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Why Your Oil Investments Are Still Profitable
By Keith Kohl | Thursday, October 2nd, 2008
http://www.energyandcapital.com/newsletter.php?date=2008-10-02
"Beginning this moment, this nation will never use more foreign oil than we did in 1977-never."
When Jimmy Carter uttered these words during his Crisis of Confidence speech in 1979, the U.S. was importing eight and a half million barrels of oil every day. At the time, we were dependent on foreign imports for approximately 40% of our oil demand.
He wasn't the only President with energy independence in mind.
Four years earlier, President Ford wanted to lower oil imports by two million barrels per day before 1978. Rather than falling, imports rose more than 2.3 million barrels per day. His plan, however, was less ambitious than Nixon's goal to completely eliminate our energy dependence by 1980.
During the ten years after President Carter stated his energy goals, things appeared brighter. According to the Energy Information Administration [http://tonto.eia.doe.gov/dnav/pet/hist/mttimus2a.htm ] , our imports of crude oil and petroleum products fell to as low as 5 million barrels per day in 1985, or about 40% since Carter's speech.
Today is a much different story. So before I tell you how to invest in oil, let's go over our current situation...
Blindsided by Peak Oil
Here's how the U.S. is stacking up today:
Crude Oil Production has dropped to 5.064 million barrels per day. U.S. oil production peaked 38 years ago in 1970. Since then, we've been going downhill. My Energy and Capital readers know that the U.S. is producing roughly the same amount of oil it did in 1947.
Imports of Crude Oil and Petroleum Products was 13.4 million barrels per day in 2007. If you thought 40% dependence on foreign oil during the Carter administration was a lot, now take into consideration that foreign oil makes up 67% of our oil consumption.
Crude Oil Consumption reached 20.6 million barrels per day in 2007. That's approximately 40% of our total energy consumption, with coal and natural gas coming next in line. Despite the different energy programs over the last 3 decades, fossil fuels remain the dominant source of our energy consumption.
Since U.S. oil production peaked three decades ago, that fact is that we are consuming one-quarter of the world's oil supply, yet only producing 5% of it. In other words, our addiction to foreign oil shouldn't come as a surprise for us.
The problem, however, is that peak oil is no longer just a U.S. problem.
Struggling to Produce Oil
When the subject of our country's oil addiction comes up, the rhetoric coming from Washington has been to reduce and eventually eliminate our dependence on foreign oil. Naturally, they mean oil originating from the Middle East. OPEC's oil.
In order to achieve that goal, that means the U.S. needs to find an extra six million barrels every day. Saudi Arabia is providing over 1.6 million barrels per day alone. We might not have to worry too much about reducing Saudi imports, however. First take into account that production at the Saudis' biggest oil field (and the world's largest, for that matter, Ghawar, is now in decline.
Today, nine out of the world's ten largest oil fields are in decline. In fact, 94% of global production comes from just 1500 giant oil fields. Finding replacements is even more difficult, considering that discoveries of these giant oil fields peaked more than forty years ago.
The U.S. only has two options to make up for the loss of Middle Eastern imports: either boost its domestic drilling or increase their Canadian imports.
What about Mexico? Isn't Mexico one of our biggest importers?
Mexican production, unfortunately, is heading in a downward spiral. Their massive Cantarell field is in serious trouble. Pemex reported that oil production at Cantarell has fallen 29.2% to a mere 1.1 million barrels per day. As if that were not enough, Mexico's second-largest field, Ku-Maloob-Zaap dropped 39%. Let's not forget that nearly 40% of the country's budget is generated from oil revenues.
Imports from Mexico were down almost 400,000 barrels per day in July compared to 2007.
Investing in Oil: The Profitability of Your Oil Plays
Although oil prices have been hammered for the last three months, our long term outlook hasn't changed. The fact remains that oil, coal and natural gas remain our predominant form of energy. On a global scale, fossil fuels still make up 86% of primary energy production.
Regardless of when oil prices begin to rebound, one thing we can count on is that the U.S. will continue to shake-off its addiction to Middle Eastern oil. As I just mentioned, it's going to come down to increasing domestic production and/or relying on Canadian imports. Granted, we won't be able to make up the six million barrels per day we need to walk away from OPEC, but that certainly doesn't mean we won't do what we can.
The bottom line is that the producers are going to be back on top again, and sooner than you might imagine. Energy companies have been slapped hard for the last three months. This means there are a ton of quality companies that investors can pick up at a discount. I prefer to stick with the drillers that have the property and experience to extract our future oil supply.
Investing in Oil: The Canadian Bakken
With that in mind, I see two ways for investors looking to get a piece of the Canadian side of the Bakken.
