Crude Observations

My Stocks are Down

So here I am, back in the office for a spell and still ruminating on my epic Vegas trip. Did I mention I made $124.50 off my $20 investment in a slot machine? That’s a 600% return. I have never had a six-bagger in the stock market, unless you are talking about an investment that is now worth 1/6th what I paid for it and now I am stuck with a dog in my portfolio that I have to hold for the next decade as it slowly climbs back to some reasonable approximation of what I paid for it. Which would then make it a 600% return from the lows.


Why am I obsessing about this right now? Well because like any over-confident energy sector participant, I do have a few names in my portfolio that are active in the energy sector, since having my day-job 100% leveraged to the energy world just isn’t risky enough, I also have to have my passive investments in there as well.


Don’t get me wrong, I have other stocks as well, many of which have done very well. But the energy stocks have gotten and continue to be the downtrodden dogs of the market.


It’s gotten so bad that Canadian energy companies, that have recently reported quite spectacular (under the circumstances) second quarter results by the way, are trading off historic lows.


We’ve got companies that last year were not posting great numbers at an oil price roughly the same trading 50% or more lower. It’s absurd.


When it’s easier to make money at a casino than buying companies with copious amounts of free cash flow, something is broken. So let’s delve into this a bit, because so much of it doesn’t make sense.


Oh, and I know that this wasn’t one of my “future topics”, but it is topical


Top 10 reasons why Canadian Oil and Gas stocks can’t catch a break


1 – Pipelines and Egress


Yes, I know.  It’s getting pretty boring isn’t it? But it’s the second most important factor affecting Canadian energy company stock prices. Without new pipelines and the ability access new markets, Canadian energy stocks will always be perceived as dollar short. Why? Because we have told the market that so they bid accordingly. Ultimately this egress problem gets solved though, whether through Line 3 or the TransMountain Expansion or Keystone XL (remember that one?). And when the market figures out that the egress problem is solved, expect Canadian stocks to rally. In the meantime, Canadian producers will continue to incrementally grow production, stealthily make money hand over fist, pay dividends and buy back stock.


2 – Commodity Prices


Up until recently, oil and gas stocks would move up and down with the prices of the commodity they produce. This of course makes sense. If oil is higher priced, then it stands to reason that a company that produces said oil should be worth more. Makes sense, right? Not anymore. Currently the performance of Canadian energy stocks is disconnected from the prices of the underlying commodities. It is never a good sign when stock movements get disconnected from their underlying fundamentals.


3 – Trade Wars


Every time we seem to be about to take a breather from all the bad news swirling around about the energy sector here in Canada we get another smack upside the head from Donald Trump and his world economy cratering trade war. Far from being “easy to win” or a “good thing”, the trade war between the United States and China is probably the most disruptive, and completely unnecessary, economic influences since the near death experience of the financial system in 2008. The trade headwinds are affecting all commodities and are resulting in global growth prospects to be revised downward almost daily.


4 – Bad Mood


I think I wrote a whole blog about this some time ago, but we do a pretty poor job of self-promotion. Aside from all the market and business issues, there are very few parties extolling the virtues of the Canadian energy sector. Instead we have a whole ecosystem of aggression and doom and gloom. Who is going to invest money in a sector that needs to be defended by a “War Room” and that has a giant cabal of US oil companies and charitable foundations lined up to protest us out of existence? The reality is far different. Canadian companies make money, have conservative balance sheets and offer high quality in demand product to a voracious consumer. Plus we have a pretty enviable regulatory system.


5 – Overreaction to Climate Change Fears and Peak Demand


It is unavoidable that climate change factors play a part in the publicly traded energy sector. In a world where fossil fuels are seen as a pariah and renewables ascendant, it is easy to see where replacement fears, stranded assets and inevitable peak demand are catalysts for investment decisions. Canada is squarely in the crosshairs on this and the more air the misguided belief that fossil fuels are on their way out gets, the more the prices of publicly traded companies find themselves held down. This is misguided on several levels but I would point out the following – the likelihood of fossil fuel demand being substantively reduced in the next generation is pretty much nil, peak demand assumes no growth in Africa and the Indian subcontinent and a perfect storm of renewable energy implementations. The next point I would make is that energy companies are run by very smart people. There is no chance that these management teams won’t be able to adapt to changing circumstances given and reinvent their companies for a gradually changing world.


6 – Slowing global growth/Recession Fears


The so called #Trumpslump is one of the primary factors holding back energy stocks in my own humble opinion. This is obviously tied to and a result of the absurd trade wars. In a nutshell, the world is going to hell because someone doesn’t understand economics and the global growth engine is sputtering as a result with several major economies (South Korea, Germany, Argentina) already likely in recession. What this means is reduced demand growth for oil and the stock market is acting accordingly. The fact that these fears are over-riding OPEC + cuts, Iran sanctions and the Venezuelan meltdown should tell you all you need to know about how seriously this threat to the global economy should be taken.


7 – Permian Permania


The United States continues to grow production. Never mind whether that is a good or a bad thing (it’s a bad thing BTW) or whether US companies actually have cash flow (they don’t). The key takeaway here is that the growth of production at all costs attitude of the average US producer has produced the worst market for energy stocks since the 1980s and has dragged Canada down with it, regardless of whether our production profile is different or whether our companies are actually returning real cash to shareholders. It is a contagion afflicting North American producers and until the rig count drops below 750 in the United States and capital providers stop sending money to Midland Texas, the Canadian market is stuck. It makes no sense, but there it is.


