|
|
Oil and
gas producers have come to rely on the know-how and skills of an innovative
group of service providers that create efficiencies through novel
technologies and products. Keith Schaefer, editor and publisher of The Oil
and Gas Investments Bulletin, believes investors can both derisk their
portfolios and achieve growth with energy services companies that
dramatically improve profits of producers. In this exclusive interview with The
Energy Report, Keith stakes out some ideas that could yield big upside
and add a cushion during volatile times.
Companies Mentioned: Argosy Energy Inc. - Black Diamond
Group Ltd. - Bowood Energy Inc. - Calfrac Well Services Ltd. - Canadian
Energy Services and Technology Corp. - Coastal Energy Co. - DeeThree
Exploration Ltd. - GasFrac Energy Services Inc. - Open Range Energy Corp. -
Painted Pony Petroleum Ltd. - Primary
Petroleum - Tag Oil Ltd.
The Energy Report: With this debt ceiling debate behind us
now, the markets are frayed. What's your take on this across-the-board
selloff that we saw the last week of July through the beginning of August?
Keith Schaefer: This is a normal crescendo of fear in the markets that
we're getting each year or so after the financial crash of 2008. The
financial crash of 2008 has prepared us for all the debt talk. The political
system and the monetary system know what to do to get us out of this problem.
It's the indecision in taking action that's causing all of the turmoil.
Everybody knows that there needs to be a restructuring of debt where both the
private and public sectors take a bit of a haircut and move on. I don't think
that we're going to see a global recession that will have any huge impact on
equity valuations.
TER: You just used two words that caught my attention:
"restructuring" and "haircut." Are you talking about
Europe—Spain, Portugal, Greece, Italy?
KS: Yes. Right now, the European situation is by far the most
important driver of this stock market pullback. As
soon as the market can figure out that it is resolved, the rest of the
issues—the lingering U.S. unemployment, the high debt in the U.S, the
declining dollar—will all be managed, maybe with a bit of pain, but
they will be managed. It's the indecision and turmoil around resolving the
European debt crisis that is giving us this problem. Once this gets done, and
everyone swallows the medicine, you're going to see a pretty big rebound.
TER: How badly is this going to affect the oil and gas sectors and for
how long?
KS: For natural gas, none of this economic turmoil is going to make
any difference. Around the world, gas is still a relatively regional
commodity that doesn't have any politics in its price. Natural gas prices and
the market are completely insulated from all this political turmoil.
Oil is a completely different story. It's a very political commodity. It goes
up and down with politics, if not more, as with fundamentals. I see oil
having a bit of a range. The market and the world economy have said in very
clear terms earlier this year that when oil gets to $120/barrel (bbl.), it
starts to price in recession and the oil and gas stocks stop moving. I'm
going to suggest that if oil does start to get up there towards $120/bbl.
again, the market is going to start pricing-in a recession that will cause
the oil price to come down. It might come down to $85/bbl. I think that the
range is probably going to be a little bit higher. I
see Brent and West Texas Intermediate (WTI) crude trading in a range here
that's going to be somewhere between $90 and $110/bbl.
TER: You're talking about WTI coming down to $85/bbl.?
KS: I would love to see oil stay at $85/bbl. for the next two or three
months for a couple of reasons. If oil can stay under $100/bbl. as we move
into the Northern Hemisphere's heating season this fall, that would be great
for oil stocks. One, it would convince the market that we're not going to see
such a high oil price that the world will fall into recession again. That
would give investors a lot of confidence in buying oil and gas stocks. Two,
the valuation on the juniors has gone through the roof over the last year.
Part of that is quite deserved because of the new technology of horizontal
drilling and fracking, which has enabled us to get a lot more oil and gas out
of formations and increase profitability of the sector. The valuations got
very high. Now you're seeing valuations come back down to a much more
historical norm. That is a great place for investors to reload on the junior
energy stocks that have been beaten up. A lot of fear has come into the
market and weeded out a lot of the weak holders. This is a great opportunity
for investors to pick up some of their favorite stories very cheaply.
TER: Do you see this as a combination of value story and point of
maximum pessimism?
KS: Yes. I say that cautiously because this pessimism and this value
could still last for another one to three months. Personally, I don't think
so. I think we're going to end up getting this situation resolved sooner than
that.
TER: You tweeted on Aug. 4 that the put:call ratio was 1.2:1, which
you said usually signifies a bottom.
KS: That particular ratio at 1:1.2 is a very strong, historical
turning point for markets.
