Crude Observations

Fearless Forecast – Decade Edition

Are you ready for it? Because I sure am! Brace yourselves dear readers – it is that time of year where I lay myself bare to all of your collective scorn and ridicule and put out the one and only Fearless Forecast that you absolutely must read, right now, before the market opportunity escapes you! Read it! And sorry, it is long.


Anyhoo, step right up and let me tell you about the prognostications that will amplify and electrify your portfolios. The stock picks and the macro directions that will set you on the path to eternal riches and immortal salvation.


The dreams, the visions, the words that will allow you to rise above the petty, malignant grind of daily life, secure in the knowledge that up is up, down is down and whatever is in the squishy middle is indeed edible.


The future has been revealed to me, I have consulted my sources and have my finger on the pulse. When it comes to my sources, I truly have the best sources. Tremendous sources. No one knows more about forecasts than me. I alone can do this forecast.


And if I am wrong, it doesn’t matter, right?


It’s not like anyone risks any money on these forecasts. Right? Like really. I hope not anyway…


And if I may say so myself, compared to prior years, this may be the Greatest Forecast Ever AssembledTM


And to let you in on a little secret, I may have called Donald Trump to get a few pointers.


Broad Themes


This year, I am thinking that while the theme of civil unrest is still topical, the reality is that that this is going to take a back seat to what the largest influence on the globe will be which is the runup to and the eventual result of the US Presidential election. Regardless of the Democrat Candidate (and I will take a stab at that too), the actions of Donald Trump and his administration approaching the election, the result on impeachment and whatever trade and foreign policy rabbit holes he elects to go down are going to go a long way in determining the fate of the free and not so free world.


For the record, I expect that “2020 election” Trump is going to be a lot less apocalyptic than 2017-2020 President Trump and that he will want to run on his economic success as opposed to his foreign policy fever-swamp.


While Donald no doubt has a rock solid base, in order to recover some measure of popularity, he needs to quickly inject some life into what has been a slowing economy, particularly in the manufacturing sector where the most recent PMI number was at its lowest level since 2009. In this context, I fully expect the Trade War to go into a rapid wind down, with the soon to be signed Phase I agreement with China rapidly followed by a Phase 2 agreement. This will allow Trump to claim trade war “Victory” and remove the destabilizing impact of a global slowdown from the election contest.


While there are several theories that Donald Trump won’t make it to the election, the only one that really may hold some merit is the health concern. Clearly something isn’t right with Trump since that mysterious midnight run to the hospital several months ago – his speech is less coherent, his balance is odd and he is decidedly glassy eyed in many appearances. The tin-foil hat crew will point out that the Reagan White House successfully hid his dementia for at least two years while they implemented their agenda, why wouldn’t the same be happening here? Regardless, something is off and should be monitored as a wild card.


Parking that however, there is little in the way to interrupt his candidacy. Impeachment will make it to the Senate where it will be defeated on party lines and we will segue nicely into election silly season, where the Trump-Pence 2020 ticket (I toyed with Trump-Haley but there isn’t enough time) will lose to Biden-Harris. It will be a solid victory, but not as resounding a mandate as everyone expects.


On a global basis, the Iran crisis, which has been ongoing for more than 40 years will continue to percolate. I am fearful that unshackled from their taskmaster Suleimani many Iranian proxies may take it upon themselves to freelance in the Middle East which could lead to some significant instability, but there is always the possibility that in light of the tragedy/atrocity of Flight 752 cooler heads will prevail. No one actually wants a full-on US-Iran war (except maybe Mike Pompeo, who has to be on the way out by now). Expect continued sanctions, occasional posturing and gradual cool-off.


That is not to say that there aren’t other regional conflicts of note. There are. Many countries in Africa are on the edge (Burkina Faso, Ethiopia, Sudan) and places like Libya are still potential powder kegs.


All things being equal though, 2019 was a year of much crisis and I expect 2020 to be relatively more stable with the exception of two major areas that have the potential to spiral out of control if left unattended.


The first is Venezuela which is in its 119th year of economic stagnation and, with an election year in the Untied States, seems destined to fall off the collective radar of powers that should want a peaceful resolution. This could create a vacuum that leads to conflict.


