Another three months gone by and it is time yet again to review where I am in my forecast. While I hate to pat myself on the back (pat, pat), I have to admit I am feeling more than a bit excited that for once I may have underestimated the commodity price deck. Given how badly I have whiffed on natural gas for the past 6 years, this turnabout is totally fairplay.
On the other hand, these high commodity prices are wreaking havoc with global energy complexes, manufacturing, pocketbooks and, perhaps, world peace. Or at least peace in the UK, where petrol is being rationed and people are actually fighting over it while their government, in a moment of enlightenment is attempting to get rich nations to agree to phase out public financing of fossil fuel projects. Whatever that means. Maybe ask the power plant in Germany that ran out of coal how they feel about that.
At any rate, the game is afoot. And there are picks and calls to analyze. The reflation trade is underway and commodities are ruling the roost. And thus typically means great things for Canada in general and Alberta in particular. As long as we don’t screw it up.
Oh, another milestone too today. It is the first day of operation for the dreaded Line 3 replacement project. That’s right. It’s open baby! Special thanks to… Ugh. Wait. Justin Trudeau? Really? Crap. I forgot he approved it. That and the TransMountain. And Coastal Gas Link. WTF. What is up with this Trudeau character and all these pipelines? Doesn’t he realize we are all going to be driving EVs to our jobs at the windmill factory in two years? Who needs pipelines and LNG and oil anyway.
What’s that? Everyone? Well I guess we better start spending money finding that stuff or call OPEC or something to get them to ship more.
Oh right, never mind. I forgot we had centuries of supply right here in our own backyard. Phew. Maybe that explains the pipelines?
Who really knows. But you know what “they” say, out of volatility and high prices comes opportunity (or chaos, but that’s just splitting hairs) and as I look at our business and try and crystal ball the next twelve months, I see an exceptionally busy time, filled with significant potential for all parts of the Western Canadian economy, but most importantly, for the energy sector writ large, which is a good thing, isn’t it?
At any rate, back to the matter at hand.
The nine-month review. This is the time of year when all of the forecasts start to crystallize and I can get a clearer view of where I may end up in January when the dust settles. And as I mentioned above, as it regards energy prices, I’m pretty jacked, but the rest of it? I haven’t paid much attention. And for sure my stock picks are going to crush my spirit.
Okey-dokey, enough blather and lead in. No more hiding.
It’s time to face the music, pay the piper, grin and bear it, face the facts, bite the bullet, take my lumps and swallow my medicine.
So here goes. Q3. Deal with it.
Broad Themes
Politics and Stuff
Last year, civil unrest and the US Presidential election was my pick to be front and centre on the North American and global front for the course of the year.
This year I figured it wouldn’t be much different and posited that without his presence on social media (banned from Parler, Twitter, Facebook, YouTube, Tiktok, SnapChat, Instagram, Shopify, MySpace) the influence of Trump that Trumpism, such as it is, would eventually die out.
As the first nine-ish months of the Biden presidency have unfolded, it has in fact been quite refreshing to have Trump in the background and fading with none of his range of sycophants and family possessing even a fraction of his charisma or ability to command the limelight.
Jack Dorsey’s single most impactful contribution to civil society may not in fact be Twitter, but rather the decision to cut Trump off from it.
That said, there has been a gradual reinflation of Trump noise, from his ridiculous letters that he sends out (“from the desk of Donald J Trump” – good lord) to a few rallies and photo ops and his sycophants are continually trying to kiss his grits, but even this seems to be dying down and replaced by just pure animal partisanship that is threatening to paralyze the US government. Or at least make it default on its debt. You know, small stuff.
Following that theme, another comment I made was with respect to the fracturing of the Republican party. Unlike others, I don’t view it as permanent and I see it being put back together but at this stage, no leader has yet emerged with the chops to pull off any rebuilding effort. Time will tell and a third party could yet emerge, but so far, Q whackos aside, the party is holding together. Meanwhile, individual Republican led states are taking their revenge on an electorate that dared to support the Democrats and are systematically dismantling as many voting, civil and women’s rights as they can before the electorate figures them out.
