150+ years of inflation-adjusted oil prices.

The average is about $47 in real terms.

oil

What does this tell us? Well, not much, except it’s the $100-ish prices that were more of an anomaly than the recent price situation.

— Thanks to David Stockman —

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“Environmental activism is becoming a new form of protectionism.”

This is worth reading:

An article from summer 2014 that explores how U.S. interests fund anti-oil environmentalist radicals to selectively target Canadian oil production as a roundabout protectionist strategy.

The Tar Sands Campaign pointedly ignores the dozens of tankers bringing foreign oil into the United States and Eastern Canada on a daily basis. Evidently, the only tankers this campaign opposes are those that would break the U.S. market’s monopoly on Canadian oil exports.

But in North Dakota and Texas where oil production is booming, there is no multimillion-dollar campaign to stop or slow down the oil industry. As far as I can tell, the only country where there is a systematic, multimillion-dollar, foreign-funded campaign to choke the oil industry is Canada.

Whether intentional or not, environmental activism is becoming a new form of protectionism. By exaggerating risks and impacts, activists exert such political and social pressure that major infrastructure projects can be stalled or stopped altogether, land-locking Canadian oil and gas and keeping Canada over a barrel.

— Read more at Alberta Oil Magazine

$100 in 2011 and $19.81 Now: Canada Heavy Crude

 

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From Bloomberg.

— Read more at Bloomberg

A Bleak Update on Tourmaline Oil Corp. (TOU)

This summer CMR published a report on Tourmaline Oil Corp (TOU). We showed that the company sucked up cash harder than a black hole and becoming economically viable was nigh mathematically impossible.

Their strategy has been nothing more than bigness. They were not building a strong company and making acquisitions with internally generated cash, Instead, they gobbled up the proceeds fed to them by fanciful underwriters to buy assets so they could constantly trumpet record production numbers and drive up the share price. While Tourmaline’s C-suite speculators kept devouring funds with their capex and M&A binge, they were striving for a Hail Mary liquidity event when some bigger E&P company would hopefully buy them at a nice valuation.

The company just released its Q3 results and has only provided further support to this thesis. Tourmaline is still spending too much money with little to show for it. CMR analyst Daniel Plainview provides us with an update.

Tourmaline Oil Corp.; Q3 Update

A follow up from the quill of Daniel Plainview, Esq.

It has been a number of months since I took to this forum to share with the fine readers the patent market absurdity that is Tourmaline Oil.  While its shares have fallen since the summer (about 30%) this is by no means out of line with the declines of other Canadian oil gas companies.

Recently another quarter of financial results was announced, so perhaps it is a good time to see if this company has finally made a dollar.

tourmaline update

Nope.

(Also note that we have updated the chart to now include proceeds from asset sales; technically a positive cash flow item, as asset acquisitions would be negative. Not that it matters much.)

In the six months of new financial data we can see that Tourmaline continues to outspend what it takes in, in an effort to grow production (to lead to more of the same?)

Cash flow from operations were together another C$ 412 million, but spending (net of $0 new asset sales) was C$ 719 million.  Free cash flow was therefore -C$ 307 million for the last 6 months, bringing the grand total money pit to ~C$4.35 billion since 2009.

A positive development might be that it appear the company is now aware that they cannot promulgate cash flow and earning figures without the accompanying capital expenditures that drive the production.  In their October 14th press release they have budgeted free cash flow projections for 2016 and 2017.  In a low gas price scenario they free cash flow will be ~C$45 million followed by ~C$167 million, and in a high gas price scenario free cash flow will be ~C$103 million and ~C$414 million.

So hypothetically, at the high price scenario, investors might see positive cumulative free cash flow some time in the 2020s, but I won’t hold my breath.

Also worth noting is that the low gas price scenario assumes a median C$3.25/mcf price for Alberta natural gas.  Presently it sits at ~$2.40/GJ (or ~$2.53/mcf); so they only need their base commodity price to go up 28% too.

This is a company that grows production at any cost and has never had an economic business model.  It requires constant issuance of new shares and cannot maintain growth on a per share basis if valuations drop.  It is a house of cards waiting to fall.

It’s enough to make Tourmaline shareholders sweat.

