Energy & Commodities

Keith Schaefer's new stock report - free for MoneyTalks

Posted by Keith Schaefer

on Saturday, 28 July 2012 09:23

Keith Schaefer crop 2

Dear Money Talks Readers:

From time to time we are able to bring our readers subscriber-only reports from our colleagues. Today, we have a new report from a regular speaker at our MoneyTalks conferences, Keith Schaefer, who publishes the Oil & Gas Investments Bulletin. Keith has agreed to make this report available to our readers at no cost, and  it is one that we highly recommend you download while it’s available.

Keith is one of the few analysts out there who focuses exclusively on the junior oil and gas sector. And in his new report, Keith reveals a Canadian junior oil producer that has:

-          Three core plays—two are producing now, the other in 2013…

-          Exceptional management with proven drilling record and execution

-          96% oil makes them very profitable against their peers

-          Huge land position that will provide years of low risk drilling

To get Keith's new stock report at no charge, simply click here for access.

You'll also begin receiving Keith's Oil & Gas Investments Bulletin Free Alerts, delivered to your email inbox one to two times per week. (You can opt out easily at any time.)

Keith is able to break down the oil & gas market into easy-to-understand research, and he's also given his subscribers the opportunity to take exceptional profits along the way. Download Keith’s report here, while this offer lasts.




Timing & trends

Energy Stocks Have Hit Bottom: Get Ready for a Natural Gas Boom

Posted by Josef Schacter via The Energy Report.

on Saturday, 28 July 2012 09:01

ED Note:listen to Josef Schacter inteviewed by Michael Campbell on Money Talks July 28th/2012 - The interview starts at the 19:20 and ends at the 42:20 mark. The show that preceded it and came after the interview with Josef can be listened to onl the player at the centre player in the middle of the top banner home centre title Money Talks July 28th.


Schachter Asset Management Analyst and Investment Advisor Josef Schachter, who provides oil and gas research to Maison Placement Canada clients, is recommending a group of Canadian companies that are maintaining the delicate balance between oil, on which he is bearish, and natural gas, which he believes will soon enrich both producers and investors. In this exclusive interview with The Energy Report, Josef shares some value-priced names he feels are poised for big gains, along with natural gas' rising price. (Ed Note: Josef Schachter who provides oil and gas research is Michael Campbell's Guest on Money Talks this coming Saturday at 9am)


The Energy Report: You recently said that if gasoline prices continue to rise we should see West Texas Intermediate (WTI) oil in the low-$70s in the third through fourth quarters of 2011 (Q311–Q411). That represents an approximate 25% decline from current levels. Does that mean that the North American economy will be in trouble?

Josef Schachter: That's the key. When you get $4/gal. gasoline at the pump, or $1.25–$1.35/liter in Canada, you start seeing demand destruction. If we look at the weekly Energy Information Administration (EIA) data for the week ending June 3, we can see that demand for finished motor gasoline was 9.16 million barrels (Mbbl.)—down 268,000 barrels on the week. And year-to-date (YTD), it's down 0.3% to 8.956 Mbbl. per week. So, we're already seeing demand destruction in the States from the handle of $4/gal. In Canada, we're seeing the same thing; and Europe, of course, is showing much weaker demand. Japan also is showing much weaker demand, and we have the tightening of credit in China. Quantitative easing 2 (QE2) is now out of the way, so the stimulus is gone in the U.S.

There is probably a $30/bbl premium in the price of WTI oil, and 50% of that relates to Middle East issues with about 900,000 barrels per day (bpd) that have been cut off from Libya. If we see the Libya issue resolved in the next three to six months with Muammar Gaddafi going out, that production will come back on and will remove the pressure of the Arab Spring premium. The other 50% is the hedge and commodity funds. 

