Sprott Resource Corp Ord SCPZF

Galleon Mentioned

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Dear OGIB Reader,
It’soften tempting to cut and run following a big dump in the stock market, but it’salso a good time to take a breather and reset some priorities to take advantageof the next market cycle.
The good news is that if you’re still reading,it means you’re still in the game. Sometimes it’s easy to forget that volatilityis our friend -- what goes down must surely come back up again and that’s wherepositioning will be key to cash in on some compelling new buying opportunitiesthat have emerged from the latest market train wreck.
Rule 1:Keep sight of the bigger picture
From an oil and gasperspective, we all know the fundamentals haven’t changed enough to justify the25%-30% haircut we’ve seen over the past two weeks.
The world still needsoil, and Canada is going to keep producing it no matter what the futures marketsdo. That’s when it’s a good idea to turn off the TV and think about what’s goingto happen six months to a year from now... instead of what’s on the news latertonite.
The answer? Probably not a lot, given where things sit today. Isthe global economy any better than it was a week ago? Maybe not, but itcertainly isn’t any worse than it was in 2008-09. It’s important to keep someperspective.
Which is all to say that there are plenty of bargains to behad, even if share prices fall into a lower trading range, presenting goodopportunities to accumulate some of the names you already own and maybe broadenthe portfolio with some new picks. Hopefully you kept a nice little stash ofcash, because now’s the time to put it to use.
Battered servicesector outlook remains bright
Not all corrections are createdequal, and some sectors took it harder on the chin than others. Service stockswere already at a seasonal low even before the latest market rout -- it’s justthe nature of the business. The spring quarter is always characterized by downtime due to weather delays and mud so thick it’ll literally swallow trucks andbulldozers (no lie) before picking up again in the drier fallmonths.
Yet, all the big service providers reported relatively decent Q2numbers that beat or exceed what were admittedly low expectations, given aprolonged break-up followed by forest fires and then floods. Even so, it’s notentirely clear why expectations should be so low, given that big pressurepumpers like Calfrac (CFW-TSX) and Trican (TCW) are having a field day, so tospeak, with all the new unconventional shale drilling.
But it’s atrickle-down economy that’s flowing through all sectors of the sevice industry.Precision Drilling (PD-TSX) increased its capital program for the second time inas many months to build new purpose-built shale rigs, so it’s clear that thedemand for specialized equipment and services will remain strong at leastthrough this winter.
New drilling opportunities ontap
Several new plays are on the horizon in both Canada and theUS -- and there’s no sign this trend is going to reverse itself anytimesoon.
Ohio’s Utica shales are the latest liquids-rich rocks to be toutedsouth of the border, with producers like Chesapeake staking out billions ofdollars worth of new acreage in yet another potential Eagle Ford, or Marcellus.There’s already talk of Shell relocating petrochemical plants back to the US totake up all the liquids, which will really light a fire under what is already ahot play.
In Canada, Alberta’s Duvernayis the latest potential blockbuster, after Talisman and Encana both snapped uphuge land positions and announced plans to start drilling test wells later thisyear.
Also, Crescent Point Energy (CPG-TSX) said this week it is plungingahead with the Beaverhill Lake oil play -- another blast from the geologic pastthat’s already produced two billion barrels since the 1950s, and is set to gusheven more with new technology. Crescent Point increased its 2011 capital budgetby 25% to $2 billion, with most of the additional monies going to the BeaverhillLake.
If the new plays prove successful, there’s little doubt drillinglevels are going to pick up in a big way, possibly returning to pre-2006 levelswhen some 25,000 new wells were drilled in Western Canadaalone.
According to Macquarie Securities, the Duvernay may be the mostprolific example yet of a widespread resource play to benefit from hydraulicfracturing. In fact, this may be an ideal time to load up on anything to do withfracking because it’s unquestionably the silver bullet that makes these playshappen.
Producers also stand to gain fromDuvernay
Then there are the producers who also stand to benefit,and some offer compelling -- make that irresistible -- upside after thepull back.
In the same Macquarie report, the brokerage identified severalnames with prominent exposure to the play:
Athabasca (ATH-TSX), Daylight(DAY-TSX), Celtic (CLT-TSX), Vero (VRO-TSX), Chinook (CKE-TSX), Bellatrix(BXE-TSX) and Angle Energy (NGL-TSX) have the best exposure. On the smaller capside, Macquarie says Delphi (DEE-TSX) has the highest leverage relative to itssize, though its lands are in the unproven ‘oil window’ of the play.
Asyou can see the field is ripe for consolidation...
Potential acquisitorsinclude Trilogy (TET-TSX), Sonde Resources (SOQ-TSX), Longview (LNV-TSX),Galleon (GO-TSX), Yoho (YO-TSX) and Terra (TT-TSX). As a group, these are theguys who want to take it to the next level. Last week Galleon appointed formerPenn West boss Bill Andrew as its CEO, a sign things are getting competitive.Penn West pioneered the Cardium, so Andrew is a natural fit for Galleon, andintermediate producers that have struggled to regain traction over the pastcouple years.
Believe it or not, some big majors like Chevron areaccidental tourists in this thing too, given the large historical land blocksthey’ve owned since the 1950s or haven’t got around to selling off. All eyes areon Chevron’s latest Duvernay test well to see if it justifies furtherdevelopment. If it does, look out because this could take off fast. When didmajors ever want a smaller piece of the pie?
Macquarie expects Duvernayto be a major producing play by the end of the decade but that seems to us to beconservative given all the existing infrastructure already in place. Alberta hasenough capacity to move a quarter of all the oil and gas produced in NorthAmerica although Macquarie notes producers will probably want to install‘deep-cut’ processing facilities to get full value for the liquids. It may takea year or two to get moving, but it’s the right thing at the right time as faras getting it out of the ground which is what matters most rightnow.
Taking steps to bulletproof yourportfolio
Investors who go long tend to focus on the speculativegains that come when everything is going right. But it’s even more important tobe able to play the market when it goes down even if it means being a littlemore defensive.
Believe it or not, there are still oil and gas stocksthat provide excellent dividend yields -- Enbridge (ENB-TSX) or TransCanadaCorp. (TRP-TSX) fit the bill -- that are less exposed to daily oil pricegyrations. Sure, they’re more expensive, but blue chips tend to outperformduring a downturn. In fact, they benefit from a downturn because it reduces thecosts associated with big mega-projects, especially in the oil sands.
Or,risk takers can go even longer, because the speculative upside is probably evenbigger today than it was two weeks ago. (When times are good, they’re reallygood; when they’re bad they’re better.) For momentum takers, the rollercoasterride is what’s it’s all about. With markets bouncing 500 points on any givenday, it’s all about catching the right wave.
If you think we’ve alreadyhit bottom, then the only choice is to double down, dollar cost average, andhang on for the ride because it can only get better from here.
As always,keep at least a little cash on hand to take advantage of some bargains or to topoff some of the names you already own.
Happy hunting!
- OGIBResearch Team