TER: Do you feel like there's a lot of cash on the sidelines right
now?
KS: There is a ton of cash on the sidelines and not just for the
market but also corporately. Corporate America, which is still by far the
largest economy in the world with 25% of global production, is full of cash.
And the buyside in the investment market is full of cash. So there is a huge
opportunity to see a lot of sustained buying coming
into the market. Fear and volatility mean that interest rates are going to
stay very close to zero. People think economics is the main driver of the
market, but that's not true. Cheap money is just as much a
driver of the market.
TER: We're actually seeing a negative interest rate right now where
the large deposits are being charged a fee by some of the money center banks.
KS: That's right. I just tweeted that. Everyone wants to go to cash,
and Federal Deposit Insurance costs the banks money. So the banks are now
charging clients to own cash. I think that's hilarious where they're saying,
"We don't want your money." The market is saying, "You need to
have your money in the stock market." There is just no incentive for
investors to hold cash.
TER: You've written extensively about the Bakken as "source
rock" and fracking to harvest the resources in the formations. Now we're
starting to see more media reports about fracking, and they have been on the
negative side. What will be the ultimate outcome of this added attention?
KS: The biggest outcome from all this added attention is going to be
more regulation and more paperwork, which could translate into higher
fracking costs. We've heard Obama talk about fracking a couple of times, so
this issue is already at the highest levels of the U.S. government. Over the
next year, we are going to start to see much greater regulation and
paperwork. The flipside is that we haven't hit the
limits on fracking yet. We're still improving that technology, not annually,
but quarterly. That's the flipside, even though it's going to cost more to do
all this fracking.
TER: Would you talk about some of your ideas that you've been telling
your readers?
KS: I've been saying for several months to leg out of small, junior
oil and gas producers and move into the energy services sector—the
drillers, the frackers and the chemical companies. There's a whole supply
chain of companies in sub-industries that supply a lot of equipment and
manpower to the energy producer. New high-tech products coming out in these
supply chain areas have fantastic financials. This is now the only sector
that has pricing power in the market, and you're seeing energy service rates
go up probably 5%–10% a year, and sometimes 5% per quarter. Demand is
strong for these types of products because they increase the profits of the
producers so much that the producers can afford to pay. These companies have
a backlog of sales to the producers for probably the next three to five
years, whether oil goes to $50/bbl. or $150/bbl. These energy services stocks
take a lot of the risk out of the equation.
One of my absolute favorites right now is Open Range
Energy Corp. (TSX:ONR). This is a very interesting hybrid company. It was
a gas company, and it is still a gas company producing almost 4,600 barrels
of oil per day (bopd.) of natural gas in western Canada. It has developed
what it calls the Poseidon Concepts system that handles water and fracking
fluids for producers. It allows oil and gas producers to hold large amounts
of water in heated tanks. They're very cheap to install, cheap to build and
they save companies two days of transport costs. This product is remarkably
profitable for the company. Gross margins in its last quarter were
89%—unbelievable profitability. It's growing like crazy. I see that as an
absolute must-have in the oil and gas sector. I'm buying the stock
consistently at ever-higher prices because it could be a huge winner over the
next one to two years.
TER: Open Range shares have more than tripled over the past 52 weeks.
Even in the last three months, it's still up 26% even after this stock
battering. Wouldn't this be one of the first companies that people would sell
in this kind of environment?
KS: Not when you have that kind of profitability.
TER: You said 89% gross margin, right?
KS: On this frack fluid handling system, Poseidon Concepts.
TER: Another services company idea?
KS: One of my favorites is GasFrac
Energy Services Inc. (TSX:GFS). The fracking companies right now are
absolutely on fire. One of the larger companies in Canada, Calfrac
Well Services Ltd. (TSX:CFW), just reported its Q211 numbers and beat The
Street by almost double. That is almost unheard of, and it's still
growing and increasing its capacity 48% this year. That's a huge growth
curve, but the demand is there. GasFrac has a
special, patented technology where it does fracking and horizontal drilling
with propane rather than water, thus eliminating a lot of environmental
problems. Water is expensive. There are water treatment costs and the
regulation around water is going to get bigger and tougher.
I just love Canadian Energy Services and Technology Corp. (TSX:CEU),
a company we mentioned in our last
interview. The company has done so well. It just split the stock 3 for 1,
so now it's only $12. The business is growing quickly. The management team
has been so disciplined in its acquisitions, and its performance has been so
strong in growing the business. It's just fantastic.
TER: Canadian Energy had been down about 8% over the past 12 weeks. Is
it a value?
