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Frac sand. Sees a very, very bullish underlying thesis, combined with a market that just isn’t seeing it, so stocks have sold off by 40%-70%. Of the frac sand companies, this one sold off the most because 1) they have more financial debt than the others and 2) there is a growing narrative that there will be growth in supply in Texas. As 75% of the cost of sand is transportation, there is a fear that supply growth in Texas will displace those deposits that are further away. He feels demand growth will exceed supply growth, so the market will remain tight. (See Top Picks.)
If you want to be in Canada, and want a very small cap and uber leverage to the oil price, this is a pretty good pick. They did a royalty deal on their oil sands project, which was nothing short of genius. Payments don’t start until oil exceed something like $70-$75. Their total cash/cost break-evens are around $44. If you are a believer in $65-$70 oil, this stock could really, really work. If you are a believer that we are stuck in a $50-$60 range for the next year, there are better areas to be in.
A fine company, but not one of his favourite US producers. It has a little more debt than the average company on consensus for next year, which would be higher than strip oil prices. Debt would be about 2.6X, while the average in the Permian is 1.2X. Well results have been improving steadily over the past couple of years, as they have been using more frac sand with better results. He has been warming up to the name.
How do you value a frac sand company? One way would be by calculating the cash flow stream over the 50ish years of reserve life. A quicker and easier way is to just look at, on a forward basis, the total value of the company (debt+ market cap divided by cash flow) and relate that back to historical multiples. The US names have typically traded from 7 to 8 times, and today they are trading 3 to 4 times.
Feels US names will outperform Canadian names, which have impediments such as socialist governments in Alberta and British Columbia, a prime minister that wants to shut down oil sands because of lack of pipeline to take away both oil and gas, and a Supreme Court that is not oil friendly. Management is great and the balance sheet is okay. They have deep inventory and fast payback, but fails to see how Canada in the aggregate will outperform the US names.
Hasn’t held this for about 2 years. If bullish on Canadian gas, this is not a bad name. They’ve suffered from an equity issuance they did earlier this year, where they diluted the shareholder base by about 58%. That was to get more drilling depth acreage, more contiguous where they can draw longer laterals. Trading inexpensively relative to its inventory depth, but there is a lack of a lot of pipeline, and thinks it will continue to sell at a disconnect. There are better names in the US.
One of the favoured few within Canada, where International investors are comfortable with the CEO and management team. They have the benefit of global diversification. It has always traded at a pretty healthy multiple, which has prevented him from owning the stock. It is probably better to go a little further down the risk profile in names that have been sold off.
This operates in Russia, Argentina, US and Canada. Fracing demand, in both Canada and the US, exceeds available supply. As pricing has been going up, this has been a beneficiary. What keeps him from investing in this is their balance sheet. They simply have too much debt, and it removes their strategic flexibility.
The primary long way to get exposure in the Canadian frac market of larger companies. He likes management. They are a transportation advantage within Canada, and are roughly 40% of the Canadian frac sand market. Some of the big, big wells going on in the Permian literally use 100-200 railcars for a single well. The only hindrance is that there is still a large private equity component to it, which will act as an overhang. Any time the stock rallies, there will always be a kind of concern that there will be a secondary coming into the market.
Energy. It has been a tough, tough space to be in for the first 7 months of the year. It is record-setting because for the last 27 years, the energy index has never fallen for 7 sequential months in a row. He is optimistic that given the trends we are seeing in the US inventory drawdowns, the market is going to wake up to the fact that things have been improving since July of last year. Things are not as bad as you would think, and oil is heading higher in the next couple of months. Had thought that the timeframe for a change in thinking would be roughly September, but that has now been pushed back to about March 2018. There are 3 reasons for this. 1.) The biggest one is Libya and Nigeria both coming on bringing on almost a half a million barrels per day since the beginning of the year due to geopolitical situations. 2.) The dislocation between OPEC production cuts of 1.1 million barrels per day and OPEC export cuts which only fell to 400,000. That has subsequently improved. 3.) The ramp up in the US. The rig count since the beginning of the year is up almost 50%. Despite those 3 headwinds, inventories are still falling, and we are getting closer and closer to the end point. Expects oil to be over $50 in the next couple of months, $50-$60 in 2018-2019 when the bullish picture really starts to improve. He struggles to see natural gas being much above $3.