The first is to look carefully at the smaller producers. Granted, they may not be spending the most or even have the most money in the bank, but they're also not trading for $100 a share. In other words, they can give you the most bang for your buck. They are also, however, a lot more riskier than some of the major players.
As I've said previously, look at Canadian oil stocks like TriStar Oil and Gas (TSX: TOG). The good part is that TriStar seems to be gaining steam.
The second option available for us are oil companies in Alberta expanding their operations into Saskatchewan. If you've been a reader of Energy and Capital for some time, then odds are you know my stance on the Alberta oil sands.
Ever since Alberta has changed their royalty rates, companies are starting to see the grass is greener on the other side of the fence. Over the last few months, some of my favorite oil sands companies have been staking a claim in southeast Saskatchewan.
But no matter how you go about with your personal investments, the most important advice I can offer is that you should always do you own due diligence. Above all else, make sure you comfortable with the company before dishing out your cash.
Until next time,
Keith Kohl
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Billions of gallons of oil in North Dakota, Montana
Geological Survey calls find largest reserves outside Alaska
Posted: April 13, 2008, 10:31 pm Eastern
By Jerome R. Corsi
© 2008 WorldNetDaily
http://tinyurl.com/5jaxs2
A shale formation stretching North Dakota and Montana may have an estimated 3.0 to 4.3 billion barrels of technically recoverable oil, according to a U.S. Geological Survey assessment.
Known as the Bakken Formation, this find would make the recoverable oil in North Dakota and Montana the largest United States oil reserves outside Alaska.
Map of Bakken Formation in northern United States, courtesy Grand Forks Herald
The recently released assessment shows a 2,800 percent, or 28-times increase in the amount of oil recoverable from the Bakken Formation, compared to the agency's 1995 estimate of 151 million barrels of oil.
According to the USGS, the dramatically increased estimate of recoverable oil in the Bakken Formation results from new geological models, advances in drilling and production technologies, and recent oil discoveries.
By the end of 2007, approximately 105 million barrels of oil have been produced from the Bakken Foundation.
"The Bakken Formation estimate is larger than all other current USGS oil assessments of the lower 48 states and is the largest 'continuous' oil accumulation ever assessed by the USGS," said a news release making the announcement.
The Bakken Formation lies in "Williston Basin," a geological formation in the north central United States, underlying much of North Dakota, eastern Montana, northwestern South Dakota, and southern Saskatchewan and Manitoba, Canada, according to the Energy Information Administration of the U.S. Department of Energy.
The EIA attributes the success of horizontal drilling and fracturing efforts in Montana as the reason a decision was made to re-evaluate the 1995 USGS Assessment of Resources that had estimated only 151 million barrels were technically recoverable from the Bakken Formation.
Lynn Helms, the director of the oil and gas division of North Dakota's Industrial Commission told the Grand Forks Herald the USGS announcement had prompted new interest from investment bankers and the oil industry.
"We have had contacts from Scotland and Australia today," Helms told the newspaper. "And of course, lots of Canadian interest, and contacts from across the United States, both from the media and the oil industry. And banks. I think they are looking for a place to invest venture capital."
The USGS announcement should give "a significant boost to North Dakota's already-booming oil industry," according to a news release from the office of North Dakota's Democratic Senator Byron Dorgan.
"The oil industry in North Dakota has already seen substantial growth," Dorgan said, "but this report is important because it gives oil companies another set of eyes."
"The Bakken Shale should attract significant new investment to this region," he continued. "This is an exciting time for North Dakota's oil industry. We're going to see new growth that will boost our economy and help our country shed its dependence on foreign oil."
The USGS report increasing the estimate of oil recoverable from the Bakken Formation supports the arguments of Shell Oil's president of U.S. operations, John Hofmeister, who has recently questioned the validity of the assumptions behind "peak oil."
As WND reported last month, Hofmeister told CNBC's national Squawk Box morning show audience that peak oil theorists, such as Matt Simmons, have dramatically underestimated the amount of non-conventional oil economically recoverable with oil prices hovering at $100 a barrel.
WND also reported that Simmons, a Houston-based oil industry investment banker, also appeared on CNBC's Squawk Box show to defend his peak oil position, arguing that diminishing oil flow is an irreversible worldwide "grim reality," regardless what new oil resources are discovered.
Peak oil theorists maintain that oil is a finite resource and analysis of depleting oil fields demonstrates the world has either already reached or is nearing maximum oil flow.
Non-conventional oil reserves include a variety of oil reserves, including the oil tars in Alberta, Canada, which present technology allows to be converted economically into oil through well understood synthetic chemical processes.
