Keith Schaefer is editor and publisher of the
Oil & Gas Investments Bulletin. The Bulletin subscription service
finds, researches, and profiles growing oil and gas companies that Mr.
Schaefer buys himself, so Bulletin subscribers know he has his own money
on the line.
Mr. Schaefer identifies oil and gas companies that have high growth rates,
or have the potential for that – this usually means they have a large undeveloped
land position in an area where either production costs are very low or
production rates can be very high. They are covered by several research
analysts, so there is research support and institutional money flow behind
them.
Smallcappower’s Mark Thorburn interviewed Mr. Schaefer in late December
2013.
SMALLCAPPOWER (SCP): Keith, as we near
the end of 2013, would you say that the year performed as expected in the
Oil & Gas sector?
KEITH SCHAEFER: Well, sometimes yes and
sometimes no. I think what really did perform exactly as we expected was
the natural gas price. No one really expected it to do much and until it
got cold in December, it really didn’t do much. But this cold weather spell
has taken natural gas storage back below five year averages, which is mildly
bullish. However, natural gas stocks in the US aren’t moving, which means
the Market is looking through this cold to fast increasing supply out of
the Marcellus formation in Pennsylvania., I expect supply to increase two
BCF a day over last year. So we’re not seeing any significant fundamental
turnaround in natural gas. And oil supply, as well, has performed exactly
as expected where the shale revolution continues to pump out increasing
amounts of crude out of the U.S. and Canada but especially the U.S. And
right now there’s no real end in sight for that either. We’re looking at
probably another two to four years minimum and some people are saying as
much as ten years for increased supply out of the shale game in the U.S.
So I think that’ll run according to plan. I think a few things that didn’t
probably pan out the way some people expected was, that here in Canada
a lot of people really believed that with all the new rail capacity being
used to ship oil around North America that our big discounts that we saw
last year wouldn’t happen again. But in the fall of 2013, they did. Where
in early December again our heavy oil was $40 below WTI. Our light oil
was almost $30 below WTI for a short period of time. And so those discounts
have now narrowed but still, I think it’s fair to say, SCPuite a bit higher
than what everyone thought would happen. We all thought that rail would
really reduce those discounts but it just goes to show we still need pipelines.
We still need pipelines badly to increase the price that we’re getting
for our very valuable oil.
SCP: What’s your outlook for the oil and
gas markets in North America in 2014? What do you think will be some positive
investor catalysts in 2014?
KEITH SCHAEFER: Well, I think technology
is going to be a big catalyst. There was a simple but powerful breakthrough
this year and it seems to be increasing oil production quite dramatically,
even more than before. And that is: for the last 10 years we’ve been trying
to frack these long narrow fracks out into oil and gas formations. And
trying to get as much oil and gas that way. What a few companies have done,
particularly EOG and Whiting down in the States, they have said, no, we’re
going to do short, wide fracks. We’re going to do more fracks per well.
We’re going to put the fracks closer together every 75 100 metres instead
of 200 metres along the horizontal well bore. And we’re just going to maybe
not have quite as powerful a frack but we’re going to have more of them
and– so they’re going to be closer to the wellbore. And what we’re finding
here is that what the initial results are is that they are getting an incredible
amount of oil compared to the long narrow fracks. So these shale wells,
Mark, they fall off very, very rapidly. They come on at a really high rate
but then they fall off quite dramatically. What we’re finding so far, again,
it’s early days but that with the wide short fracks, production doesn’t
fall off that much. It’s a completely different well profile. It’s got
a much shallower decline curve (we call it). So that could be a real game
changer for the amount of oil that gets produced in North America over
the next two or three years. Another positive catalyst– I think the industry
is doing a better job, they still have a long way to go but they’re doing
a better job, in engaging communities to get infrastructure built. So it’s
just a painful lesson the industry’s going through now is to figure out
how to properly approach communities, special interest groups, to get their
agenda moved forward. To get, you know, they really do have to get a new
social license. They have to include the people along the way in both terms
of prosperity and the environment. So that’s been a pretty painful road
for the last two or three years but I think there’s– look at the public
opinion polls now and it’s pretty clear that the public is moving towards
accepting a lot more energy infrastructure close by than they have been
in the past. So that should be, I think, a very important catalyst. It
might not show up in everybody’s wallets, but will certainly, I think,
make for better neighbours.
