Must-Read: Canadian Natural Gas Producers And The OPEC Deal

Alliance offers natural gas producers more access to the east as West Coast LNG prospects fadeFinancial Post

TransCanada’s natural gas pipeline deal with producers just saved the industry from losing US$25 billionFinancial Post

OPEC’s misleading narrative about world oil supplyBelfer Center

Saudis are right back where they startedBloomberg Gadfly

Not for republication on Seeking Alpha.

Must-Read: Saudi Arabia, US Crude Oil Exports And Heavy Oil

Exclusive: Saudi Arabia wants oil prices to rise to around $60 in 2017Reuters

US crude exports surge to a recordBloomberg Markets

U.S. gasoline demand hits record number last yearReuters

U.S. crude oil imports from Saudi Arabia and Iraq combined recently approached five-year high, but are expected to declineEIA

After OPEC cuts heavy oil, China teapot refiners pull US supply to AsiaReuters

Enbridge CEO downplays need for competing pipelines till at least 2025Financial Post

Not for republication on Seeking Alpha.

Portfolio Update: Moving Chips To My Winners

I am now well positioned for 2017 after another series of move in my portfolio.

  • I added to my positions in Painted Pony Petroleum (PPY) and in Gear Energy (GXE) by selling part of my position in MEG Energy (MEG). I am preparing my portfolio for lower oil prices.
  • I opened a position in Tidewater Midstream & Infrastructure (TWM).
  • I bought back shares in TransGlobe Energy (TGL). TransGlobe’s Canadian transformation is a game changer to me. Plus the acquisition metrics are very good for TransGlobe shareholders.
  • I opened a position in Point Loma Resources (PLX).

I made a quick analysis for Point Loma Resources after hearing about the stock on Seeking Alpha. The stock is indeed trading at a very low 6.3X Year-End 2016 FFO. I estimate FFO of C$17.92 per barrel at year-end 2016. Furthermore, the company holds no debt except for convertible debentures and plans to grow production aggressively next year. In other words, the multiple should be higher.

Other interesting news for Canadian oil and gas producers: lower oil exports from Venezuela and possibly lower transport tariffs from TransCanada.

Lower heavy crude from Venezuela will benefit Canadian heavy oil and tighten the price differential of Canadian heavy oil versus WTI.

Finally, the new push for natural gas pipelines in the Northeastern US will force TransCanada to lower its transportation tariffs. Else it will face a severe decrease in its market share in Eastern Canada.

Disclosure: I am long GXE, MEG, PLX, PPY, TGL, TWM. Not for republication on Seeking Alpha.

Portfolio Update: Aggressive Moves To Start 2017

Here are my trades to start the year:

  • I added to my position in Amaya (AYA). Indeed, bad names will stop appearing in bad actor clause negotiations now that both David Baazov and Daniel Sebag are gone. Plus Amaya’s operations are coming out as very strong.
  • I bought back shares in Corridor Resources (CDH), as you know. It’s now or never for Corridor to move west and grab assets on the cheap before oil heads substantially higher. I need to go long before reading about the acquisition in a press release.
  • I added to my position in MEG Energy (MEG) after the company announced a major refinancing plan.
  • I added to my position in Painted Pony Petroleum (PPY). The company is still undervalued despite being up 60% since I bought it nine months ago.

I also went long lithium by buying all the junior exploration companies operating in Quebec: Critical Elements (CRE), Nemaska Lithium (NMX) and Natan Resources (NRL). I’ll let you know shortly how I narrowed it down to those three companies.

Disclosure: I am long AYA, CDH, CRE, MEG, NMX, NRL, PPY. Not for republication on Seeking Alpha.

Bankers Petroleum: Why I Might Lose Patience

As we all know, Bankers Petroleum’s share price won’t move a lot for some time. First, Geo-Jade Petroleum needs to raise capital to fund its acquisition (read: risk), and second we also need to vote on the deal by the end of May as shareholders. We will see the money in the summer.

The acquisition price of C$2.20 per share means the current arbitrage represents a gain of less than 20%. As you know, I am looking to double down on natural gas by buying Painted Pony Petroleum. Let’s take a look at the stock:

PPY StockCharts.com April 13

Source: StockCharts.com

As we can see, while Bankers didn’t move, Painted Pony did. For the last week, my Bankers position wasn’t a very good performer compared to my next target. Why didn’t I start buying the stock? The stock had clear selling signs when it went under its 50-day moving average last week. I believed that the stock would test again its support level of C$4 per share. Obviously, this reading was wrong. The stock went bullish even though natural gas price was hitting new lows, both in British Columbia and in Alberta.

