As promised, this week’s edition is all about forecasts. It’s about good forecasts, bad forecasts, stretch forecasts, random thoughts and vague justifications. But mostly, it’s about the Fearless Forecast, 2017 edition.

 

I call it the Fearless Forecast because unlike many pundits and professional prognosticators, the accountability for these picks is truly my own. I expect no one to invest on the basis of any statements I make (I mean seriously, why would you?), nor do I expect to be laughed out of the room.

 

Instead, I present my best guess, based on observation, research, gut feel and, quite frankly, wild-ass guessing as to how the year may or could unfold.

 

In that light, the following is the Fearless Forecast, separated into the convenient categories of “Broad Themes” and “Actual Numbers and Stuff”

 

Broad Themes

 

I suppose before I start, the key assumption or forecast is that we aren’t about to trip into some apocalyptic WWIII conflict triggered by some random midnight Trump Tweet sent to either China or Russia, a risk which some on the left consider a certainty. Me on the other hand, I have come to see these as less a threat than many people think. While no doubt a pointy stick, and an expression of some form of generic policy, these tweets increasingly reveal themselves to be less about the target and more about the audience, a form of pandering to the faithful to keep the fires burning. It’s the entertainer and carnival barker/con man in Trump keeping his marks engaged to distract from the mendacity of what the rest of his team is doing, which is implementing a nationalist, America first, job protecting, national security oriented agenda and unwinding some of the perceived progressive over-reaches of the previous administration. Maybe not everyone’s idea of “presidential” communication, but unlikely to cause Armageddon.

 

Note too, that I reserve the right to revise my forecast if any more damaging stuff about Trump “leaks” before inauguration day.

 

All kidding aside, the Trump movement matters because it isn’t isolated.

 

Globally, we expect to see the continued evolution of the new nationalist, mercantilist, anti-free trade and globalization wave, particularly in Europe as the ripples from the Brexit vote and the election of Donald Trump register as waves in countries such as France, Germany and the Netherlands. The outcomes of elections in these countries will have a significant impact on the direction and future of the European Union and should be closely monitored. I expect these right wing movements to wane somewhat for reasons discussed below.

 

In the United States, we should expect to see the implementation of policies designed to bring jobs and investment back in-country, punish companies that don’t repatriate profits and jobs and generally lower taxes to make America a more competitive business environment. On top of this is expected to be a broad push for infrastructure investment and a liberalization of regulations in the energy sector.

 

It should be pointed out that the main focus of the anti-trade rhetoric is China and Mexico. While it is unlikely that the North American Free Trade Agreement will be tossed into the trash, the reality is that renegotiating it was a key plank in the Trump platform and Canada needs to be prepared for the fallout. The Trudeau government has done what it can at this stage to prepare, via a Cabinet shuffle and outreach to the new Trump administration but at the end of the day, we all wait.

 

Before getting all panicky about it, it is important to remember that Canada was mentioned maybe 3 times during the entire election campaign, so we aren’t the target. The US does not have a trade deficit with Canada and the interconnectedness and inter-dependence of the economies of the key states that elected Trump and the Canadian manufacturing heartland should reassure us somewhat that our interests are also the interests of Trump’s supporters. From an Alberta perspective, let’s face it, Trump is all good news. An opened up energy sector will provide myriad opportunities for Canadian producers and service companies to participate in the continental industry and we should expect movement on Keystone XL within the first 100 days of the Trump administration.

 

So broad theme – expect to see duties, tariffs and economic actions targeted at those countries where the US has a very large trade deficit (hello China, we are ALL looking at you) and while some Canadian industries may get caught in the trade crossfire, we should make it through 2017 at least relatively unscathed.

 

On the national security front, expect a more brash projection of American power, but nothing along the lines of George W. Bush nation building or Clinton style interventionist meddling. Expect something more of a “the United States is back and don’t even think of testing us” positioning. Call it Obama with follow through. The American “pivot” to Asia is going to be challenged by a possible trade battle with China and with ISIS and terrorism being a high priority, expect to see foreign policy attention focused toward the Middle East. The appointment of Rex “Rexxon” Tillerson to Secretary of State is a pretty clear signal that the Trump administration wants better relations with Russia, but expect more of a tentative rapprochement and friendly detente as opposed to the Trump/Putin bromance many expect and a more aggressive stance projected out to Iran and problematic Middle Eastern states.