SCP: What’s your opinion on the shale
oil and gas industry in North America?
KEITH SCHAEFER: Well, I think it’s going
to continue to boom here. And like I explained with the technology advancements
that we’re seeing, I think there’s a real possibility the amount of oil
and gas that’s going to come out in North America is going to increase
even more than people think. To the point where probably the price of oil
is going to drop a bit. And for gas, you know, gas in North America really
comes down to one word and that’s Marcellus. The Marcellus formation in
Pennsylvania and Virginia is so big. It has shown itself to be so prolific
that until production there peaks, gas will stay capped. I think it has
doubled in the three years, tripled in the last four, quadrupled in the
last five. It’s a monster formation with huge productivity. And the industry
is still drilling it like Swiss cheese. There could be a long way to go.
So depending on how it performs over the next year or two, gas is still
kind of dead in the water until that formation shows some sign of slowing.
But generally speaking, the shale revolution has just done an amazing job
for American GDP. You’re looking at all kinds of petrochemical plants that
are coming back and manufacturing that is coming back because they’ve got
so much cheaper power than they do elsewhere in the world. Our natural
gas prices are half of everywhere else in the world. So that makes a big
difference for industry looking to operate here. And so that’s kind of
what I think’s going to happen here through 2014.
SCP: Could you briefly educate our subscribers
about the Liquid Natural Gas (“LNG”) opportunity in BC? What’s the size
of the market opportunity, who are the major players, and what stage are
we in for the development of this market?
KEITH SCHAEFER: Well, I think the size
of the market is easily $100 billion in the next 10 years. And there’s
a pretty simple rule of thumb that you can peg about $7.5 billion in construction
costs for every billion cubic feet of gas you want to export. And so right
now there’s about 13 to 15 BCF a day on the drawing board to be exported
off the B.C. West Coast. So, you know, you multiply 13 by 7 and you get
about $100 billion. And, of course, not all that’s going to get built,
but I think there’s a good chunk of it that over the next 10 to 15 years
will get built. And the stage we’re at right now is just so stage one,
early stage, it’s– everything’s starting just getting approved now. And
even once it’s approved you still have to go through the big environmental
approval that goes into all the nitty-gritty details of what you’re going
to do, who you’re going to impact, how it’s going to work. And so now we’re
entering into that part of the process. And that’s going to take a couple
of years. So basically if that happens once that’s done it’s clear sailing.
And what you’re seeing now is all the big companies that are applying for
this like Shell and B.G. and Exxon, they’re already working really hard
on the ground, in Kitimat and Prince Rupert, to get their sites as ready
as humanly possible in advance of all these permits. So land is being cleared.
Local permits are being applied for. So on the ground there’s actually
a lot of work being done. But we really do need the main government now
to say, okay, let’s go. Literally just this week four new LNG proposals
got approved. So we’re up to, I believe, 18 approved– projects now.
SCP: Great. So how do you think technology
will change the way in which we look for and extract energy in the future?
KEITH SCHAEFER: Well, really what technology’s
done for us has been just a slow, continual creep, a tweaking that– where
each advancement builds on what’s done in the past. And certainly the big
game changer was getting multistage fracking and horizontal drilling together
here what the late George Mitchell did in the Barnett Shale in Texas in
the late 1990s. But really since then it’s just been a little tweak here,
a little tweak there that has really helped increase productivity in these
wells. And on the services side just, again, little tweaks in chemical
composition of what they’re doing in the well where it allows these wells
to be drilled faster at less cost. So you’re seeing a continual cost reduction
in the industry’s breakeven price for oil. So despite what you read in
the news, I’m just not convinced that the breakeven cost for oil is moving
up as high as everyone says it is. So technology really is lowering the
price of energy. And that’s why I’m actually very bullish on the Market
and mankind. I don’t see super expensive energy in our future.