If we see weakness in the economy, the whole commodity board will come down and we'll see the U.S. dollar rally. We believe oil prices will lose that $15/bbl premium held by speculators in commodities and exchange traded funds (ETFs). The combination of the two could take $30 off the price of WTI oil, which is just around $93.40 today (Ed Note: This article was written June 23rd/2012. September Crude closed at 88:50 July 24th). Remember, when you have weak economic conditions, you trade below fair value. Recall Q109, while the fair value price might have been $50 for oil, we traded in the low-$30s.

TER: You use technical analysis quite extensively in your research reports, more than many sellside analysts. What are the charts telling you?

JS: My background is fundamental. I have an accounting background and am a Chartered Financial Analyst (CFA), so I come at it from a fundamental point of view. But I have had healthy respect and training from the technicians during my +30 years in the business, so I do look at the charts. We were at $112/bbl of WTI, now we're at $98—  if it breaks $94 on the charts, so it's going down and looks like low-$70s (again article written June 23rd). So, I think you must have respect for, and use all of, the disciplines. But I come at it from a supply/demand point of view; and, while the price of oil ran to $112 due to concerns about supply removal in the Middle East, that could be reversed if Libyan production comes back on because it's a big producer.

TER: With $4/gal. gasoline, we've seen oil demand falling in the U.S. But what about natural gas, isn't the reverse true? At the $4–$5 per-thousand-cubic-foot (Mcf) level, shouldn't we be using a lot more gas? Isn't that equivalent to about $1/gal. gasoline?

JS: Yes, we could see natural gas prices triple and still be the fuel of choice. The inventory picture has been high, but that's coming down. Because of the Haynesville and the Marcellus and everything else, there was a perception that we have a natural-gas glut. We believe natural gas prices will go significantly above $5/Tcf this summer with big air-conditioning demand during the hurricane season. Over the winter of 2011–2012, we think NYMEX gas will trade north of $7/Mcf.

TER: Nat gas is quite a bit higher in Europe and Asia. Is there an arbitrage opportunity?

JS: There is currently no arbitrage capability, in terms of shipping natural gas from the United States to Europe or Asia. Remember, there are costs to do that. If prices in Japan are $10 or $12/Mcf and today we're trading at $4.35/Mcf for NYMEX July, there's an arbitrage there; but there are landed costs in building a facility. Cheniere Energy Partners L.P. (NYSE.A:CQP) and other companies are talking about this. It may cost $5/Mcf more to convert that into liquefied natural gas (LNG) and ship it to Japan due to distance, and it may not be enough of an arbitrage to attract the kind of capital needed.

TER: You're bullish on natural gas and bearish on oil. Do you feel like gas prices will rise at the expense of oil, with investable dollars being redeployed into gas and gas stocks?

JS: That's what we've been recommending to Maison's institutional clients. If you look at some of the big-name oily stocks, they've already come down a bit from where they were. For instance, Suncor Energy Inc. (TSX.V:SU; NYSE:SU) was trading at $47 in February, and now it's trading at $38. So, there's been a bit of a haircut there. The big Canadian producer Imperial Oil Ltd. (TSX:IMO; NYSE.A:IMO) was $54 in February, when WTI oil was at $112/bbl, and now the stock is trading at $44.56. 

So, we've already seen a correction in the oil names, and we think that will continue, especially if we see another $20–$30/bbl come off the price of oil. Gas stocks have done the reverse. At the beginning of the year, Encana Corp.(TSX:ECA; NYSE:ECA) was a $29 stock, and now it's a $31 stock. That's not a big move, but it's gone up versus the oily names going down.

TER: Back in March, the Government of Quebec halted shale gas drilling until a safety evaluation could be completed. This could take up to two years and, with court challenges and environmentalists converging on this area as a battleground, it might take longer. What's your feeling on this?

JS: There's a pilot phase that will go on for the next two years. I believe six wells are forecast, two of which are being worked by a joint venture (JV) between Talisman Energy Inc. (TSX:TLM) andQuesterre Energy Corp. (TSX:QEC). They're going to be monitored by the government, which will have people onsite. What the companies will have to do is deal with local people and environmentalists, get approval from the farmers and explain what's going on. They're going to measure the methane before and after they start drilling since the companies want to prove that they're not increasing the amount of methane from their activity. So, the industry has to prove its environmental case. 