 

The de-escalation of fighting in Syria and gains against ISIS in Iraq should slow down the waves of refugees and immigrants around the world and allow a little stability to return to both the Middle East and a blunting of the edge of right wing nationalism in those European countries that have been the recipients of this immigration, which may in fact mark the beginning of the end of the nationalist trend which at its heart is driven by insecurity and fear of the loss of nationhood to the other.

 

The wildcard in all of this I think is Turkey, the intersection of Europe, Asia and the Middle East. Of course it has been this way for thousands of years, but it will be the ability of the Turkish government to manage its domestic terrorism issues, economic malaise, clear human rights abuses and abandoning of democracy against its NATO membership, EU aspirations and Russian rapprochement that will be a critical piece in European, Middle East and Central Asian security for decades to come. A destabilized Turkey is a major issue for global security.

 

On a less ominous note, I am thinking that 2017 will be the year that the green wave finally crests. I am not saying that the environment doesn’t matter, nor am I opining on CO2 levels or climate change. The cresting of the green wave simply means that the receptivity to the dire warnings of impending climate doom is waning and that the ever more shrill and reactionary protests against any and all energy developments are falling increasingly on deaf ears – we’ve heard it, we get it. If there is any lesson from Trumpism, it is that people are concerned about the here and now, and are much less aspirational than the progressive set expects, which I suppose happens with rampant income inequality and under-employment. The alarm bells of climate doom just don’t sound as loud in the current political climate and as the voices get muted in the United States, there are fewer and fewer places for that outlet aside from Canada and even we appear to be getting on with it. The election of Donald Trump is, in a nutshell, a complete disaster for the Climate lobby although not necessarily a disaster for the climate. Perhaps when the rhetoric calms down a bit there is an avenue for progress, but it’s going to be on “Trumpist” terms, not the environmentalists.

 

Actual Numbers and Stuff

 

Production and the Price of Oil

 

As with last year, I will address production by broad region – OPEC/Non-OPEC/North America

 

We expect that in the short term OPEC will meet its targeted cuts in production. There will be tremendous temptation to cheat, but the reality is that the only country that actually has the ability to increase production and cheat materially is Saudi Arabia and since this is their cut, the likely of them cheating themselves is pretty much zero. Expect OPEC production to exit next year at about the same level it started this year – 33.1 million barrels.

 

Russia is always is a wild card, but 11 million barrels a day of production is going to be hard to sustain. Russia’s promised cuts are being met by weather-induced shut ins and natural declines and they will be hard-pressed to exceeed that, so I see no real growth there.

 

Expect non-OPEC production such as the North Sea and South America to be relatively flat year over the year as the lack of investment in exploration since 2014 means little new production will be brought on line. In addition, most of the productivity gains from existing fields are “in the bag” meaning natural decline rates will start to catch up. South America has great potential but that is several years off. It is unlikely that China restarts some of the older fields it shut in when it has so much access to lower cost quality grades from the Middle East and Russia.

 

Much has been made of the “65% increase in rig counts” in the United States since midsummer, but to keep things in perspective, the number of rigs is still at one-third of the peak and it took that amount of rigs drilling non-stop for three years to reach the production levels we saw in 2015. To expect a massive resurgence in US production in 2017 is a major stretch. I expect the US to add about 300,000 to 400,000 barrels a day of production in 2017 – significant but not a game changer. This number will be impacted by the availability of capital and manpower and rising costs will be a natural regulator on activity. Efficiency gains have a way of disappearing quickly when pricing power returns to the service company.

 

Canadian production is expected to show stable to moderate growth, much the same as the United States as capex gets loosened up. Look to Canada to add at least 100,000 barrels of production in 2017.

 

As it regards the price of oil, it is inventory numbers in the OECD and specifically the US that need to come down to allow the price of oil to truly rise and we are likely looking at the second half of 2017 for the OPEC cuts to start to be reflected in these numbers. Although once they take hold, the 2 year holiday on exploration and lack of spare capacity may bite pretty hard at that time and cause prices to spike. The call is for pretty choppy pricing in the $48 – $55 range for the first 6 months and a possible run up to $65 to close the year. Average price for the year will be $55.

 

Price of Natural Gas

 

Yay! Gas! As was been postulated here previously, natural gas was the top performing commodity of 2016 and we expect that positive performance to continue into 2017. Notwithstanding an increasing rig count in the United States and Canada and associated gas production from a renewal of tight oil drilling, the demand profile for gas in a growing US economy suggests continues strength in this market. This demand profile is further supported by the continued construction of export facilities (existing LNG plants and current and under-construction pipelines to Mexico will consume close to 20% of US production) that suggests that there is some stability under gas prices that hasn’t been there for a number of years. My year-end forecast for gas is $4.50 per MCF at an average price for the year of $3.50.