The second is the disputed Kashmir, a traditional area of conflict between India and Pakistan that has been threatening to blow up for decades. While Western powers back India’s Modi and his recent incursions and crackdowns in Kashmir, it would not take much for a major conflict to flare up in an ignored area of the world that I have long held will be the site of the first nuclear conflict of the modern era (as opposed to Iran-Israel). You have been warned. Pay attention.


On the energy and environment front, 2020 is going to be a year of transition. It is going to be the year where for the first time in a decade, the story isn’t going to be Light Tight Oil. Instead the year is going to be all about ESG (Environmental Social and Governance), a movement that will shockingly not be led by a messianic figurehead like Greta Thunberg but instead by uber-boring rich white dudes like Steve Schwartzman, CEO of Blackstone (largest private equity fund in the world), former Bank of Canada/Bank of England Governor Mark Carney and other investor groups. Look, I don’t pretend for a second that these guys are doing this for any altruistic reason aside from self-preservation and self-enrichment, but actions matter, regardless of motive. How energy companies globally adopt in the face of these climate crisis driven demands will determine their success for years to come.


At any rate, there is no escape from this as successive crises continue to support the case for emission reduction and let’s face it – events like the Australian bush fires serve to change the narrative in particular because koalas are so much cuter than the venomous jungle snakes burning up in the Amazon.. Accordingly, I think 2020 will be the year where emissions reducing solutions like nuclear power come back to the fore – and not just from fringy right-wing web sites, but instead an institutionally driven initiative from many levels of government. Look, if the United States can reduce its coal consumption for electricity to below 1974 levels with Donald Trump in the White House and only using natural gas, surely other countries can embrace change. Why does France lead in per capita emissions? Nuclear. Why is Germany fading? Abandoning nuclear. What do wind and solar fail at? Baseload. What is nuclear all about? Baseload.


There is a of course a leading role for Canada to play in all this. Canada is already a global leader in ESG influenced fossil fuel production and we are a leading exporter of next generation nuclear technology.


OK, that’s it on the environmental soapbox except, finally, as a famous cartoon ironically says (paraphrasing)… “What happens if we spend all this money and all we get is a better/cleaner world?”


On the oil and gas front, with the Permian not being the main focus (while still being massive, don’t get me wrong), we are projecting significant investment in offshore Africa, Latin America and non-Iran OPEC. Sorry, not Canada. Rationale is below.


But before that, and against that backdrop, specifics! First off I am changing the order. Prices first, then production.


Price of oil


This is the one everyone wants to know. It’s the call that all of you should be basing your investment decisions on. Well that’s smart, because I’m taking a pretty bold gamble on this one this year.  Why oh why, you might rightly ask? Well mainly because I got my a** handed to me last year and I’m hopping mad.


So – my thoughts.


First off, oil and gas demand is expected to increase by about 1%, as it does every year. Against that you have record production in the United States that is being offset by big cuts from OPEC/NOPEC and substantial spare capacity in Saudi Arabia. OECD inventories have built up but will now start to decline with the renewed OPEC/NOPEC cuts, we have the political risk premium from global conflict and recovering global GDP growth all acting as bullish signals for prices. On the other hand, two major producers (Iran and Venezuela) are under sanction and represent about 3 million barrels of oil per day in capacity and no clear picture of if they may see some relief. In additon, you have US shale oil production growth, potential OPEC cheating and of course the end of the oil industry as we know it because of electric vehicles all acting to hold prices back.


Look. I know I have been a bull for the past few years, but I can’t do it this year. There are too many headwinds and there is too much supply. So, my general direction is sideways, but I wouldn’t be surprised to see oil prices pretty volatile during the year. My year end price is $62.17 and my average price for the year is going to be $60.38. Look – everyone can make money at these levels if they try, so all I can say is remain calm.


Price of Natural Gas


Ah natural gas, I can’t quit you! As I say every time I write about everyone’s favourite transition fossil fuel, natural gas has been disappointing me and pretty much all of Canada with lousy pricing for what seems like forever. Showing great potential at times before collapsing back to “super-cheap alternate fuel – why don’t we use even more of it” status. And like any true forecaster for natural gas, we watch the storage reports with bated breath and hope for a polar vortex to descend on New England, spiking prices and proving our bullish forecasts right for yet another fleeting week before crashing back to earth with a heat wave in the Midwest.


