Transcript Slide 1

The Association of Professional Engineers, Geologists and
Geophysicists of Alberta
Oil & Gas Strategy…
The Long and Short of it…”
Calgary, Alberta
September 2006
Brian Prokop, P.Eng, CFA
Vice-President, Oil and Gas Specialist
Institutional Sales
CanaccordAdams
Lunch Talk Coping Strategies
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Overview
• Industry Themes and Issues
• Commodity Price Forecasts
• Investment Themes
• Key Investor Criteria
• Stock Picks
– Oilfield Services
– Royalty Trust
– Large Cap
– Small Cap
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E&P Sub-Index Historical Performance
4,000
E&P Sub-Index
200 day moving avg.
3,000
2,000
1,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
As at September 11, 2006
Source: Bloomberg
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Can This Bull Market Continue?
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Industry Themes
• Seasonally volatile commodity prices
• Cash-rich, relatively opportunity-poor E&P companies
• Shortages of services shifting pricing power away from E&P
sector
• Escalating cost structure
– Rising finding and development costs
– Rising overhead and operating costs
• Consolidation
• Internationals
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Near-month Crude Oil Prices
$80
WTI (US$/b)
200 day moving avg. (US$/b)
$60
$40
$20
$0
1995
1996
As at September 11, 2006
Source: Bloomberg
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Crude Oil Price Drivers
• Supply
– OPEC
– FSU – ability flat-out
– Supermajors – buy/not find
– Hubbert’s Peak
• Demand
– Real Price of Oil – below peak
– China & India
– FSU - industrialization
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Crude Oil Price Drivers
• Expectations
– Reversion to Mean – what mean?
• $30 - $40 - $50/B
– OPEC Capacity – Indonesia, Saudi Arabia
– OPEC Instability – Iraq, Nigeria, Venezuela, Mexico, Iran
– Alternatives
• Price Forecast – will be wrong – just hope to get trend right!
– CCI 2006E/2007E – US$70.00/B (upward bias)
– Strip Implies Higher in 2006
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Near-month NYMEX Gas Prices
$16
NYMEX Nat. Gas (US$/mmbtu)
200 day moving avg. (US$/mmbtu)
$12
$8
z
$4
$0
1995
1996
As at September 11, 2006
Source: Bloomberg
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Natural Gas – Price Drivers
Supply
• Drilling Activity
• Storage, LNG, GOM prod – still small hurricane uncertainty
Demand
• Weather, Economy, Demand Destruction
• Oil Price/Alternatives
Expectations
• Warm Winter – price weakness (relative)
• Long-term Bullish
• Alternatives/Complements – LNG, Coal, CBM
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Canaccord Adams Commodity Price
Assumptions
2005A
2006E
2007E
WTI (US$/b)
$56.67
$70.00
$70.00
Heavy (Lloyd Blend @ Hardisty C$/b)
$45.33
$55.51
$54.65
Edm. Par (C$/b)
$69.18
$76.66
$76.67
NYMEX (US$/mmbtu)
$9.02
$7.30
$9.00
Alberta Spot (C$/mcf)
$8.92
$6.80
$8.80
FX Rate (US$/C$)
$0.826
$0.890
$0.900
$68.05
$70.45
(3%)
1%
$7.15
$8.77
(2%)
(3%)
Crude Oil
Natural Gas
Forward Strips, as at September 11, 2006
WTI (US$/b)
Upside
NYMEX (US$/mmbtu)
Upside
Source: Canaccord Adams estimates, Bloomberg
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Investment Themes
• Current industry activity still robust, although stocks have drifted
over the spring and summer due to wet weather. Weak Q2,
stronger Q3
• Commodity strip shows winter strength, although current spot
price has been weaker. Warm winter would threaten pricing –
potential weakness in natural gas stocks
Focus on Service companies offering:
• Increasing Rates
• Additional Units
Focus on Royalty Trusts and E&P companies offering:
• Low Cost – always within commodity environment
• Growth – scalable, repeatable results
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Investor Wants/Expectations
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•
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Value Creation/ROCE
Growth
Clear and Honest Communications
Clear and Sensible Strategy
Excellent Management/Board Independence
Sound Financial Structure
Respect for Shareholders and Other Stakeholders
Liquidity
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Investor Wants/Expectations
• Value Creation/ROCE
– Focus on underlying economics of companies
• Reserves • Assets – land – large and contiguous
• Capital costs – F&D
• Operating costs - $/BOE
– Maximize Value
• Perform (Grow) or Sell
• Growth
– Solid underlying value (reserves and reserves credibility)
– Ability to show definable, long term, repeatable activities
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Risks to Consider
• Mild winter weather
– Reduces heating demand
– Hurts oilfield activity
• Price volatility
– Restoration of GOM production
– Transition from heating to shoulder season in Q2
• Access to oilfield services - Bad – E&P’s, Good – Services
– E&Ps – higher costs, difficult availability
– Services – greater demand, higher prices, better margins
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Services – Savanna Energy Services (SVY : TSX)
Strengths
• Currently 4th largest drilling firm – will be 3rd after current rig build
– Largest fleet of new equipment (an average of less than 3 years old)
– SVY – coiled tubing hybrid rigs – disruptive technology
– WLE – deep rigs and access to First Nation’s land and labour
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Over $1B in market cap ($1.3B) – hits new radar screens
High utilization – above industry average
Clear visibility for growth for both entities
Trust conversion potential
CHEAP – trading at 8.8X 2007 EPS (24% discount to peers)
Risks
• Precipitous commodity price drop
• Excessive E&P consolidation
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O&G Royalty Trust – Canadian Oil Sands (COS.UN : TSX)
Strengths
• Multi-decade reserve life
• Largest and cheapest – P/NAV of 85%
• Transition to dividend play – upward target price bias
• Distributions – increases pending
• Further long-term growth – Stage 4 & 5
Risks
• Asset concentration
• Stage 3 timing – minor (back on)
• Stage 4 & 5 timing
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Large Cap Pick – Nexen Inc. (NXY : TSX, NYSE)
Strengths
• Strategically positioned for near-term and long-term growth
– Oilsands – Long Lake (30,000 b/d) and Syncrude (10,000 b/d)
– Conventional – Buzzard, North Sea (85,000 b/d)
– Exploration upside – GOM, West Africa
– Strong balance sheet
– Responsible management
Risks
• Timely and cost effective access to services and construction
• Timing delays
• 80% oil-weighted
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Small Cap Pick – TAG Oil Ltd. (TAO : TSX-V)
Strengths
• Leveraging energy crisis in New Zealand
• Large inventory of drilling opportunities – large potential
exploration targets (100 mmb+)
• Access to over 1,000,000 net acres of undeveloped land in
immature basin
• Strong balance sheet to finance aggressive capital spending
program
• Experienced management
• First production last month – 100 B/d
Risks
• Timing delays
• Limited infrastructure in some areas of focus resulting in longer
lead times to convert investments to cash flow
• International
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Summary
• Commodity Price Forecast – higher trend
Oil range - $60.00/b to $70.00/b
Natural Gas range - $7.00/mcf to $11.00/mcf
• Top Picks
– Service – SVY
– Royalty Trust – COS.un
– Large Cap. – NXY
– Small Cap. – TAO
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Questions?
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