Quebec has a history of environmental legislation for mines; but in the end, it does approve the mines if they go through the environmental hurdles. I think the case will be the same here with natural gas. Companies might not be able to drill close to Montreal or Quebec City, but that's the same issue with New York. However, in our minds, there will be activity; it's just a question of when it happens. Remember also, there's an election in Quebec in two years; and I believe the government wants to wait until after the election on this issue. So, it's going to take that two-year window or more.

TER: What are the plays that you're recommending for investors today?

JS: We like companies in Western Canada, where there are multizone liquids-rich natural gas areas.


Oil is in some of the plays like the Cardium Formation or the Doe Creek. So, we like companies like Delphi Energy Corp. (TSX:DEE)Vero Energy Inc. (TSX:VRO) and Galleon Energy Inc. (TSX:GO). We also like some Canadian-domiciled companies dealing with international markets like Niko Resources Ltd. (TSX:NKO), which is in India, Indonesia, Kurdistan, Trinidad, Madagascar and a number of other places.

In the past, we've been fans of Sterling Resources Ltd. (TSX.V:SLG), which is in the North Sea, the Netherlands and offshore Romania; however, currently we are on the sidelines due to their ongoing difficulties in Romania. We like WesternZagros Resources Ltd. (TSX.V:WZR), which has just completed a very exciting well, Sarqala-1, in the Kurdistan region of Iraq and will spud another well, called Mil Qasim-1, in July. We like a company in Egypt, called Sea Dragon Energy Inc. (TSX.V:SDX). It has the same management team that was successful with Centurion Energy International Inc., which was acquired by Dana Gas PJSC (ADX:DANA) in 2007. A lot of Canadian-domiciled companies are taking the modern technologies around the world and are doing very well with that.

TER: You mentioned Delphi and WesternZagros, which are your top-two picks. One thing that jumps out at me is that neither of these companies has had spectacular returns. So, is this your contrarian gas play?

JS: Yes. DEE got hurt because of their gas bias, but they always had land with liquids-rich capability. For example, in 2009, Delphi was producing about 15% oil and 85% natural gas. This year, it's going to do about 27% oil and liquids—and that number will go north of 30% by the end of the year. It's going to generate over 50% of its revenue from oil and liquids; so cash flow will go up, and production volumes will go from 6,700 boe/d in Q109 to north of 9,500 boe/d by year-end. Delphi is doing the right things, in terms of the mix. It's going after the liquids-rich capabilities on its land, but the company always has the dry gas sitting in its inventory; so, when gas prices go back to $7–$8/Mcf, Delphi can move those assets. In the meantime, it can increase its net asset value (NAV) and cash flow by going after the liquids. It's similar to the gold business—when prices are low, you go after your best veins; and when prices are high, you go after your bad veins.

TER: Your target price on Delphi is $4, which implies a 60%–65% return, but I noticed the company's NAV is $3.78. It sounds like a very conservative target price.

JS: Yes. And that's because we're looking for Delphi to trade at a ratio of its cash flows, and we're looking at it annualizing about $0.60 in cash flow by Q411. The cash flow multiple should be no greater than the proven reserve life index (RLI); and, if you have seven-and-one-half years of proven reserves, you also have probable and possible reserves, tax pools and land value to protect the value for shareholders. 

So, we take an approach in which a company's maximum cash flow multiple should be equal to its proven RLI. However, we didn't even use that in this case. So, you could argue that we may have an even higher target, but our view is to use a reasonable target that we can see makes sense. Then, if it gets to that target and the company is doing better than expected, we can always review it again and come up with a new target.

TER: Your other top pick was WesternZagros, on which you have a target price of $1.50. That represents a roughly 175% return. What are the risks here?