Here’s the deal. Gas consumption in the US is way up. Exports of LNG are growing rapidly and exports to Mexico are also rising. Of course production is also rising, sometimes it seems exponentially, and associated gas from the Permian is a major contributor. But this isn’t limitless so at some point supply will have to become constrained – even though there is always old reliable Alberta supply to act as a relief valve. The catalyst for gas is still a year or so out – LNG Canada, more export capacity out of the US, the completion of the coal to gas power conversion – this all takes additional time. I won’t give up on the bullish case and I’m more constructive for gas than oil, but it’s a multi-year play.


My year end price for natural gas (NYMEX) is going to be $3.52 and the average price will be $2.96, up marginally from last year. Like many, I see a better year for AECO than I think many Canadian producers are used to, which should be a pretty big bonus for the Alberta government’s coffers.






With the flat-lining oil prices I am predicting, I am guessing that 2020 will finally be the year that US producers take a real breather in the Permian. Capital for new drilling programs is scarce, the pace of completions has slowed considerably and the rig count is down 200 from the beginning of last year. Of course in the United States that still means some 600 + rigs drilling for oil and a bazillion DUCs quacking around West Texas. The repeatable nature of high intensity drilling will allow the larger companies to execute in the Permian in much more of a manufacturing model, and the majors are much more able to absorb the cash flow vagaries and super steep decline rates of a resource whose break-evens to this day remain a mystery. Accordingly, rig count should stabilize at current levels in the United States as companies live within their means, targeting the maintenance of production levels with modest growth as commodity prices allow. Also in the US, a significant amount of capital is finding its way into the Gulf of Mexico.



All of the preceding is a long-winded way of saying that we believe that US production will continue to grow albeit slower. If we assume the year end production numbers of 12.9 million bpd of production in the US are correct, it would not be unreasonable to expect that year end production will be in the range of 13.3 million. Expect activity to only slowly ramp up so it is reasonable to expect that the first half of the year could see slower growth or even a decline and that the bulk of supply additions will happen in the latter half of the year.


In Canada, it is hard to make any kind of bullish case, or even any case, while curtailment continues and our egress issues, while a work in progress, will not be on the solution page until year end at the earliest. Activity levels in Canada should closely mirror last year – pockets of conventional unconventional (tight oil, deep basin, condensate, liquids rich) activity in places like the Duvernay/Montney/Viking and the Bakken but not much in between. Continued optimization and slow-footed brownfield expansion in the oilsands, but not much more. All in, we are thinking not much growth above replacement of natural declines, notwithstanding recent government incentives to exempt new drilling from curtailment. Without takeaway capacity, it’s just not enough.


So, another no-growth year for Canada. But it will be the last one (until the next one).


An aside about curtailment. There is no doubt that the idea of curtailment has done its job on the price differential which has narrowed considerably over the past year. The sentiment has certainly changed. However, this genie needs to be put back in the bottle sooner rather than later as the passage of time creates unintended consequences and it is severely distorting to the market, in particular given the stark contrasts in production profiles between the oilsands (low decline, long life, super heavy) and everything else we produce. Curtailment is distorting decision making, crushing capex and the longer it stays in place, the worse off we are.


OPEC production levels will depend on what happens with the new OPEC/NOPEC agreement at the various jump-off points through the year. The key to the agreement is the Saudi/Russia collaboration which is likely to continue at least until June. If shale growth starts to exceed the top line number referenced above, the Saudis might be inclined to rein in prices. It’s a risky game but I would think OPEC/NOPEC output should be flat year over year.


In the rest of the world, it is highly likely that we will see limited growth this coming year but acceleration as the year progresses. New projects in the North Sea (Johan Sverdrup field) will continue to ramp up and investments in Africa will come on line. Latin America will be a growth area – look for Argentina to outperform and Brazil to disappoint – because that is what they do.


The fact that global supply growth is not expected to come from a slowing US shale sector should be concerning because it now starkly exposes the lack of investment in other regions and being such a capital dependent industry, production can turn negative as quickly as it ramps up. Inventories can come down very rapidly and we have seen over the last few years how difficult it is to reverse a trend once it starts. Keep in mind as well that demand growth for oil shows absolutely zero sign of reversing and we now consume more than 100 million barrels of oil per day. We actually need production growth.



Activity Levels


On the Canadian side, this year is going to be a hard one to predict. But I am going to do my best.

There is a lot of uncertainty in the Canadian market in the face of our well-documented egress issues and attendant pricing dilemma. While we no longer are subject to free natural gas for extended periods of time (props for AECO) and curtailment is keeping differentials in check, unfortunately these price signals are not translating into upstream activity.