The stock powered through and tested today a clear resistance level of C$5 per share. This rally might be due to another good news in the natural gas industry: Chesapeake Energy’s credit facility will stay the same, despite the bearish natural gas market. Bankruptcy for one of North America’s largest natural gas producers is out of the question for now. This is good news indeed for the natural gas market!

The next question is, obviously, will the stock climb higher than its resistance level? I’ll be watching the stock very closely in the coming days.

It is interesting to note that if I did bought shares like I should have done at C$4, the return would already be over 20%, more than the current arbitrage for Bankers’ stock. This mistake won’t happen again.

Of course, this is why we shouldn’t always trust technical analysis and jump in the market instead. Should Painted Pony powers through its resistance level, I’ll sell again part of my Bankers position and start building my position in Painted Pony. If the share price falls back, I’ll be patient… But my patience will be short.

Disclosure: I am long BNK.

I Will Be Patient Before Doubling Down On Natural Gas

As we know, natural gas is trading at multi-year lows. All producers are under financial stress and their share price has reacted accordingly. Daily AECO natural gas prices are dangerously close to the C$1.10 per Mcf level. Yes you read that right: this is $0.84 per Mcf using Friday’s exchange rate. Natural gas price have been collapsing since the start of the year.

As you probably could imagine, my position in Pine Cliff Energy is deeply in the red. I am not planning to sell, instead, I plan to double down on natural gas in the short to medium-term. Natural gas is still a good long-term investment.

To profit from the rise of natural gas, let’s build a position in another natural gas producer. Only two companies survived the initial TSX screening: Advantage Oil & Gas and Painted Pony Petroleum. The details of the screening will not be posted here as a similar screening has been detailed less than a month ago.

Of course, let’s concentrate our position in only one: either Advantage or Painted Pony. Therefore, the question is: which one is the best of the two?

First, let’s take a look at the operating costs of the two producers against the other preferred low-cost producers.

Advantage O&G, Painted Pony Petroleum, Peyto Exploration, Pine Cliff Energy & Tourmaline Oil - Cost Profiles (C$/Mcf)

Q4 2015AAVPPYPEYPNETOU
Royalties0.100.040.130.170.12
Operating costs0.351.050.411.401.03
Operating break-even0.451.090.541.571.15
G&A costs0.110.550.080.160.11
Interests0.210.100.160.090.10
Corporate break-even0.771.740.781.821.36

First, as you know, Advantage has one the best cost profiles of the industry. Second, we can see that Painted Pony’s cost profile is competitive and compares favorably to the cost profiles of Tourmaline and Pine Cliff if we exclude Painted Pony’s G&A costs.

Painted Pony’s G&A costs are very high compared to its peers: this tells us that the company already has the people to manage its ambitious growth plan. Indeed, Painted Pony’s G&A costs will be cut in half in 2016 and will decrease further in the following years by taking into account Painted Pony’s ambitious growth in the medium-term. The company plans to triple its production in the next two years.

Let’s take a look a the reserves of both Advantage and Painted Pony.

Advantage Oil & Gas & Painted Pony - Net Reserves & PV10

YE 2015AAVPPY
1P natural gas, net (Bcf)1,1401,610
2P natural gas, net (Bcf)1,7143,543
PV10, after-tax, 1P (C$M)1,071953
PV10, after-tax, 2P (C$M)1,6812,047

As you can see, while Advantage’s 1P reserves are lower, they are more valuable. The contrary is true for Advantage’s 2P reserves. However, let’s not forget that Painted Pony’s 2P reserves are twice as big. Also, comparing a company to its 2P reserves is of course riskier. Therefore I don’t see any company taking the upper hand just based on the NPV of their reserves.

It is interesting to see that Advantage was trading on Friday at a market cap of C$1,246M, which is higher than the NPV of its 1P reserves. Painted Pony was trading on Friday at a market cap of C$398M on the TSX.

As you can see, the picture is not clear only by looking at the cost profiles and the reserves of both Advantage and Painted Pony. We will need to dig deeper to find the best pick between the two. The result will be presented in a following post. Let’s look at the valuation of each companies and compare them to their cash flow from operations and their expected earnings in 2016 and 2017.

Disclosure: I am long PNE.