Investors look to oilpatch to fuel returns
David Pett, Financial Post
Published: Monday, April 14, 2008
http://www.financialpost.com/story.html?id=445331
Tyler Brownbridge/Canwest News ServiceEconomist Jeff Rubin says the TSX oil and gas index should be trading about 35% above current levels.
Expectations are high on the Street these days that stocks from the oilpatch can fuel solid returns for investors and help drive the S&P/TSX Composite to new heights in 2008.
Jeff Rubin, chief strategist and chief economist at CIBC World Markets, recently estimated that energy stock valuations appear to price crude oil at about US$75 a barrel, 25% lower than the approximately US$100 commodities market value.
Consequently, he said in a report the TSX oil and gas index should be trading about 35% above current levels.
Those attractive valuations only look prettier given predictions of an active M&A market over the coming months, and with solid opportunities seemingly around every corner, the only question that remains is how best to play the game? A definitive list it is not, but here are a few suggestions to get you started.
Large Caps: Talisman Energy Inc. (TLM/TSX) is a stock that has been hindered by the short reserve life of the company's resources, and over the past two years shares are virtually unchanged at a value that remains well below its peers. But with new CEO John Manzoni on board and a strategic review in motion, the stock has caught some momentum, rising almost 20% over the past month.
Many analysts, including Genuity Capital's Philip Skolnick figure Talisman shares are well positioned to move further on up. "[Mr. Mazoni] understands that assets with short reserve lives don't work for a company this size," Mr. Skolnick said. "What they need to do is focus on long-life resource plays."
Luckily, he adds, Talisman won't have to make a big acquisition to do that, because in North America it has huge land positions in five key resource plays that people are starting to hear about, including the Outer Foothills in Alberta, the Montney shale in B.C., the Marcellus shale play in the northeastern United States, the Utica shale in Quebec and the Bakken in southern Saskatchewan.
Mr. Skolnick is confident that by concentrating its efforts on these plays, Talisman will be able to increase its overall reserve life over time, noting "the market has been rewarding companies who make that kind of strategic shift."
Analysts also like Suncor Energy Inc. (SU/TSX) and Canadian Natural Resources Ltd. (CNQ/TSX) in the large-cap space. Of Canadian Natural, Mr. Skolnick notes that the company's Horizon project is expected to come on line in the third quarter of this year and will reach peak production sometime in 2009 of 110,000 barrels of oil per day. At US$85 a barrel, Mr. Skolnick said, CNQ will generate $1-billion in free cash flow. "Try and find another company out there with a significant near-term project about to come online like Horizon," he said.
The trusts: Thanks to attractive yields in volatile times, energy trusts have done their part, and then some, in driving overall positive, if slight, valuations in the energy sector over the past quarter. Among the myriad "buy" recommendations from analysts who cover the sector, Bonavista Energy Trust (BNPu/TSX) gets great props from all but two analysts who have "sell" ratings on the units.
"Great yield, great management, great company. It's probably our best pick on the trust side" said UBS analyst Grant Hofer. But it's oily weighted Baytex Energy Trust (BTEu/TSX), he said, that offers great momentum for investors right now.
"There's a real heavy-oil story at the moment with heavy oil basically selling for the same price as light oil compared to the 30% discount it usually trades at."
With 60% of Baytex production coming from its heavy-oil assets. Mr. Hofer said nothing comes to mind as a better play on heavy oil prices. He also likes Vermilion Energy Trust (VETu/TSX) for its very conservative 35% payout, strong balance sheet and diverse international operation.
He also said Vermilion will at some point do something with its 42% stake in Libya-based Verenex Energy Inc., giving the stock great option value going forward."
The intermediates A consolidation trend in the junior and intermediate explorer and producer sector is giving new hope to the mid-cap sector following a disappointing 2007.
Canaccord Adams analyst Wendy Liu says reduced access to capital, existing financial pressures and uncertainty concerning the effect of the proposed Alberta fiscal changes is creating a "bigger is better" mentality with new, larger entities worthy of investment being created to fill the mid-cap tier.
Ms. Liu sees no shortage of good names in the space and recently initiated coverage with "buy" ratings on three companies that have bought their way up to the 20,000-barrels-of-oil mark through corporate transactions in recent months.
She said the recent acceleration in merger and acquisition activity, specifically at the Bakken Formation in southeast Saskatchewan is particularly relevant for TriStar Oil & Gas Ltd. (TOG/TSX), which she tagged with a price target of $18 upon initiation. "TriStar holds the third-largest acreage position prospective for the Bakken. It has demonstrated its prowess at acquiring others, but there exists the distinct possibility that it, too, will be bought by a larger entity given the strategic positioning of its asset base. The analyst also likes Iteration Energy Ltd. (ITX/TSX) and NuVista Energy Ltd. (NVA/TSX), whose 12-month price targets of $7.50 and $20, respectively, represent upside of more than 20%. "In our view, the market is not recognizing that the respective fundamentals for Iteration and NuVista are solid," she wrote.