While winter is the time Canadian E&P’s go to work, as I have explained previously, with only about 25% of Canadian production subject to high decline rates, the incentive to drill just isn’t there because the pipes are full of heavy oil. Plus we don’t have the intense drilling imperative that the US has, where more than half of their production has a 35% decline rate and lower production levels per well so they have to drill like lunatics just to stay in one place. Add on top of that curtailment and it is easy to see the case for Canadian oil and gas companies sitting on their hands for all of 2020.

While I don’t expect anything that drastic, it is hard to see any outperformance vs 2020. While we Canadians are creatures of habit and it’s winter and in winter we drill, there is no catalyst for growth. If we had a new pipeline in service or if the UCP had managed to solve the Crude By Rail riddle, we might have got something, but until these are resolved and curtailment comes off, we are stuck in neutral.

With all that in mind and taking into account the OPEC/NOPEC production cut, plus no accountability whatsoever, I will confidently predict that activity in Western Canada will be … pretty much flat with last year. I expect E&P companies to hold their cards close to the vest while awaiting news on egress. Capex spend in the first half of 2020 is going to be soft or down, but activity will pick up in the latter stages of the year on the impending completion of Line 3. So less activity in H1 is going to trade off high relative activity in H2.

As with last year, The majority of the activity is expected to be concentrated in the Montney/Duvernay/Viking fairway with the balance in Saskatchewan.

Curtailment aside, oilsands activity is expected to be focused on production maintenance and modest brownfield development until Line 3 comes online. Another relatively thin year for Canada’s signature oil play.

Given where things could be with all the other headwinds we face, these numbers are OK, especially with decent pricing, but it’s hard not to feel a little tinge of disappointment that our baby recovery is still a year off. It’s easy to want to blame the Trudeau Liberals, but this one is really on US regulators (Line 3 and KXL) and a bit of an own goal with Curtailment and no CBR solution.

Unlike Canada, the US had significant growth last year in production. That said, the rig count has been declining for a number of months. Drilling activity and capex in the US is expected to be off 10% and the large inventory of DUCs will hold back the rig count and drilling activity in the first half. It’s going to be a different year for American drillers – still growth, but the newfound capital discipline will make things seem tight.

M&A Activity


M&A in the oil patch, at least the upstream side and in the United States, managed to register a decent year in 2019. There were some signature deals on both sides of the border and I expect this trend to continue into 2020 as property consolidation, non-core asset sales and private equity investment all remain robust as the industry adjusts, yet again, to a new normal. Expect the M&A activity to be broadly based – upstream, downstream, oil, gas, services and everything in between.


On the Canadian side, M&A activity should pick up as portfolio rotation out of the Permian brings American and international investors back to Canada and our absurdly high Free Cash Flow yields. There are a number of Canadian companies that are historically undervalued cash cows and you can only buy so many “WeWorks” until your investors demand a cash on cash return. Expect a prominent Canadian name or two to find themselves with new foreign owners as the year progresses. Construction on LNG Canada should also lead to M&A activity amongst the gas-weighted companies as they seek to fill the gas supply not already developed by the project proponents. So, American or foreign interest coming back into Canada – crazy I know, but I did say it was a “fearless” forecast.


On the services side, we still like energy infrastructure and related industries and see that as an area where Canada will see a fair amount of activity.  Mid and downstream oriented companies will continue to be of interest to strategic consolidators and private equity. On the upstream side, ancillary service providers such as safety and testing companies will attract interest in addition to traditional drill-bit focussed companies, particularly as we get more clarity into H2.


In addition, Canadian companies are well-known for their technology and solutions-based approaches to innovation and there is a well-worn path of US PE and strategics coming north of the border to snap up cheaper Canadian tech. With more and more Canadian companies plying their trade in a more active US industry, that trend will accelerate. Canada is a currency advantaged, rational valuation and stable market for consolidators tired of the madness in Texas.


Canadian Dollar


The Canadian dollar should see some relative stability this year with the commodity price, but there is no real catalyst to send it upwards aside from timing differentials with the United States in the economic cycle. From a year end value of about $0.77 against the US dollar, I fully expect the Canadian dollar to reach perhaps as high as $0.78. How daring is that for a forecast?




