the middle of the cost curve (with service/drilling costs dropping all the while). It would seem that oil was too high for too long and that North American companies have now become too good at exploiting it.
Sure I could make some kind of bull case for oil here, but would it matter? Not one bit. To take a zen approach, the crude market will resolve itself when it resolves itself. Swimming against tides like this is ill-advised, but in the long run I think it's probably a little late to be piling into the bear camp. Even if oil prices just stayed where they are, that would probably be a bearish enough outcome for most. Having said that, the market probably needs to see some high profile bankruptcies (and/or high yield debt implosions) in the oil sector to really put the icing on the cake of crude's demise, but it's times like these when indiscriminate selling can result in some real bargains if you can see through the fog, which leads me to highlight Pan Orient, Sea Dragon, and Valeura. Sure there are lots of cheap oil stocks, but none of these companies are really "oil stocks" in the traditional sense of the word...
While everyone is awash in oil, there is still the subject of natural gas… remember gas? Domestic gas prices fell off a cliff well before oil did and North American production and supplies appear to be adequate at the moment, leading to a subdued market and minimal investor interest at home, but go to some foreign jurisdictions and the gas scene can be a lot different. Egypt is in a full-on gas crisis at the moment… I kid you not… Egypt is literally starving for gas. Read a bit about it here: (http://www.thenational.ae/...resolving-egypts-energy-crisis and http://www.theoilandgasyear.com...Egypt_2015_Preview.pdf). Tiny Sea Dragon Energy could be sitting on a gassy gold mine if South Disouq clicks for them. Meanwhile, Turkey imports 99% of its gas supplies even though domestic pricing is multiples of those in North America… again, I'm not making this stuff up: (http://www.eia.gov...analysis.cfm?iso=TUR). To drive the point home, Valeura reported netbacks of C$45.90/boe in Q2 thanks to an average gas price of C$9.89/mcf… how many other energy companies do you know of that have $46/boe netbacks these days? Finally, for Pan Orient, current gas prices of USD$6.50-$8.00/mcf in energy-starved Indonesia ($9-11/mcf if exported to Singapore) could be a boon for investors should the upcoming Akeh exploration well proves to be successful, as it is likely to be gassy. I'm sure you get my point by now. Not all energy companies are created equal, but they are all being treated the same in the Great Flush that characterizes today's oil market. Call me crazy, but in the chaos, I still see opportunity.
In order for me to be proven right, I still need these companies to get lucky with the drill bit, but with Pan Orient trading at a 15-20% discount to its cash value, Valeura trading at 1.5x EV/CF, and Sea Dragon trading with just a $5.6 million market cap (with no net debt and some low-cost production in its pocket), I think I'm getting some pretty good optionality in some pretty well-positioned companies… particularly in light of their respective energy market fundamentals.
As always, time will tell.
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