Market Outlook. Last year there was a massive dislocation between what oil did and what oil stocks did. This year oil was up close to 8% and the average Canadian company is down about 20% from the high on January 26th. He is seeing unbelievable opportunities in the oil stocks. Some names are down 30%. It is craziness. He is seeing the greatest breakdown in history between perception and reality. There is a misunderstanding of US growth oil output and how that fits into the global context. You need growth. The market is already undersupplied. Demand is up – Goldman Sachs is saying 2 million barrels this year. We are in a multiyear bull market for oil because we experienced the largest drop in upstream projects spending globally. Oil price should remain very strong for the next 5 years.
Can you recommend a non-Canadian producer to invest in? He typically doesn’t buy the mega-cap companies. Their growth rate is fairly modest as they are basically a proxy for the price of oil. It has been topical to go out of Canada. He is 40% in the US. Repatriated some to Canada over the past month given the implosion in share prices. He likes WPX Energy Inc (WPX-N) in the US. They are deleveraging. Trading at a 2-point discount compared to its peers. Good mid-cap company with good balance sheet. Main thesis: high quality multi-decade running room and management the he likes.
What is the US reserve for fracking oil? Big debate on shale oil. Arthur Berman a couple of years said that there is a decline rate of 80% or more after the first year. In his opinion there was a fallacy as he didn’t recognized wells that were brought on. In his mind is not a debate on oil shale. It is more about quality of acreage. When you look at the best rocks. Because the marginal economics when you move to your tier 2 erode very rapidly. Companies are drilling longer, and efficiencies are flat lining. He sees that some evidence that high grading is eroding.
Cardinal Energy (CJ-T) vs Torc Oil & Gas (TOG-T). Very different companies. Cardinal is a medium gravity producer. They are 60% exposed. They are going to lower their debt. They can pay the 10% yield and that is sustainable. He would buy Cardinal Energy (CJ-T) vs Torc Oil & Gas (TOG-T). (Analysts’ price target is $6.44)
Poster child for investors not wanting to own gas stocks anymore. A name that is intriguing. Trading 5.5 cash flow. Should be fully discounted. But there are concerns about take away, summer gas. Unless there is a demand increase LNG you need supply to fall off. He would rather be in the oily names. Valuation looks cheap. In the next year or two years it is hard to come with a catalyst for any natural gas name in Canada.
Very limited appetite for the mid-caps in Canada. Trading at 4.1 cash flow. They 5 years’ worth of proven reserves. Effectively paying below the value of the production and getting their unbook inventory for free. They shouldn’t spend any money on waterflooding. The stock market doesn’t give a darn about it.