Finally, right? I know in the media things look bleak, what with the United Nations saying we are bad hombres and first nations eviction notices, but it may surprise people outside of the energy sector that we are kind if in the early to mid stages of an infrastructure supercycle in Canada. This should continue well into the mid-2020s. Here’s what I see in 2020 – with only one signature project giving me pause:


  • Line 3 complete and operational by year end
  • TransMountain Expansion well underway with multiple spreads operating during the year in Alberta and BC
  • Coastal Gas Link continuing notwithstanding current challenges
  • Keystone XL, which should be half built by now and was approved by Trump in 2017 and 2019 but is hung up in landowner challenges is going to be a political football. Depending on who wins the US election, this pipeline may never happen. A Trump victory secures an FID, a Biden win a wait and see but a Sanders or Warren presidency means it’s done. It’s that simple. TC Energy waited too long.


And we may get one more LNG FID this year. So there. Plus there is a host of multi-billion and hundred million dollar petrochemical plants on the books as well as wind and solar investments. So despair not, my friends. People are spending money. In Canada of all places!


Stock Picks


So last year was interesting, right? I advise the service sector and my service sector picks were terrible. I was saved only by a random offshore GOM pick and an engineering company. So this year I am determined to hit it out of the park on the Canadian service side, which of course is going to be tough, since as I said above, this year is going to be a “challenge”. But, as they say, here goes nothing.



True to my rules, this year I pick two Canadian E&P’s as well as two service companies and, finally, one non-Canadian producer and service company.


Here goes nothing…


On the Canadian oil and gas E&P side, I am going to bail out and pick an old shoe and a contrarian pick. Both of these companies should benefit from the current environment and one in particular is so undervalued it could arguably be considered free – kinda like AECO gas.


Pick #1 is Peyto. Look, I know I picked it a couple of years ago and caught lightning in a pipeline, but this time, I am totally intrigued. It trades at a 60% discount to book value and has the lowest PE of its peer group. On the other hand it has the best return on assets, equity and investment as well as the best profitability margins by a long shot. It carries marginally more debt, but as one of the few natural gas companies to make “money”, leverage isn’t a concern. Peyto hasn’t reported a quarterly loss since my kids were born. It’s rated a hold by every analyst out there, except apparently me. This is about as textbook a value play as there is.


Pick #2 is Seven Generations. So here’s the logic. It’s more oily than Peyto so I’m now diversified and… well its fundamentals look extremely similar to Peyto, right down to cash generation and valuation.


On the large cap Canadian service side, I am going to pick Enerflex. Enerflex is a supplier of natural gas compression, oil and gas processing, refrigeration systems and electric power equipment. They operate in Canada, the United States and internationally. Given expectations for the energy sector, this is a reasonably stable play (famous last words).


No pipeline operator or junior this year. Instead I am going to go the fake ESG route and play the enviro card. My pick is TransAlta Renewables, otherwise known as the one that got away (long story – TransAlta reorg, I rolled into the wrong company chasing a dividend). TransAlta Renewables is engaged in developing, owning and operating renewable power generation facilities. They own and operate over 10 hydro facilities and approximately 20 wind farms in Western and Eastern Canada with a total installed capacity of approximately 1,140 megawatts (MW). They are trading at the top of their 52 week range, but I am feeling the winds of change here guys…


In my search for a US producer, I am of course fully committed to finding someone who has low debt and great prospects. But I don’t want a major, I want to dig up something underlooked and weird that no one has ever heard of. Last year my GOM producer did pretty well, so obscure is the way to go. Not like a biggie is going to excel, right? Like Aramco – what do they have going for them aside from being the biggest and controlling the commodity price. Wait, what am I saying. I am totally picking newly-IPO’d Saudi Aramco, even though I can’t actually own it.


On the service side, I am staying away from the Permian and going international. This year I am picking a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and gas industry. It’s called Forum Technologies. It’s not small. It’s been beat up and abused. Chewed up and spat out. But it’s in the right space. Fingers crossed.


That’s it!


Fearless? Sure. Crazy? No doubt. Food for thought? I hope so.


A few final predictions in the quick fire round…


Wall – Never!


Impeachment – Don’t be stupid


College Football – Clemson!


Super Bowl – Lamar!


Stanley Cup – Dallas


President – Biden


CPC Leader – Ambrose


Best Picture Oscar – 1917


Portfolio performance – 12%

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