Portfolio Update: Escaping Volatility

I was out of Gear Energy, as you know, and MEG Energy. My timing was, for once, good. I took profits.

On the other hand my timing on Granite Oil wasn’t good.

GXO StockCharts.com August 19

Source: StockCharts.com

I sold Granite at a rock bottom price. It was frustrating as the stock was at C$3 per share a month ago. The stock continued falling last week. Granite could be an interesting buy in the future. For now it simply didn’t make sense to keep the stock.

I still think MEG is an interesting play on Canadian heavy oil, despite having sold half of my position. The stock showed some strength at the end of last week. There is a future for MEG shareholders, especially with an activist investor such as Highfields Capital.

I started to rebuild my position in Gear after the fall last week.

I also bought Corridor Resources. The New Brunswick election in September is coming in a month and it’s currently projected to be much more closer than what’s reflected in Corridor’s share price. All hope is not lost for shale gas in New Brunswick. Stay tuned for an updated article on Corridor.

I also bought more Raging River. My portfolio is also overweight Raging River. For the sake of good timings, this stock is one of them. Stock is at a 6-year low and I am off only by about 10%. Not so bad.

Disclosure: I am long CDH, GXE, MEG, RRX. Not for republication on Seeking Alpha.

Granite Oil: Still Bullish

Temporary operational setbacks have sent the stock to the cave.

Tighter well spacing wasn’t optimal after all.

In 2017, the Company tested further down‐spacing, with infill drilling on 100 and 133 meter intervals (see May 9, 2017 press release). These wells initially tested at rates comparable to wells drilled on 200  meter spacing, and while economic, have proved to be less productive over time.

Granite Oil Press Release, November 9, 2017

Well spacing will be 200 meters from now on.

Despite these setbacks, Granite is still one of my favorite oil stocks.

  • The company will spend over C$10M in growth capital in 2018. This will grow production 600 barrels per day year-over-year.
  • Cash netbacks are high.
  • The dividend is safe at current WTI prices.
  • Some of the decrease in production is due to conversion of producing wells to gas injectors.

Plus there are still 80 drilling opportunities to further grow production and oil recovery. The next area of focus is delimited in purple, with approximately 10 drilling locations

Drilling Development GXO December 03

Source: Granite Oil, December 2017 Corporate Presentation

I added to my position on November 15, 2017.

Disclosure: I am long GXO. Not for republication on Seeking Alpha.

Granite Oil: I Should Stop

The next resistance level is at C$4 per share.

Cadotte Capital Partners, November 7, 2017.

Then…

GXO StockCharts.com November 13

Source: StockCharts.com

GXO StockCharts.com November 13

Source: StockCharts.com

Yeah, I should stop. But it’s still a great time to buy the stock. For better or worse, management is keeping the dividend. Warning: The dividend will be cut should oil drops below $50 again.

Disclosure: I am long GXO. Not for republication on Seeking Alpha.

What’s Up With Granite Oil

It doesn’t look good from a daily point of view.

GXO StockCharts.com October 7

Source: StockCharts.com

And the weeklies aren’t looking good either.

GXO StockCharts.com October 7

Source: StockCharts.com

So what’s up? Well, we are back to the lower for longer rhetoric.

And if oil prices are lower for longer, then Granite Oil’s whole business model is in big trouble. Especially if we look at current and past guidance from management.

GXO September Presentation October 7

Source: Granite Oil, September 2017 Corporate Presentation

GXO August Presentation October 7

Source: Granite Oil, August 2017 Corporate Presentation

GXO May Presentation October 7

Source: Granite Oil, May 2017 Corporate Presentation

What can we see:

  • We know management is planning for lower for longer;
  • $55 WTI is expected until 2021 compared to 2018 before;
  • Capital expenditures are lower, and therefore production growth is almost nonexistent;
  • And… The juicy dividend is maintained nonetheless.

This is the reason the market is reacting: Management is definitively holding the dividend steady. This is big trouble for Granite Oil’s business model, should oil prices hold $50 in the long-term.

GXO Free Cash Flow Projections February 3

Source: Cadotte Capital Partners

As we can see in the graph, free cash flow is negative years out using $50 WTI. Debt will increase, and there won’t be any cash to make up for it.

Not to mention bullish assumptions, including a tight WTI/WCS differential and an advantageous foreign exchange rate.

In all, Granite Oil will need higher oil prices for the stock to be worth something. $50 WTI isn’t enough, and it’s the price the market expects in the medium to long-term.

Disclosure: I am long GXO.

Portfolio Update: Sympathizing With Investors Enduring Pain

  • Despite mostly upbeat Q2 results, my stock picks aren’t moving higher.
  • Sentiment is still negative in the energy market, capping energy stocks gain.
  • Painted Pony and Point Loma are underperforming.
  • Prairie Provident and Granite Oil are my two favorite buys right now.

Click here to read the entire article on Seeking Alpha.