It s Going to Take Some Time This Time

Transcription

1 It s Going to Take Some Time This Time Notes for Remarks by: Michael J. Tims Chairman, Peters & Co. Limited Calgary CFA Society 8 th Annual Oil & Gas Forecast Breakfast Calgary, Alberta October 22,

2 It s Going to Take Some Time This Time Relatively unprecedented set of circumstances Due to time allotment, will not try to reiterate that which has been said in the press and well discussed Will try to focus on: The most probable case The big picture Where we perhaps go from here 2

3 The Most Probable Case Governments and central banks have enough firepower to avoid disaster 3 3

4 The Big Picture The creation of large amounts of money, and its expenditure or investment by the U.S. and other countries has significant long run implications for debt, deficits, unfunded liabilities and inflation. However, all of these issues have been temporarily set aside to avoid the world going over the brink, financially. 4

5 The Big Picture There has likely been enough damage done to the real economy to prolong a reasonably severe recession, already in progress. No one knows how long this recession may last. However, the severity of the events leading up to the recession suggest planning should be for a longer (2 year) rather than a shorter, recession (8 months). 5

6 The Big Picture We are seeing the unwinding of an enormous amount of leverage, both business and personal, including at some investment banks, European banks and other financial players leveraged at the rate of 30 or more to 1. (Roughly 3% equity) 6

7 The Big Picture Part of what we are seeing in the world today is the problem of Mr. Micawber (Charles Dickens) Micawber Principle "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." 7

8 In Buffett We Trust Yet, probably the most trusted person in America has a positive long-term view 8 8

9 Big Issues in the Oil & Gas Industry Visible effects of a weaker global economy on demand, and therefore on commodity prices Uncertainty over which price forecasts to use Determining the duration of the recession (and the slower demand) Different drivers for crude oil and natural gas 9

10 My Prior Scenario (Last Few Years) Global supply of energy is very difficult to add; declines of existing global production are hard to replace Global demand for energy will continue to grow in line with economic growth by region (Ex: Asia, Middle East) Risk to oil and gas prices: U.S. or global recession Economists call it the law of supply and demand for a reason Note that it is not the theory or the hypothesis of supply and demand 10

11 World Energy Demand Forecast to Grow at 2.0% per Year By Fuel By Region Other Nuclear Africa Middle East Central and South America MMBOE/d Coal MMBOE/d Non-OECD Asia Non-OECD Europe and Eurasia 100 Natural Gas 100 OECD Asia OECD Europe 50 Oil 50 North America Source: Energy Information Administration 11 11

12 Global Liquids Demand Can the Global Oil & Gas Industry Keep Up? Global Demand MMBOE/d OPEC Canada Other Non-OPEC / OECD 20 Non-OPEC / Non- OECD Source: Energy Information Administration 12 12

13 My New Scenario Global recession has set back the date for the collision of slowly growing supply and faster-growing demand Lots of impacts from this setback alternative energy; hybrid/electric cars; conservation Markets do a better job of short-term events and crises than long-term ones The long-term energy supply/demand challenge has essentially not changed (unless one s forecast is for depression) 13

14 Implications For Oil & Gas Companies Oil and gas and oilfield services share prices, over time, tend to reflect the underlying commodity prices 14

15 Commodity and Share Relative Price Performance 1, Blended Commodities P&Co. 100 Index Note: Commodities are blended 25% light oil, 25% heavy oil and 50% natural gas 15 15

16 Implications for Oil and Gas Companies Thus shares are appropriately valued if commodity prices stay in current ranges Undervalued if you believe in the supply/demand collision when the economy revives Overvalued only if commodity prices crash from here 16

17 Premium/Discount to After-tax NAV as at October 20, 2008 (over 50 MBOE/day) 20% 10% 0% -10% -20% -30% -40% -50% NXY TLM APC SU HTE.UN CNQ DVN PWT.UN ERF.UN BNP.UN APA AET.UN PGF.UN ECA EOG Corporate Trust

18 Premium/Discount to After-tax NAV as at October 20, 2008 (under 50 MBOE/day) 40% 20% 0% -20% -40% Corporate Trust -60% -80% SAB EBR TBE CMT MXL BEN HPX YO PSX OEX ZAR.UN ITX CR POU TET.UN NAE.UN PEY.UN PMT.UN VET.UN NVA FEL CLT TOG PGX.UN SEO BTE.UN BIR PXE

19 Major Market Concerns Market is very skeptical of companies with major capital requirements over and above cash flow, cash balances, and established credit lines (oil sands; North Sea; any major project; unless in very strong hands) Investors and acquirors still having lots of trouble with oil and gas price forecasts What forecast is reasonable and prudent? Previous forecasts of a major recovery in oil field services in Q4/2008 and Q1/2009 are becoming more subdued 19

20 Western Canadian Rig Count Number of Rigs On Track with Five Year Average Year Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 20 20

21 Major Market Concerns Some worries about Alberta land sales and conventional oilfield activity levels in 2009 Land prices lower because companies bid based on the total return (including new royalties) B.C. and Saskatchewan have some of the hot plays 21

22 Year-to-Date Western Canada P&NG Land Sales Lots of Capital to B.C. and Saskatchewan 4,500 ($ millions) 4,000 3,500 3,000 2,500 2,000 1,500 1, Saskatchewan B.C. Alberta

23 Major Energy Market Concerns Some worries about natural gas prices for 2009 Significant additions to U.S. reserves and production in recent years - effectively capping prices LNG in North America less of a worry, though, as it is more attracted to Asian and European markets by higher prices 23

24 US Marketed Natural Gas Production 62 Natural Gas Production (Bcf/d) E 2009E Source: Energy Information Administration 24 24

25 US Natural Gas Production by Region MMcf/d 9,000 8,000 7,000 6,000 5,000 4,000 3,000 Appalachia West Texas Overthrust Greater Natural Buttes Pinedale/Jonah Powder River Basin Woodford Shale Piceance Basin Fayetteville Shale Barnett Shale 2,000 1, E 2009E 2010E 2011E 2012E Source: Energy Information Administration 25 25

26 Most Probable Case One to two somewhat subdued years in the oil and gas industry; then back on the prior track Not a disaster for the next two years; just less buoyant Lots of opportunities coming out of this, but care is needed in trying to capture them Businesses and individuals need to watch their liquidity first; debt will be reduced in many sectors of the economy Those with long-term money (pension funds, endowments, large corporations) can start finding new investments, any time now, and average in Most others will likely wish to see more evidence of the bottom, and the time frame to recovery 26

27 Conclusion So it s one more round for experience And I m on the road again And its going to take some time this time Carole King Michael J. Tims October 22,