Observations on the Royalty Review Panel Open House

In the following I will share the observations of a man who attended last night’s Royalty Review Panel Open House in Calgary, originally posted on Instaface or Facegram or whatever it’s called. This man is an entrepreneur in the Alberta oil industry, so it seems reasonable that he understands many of the underlying issues. His reporting rings true to me and it should deeply unsettle not just Albertans, but also the other Canadians who gobble up the transfer payments out of Alberta:

Well I went ahead and attended the Royalty Review Panel Open House in Calgary last evening to see what they had to say. They had lots of stand up displays with hundreds of factoids about supply, world prices, reserves and a whole bunch of other information most of us Albertans have known about for decades. Interestingly enough they had whiteboards for attendees to write comments, Trevor Marr took pictures and the attendees were hammering the government hard on the many points you’ve already posted, read, liked and shared on these pages.

I spoke and asked questions about the risk of engaging in a review at a time when prices are low and royalty revenues are already in full collapse. The Al Gore trained political hack, ATB CEO Dave Mowat did confirm that the government would be lucky to collect $3 Billion this year, down from $9 Billion last year. He couldn’t answer why if we were at $13 Billion prior to the last review and it contributed to a drop to $9B since and were now down at less than $3B, what good could possibly come from throwing two plus years of uncertainty into the mix now? He kept referring to how they were sure that they could OPTIMIZE the royalty rates. But no, the full report wouldn’t be shared with Albertans as a large portion of their process was so complicated it could only be done by 3 separate expert non public panels that they are hiring to work for a whole month. But the end result would be the best Royalty Rate system ever done and the OPTIMIZED recommendations would be provided to the NDP government by December 31st, 2015. He also said that since oil would be phased out over the next 20-30 years, it can no longer be viewed as a finite resource since we have more than will ever be able to be sold! He said the inability to get to markets wasn’t relevant to the rate structure! He also said if our oil wasn’t competitive in the world markets not having pipelines to those possible clients didn’t matter. He said it wasn’t their concern if other taxations such as corporate tax rate increases or carbon tax burdens were put on our oil and gas industry as they were only mandated to recommend a royalty rate structure that was based upon 4 core principles that could guide all the future rate reviews. He suggested that every two years or so they might want to adjust rates! He admitted that the $65 Billion in annual investment by the oil and gas industry was dependent upon both pricing and royalty competitiveness. He wouldn’t say how much lower the investment is this year nor how much investment might be withheld due to the not knowing what the rates are going to be. He couldn’t answer as to how long it might take the NDP government to implement their recommendations or even if they would.

I came away convinced that the whole process is a traveling Gong Show run by ideologues who are so enamored with their own intelligence that they actually believe that they can squeeze more revenue out of the resources that we own by performing a superb OPTIMIZATION of the rates. They have no concept of RISK. Dave Mowat declared that the USA is no longer a trusted customer, that they have become our biggest competitor and since they produce so much oil relative to our miniscule output, we cannot compete. I also spoke with Peter Tertzakian from the panel who accused the PC’s of not collecting enough over the past decades. He also had absolutely no concern that the revenues had fallen due to the low prices, he expressed a concern that Albertans weren’t getting enough revenue from the oil being sold with no concern that the O&G industry were operating at a loss as is!

In other words, much like Rachel’s NDP government, nobody on this Royalty Review Panel are prepared to Stand Up For Alberta! They do not understand risk management, product promotion, stability needs of large long term investment, spinoff benefits from capital investment, incentivization potential, access to tidewater ports and human cost impacts from reduced employment opportunities. We must redouble our efforts to wake them up. I got under their skin, Mowat tried to label me as smug but apologized when I called him out for attempting to assign a negative connotation on a brief facial expression I might have had while listening to another speaker grill him. Although someone in the back did holler that I should be the next Energy Minister. 🙂

Let me call attention to a few of the most startling comments here.

[Mowat] also said that since oil would be phased out over the next 20-30 years, it can no longer be viewed as a finite resource since we have more than will ever be able to be sold!

WHAT.

Dave Mowat declared that the USA is no longer a trusted customer, that they have become our biggest competitor and since they produce so much oil relative to our miniscule output, we cannot compete.

WHAT.