JS: Well, this is in Kurdistan and now the Baghdad and Kurdistan governments are getting their collective act together, in terms of allowing money to be paid to the players in the area, which makes a lot of sense to us. WesternZagros has a lot of cash on the balance sheet, so it has enough for the next phase of drilling. What we like about the company is that the Sarqala-1 well has tested at 9,444 bpd light, +40-degree oil. So, it may have a massive oil field there. WesternZagros' biggest shareholders are George Soros and John Paulson. Thus, we have big, international investors that believe this company has a big land spread, very attractive base and has proven that there is light oil on it.

TER: You went to the SEPAC Oil & Gas Investor Showcase in Calgary at the end of May. What was the atmosphere there? What did you hear?

JS: If a company is in natural gas only, it's not generating a lot of cash flow and not making any money. And if it has any debt, it has problems. So, almost every company was trying to draw attention to itself saying, "Let's find the liquids-rich or oily stuff and use the new technologies to harvest our lands." Nearly every company was carrying the flag of "liquids-oily" to draw attention. 

From my perspective, they're doing what they have to do in these tough times. But it is getting easier. The basin in Western Canada is gassier, with small pools where the new technologies will help with the oil recovery. But in the long run, we're going to need a much higher natural gas price for the industry to be successful—not only to get a cash flow but also to start generating free cash flow and net income. That's when people can see that it's not just trading dollars in the industry, but also making real money.

TER: Can the small guys survive?

JS: Again, they've got to go get land where the big boys aren't pushing up prices exorbitantly. That means they will have to go into areas that are not 'hot.' Everybody loves the Duvernay or the Cardium, but land prices are rising above $5,000/acre. A little company can't do that today. So, it must have had the land in inventory that it holds or has farmed in from a big boy. But the key thing is that the company will have to be away from where the big boys are located. Companies like Delphi, Galleon and Vero were buying low-priced land in these hot areas before the big boys come in—and where the little guys now just can't compete.

TER: That makes sense. Josef, do you have any further thoughts that you'd like to leave with our readers?

JS: Just that we're cautious right now with QE2 over and with all the country risks in Europe. I think almost everybody agrees that Greece has problems that cannot be fixed. At some point, it will have to face the moment and resolve these issues with haircuts everywhere, which is deflationary. So, if that's the case, and we have a weaker U.S. economy along with Europe, China and Japan, we think there's a chance for a severe correction. So, we're not saying investors should go out and buy things right away, but rather build up their buy lists.

Sometime this fall, the market could have a 10%, or even 30%, correction. I'm not sure which one it will be; it depends upon how serious the problems in Europe become. And, of course, Americans are facing their debt issues. So, if we do see a severe 30% correction, some stocks could go down much more than that; so, you want to be ready to be a buyer. We're saying if you have oily names right now, sell them and lighten up your exposure. If you have to be exposed to energy, be in the natural gas-focused names, but sit there with some decent cash reserves underweighting the sector and be ready to be a buyer sometime this fall when the pain is over.

TER: Great advice. Thank you, Josef.

JS: Thank you.

After a successful investment stewardship at Richardson Greenshields of Canada Limited (RGCL), and the Royal Bank purchase of that firm, Josef set up his own investment advisory business, Schachter Asset Management Inc. (SAMI) in late 1996. Mr. Schachter has nearly 40 years of experience in the Canadian investment management industry. He was the market strategist and director at Richardson Greenshields, as well as a member of its Investment Policy Committee. He holds the Chartered Financial Analyst designation and is a past chairman of the Canadian Council of Financial Analysts. 

Currently, Mr. Schachter and his research team provide oil and gas research coverage to the institutional clients of Maison Placements Canada and presents to, and consults, various industry companies and organizations. Mr. Schachter is a frequent guest on BNN and is regularly quoted in such news and financial publications as the Globe and Mail, National Post and Business Edge—the latter of which awarded Mr. Schachter its "Stock Picker of the Year" award in 2003, 2004 and 2007. He is also a regular on various radio shows including Michael Campbell's "Money Talks." 

