Announcer: Live from the Vancouver Resource Investment Conference, it’s the SmallCapPower Expert Interview featuring Keith Schaefer.
SmallCapPower: Welcome, Keith. It’s January 2015. Can you tell our viewers your thoughts on the current state of the oil industry?
Keith: Well, it’s had a pretty catastrophic collapse in the last four or five months. Really, that’s because the Saudis have said, “Enough is enough.” Everyone is wondering who’s the target of all this concerted price action down into the $40 a barrel range. Are they after the Iranians? Are they after the Russians? Are they after the American producers? The answer is none of the above. They’re actually after the shale lenders, the bankers behind the shale revolution. That’s really who the secret weapon is for these guys. They’ve had incredible access to cheap, easy debt. None of these companies make money even at $100 a barrel because they’re growing too fast. So oil can be a very profitable game, but the U.S. has just gone crazy in their production increases. A million barrels a day a year for the last three years, and it’s really upset the balance of supply and demand.
So now, the Saudis have said, “Okay. Well look, we’ll fix this.” So on American Thanksgiving when all the Americans were eating their turkey, the Saudis started to eat our lunch and down tick the price of oil. When the traders came back to their desks the next day, it was clearly sailing to lower prices.
So really, what I see happening here is that the Saudis really want the lenders to the shale producers to restrict access to that debt that they so desperately need to slow production growth and they’re willing to keep. When they shoot the price of oil down this fast, they’re sending a big message to the lenders saying, “Hey, you’ve got to put some discipline in what you’re doing, because right now, this is just crazy. This can’t continue. We’re all going to run the ships onto the rocks in the oil industry if you don’t slow down.”
But the U.S. isn’t a big company, it’s many different companies. So what they wanted to do was really put the fear of God into the shale lenders that, “Hey, you guys might not get your money back, because right now before this crash, these companies were trading at three to five times debt to cash flow. Now they’re trading 30 to 50 times debt to cash flow, and well, used to pay out in a year, year and a half. Now, that’s somewhere between three years and infinity. So I think, we’re going to see the price of oil stay low. For at least six months, the Saudis want to make sure all these reserve reports come out with lower price decks and really get the message home to the lenders that they cannot just keep lending money to these guys all the time without any consequences. So that’s why I think we are where we are with the price of oil here at $48.
SmallCapPower: So what are your forecasts for natural gas?
Keith: Well, it’s interesting that with all the negative talk in oil, that’s actually going to be the bright spot in the energy market this year because natural gas, I think, really has a big down link coming. You look at the price of gas that’s gone from $4 an MCF to $2.50 an MCF in that last six weeks, so that’s right at the beginning of winter when gas should be going the other way from $2.50 to $4. So why is that? It’s because the production growth out of the U.S. has just been stunning. You’re looking at, really, the one big formation is called the Marcellus in Pennsylvania with a little bit of that in Ohio, West Virginia, New York State. But Pennsylvania’s the big shale producing gas state. It’s gone from 3 billion cubic feet a day a few years ago to 19 billion cubic feet a day in just four years. That’s unbelievable.
So you’re seeing growth in the U.S. shale production that can overwhelm any demand increase that lower prices could throw at it. The other thing is that the cost of getting that shale gas out of the ground is getting cheaper and cheaper so the price can afford to go lower without it really impacting cash flows that much. But what that’s going to mean for Canada is very bad news. Because we’re the back end of the pipe, we’re the farthest away from all the demand centers so we have the highest transportation cost to get to the big markets in the states and we’re going to be stuck with extremely low prices this year, probably lowest prices we’ve seen since 2012 and maybe even lower than that. I don’t see any gas produced in Canada with any positive cash flow at all by May of this year.
SmallCapPower: Can you give our viewers some of your best advice for picking good oil and gas stocks?
Keith: Well, right now when you’re looking at oil and gas stocks, the number one thing is balance sheet. You want to see someone that’s got net cash, no debt. Because right now, the debt markets have just absolutely turned off. There’s no positive cash flow to pay any of that debt back, so the bankers are really running the show on those companies. So very few companies have flexibility. You want to find somebody with net cash. The other thing is 2015 is going to be the year for smaller bets. We had a fantastic run in early 2014 where both gas and oil prices went way up and everybody was making money, stocks were doubling in two or three months time. That’s not going to happen this year, so it’s a time for smaller bets. You get to buy the leaders cheap and just stick with that and be patient.
SmallCapPower: Thanks, Keith. So how can viewers learn more from you?
Keith: The best way for subscribers to learn more about me and my service is to go visit the website at www.oilandgas-investments.com, or they just Google Keith Schaefer and I’m going to show up. That’ll take them right there.
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