8 – Irrational capital


One of the peculiarities of the current market is that investors seem to be sitting on the sidelines as opposed to scooping up bargains. I am not sure whether it is because they are waiting for prices to drop any further (hint, they can’t) or whether they have so many other compelling opportunities (like WeWork IPO or the sewer of losses that is Uber) or maybe they have decided to go all in on zero yield 10 year bonds, but it seems to be the case that the overall investor market hasn’t yet clued in to the fantastic cash on cash returns available in the E&P space. In Canada.  Instead we still see money flowing into the Permian hype zone or sitting on the sidelines in Canada wringing their hands at the latest bump in the road to a pipeline. Note to investment community – the ultimate value play in pretty much the world is Canadian oil and gas.


9 – Justin Trudeau


No. This isn’t true. But lots of people like to think it is. Lots of people seem to believe that if Trudeau is defeated by the Conservatives in the upcoming election, it will put air under Canadian energy stocks. Let me be the voice of reason here – it doesn’t happen that way. You can no more predict a rise in stock prices from a Trudeau defeat than you can blame the recent declines on Jason Kenney. People don’t move markets. Sure a change in sentiment can be a positive (or negative) but that merely provides an excuse for the purchase/sale decision and can only deliver a very temporary lift. It’s not enough to move the needle. And as we discussed in a strategy meeting today (lunch), we need to prepare our firm and our clients for the likely federal election outcome of a second term Liberal government. Which means what? Probably that the market doesn’t change much until some of the other factors change as well. A second term is neutral for energy stocks at worst and the market has likely already priced that in.


10 – The Emotional is overriding the fundamental


This is the last point I will make and this is why the Canadian companies can never win. The fundamentals are great. At US$43 heavy oil and a $0.75 dollar, Canadian producers are a cash machine. Our rocks are better. Our decline rates are lower. Our balance sheets are stronger. Our capex and spending discipline is higher. Our environmental standards are higher. Our regulatory regime is stronger. Our management teams are smarter. Our carbon footprint is shrinking. Our egress is happening. All that but “Trudeau”, “no pipelines”, “single customer”, “end of world recession”, “peak demand”. It’s emotion and it overrides the fundamental. This is the world we are in. Until that changes, Canada’s energy stock prices are in the doghouse. Woof.


So what’s the answer?


Well you can either sit around and wait for the market to turn or take advantage of this historic undervaluation of so many quality Canadian companies.


If I had a pile of money sitting around, well at least more than $124.50, and I felt even remotely comfortable that fossil fuels will be around for more than the next year or two (hint – they will), then I’m going long Canadian energy. A hard long. Even if only for the spectacular dividend yields.


Of course the other alternative is shove it all into a slot machine and hope for the best. Given the current market sketchiness, it may actually be perceived as the less risky play. And at least you get free drinks.


Prices as at August 16, 2019

  • Oil prices – Again, WTF?
    • Storage posted a increase week over week
    • Production was flat
    • The rig count in the US was mixed and Canada was up
    • Prices fell then rallied. Then cratered on Trump tariffs. The rallied. Then fell. Then rallied. Makes perfect sense.
    • Natural gas storage was up and remains higher than this point last year
  • WTI Crude: $54.88 ($54.23)
  • Western Canada Select: $41.63 ($41.58)
  • AECO Spot : $1.193 ($1.29)
  • NYMEX Gas: $2.205 ($2.135)
  • US/Canadian Dollar: $0.7510 ($0.7576)



  • As at August 9, 2019, US crude oil supplies were at 440.5 million barrels, a increase of 1.6 million barrels from the previous week and 26.3 million barrels above last year.
    • The number of days oil supply in storage is 25.5 compared to 23.6 last year at this time.
    • Production was flat for the week at 12.300 million barrels per day. Production last year at the same time was 10.900 million barrels per day.
    • Imports rose to 7.714 million barrels from 7.148 million barrels per day compared to 9.014 million barrels per day last year.
    • Exports from the US rose to 2.683 million barrels per day from 1.865 million barrels per day last week compared to 1.592 million barrels per day a year ago
    • Canadian exports to the US were 3.848 million barrels a day
    • Refinery inputs fell during the during the week to 17.302 million barrels per day
  • As at August 9, 2019, US natural gas in storage was 2.938 billion cubic feet (Bcf), which is about 4% lower than the 5-year average and about 15% higher than last year’s level, following an implied net injection of 49 Bcf during the report week
    • Overall U.S. natural gas consumption rose by 0% during the report week.
    • Production for the week was flat week over week. Imports from Canada were down 4% from the week before. Exports to Mexico were up 2%
    • LNG exports totaled 25 Bcf
  • As of August 16, 2019, the Canadian rig count was up 2 at 142 (AB – 95; BC – 7; SK – 35; MB – 2; Other – 3). Rig count for the same period last year was 207.
  • US Onshore Oil rig count at August 16, 2019 is at 770, up 6 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 5 at 164.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 2 to 25.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 67%/33%


Trump Watch: Tariff blink.

Kenney Watch (new!): A whole bunch of patronage appointments. None for me though.

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