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 Exclusive Interviews page.


Bonds & Interest Rates

Marc Faber On a Global Crash, the U.S. Treasury Bubble & China's Slowdown

Posted by Marc Faber

on Friday, 27 July 2012 16:30

On Bonds: 



Treasury yields peaked out in 1981 with the ten years at 15.8 percent and now we're below 1.5 percent , some of my friends who are the super bears on assets prices and on inflation , they think that we will have deflation they think that yields would drop to say less than one percent on the ten years and less than 2 percent on the thirty years , so it may happen but say it is like if you said at the end of 99 the NASDAQ is a bubble well it still went up between December 99 and March 2000 by thirty percent and offers people a hell lot of money in NASDAQ stocks , so all I am saying is I do not think that from a longer term perspective to own US treasuries is a desirable investment but if you asked me , can they rally somewhat more , YES possible I just won't buy them at this level I think the risk out weights the return potential - (Ed Note: Marc's comments on a Global Crash begin at the 9 minute mark in the video below. All of his comments end at the 10:10 mark)

On China:

The difference between China and the US , the US had credit bubble built on consumption in other words the debt level on the household sector level the government level went up dramatically to finance consumption in the case of China at least it financed investments in infrastructures research and development and so forth that is a key difference , now if you have a capital spending bubble like in china the downturn can be very severe because you're running to over capacities and then when you print money you produce even more over capacities and the fact is simply that if you look at reliable statistics say which country is the largest export market for Taiwan and South Korea ? it's China and if you look at exports from Korea and Taiwan they're all flat year on year so that is quite reliable , you look at electricity production in China it's up one percent year on year and so forth and so on , so the statistics would actually suggest that Chinese economy is much weaker than what the official statistics suggest , it does not mean that all Chinese growth model will collapse entirely , but I'd like to mention one thing , in China we still have One Party System and we have an incredible level of corruption and that could lead to social unrest at some point , by the way we can have social unrest anywhere in the world given the high unemployment that we are facing in most countries , but that could derail growth in China for a while and then we have geopolitical problems coming up , the south china sea and so forth and so on so there are many things that could go wrong.

Europe is in Recession



Even Euro Counterfeiters Are Throwing In The Towel

Posted by Wolf Richter via The Testosterone Pit

on Friday, 27 July 2012 11:42

Jean-Claude Juncker was desperate. The Prime Minister of Luxemburg and newly re-installed President of the Eurogroup—which brings together the Eurozone’s finance ministers to exercise political control over the euro—is the ultimate Eurozone infighter and insider. “We all know what to do, but we don’t know how to get re-elected afterwards,” he’d once said, now referred to as “Juncker’s curse.” But he knows how to get reelected, being the longest serving head of state in the EU—Prime Minister since 1995. So when he is desperate, even the eight justices at the German Constitutional Court listen.

After a fairly steady period through 2006, euro counterfeiting jumped 70% to its peak in the second quarter of 2009. Alas, following on the heels of the financial crisis, the Eurozone debt crisis began to gnaw on periphery countries, and counterfeiters lost confidence along with the rest of the financial markets. By the first half of 2012, counterfeiting had crashed 44%. And not much but thin Alpine air appears to be underneath it.


The fact that counterfeiters are throwing in the towel—worried perhaps that they’ll get stuck with high-risk but unsalable merchandise—is bad enough for Europhiles. But now we see an increasingly clear demarcation of the Eurozone into two separate parts, though not entirely along the lines of North and South often envisioned.

On one side of the line are countries whose governments can borrow at negative yields, that is, where investors agree to lend money to them at a guaranteed loss, however absurd that might have seemed not long ago. That club includes Germany, France, the Netherlands, and Belgium (!); in the secondary markets, Finnish and Austrian government debt has seen negative yields. Eurozone neighbors Denmark and Switzerland also dipped into negative yields. Negative Interest Rate Policy (NIRP) at work.