SCP: What do you think are the most important
factors when choosing a small cap or junior oil and gas stock?
KEITH SCHAEFER: Well, the number-one thing
I look for is management. You want to find a team that’s built and sold
a junior before. So who’s shown that they can grow a business, can do deals,
hire the right people, find good ground, develop it properly. That’s by
far and away the big key. And that’s no different than it is on the Hardrock
mining site. Ideally what I’m looking for is someone who’s got a big property;
a core area where I can look down the road and say, okay, these guys could
drill on this property for the next three to five years. When they don’t
have to get any more land, they don’t have to go spend anymore money, it’s
just kind of very simple development drilling that is the ideal case. They
have a big asset where they’ve had one or two discovery wells that opens
up an entirely new area that really would allow them to grow quite quickly.
And at quite low risk. And then the other thing I’m looking for is, Mark,
I want to find a company that’s got, like, somewhere between 50 to 80 million
shares out. I’ve got a line I use, if you’ve got over 100 million shares
out that’s strike one; 200 million strike two; more than 300 million you’re
out. And there are exceptions to that rule, but not too many. Basically
you’ve got to put yourself– you’ve got to make sure you’ve got a share
structure that’s in the box.
SCP: What would make a company be exempt
from those rules?
KEITH SCHAEFER: I would say, like, you
look at some of these international plays, that hit mighty big wells. So
you look at the Ithica’s, the Iona’s, you know, even the Mart Resource
was a company that, you know, in Africa, had a great property and even
with 350 million shares out they were able to bring on enough production
to get the stock from 15 cents to two bucks. But generally the bigger wells
in the international arenas are where you find these things a little bit
more often.
SCP: Right. So just finally, are there
any small cap/junior oil and gas stocks that you like currently and why
do you like them?
KEITH SCHAEFER: Yeah, there’s actually–
a few of the senior management teams out there have done really, really
well. When I say “senior” I mean, like, the deans of the junior market.
So you look at what Neil Roszell’s done at Raging River, developed a Viking
play in Saskatchewan. And done incredibly well, that’s gone from two bucks
to six bucks in the last little over a year. They’ve done a hell of a job
there. You look at what Marty Cheynehas done at DeeThree where they had
that the Alberta Bakken in southern Alberta. And also a big Belly River
play up just north of Rocky Mountain House just off the foothills. That
has turned into a fantastic asset. And they were able to read these assets
way better than any of the previous operators and really figure out the
geological code that allowed their teams to extract way more production
than anybody else has. So that those deals, even though they were expensive
at the time, ended up being very, very cheap ‘cause these guys were able
to so successfully develop them. So on the producer side that’s been a
good one. CanElson, CDI-TSX, you know, again, just a really good team at
the helm. They’re not particularly deep drillers which is what the market–
you kind of often see now with all the LNG stuff going on, but just a very
strong team that’s able to continually win business and move the business
ahead. So there’s some ideas that I think people can go check out.
SCP: Excellent. So finally, can you tell
our readers about your “Oil and Gas Investments” newsletter?
KEITH SCHAEFER: I spend all day researching
energy stocks that are listed in North America, junior, senior, they can
be producers, they can be mixed-stream pipeline companies, they can be
downstream refinery companies. Anywhere that I think I can make money and
deploy my own capital. So basically what my service does is kind of describe
in very simple English, no word’s over nine letters, what stocks I’m invested
in and why. And it’s been a lot of fun. Really finding– just discovering
these stocks is great, but then there’s even learning how to explain it
to people so people don’t feel intimidated and feel like they can really
understand the opportunity even though they’re not technical. That’s been
a lot of fun too.
SCP: Great, thanks, Keith. Thanks for
updating us and we appreciate your time.
KEITH SCHAEFER: Mark, God bless you.
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