Small caps What with trust taxation, high services costs, low gas prices and Alberta's royalty review, the list is long on negative issues that have impacted the small-cap energy scene over the past two years, with investors turning tail, unwilling to deal with the hiccups that often arise at companies in the sector.
As a result, Wellington West analyst Kim Page said full-cycle exploration companies with long lead times onto production easily get lost in the shuffle, even those with high netback and long-life assets.
"The result is value creation goes unnoticed," he wrote in a recent note to clients. "Concurrent commodity price increases can accelerate value attrition."
He flags Rock Energy Inc. (RE/TSX) among his favourite small-cap plays, rating the emerging oil-and-gas company with assets in Alberta and British Columbia a "strong buy" with a $4.75 price target. The stock continues to trade at a significant discount to its $5-a-share net asset value, he told clients, adding the company's active drilling program slated for the second half of 2008 should increase the company's to 4,100 barrels of oil a day.
He also lists Alberta Clipper Energy Inc. (ACN/TSX) and Arcan Resources Ltd. (ARN/TSXv) as good-quality small-cap companies with strong assets, management teams and in solid financial postion and suggests investors begin building diversified positions ahead of the Alberta government's announcement confirming royalty rates under the New Royalty Framework now expected in some time later in May or June.
"We believe some relief will be provided and act as a catalyst to revalue these stocks."
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TriStar engages in the exploration, acquisition, development and production of oil and natural gas reserves in Saskatchewan and Alberta. TriStar's business plan is to create sustainable and profitable per share growth in reserves, production and cash flow in western Canada. To accomplish this, TriStar will pursue an integrated growth strategy including focused acquisitions, together with development and exploration drilling.
"The areas of operation for the Company include southeast Saskatchewan, southeast Alberta, Redwater and Ante Creek.
CONTACT INFORMATION
Head Office:
TRISTAR OIL & GAS LTD
Suite 700, 555-4th Avenue S.W.
Calgary AB Canada T2P 3E7
Phone:403 262-9077
Fax:403 262-6403
Website: http://www.tristaroilandgas.com
LAND INTERESTS
Working interests:
up to 100% in the Rosebank, Carlyle, Hastings, Star Valley and AlidaWest properties (primarily oil) in southeast Saskatchewan;
Countess, Wayne-Rosedale, Swan Hills and Nisku oil and natural gas properties in south central Alberta;
37.5% working interest in West Pembina oil and natural gas property in south central Alberta;
Ferrybank, Crystal and Westerose oil and natural gas properties in central Alberta;
Redwater oil and natural gas property east of Edmonton, Alberta;
West Provost, Neutral Hills, Sounding Lake and Consort natural gas and oil properties in east central Alberta;
Enchant oil property in southern Alberta;
Scandia, McGregor Lake and Atlee/Buffalo natural gas properties in southern Alberta; and
Ante Creek light oil and natural gas property in the vicinity of Grande Prairie, Alberta.
COMPANY MANAGEMENT
Brett Herman, President & CEO; Jason J. Zabinsky, Vice President, Finance & CFO; Graham Kidd, Vice President, Engineering; Eric Strachan, Vice President, Exploration; Jeremy Wallis, Vice President, Land; James M. Pasieka, Corporate Secretary;
BOARD MEMBERS:
Paul Colborne, James V. Bertram, Fred C. Coles, Dallas L. Droppo, Richard N. Edgar, Brett Herman, Martin Hislop, Robert B. Michaleski, James M. Pasieka, Robert G. Peters
COMPANY WEBSITE
http://www.tristaroilandgas.com/
DUE DILIGENCE
TriStar Oil & Gas Corporate Presentation. 03 08
http://tinyurl.com/5ty8nu
COMPANY CHART
source of chart: dumbas
$WTIC [Oil-Light Crude-Continuous Contract[EOD]]INDX
http://stockcharts.com/h-sc/ui?s=$WTIC&p=D&b=5&g=0&id=p53461904060&listNum=1&a=105767820
$NATGAS [Natural Gas-Continuous Contract NYMEX[EOD]]INDX
http://stockcharts.com/h-sc/ui?s=$NATGAS&p=D&b=5&g=0&id=p78606739104&listNum=1&a=119882250
OTHER LINKS
PEAK OIL - EPOCHAL EVENT OF OUR LIVES
http://www.investorshub.com/boards/board.asp?board_id=6609