I also spoke with Peter Tertzakian from the panel who accused the PC’s of not collecting enough over the past decades. He also had absolutely no concern that the revenues had fallen due to the low prices, he expressed a concern that Albertans weren’t getting enough revenue from the oil being sold with no concern that the O&G industry were operating at a loss as is!

WHAT.

We shouldn’t be surprised by foolishness coming out of a Royalty Review Panel that is chaired by Al Gore fanboy Dave Mowat, but this is actually worse than I expected. If such considerations are guiding the panel’s recommendations, Alberta is in a lot of trouble.

The entire royalty review is based on asinine premises as demonstrated above along with the laughable pretense of caring what the public has to say.

NDP’s Royalty Review Czar Dave Mowat Is a Climate Change Propagandist Trained by Al Gore

I knew I smelled a rat when Notley’s NDP chose ATB President and CEO Dave Mowat to head the royalty review board.

In a process that will surely revolve around “fairness” and other uneconomic nonsense, why would the NDP pick a banker of all things to head the review?

Well, now we know.

mowatandgore

algorelies

http://www.canada.com/edmontonjournal/story.html?id=5371ac3d-3b2d-4825-a158-45fd0c3978bb&k=18066

Hmm, do you think his thinking might be a bit clouded by Algore’s lies?

Al Gore’s documentary is one of the most deceitful pieces of trash ever created. Rather than provide a thorough critique, it is sufficient to show this:

al_gore_graph

The x-axis there is supposed to be time. How does the data go backwards in time? That doesn’t make any sense!

I know Algore created the internet with his bare hands and all that, but did he invent a way to break the laws of space-time too? This is total nonsense — climate change propaganda at its worst.

Can Dave Mowat explain this magical graph? Was that part of his propaganda training with Algore?

Heck, the famous Algore graph shows CO2 increases preceding the temperature rise. You fail automatically at science if you observe that A precedes B and therefore conclude that B causes A.

Algore is a shameless liar and anyone trained to spread his lies should not be running a royalty review for Alberta’s oil industry.

It’s seems fair enough to say that Dave Mowat is biased. So he is the perfect guy to push the NDP’s agenda.

Market Lemmings Case Study: Tourmaline Oil Corp.

The fall in oil prices is starting to expose some of the waste in the energy sector, but this central bank fueled bubble is still rife with clusters of error.

The ‘boom’ phase of the business cycle — more accurately described as the malinvestment phase — is where a lot of things just stop making sense. People will shovel money into wasteful investments based on distorted credit conditions and hyped up expectations.

Today our case study is Tourmaline Oil Corp., a favorite in the independent energy growth company category. With a 52-week high of $58.73, the consensus analyst rating is “buy” while presently trading around $39 at 18x earnings. It recently issued $168 million in new shares (at $39.50/share).

CMR analyst Daniel Plainview shows why Tourmaline is an economic black hole relying on the “greater fool.” Regardless of whatever distortions manifest in the stock market, Tourmaline is its present form is a zombie company — not an investment, but just one of many ways to gamble in the stock market casino.

A Question for Tourmaline Oil Corp.: How Do You Make Money?

By Daniel Plainview

When trying to determine the proper price of a stock the conventional rule of thumb is to predict the amount of money that stock is going to make each year over the long term, and then discount those earnings to the present at an appropriate rate for the risk you are taking.

The inverse of this, but it is in essence the exact same methodology, is to use a Price to Earnings ratio to evaluate a stock. The higher the ratio, the more expensive the stock; the lower the ratio, the more likely you are getting a good deal, so long as the future earnings hold up.

But what if the stock you are looking at is in an industry that typically doesn’t make any money?  I’m referring to industries where the company earnings are often affected, to a large degree, by depletion expenses.

Depletion is a non-cash charge and it can ensure that a company generates plenty of cash flow but renders the conventional Price to Earnings analysis moot. Industries with high DD&A (Depletion, Depreciation & Amortization) are generally involved in resource extraction.

Because earnings are essentially meaningless for a lot of resource companies (not to mention the other accounting tricks that can affect earnings) it’s always a good idea to look at a company’s cash flows.  There are three types of cash flows:

  1. Cash flows from operations
  2. Cash flows from investing
  3. Cash flow from financing

While in any given period the cash flows in any of these buckets can be either positive or negative, over the medium to longer term (2+ years) one invariably wants to see that cash flow from operations is positive, cash flows from investing is slightly negative, and cash flows from financing is also negative; with the change in cash position from period to period being immaterial.