On the other side are countries whose governments have lost access to the financial markets or are in the process of losing access. The largest two in that group are Spain and Italy.

....read more HERE


Timing & trends

Time To Buy Energy Sector ETF's & Stocks

Posted by Don Vialoux - Timing the Market

on Friday, 27 July 2012 10:07

The second of two periods of seasonal strength in the energy sector is approaching. The average optimal time is from July 24th to October 3rd. Thackray’s 2012 Investor’s Guide notes that a trade in the S&P Energy Index has been profitable in 10 of the past 15 periods.

Annual recurring reasons for seasonal strength include strong demand for energy used for air conditioning and declining refined product inventories when refiners are converting their production from gasoline for the summer driving season to heating oil for the winter heating season. Added to this year’s outlook is higher than average temperatures in North America this summer and forecasts for more of the same in August. In addition, U.S. heating oil and gasoline inventories already are at five year lows even before the annual conversion process has started setting the stage for significantly higher refined product prices this fall. Prices already have started to move higher. Since mid-June natural gas prices have jumped 42 per cent, wholesale gasoline prices have increased 16 per cent and heating oil prices have gained 16 percent.

International events also could impact crude oil and refined product prices. Iran has threatened on several occasions to shut down the Straits of Hormuz in response to the West’s growing sanctions designed to encouraging curtailment of Iran’s nuclear program. Most of the world’s crude oil shipments exported from the Middle East must pass through the Straits of Hormuz.

The Canadian energy sector could receive a boost this summer following news on Monday that China’s CNOOC made a “friendly” cash offer to acquire Nexen for US$15.1 billion. The offer came at a 61 per cent premium to Nexen’s closing price on Friday. The offer suggests that Canadian oil and gas producer stocks are undervalued and could prompt additional buying in the sector.

Ironically, energy equities and related ETFs have recorded only modest gains in July despite higher energy prices. Energy equities remain well below highs set in March and only began to outperform the S&P 500 Index and TSX Composite last week. Underperformance has been for good reason. West Texas Intermediate crude oil prices averaged US$88 per barrel in the second quarter, down from US$102 per barrel in the second quarter last year. Second quarter earnings and cash flow will be down substantially on a year-over-year basis. Investors have been reluctant to own the sector prior to the release of “difficult” second quarter results. The tip off will come this week when major Canadian and U.S. energy companies are scheduled to release results. If energy equity prices move higher despite bad news, the stage is set for a significant recovery by the sector into this fall.

On the charts, the sector on both sides of the border has an improving technical profile. The S&P Energy Index broke to a 10 week high on Friday, the Philadelphia Oil Services Index broke above a reverse head and shoulder pattern last week and the TSX Energy Index will complete a reverse head and shoulders pattern on a break above 245.05. Preferred strategy is to accumulate energy equities and related ETFs at current or lower prices for a seasonal trade lasting until October.

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A wide variety of Exchange Traded Funds in the energy sector as well as crude oil, natural gas and gasoline are available in North American equity exchanges. U.S. exchanges list 30 Energy ETFs. A list is available at http://etfdb.com/etfdb-category/energy-equities. Another 24 U.S. based ETFs trade oil, gasoline and natural gas. A list is available at http://etfdb.com/etfdb-category/oil-gas. The most actively traded U.S. listed ETF is the Energy Select Sector SPDR (XLE $67.28). Canadian exchanges list seven energy equity ETFs and eleven oil and natural gas ETFs. The most actively traded Canadian equity ETF is iShares on the S&P/TSX Capped Energy Index (XEG $15.06 Cdn.).

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/


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The Dollar-Commodities See-Saw!

If you are interested in commodities, which has been a hated and neglected asset class since 2008, you will like the following chart I shared...

- posted by Jack Crooks

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