Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Oil Stocks Base Evaluation on $90 Crude Oil Price

Commodities / Oil Companies May 27, 2011 - 12:03 PM GMT

By: The_Energy_Report

Commodities

Best Financial Markets Analysis ArticlePlatform Advisors Founder Adam Michael searches the globe for oil and gas discovery stories with established cash flows that support share value in reasonably secure political environments. In this exclusive interview with The Energy Report, Adam reveals some names from his own portfolio holdings that he believes could generate considerable upside production growth to return significant multiples for investors, even if oil prices hover at $90/bbl for the next year.


The Energy Report: We've had a 10% correction in Brent crude since the end of April, and oil has been a bit weak as we're starting to see some real signs of improvement in the U.S. economy where it really counts—employment. What factors are putting downward pressure on oil?

Adam Michael: I think the biggest factor over the last year has been quantitative easing (QE), which has led to speculators entering into the crude futures market in proportions that I haven't seen before. For instance, the net long in crude oil futures by speculators is more than twice as high as it was back in 2008. This has gotten the attention of Congress, and recently we've seen the Chicago Mercantile Exchange, CME Group (NASDAQ:CME), begin to raise margin requirements for crude futures. I think the goal is to get some of the speculative money out of crude futures, and that's one of the reasons we've seen a decline over the last month.

TER: Sounds like a healthy thing that could dampen the potential for a bubble.

AM: I think so. Crude oil dropped $20 in a matter of a couple of weeks. That's a pretty sharp correction, but I think it was healthy because it helped wipe out some of the excess speculation. There could be some more downside to go but, historically, crude kind of tops out sometimes during the summer and maybe late June and early July. I don't see any reason why that wouldn't play out this year. We're still in a kind of historically strong period for crude oil. I'm not sure how much down side there is from here.

TER: In terms of oil price per barrel, is there a sweet spot where the macroeconomy can remain vigorous? What is the upside price-per-barrel limit on commodity oil?

AM: Well, I have read various opinions on this and I have to think that a good price for oil right now would be somewhere in that $90–$100/bbl range. That would allow the economy to keep taking steps and provide for improvement in global industrial production and gross domestic product (GDP) without choking off too much demand. So, I think $90–$100 is a great price for crude oil, and that is kind of a sweet spot. The kind of volatility we could see is $80–$120/bbl. I don't know how long it will remain there at those swing points. So, I think $90–100 is the right price.

TER: Do you have a forecast for oil?

AM: I don't really have a forecast, but for the longer term I use $90/bbl crude in my models and for my sensitivity analysis. I look at what kind of cash flow a company can generate with $100 or $80 oil. I think $90 is a good, safe number to use.

TER: Do you feel that $90 oil is a conservative enough estimate to build your models for the next 12 months? The next 24 months?

AM: Well, I think it is a good number through the end of 2011. As global demand continues to creep higher, eventually, we're going to soak up that spare capacity that OPEC has, and that's when things will get a little more interesting. That's probably a 2012 event, but then we're talking $110–$120/bbl oil. At some point, the price will get high enough that it will support some demand destruction—but we're not there yet.

TER: The U.S. just ran up against the federal debt ceiling of $14.3 trillion back on May 16, and the credit and equity markets really want that ceiling to be exceeded (at least temporarily). But it seems pretty obvious that something must be done to reduce debt to a lower percentage of GDP. What impact would this kind of austerity have on the economy? Will it strengthen the U.S. dollar? Will it hurt oil? Will it hurt energy companies?

AM: Obviously, the debt ceiling is a hot topic right now. I am guessing that Congress will probably negotiate with the president, and the negotiations might go all the way up to the deadline on August 2. I'm not sure how big of an effect it's going to have, and one of the reasons is that there seems to be a shortage of bonds because investors are having a tough time finding yield. So, there's a really healthy credit market out there right now.

Clearly, a default by the U.S. Treasury on government bonds would be a very bad thing, but I think there's about a 0% chance of that happening. There will be much talk over the summer as it's negotiating. Cooler heads will prevail, and I'm sure we will do what needs to be done on the debt ceiling with a combination of austerity measures; but the bottom line is that there's a healthy economy out there. If it weren't, credit spreads would not be this tight. So, I'm actually pretty positive on the economy right now. This summer could be a little tricky as we hear more about the debt ceiling and as, you know, investors can be short-term minded sometimes. Ultimately, I think this plays out well for the economy. The dollar is probably due for a rally, but it doesn't necessarily mean that commodity prices will go down. Sometimes they go up with a stronger dollar; it doesn't happen often, but it can. So, the bottom line is I am positive on the global economy. I think we will get our debt ceiling figured out and we will just keep humming along.