 

Activity Levels
On the Canadian side, we have forecasts from PSAC of 4,175 wells and CAODC of 4,665 which represent growth over 2016 of 10% and 30% respectivelyt, but still underperforming 2015 by a wide margin. With the benefit of an extra three months of news cycles, a Trump election, major capex revisions and an OPEC production cut, plus no accountability whatsoever, I will confidently predict that Western Canada will easily surpass 5,000 wells and may in fact come close to the 2015 total of 5,400 if pricing holds. That said, it will be a barbell scenario with a tremendous amount of activity in the current drilling season, a hard stop at breakup and a gradual re-inflation over the summer and into 2018.  The majority of the activity is expected to be concentrated in the Montney/Duvernay/Viking fairway with the balance in Saskatchewan – another barbell. Oilsands activity is expected to be focused on production maintenance and modest brownfield development until prices stabilize above $55-$60 a barrel.
Implicit in these numbers is a significant expansion in upstream capex, likely in excess of the 10% number being floated in the media and closer to the 21% projected expansion in capex the US is expecting to post. Far from the heady days of 2013 and early 2014, but more than enough to put food on the table for tens of thousands of under-employed energy sector participants.

 

M&A Activity

 

Along with the projected increase in activity levels we expect the level of M&A activity in the service sector to be up smartly in 2017 across a broad cross-section of industry subsectors (i.e. rentals, infrastructure, midstream service) as companies position themselves to take advantage of the upstream recovery and the volume of infrastructure projects and deferred maintenance. While a lot of this activity will depend on the availability of capital from gun-shy Canadian banks, the availability of alternative capital in the form of specialty lenders and private equity will allow bold teams to proceed with their plans.

 

On the E&P side, we expect a pause in M&A as many producers bask in the beautiful warm sunshine of higher prices before some jockeying for position resumes in the second half in anticipation of Pacific Northwest LNG and some American firms, frightened by the Permian premiums come shopping north of the border.

 

Finally, right?

 

Canadian Dollar

 

Notwithstanding the level of prices for oil, expect the Canadian dollar to remain under pressure for much of the year as the US Fed continues to pursue its policy of incremental rate hikes and continued uncertainty of Trump economic policies vis-a vis Canada conspire to sink the loonie. $0.75 seems to be the trading range we will be forced to live in for the time being, although any significant growth in the oil patch might help it climb to the $0.80 range.
Infrastructure

 

With the approval of Trans Mountain Expansion (now by BC as well), the Line 3 Replacement and the Pacific Northwest LNG facility, all eyes turn now to the hearings for Energy East. The first two projects are expected to break ground in 2017 and the LNG plant is awaiting a final, final, final investment decision by the proponent by mid-year. I know people think the LNG is a long shot, but I can’t help but believe that no one in their right mind would invest that much time and effort in this thing without follow through, especially in a rising market.

 

What was that? Keystone XL? Well I’m willing to bet that this one, back from the dead, may be the first to actually get underway. Anyone want to bet against me?

 

Stock Picks
In keeping with last year, I am picking two Canadian producers, two service companies and two US companies that I think will benefit this year.

 

Canada

 

Tourmaline. Yes, I know. It’s obvious. But it’s obvious for a reason. And I can’t choose Peyto again. This is a company and a management team that continues to do great things in a growing market area and is recognized as one of the top gas producers in the WCSB.

 

Torc Oil & Gas. Oil weighted intermediate producer. Properties in NW Alberta and Saskatchewan/Manitoba so well placed in my “activity barbell”. Low leverage and trades at a discount to its peer group.

 

Total Energy Services is my pick for upstream service company. Notwithstanding the difficult transaction it is pursuing with Savanna, Total Energy Services is the 800 lb gorilla of the surface rental market. It is a well-run and managed company with depth and breadth of service offerings and is well positioned to take advantage of the new “less vendors please” ethos of E&P procurement departments. With low debt and excellent financial flexibility, Total nonetheless trades at a discount to its peer group.

 

The second pick is one of only a few publicly traded upstream and downstream construction companies positioned to profit from the upcoming infrastructure frenzy. While not focused on big-inch projects such as Transmountain and LNG, Macro Enterprises is a significant player in the most active part of the WCSB and will benefit by both the upstream recovery and the demand for resources created by all these new projects. I could have easily picked PetroWest for this one, but Macro is a purer play.