What a positive/negative/negative cash flow segmentation is indicative of is 1) the company is making money, 2) that it is reinvesting in the business to grow the business, and 3) it is able to return capital to the shareholder, or at least doesn’t steadily require new financing to fund its investments.

It is with this in mind that we now consider the Canadian oil and gas industry.

Recently the commodity prices that drive the cash flow from operations that Exploration and Production (E&P) companies generate took a tumble.  Both oil and gas prices fell by ~50% from their levels in the first half of 2014.

By itself a single year of lousy prices shouldn’t erode as much value in the markets as what occurred, but what changed is the market is now more pessimistic about prices for all future periods too.

Companies have responded by scaling back their investing, and cutting capital expenditures for the drilling of new wells and building of new facilities.

Generally speaking, oil and gas companies always have to be spending some money on new production in order to maintain overall production levels.  Well performance declines over time, and by how much depends a lot on the geology of the particular “play”.

A really good well might only decline at ~20% per year, but it still declines.  Newer unconventional extraction methods (drilling horizontal multi-stage frac wells into shales) can come down a lot faster: ~50% per year.

So ultimately the goal of any oil and gas company, in any environment, is to have enough cash flow from operations that it can pay for all the cash flow from investing (capital expenditures needed to keep production up), and still have enough left over to pay the shareholder.

Enter Tourmaline Oil: the oil company that has 85% of their production coming from natural gas.  Etymology aside, there are more serious issues with this company’s business model.

In their last earnings announcement in March, they happily proclaimed their 76% growth in cash flow. Sounds good… but wait! There is a footnote: “Cash flow is defined as cash provided by operations before changes in non-cash operating working capital.” So what about capital expenditures?

Here is a chart of Tourmaline’s cash flows, going back to 2009:

tourmaline

The cash flow from operations is in green, and the company’s capital expenditures (only a sub-set of cash flow from investing) are in red.  The black line represents the cumulative amount of cash flow from operations minus capital expenditures (or Free Cash Flow) up to each period.

What this shows is that Tourmaline has spent almost $4.7 billion more on drilling holes in the ground, than it has made from the hydrocarbons those holes have produced, since 2009.  Furthermore, over 25 quarters of results, they have never made more money than they spent: Free Cash Flow has never been positive.

In the company’s defense, they have grown production at an industry-leading rate.  But it really looks like they’re spending a dollar to make fifty cents, and making up for it on volume.

It has gotten to the point where if the company stopped spending money, but continued to earn cash flow from operations (and let us assume the same prices and only a 20% production annual decline), they could not make that money back.  In actuality Tourmaline’s wells probably decline a lot harder than 20%, but the story is bad enough as it is.

These harsh realities force us to ask the question: where did the company get $4.7 billion?  The answer is that they got it from new investors who bought shares in secondary offerings, and some money from raising debt.  It looks as though this external funding process will have to continue ad infinitum; another secondary offering being announced just recently for $168 million.

And investors should keep this in mind: the only reason Tourmaline is able to grow production on a per share basis is because the shares have a decent valuation, but the only reason the shares manage to eke out a decent valuation is because they are able to grow production on a per share basis.  If the shares were to fall enough in price, the amount of dilution created by external financing would make it impossible for the company to grow.

And the last point to make about the company: the management team in prior iterations at Berkeley and at Duvernay were able to successfully build up and then sell the company to a bigger fish.  Duvernay in particular made a lot of people a lot of money as it was sold at the height of the commodity boom in 2008 and Shell paid an unmatched valuation in the transaction (~27x EBITDA).

In fact, the only way Tourmaline’s business model makes any sense is with an M&A exit strategy: ramp up production at any price, and find a sucker to buy it just before the house of cards collapses.

But if investors are assuming Tourmaline will be similarly sold I would only point out that Tourmaline is now worth about $9.2 billion and is the 8th largest E&P company by market capitalization in Canada.  It’s getting to be too big for others to swallow, and suckers like Shell might be hard to find this time around.

Then again, they did just find another 4.25 million suckers…

(Click here for supporting calculations.)

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