TER: Aside from buying small caps for your portfolios, what is your general investment thesis?

AM: I like to look at companies that have a proven reserve, cash flow or something else that I can get my hands around for a base-case evaluation. In addition to that, I like to see some kind of embedded call option in the form of a large land package—that is at the top of the learning curve where there's a lot of leverage for upside.

TER: Is it hard to find stable cash flows and rising production, especially in politically stable jurisdictions?

AM: I don't think so. Domestically, in this latest cycle, we've seen the emergence of unconventional oil through the development of the Bakken Shale, which is probably the most widely known unconventional oil play. But other plays are developing now that have a lot of upside running room. And it's very much analogous to what we saw in the last cycle with the emergence of unconventional shale gas. Now, I think we're just seeing the same thing as history repeats—or let me say, 'as history rhymes'—this time it's the emergence of unconventional oil, where I think there's a lot of running room. And there are other sources out there besides the Bakken that are starting to emerge, which also have good running room.

TER: Where are you finding these characteristics right now?

AM: Not to be confused with the Bakken Shale in North Dakota, there's an emerging play called the Alberta Bakken that stretches through Montana and into Southern Alberta. I think it's going to see a lot of drilling and appraisal work done over the summer. You can't do much over the winter. In Alberta, a lot of the roads are closed for spring break up, and now we're just getting on the other side of that.

Rosetta Resources Inc. (NASDAQ:ROSE) and Newfield Exploration Co. (NYSE:NFX) are the two big players south of the border in Montana, and they've been doing science and vertical wells to test the Alberta Bakken. From what we've heard on recent conference calls, both companies are pretty excited about it and are going to start horizontal wells.

On the northern side in Southern Alberta, you've got a handful of micro-cap players with good land positions. Just in the last couple of weeks, we've seen the first results come out that were made public by DeeThree Exploration Ltd. (TSX.V:DTX). I think we're at the top of the learning curve, and the initial results look really good. So, there's a lot of running room here for these guys.

TER: Is DeeThree a company that you own?

AM: It is.

TER: DeeThree is mostly natural gas, which is expected to be stable over the next 12 months at best. Where does the upside come from here?

AM: Well, it is currently doing a couple thousand barrels oil equivalent per day (boe/d), and most of that is gas—probably 70% gas and the rest a mixture of light oil and liquids—so you have a little bit of cash flow there, which I like to see. It also has a couple hundred thousand acres in the Southern Alberta Bakken play, and I think, at least 70,000 acres in what I call the "sweet spot." So, there's a lot of running room there. DeeThree just drilled its first well and completed a frack. The average one-day test rate was 250 boe/d. The company is now removing the frack string and putting in production pipe. That's a very positive first result for its first horizontal well. And there are other excited players also in the play—big players, at that.

Murphy Oil Corp. (NYSE:MUR) signed a joint venture (JV) with DeeThree and has drilled a couple of wells that are rumored to be pretty good. Murphy has committed to drilling four wells on DeeThree's acreage by year-end to earn a 60% working interest in about 15,000 acres. DeeThree is being carried on the wells and will receive revenue from first production.

TER: Is that JV with Murphy on the Lethbridge property?

AM: It sure is.

TER: You sound optimistic about this play.

AM: Well, I've seen the cycle repeat over and over wherein you have an unconventional play that's in its drilling stages, and it takes a few months for industry to crack the right science to produce the most assets in the most optimal way. The wells should become more prolific with time, and drilling cost should trend lower.

TER: Where else are you looking?

AM: Well, there's a company I mentioned in my interview a year ago with The Energy Report that I really like over in Egypt called TransGlobe Energy Corp. (TSX:TGL; NASDAQ:TGA). Since then, the company has identified a new play called the Nukhul Fairway, and it extends across several of TransGlobe's acreage blocks in Egypt. The wells cost $1M–$1.5M, and some of them are coming on at 1,000 barrels per day (bpd) and holding up fairly well. It's become more of a developmental play where the company just keeps punching holes, and production is going to increase pretty rapidly this year.

Last year, about 30% of TransGlobe's production came from Yemen—most of which has been shut down due to the political turmoil there, but the Egyptian production has ramped-up so strongly that it's already eclipsed the Yemen production. This has allowed the company to keep its guidance that originally included Yemen. I expect that to continue this year, and I like the strong cash flow that's associated with the wells TransGlobe is drilling right now. There's just a lot of upside there and a lot of strong cash flow backing up the stock. So, TransGlobe is a company I am still very excited about.