KS: It's both a value play and a growth play. It trades at a bit of a
premium to its peers, but the growth curve more than justifies that.
TER: Is there a non-technology services play that you're following
today?
KS: One interesting company is Black
Diamond Group Ltd. (TSX:BDI). I don't own the stock because it's a $30
stock, but it's a nuts-and-bolts play. This team has been able to grow its
business so strongly. Black Diamond was up 80% last year, and it is really
doing a great job of providing high-quality accommodations to oil sands
workers. Only a few years ago, housing for these workers was very rudimentary
and not very pleasant, but the game has changed a
lot. You better have nice accommodations and high-speed Internet because
competition for the workforce is intense. Guys can just walk across the
street and go work for a different company.
TER: Keith, what about international or global plays?
KS: Usually that's where the big risk-reward scenario is for investors
because sometimes you are dealing with countries that have a little bit of
extra political risk so you need to have a bigger prize in the ground to
warrant spending the money. One of my favorites is Coastal
Energy Co. (TSX.V:CEN). The company has been having huge success drilling
wells in the Gulf of Thailand. It hit two big wells a couple years ago, and
the stock had a great run before it fell off. Since
then, its team has been able to figure out the geology and its last nine
wells have all been successful. These wells have come in at
greater-than-expected flow rates. This company is going to double production
from 8,000 bpd. and that is slowly getting priced into the stock. It's a
great opportunity for investors here with this pullback.
TER: What else are you looking at globally?
KS: Globally, one of my favorite stories has been Tag Oil
Ltd. (TSX.V:TAO). This company has way outperformed all expectations. It
was one of the first to discover an international shale play. It's in New
Zealand, so it's in an Anglo-Saxon country with English rule of law. Tag Oil
is about to drill their first big well into this asset, probably in November.
So the market is very excited about this story. But in the two years leading
up to this drill, it has actually been able to find a lot of oil, but mostly
gas, in a different basin in New Zealand. Like Coastal Energy, Tag Oil has
discovered a lot of oil and gas, almost more than 5,000 bpd.,
which will be brought on stream over the next 6–10 weeks. It is going
to go from 1,000 bpd. to 6,000 bpd. over the next three months. Their high
impact east coast shale play is thick; all the early indications are that
it's going to be a Bakken lookalike. Of course, until the drill comes back on
the first hole, we won't know.
TER: A domestic play?
KS: I think Painted Pony Petroleum Ltd. (TSX.V:PPY.A) remains a very
strong story. The company has fantastic land packages in both the oil patch
in the Bakken in Saskatchewan and in gas in the Montney play in Alberta.
President Pat Ward has done just a fantastic job on assembling land packages
and quality joint venture partners, and he's executed flawlessly. The stock
has had a run from $6–$14 in the last year, but I can see this stock
having even greater upside.
TER: You've been writing about companies drilling just outside the
Bakken to tap into that.
KS: What I said on that topic is actually not on the periphery of the
Bakken. It's an entirely new basin of Bakken play called the Alberta Bakken.
The first few wells have come in with mixed results, but we're going to start
to see a much larger number of wells get reported over the next couple of
months. I really believe this play is going to be a winner. I've been telling
my subscribers that they need to own some stock in this play. That would be
companies like Primary Petroleum (TSX.V:PIE), which could have a
fantastic run, if successful, in 2012; DeeThree
Exploration Ltd. (TSX.V:DTX) on the Canada side; Argosy
Energy Inc. (TSX:GSY); and Bowood Energy
Inc. (TSX:BWD). They are all stocks that have medium to large land
positions in the Alberta Bakken. If that play proves up as I expect it to, it
could be very positive.
TER: Thank you very much. It's been enlightening.
KS: Thank you, too.
Also, we would like to extend a special offer to your readers—we're
offering a free Oil & Gas Investments Bulletin report, which
includes an exclusive stock pick—one that I believe still has lots of
room for share-price growth, despite it more than doubling for my subscribers
already. In addition, we're offering readers a 25% discount on current
subscription rates for a limited time only. For more information on this
special offer, please visit our website.
The Oil & Gas Investments Bulletin generated 114% gains in 2009
and this year is on track to be another winner!
Keith Schaefer writes on energy and junior energy stocks
in a simple, easy-to-read manner. In his newsletter, the Oil and Gas
Investments Bulletin, he finds the fastest growing producers and
energy service companies for his subscribers. The new shale discoveries plays
are steadily creating new opportunities for investors.
The
Energy Report
|
|
