Northern Blizzard - an investable Canadian oil sand business with a cool name

Canadian oil sand production is as expensive as U.S. shale production while often realizing discounted pricing to WTI prices. The lower prices are due to the heavier nature of most Canadian produced oil. Only 25 % of Canadian produced oil is conventional light oil. In order to find a Canadian oil production company investable it is therefore critical that it produces oil at the low-end of the Canadian cost curve. On a more positive note Canadian producers are experiencing lower operational costs than their U.S. counterparts due to the depreciating CAD.

Graph # 1: Mid-cycle breakeven price Canadian oil sands vs. U.S. shale

                               Source: Scotiabank Equity Research

In terms of mid-cycle breakeven economics Norther Blizzard may have one of the best field portfolios out of any Canadian oil sand production company (Graph #2). Furthermore its focus assets which represents 55 % of the company´s current production can bolster an impressive full-cycle return potential even at sub USD 40 WTI prices (Graph #3). These assets alone are expected to double the company´s production from 20k boe/d to 40k boe/d within the next 5 - 6 years. In other words one may consider Northern Blizzard to be a growth case in the mid- to long-term, even at lower than expected oil prices.

Graph # 2: Mid-cycle breakeven economics Northern Blizzard fields (red) vs. peers

                            Source: Northern Blizzard

Graph # 3: Project economics Northern Blizzard focus assets

                              Source: Northern Blizzard

With the current depressed and volatile oil prices it is crucial for any oil producing company to have a healthy balance sheet. Additionally any price hedges made at high prices is beneficial. According to Gurufocus.com Northern Blizzard has a Equity to Asset ratio of 0.6x and a 2016 year end Net Debt to Operational Cash Flow ratio of 2.4x. Furthermore the company is within the boundaries of its debt covenants (with a huge buffer) while having a USD 475 million borrowing base, currently undrawn. Northern Blizzard is also supported by two renowned Private Equity investors: New York-based Riverstone Holdings LLC and Irving, Texas-based NGP Energy Capital Management LLC. The company also has one of the most healthy price hedging programs in place among its peers (Graph #4).

Graph # 4: Northern Blizzard vs. peers 2016 price hedging

                              Source: Northern Blizzard

In terms of pricing the company looks dirt cheap with a Price to Book ratio of 0.4x vs. the industry median of 0.85x and vs. its historic median of 0.75x since its 2014 IPO. The company stock is down by more than 80 % since the IPO. As previously mentioned please note that making a play on the oil industry is currently not for the faint-hearted. You should expect high volatility and at times great unrealized portfolio losses. In order to make this play you have to be a patient long-term investor who can handle crazy volatility.

Disclosure: I am long Northern Blizzard Resources Inc.

I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Oil stocks do's and don'ts

According to BP´s annual energy outlook analysis oil prices may make a comeback to 110 USD/bbl within five years due to continued demand growth in combination with slowing none OPEC supply growth (see graph below). Oil related stocks should therefore offer great value as Brent Crude currently is trading at 30 USD/bbl. However there are some pitfalls when looking for value within the main three oil related segments: E&P, human capital intensive oil service and hardware intensive oil service. The main pitfalls are liquidity/ bankruptcy risk and pricing.

In my opinion you should not avoid the high-risk hardware intensive oil service companies. Instead you should construct a highly diversified portfolio of companies within all three main oil related segments as you want to take advantage of irrational pricing within all segments.

What to look for in oil related companies:

• Low P/B ratio vs. industry and history 
• Some of the oil majors have stretched valuations taking the current situation into consideration. If you want to make a play on the current low oil price you should avoid expensive E&P companies. Instead look for cheap E&P companies with low production costs and low CapEx commitments. If you dare you may want to take a look at Russian E&P companies.
• Low bankruptcy risk
• There is no point in buying cheap companies if they go bust or have to restructure and dilute. 
• Investors should screen for companies with:
• High cash to debt ratio vs. industry and history
• Solid equity to debt ratio vs. industry and history
• Solid interest coverage ratio vs. industry and history
• Positive or flat free cash-flow to equity

Please note that making a play on the oil industry is currently not for the faint-harted. You should expect high volatility and at times great unrealized portfolio losses. In order to make this play you have to be a patient long-term investor who can handle crazy volatility. 

FYI: If you own Seadrill stocks you should probably sell and take your losses while you still can. 

Oil demand vs. supply in 2035. OPEC will have to pick up the supply slack:

                                 Source: BP p.l.c.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it.

Insiders are buying energy stocks hand over fist

I am not the only one who is bullish on the energy sector in the mid-to long-term as insiders and energy company CEO´s have been buying stocks in their respective companies hand over fist the last couple of quarters. According to Gurufocus the XLE (US Energy Select Sector index) insider Buy/ Sell ratios were 7.73x, 4.25x and 2.06x for Q3-15, Q4-15 and January 2016 respectively. Energy company CEO´s were even more bullish, boosting insider Buy/ Sell ratios equalling 13.82x, 9.13x and 1.67x for Q3-15, Q4-15 and January 2016 respectively. As Graph #1 below illustrates the energy insiders have been good at timing the market in the past as they purchased a lot of shares at the trough of the financial crisis and during the 2011 - 2012 slump. Post spikes in the XLE index insider Buy/ Sell ratios the XLE index have tended to appreciate significantly.

A company insider is defined as a senior officer or director of a publicly traded company, as well as any person or entity that owns 10 % or more of a company´s voting rights. A Buy/ Sell ratio above 1x indicates that insiders are buying more shares than what they are selling in their respective companies. 

Graph 1: Insider Buy/ Sell ratios and XLE index development

                               Source: Gurufocus

Graph 2: CEO Buy/ Sell ratios and XLE index development

                               Source: Gurufocus

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it.

Statoil on track with scrip dividend and efficiency measures

• Statoil has suggested to offer a scrip dividend which will enable shareholders to choose if they want to be paid dividend in cash or by 5 % discounted newly issued shares. The move has to be approved by the majority owner (Norwegian government) who has expressed that it supports the suggested dividend policy. 
• Statoil shares were surging in today´s trading as investors reacted positively to Statoil´s efficiency and cost cutting programs. Statoil delivered USD 1.9b in cost cutting one year ahead of plan (original cost cutting target was USD 1.7b for 2016). 
• The company stated that there will be no more job cuts, although they will keep their focus on efficiency measures and cost cutting. Furthermore they have reduced the average break-even price per barrel from USD 70 to USD 41 for non-sanctioned projects with start-up by 2022.
• Statoil plans to cut capital expenditures by 12 % in 2016 compared to 2015. A reasonable measure considering the current state of the oil price.

I previously criticized Statoil for borrowing money in order to pay dividend instead of spending the borrowed cash on positioning the company for the next bull market: Oeistein Helle: Statoil fires thousands of employees while borrowing billions to pay dividend

The above mentioned scrip dividend, alongside efficiency measures will improve the company´s cash position and enable Statoil to be opportunistic regarding attractive opportunities in a buyers market going forward. Thus the measures mitigates a lot of my concerns in my previous post. Furthermore Statoil stated that they will stop job cuts, which will enable the company to keep valuable in-house competencies. I am now a lot more confident regarding Statoil´s positioning ahead of the next bull market. 

Statoil strategy to capture value in upturn:

     Source: Statoil ASA

Disclosure: I am long Statoil ASA.

I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it. I have no business relationship with any company whose stock is mentioned in this article.