TER: Amazing that the stock could be up 76% over the past 52 weeks with the shutdown in Yemen, which was producing 2,300 bpd.

AM: The Egyptian play has a lot of running room, and it has more than made up for the Yemen shortfall. Eventually, Yemen will become straightened out. I don't know if it will be three months from now or six months from now, but that production will come back. I am not counting on it, and I can get a good valuation without it at the current stock price level. So, I think there's a lot of upside for TransGlobe based on the rapid production increase in Egypt and possibly bringing Yemen back online later this year.

TER: Ok, you're in Egypt and the Alberta Bakken in Canada. Where else in the world are you currently looking?

AM: Well, the Colombian oil companies have been hit hard over the last six months, after having been a little frothy last year. We're now starting to figure out which ones are the real players and which ones are not. The premier oil company in Colombia is Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC). I still think it has the best land package with more than 10 million acres for exploration upside. But what I really like about Pacific Rubiales is that the stock has been beaten down a bit and there are some very strong cash flows. It will increase production by about 20% to more than 110,000 boe/d by year-end, and I have it generating over $2B in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) this year. It has a very strong, healthy balance sheet and it's proven the premier operator in Colombia. So, for Colombia, I'm going to stick with the "best of breed" and that's Pacific Rubiales.

TER: The company has a $7B market cap and is buying back up to 4.3% of its outstanding equity. That shows some confidence, I would think.

AM: Yes, Pacific Rubiales has a strong balance sheet, which gives it the ability to buy back stock when its value is not reflected in the market. I agree with management, and I think the stock has tremendous value here. It's going to generate $2B in EBITDA this year, and it's trading at about one-half the multiples that we see here in the States. I like the stable production profile, strong cash flow, management team and, like I said, I think this is the blue chip of Colombia and a great way to play Colombia.

TER: Is there any place in the U.S. that you're looking?

AM: Well, I like to go back to the old Permian Basin. It's been a long-standing producing region for Texas. We still keep finding new ways to get more oil out of the ground, as technology gets better and we do horizontal drilling and multistage fracking. One company I like, in particular, is Approach Resources Inc. (NASDAQ:AREX), which has some good reserves on the books.

What's gotten me excited is its new 130,000-acre Wolffork oil shale play. The first wells have just recently been announced and the horizontal wells are producing 200–300 bpd. I think the ultimate recoveries on these wells could be as high as 200,000–300,000 bpd. I should also mention that EOG Resources (NYSE:EOG) is just north of that play and is seeing a little better rates in the 400- to 500-bpd range on its first producers, and it's also rumored that Apache Corporation (NYSE:APA) is acquiring acreage in the area. So, there's a lot of running room with 130,000 acres in Approach's portfolio, and the company believes it has derisked about 70,000 acres of it—more than 1,000 locations. The returns on these wells are going to be good, and they're only going to get better as Approach works down the learning curve. It fits my preferred profile, as you have some base reserves to kind of get a conservative valuation of maybe $20/share. You have a lot of upside and running room as this new play is being developed.

TER: Is there anything else interesting you'd like to hit on?

AM: Well, I would like to mention one speculative name in Colombia. I know we already talked about one with a larger market cap, Pacific Rubiales, but the other one that has gotten my attention is Canacol Energy Ltd. (TSX:CNE), which has about 10,000 bpd light oil production. That is good for both cash flow and funding for growth initiatives. But it also has one of the best heavy oil land packages that I've seen in the Putumayo Basin, and that's something that's going to take some time to derisk. Once the company derisks this, there's a lot of upside to the heavy oil component of the company—and it makes it an extremely attractive acquisition target. I do like the fact that Canacol has some good cash flow to back up its valuation. I think it's an excellent acquisition candidate.

TER: It's been a pleasure speaking with you today, Adam.

AM: Thank you.

Adam R. Michael, 36, founded Platform Advisors, a California registered investment advisor that manages the Platform Energy Fund. Mr. Michael has over 10 years of experience in the energy industry in various capacities. With the majority of his career based in Houston, Texas, he is able to use his energy background and industry contacts alongside his investment experience to identify energy investment opportunities in geopolitically stable countries with attractive geological prospects and fiscal regimes. Mr. Michael has a bachelor's degree in industrial distribution from Texas A&M University (1997) and an MBA from Rice University (2004).

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Brian Sylvester and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Greg Gordon: See Morgan Stanley disclosure that follows.*

*The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.

The ENERGY Report is Copyright © 2011 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The ENERGY Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in