 

United States

 

Continuing my theme of infrastructure, my service pick in the United States is Quanta Services. Quanta is one of the premiere contractors to the electric power industry, and the transportation of natural gas, oil and other pipeline products. With operations in the United States, Canada and Australia, the company is well positioned for the upcoming expansion of investment in the energy industry.

 

EQT GP Holdings is a natural gas producer based in the United States with a significant interest in the Marcellus which is the highest growth gas play in the Continental US. Another low debt company that trades at a discount to its peers, the company will benefit from the growth in the natural gas industry both through its production company but also through its midstream company that operates gathering, transmission and storage facilities for natural gas in its operating region.

 

Okay, that’s it. I’m exhausted. What? You want more? OK, rapid fire round!

 

Super Bowl – My head says New England over Green Bay. My heart says Kansas City over Green Bay. Go with the latter. Dallas is out this week. Alex Smith wins a Super Bowl. Sorry Kim.

 

Stanley Cup – Montreal Canadiens. Was there ever a doubt?

 

NBA Championship – Cleveland Cavaliers

 

Calgary Mayor – Nenshi for a third term, but some unnamed opponents will press him hard on taxes.

 

Tax cuts in the US – for sure.

 

Tax cuts in Canada – you’re kidding right?

 

Who wins the Donald Trump/Meryl Streep cage match? I think I can safely say that the viewers are the winners.

 

That’s it. I look forward to feedback, criticism and witticism.

 

Prices as at January 13, 2017 (January 6, 2017)

• The price of oil dipped sharply then rallied at the end of the week on improving confidence OPEC would live up to their deal.
  • Storage posted a large increase
  • Production posted a large jump
  • The rig count in the US and Canada continues to grow

• Natural gas was volatile during the week as milder weather reduced bullish sentiment, but finished up on solid draws

• WTI Crude: $52.49 ($53.99)
• Nymex Gas: $3.415 ($3.285)
• US/Canadian Dollar: $0.7623 ($ 0.7563)

Highlights

• As at January 6, 2017, US crude oil supplies were at 483.1 million barrels, a increase of 4.1 million barrels from the previous week and 31.9 million barrels ahead of last year.
  • The number of days oil supply in storage was 28.8, behind last year’s 29.2.
  • Production was up for the week by 176,000 barrels a day at 8.946 million barrels per day. Production last year at the same time was 9.227 million barrels per day. The change in production this week came from a small reductions in Alaska deliveries and a big jump/revision to lower 48 production.
  • Imports soared from 8.167 million barrels a day to 9.052 (the highest since 2012), compared to 8.188 million barrels per day last year.
  • Refinery inputs were up during the week at 17.107 million barrels a day
• As at January 6, 2017, US natural gas in storage was 3,160 billion cubic feet (Bcf), which is on par with the 5-year average and about 10% less than last year’s level, following an implied net withdrawal of 151 Bcf during the report week.
  • Overall U.S. natural gas consumption was up 27% during the week as cold weather set in and demand increased across all sectors
  • Production for the week was up 2% and imports from Canada rose by 14% from the week before in response to cold weather
• As of January 9, the Canadian rig count was 252 (39% utilization), 188 Alberta (42%), 23 BC (32%), 37 Saskatchewan (32%), 4 Manitoba (27%)). Utilization for the same period last year was about 25%.
• US Onshore Oil rig count at January 6 was at 522, down 7 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was up 1 at 136.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 50%/50%
• Offshore rig count was up 2 at 25
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• The BC government announced that its 5 conditions for approval of the Kinder Morgan Transmountain Pipeline expansion had been met
• Jane Fonda came to Fort McMurray and Edmonton to lecture us about fossil fuels. Scantily clad in a form fitting one piece shimmering green body suit and matching gogo boots, the laser gun toting Queen of the Galaxy did her best to disabuse us of our fossil fuel addiction and promptly returned to her mansion in Beverley Hills to record an exercise video
• Saudi proxy Suhail Al Mazrouei, the Energy Minister for the United Arab Emirates, suggested that $50 may still be too low a price for OPEC. The group said it would review the output cuts in May to determine whether additional cuts were warranted.
• Trump Watch: Not just wikileaks anymore, golden leaks! Seriously, this whole thing can’t get any weirder, it reads like my 8 year old got hold of a copy of All the President’s Men and crossed it with Captain Underpants and the Terrifying Return of Tippy Tinkletrousers (note – this is a real book). Honestly, for the sake of all that is well and good, can we please just make it through the next week with some sense of normalcy? Please?