I predicted that the lesson of course will be lost on Canada’s conservatives who are also fracturing, even if they don’t know it. Weak leadership and pandering to the fringes is a recipe for disaster that Canadian conservatives are all too familiar with such as the PC/Reform/Bloc/CCRAP/CPC evolution and our very own PC/Wildrose/UCP and resultant Humpty Dumptying. Don’t even get me started on the Maverick and PPC clownshows.
Against this backdrop is my biggest US forecast, namely that Biden will deliver, in my estimation, the single most boring US administration in memory.
Joe Biden’s mandate is clear. Manage through the rest of the pandemic, restore the economy, which is in much worse shape than anyone wants to talk about, rebuild the US brand internationally and create a sense of unity and common purpose around all the preceding. It is a tall task for a president who probably should be taking afternoon naps at this stage of his life, but it’s his moment and it sure hasn’t seemed too big for him yet. Stimulus, infrastructure, vaccines. So far he’s on plan.
Sure, there will be continued protest and conflict. It’s a big diverse country with many opposing viewpoints. The pull-out from Afghanistan was a disastrous mess, but a majority of Americans (on either side of the aisle) wanted the 20-year, multi-trillion dollar effort over. But starved of oxygen, I don’t how Trumpism survives. Reality is I don’t believe that deep down anyone actually wants it to anyway – even the most ardent supporters. It’s just too damn exhausting.
Here in Canada, I boldly predicted that we are about to have (another) Federal election. My reasoning? Because the Liberals are sharks while the opposition is basically a couple of muppets with paper cuts flailing in the water. My reasoning was that if the tide turns against the pandemic with vaccines and cash, then that is the time to engineer an election as opposed to when the bills come in.
Turns out I was right. Yay me! My other prediction was a Trudeau/Liberal majority (whoops!) and Trudeau quits by year end and PM Freeland takes charge. Clearly a swing and a miss on the election result, but there is still time for him to stand down. A second minority government with even less popular support isn’t a real vote of confidence. Plus he took a trip to walk the beach in Tofino. Maybe it’ll snow while he’s there.
I predicted 2021 should see a return to and continuation of some regional tensions.
The Iran crisis, which has been ongoing for more than 40 years will continue to percolate. A robust nuclear program is their goal and they will challenge Biden early. So far, Iran has not disappointed but then again Biden is actually more of a badass than they bargained for. The nuclear deal renegotiation is stalemated and they are enriching more uranium than previously thought. Time to turn up the heat.
China is the elephant in the room. Donald Trump’s unilateral and confusing approach to China did absolutely nothing to rein in this emerging superpower but the steps taken so far by Biden appear to have restored a quiet détente with the new yin to America’s yang. Hong Kong is lost so attention needs to be placed on Taiwan, Africa and South America to stem Chinese influence. The recent plea deal with the Huawei CFO and subsequent release of Canada’s two Michaels just underline how dealing with China going forward is going to be purely transactional.
Russia is a big deal to the United States and Europe and a lesser deal to other countries around the world. I predicted that despite aspirations, Mother Russia will soon find itself increasingly hemmed in by a vengeful US government intent on exacting its pound of flesh for election interference and systems hacking, not to mention questionable loan guarantees to failed real estate developers. The prediction was that it may not be in 2021, but Putin is on his way out. You can only assassinate so many people.
Venezuela, which is in its 1219th year of economic stagnation seems destined to fall off the collective radar of powers that should want a peaceful resolution. This could create a vacuum that leads to conflict in South America.
Another area to watch for conflict and humanitarian crises is Africa, whose countries comprise at least half of the top 10 humanitarian crises list for yet another year. Whether it’s starvation in the Democratic Republic of Congo, sectarian violence in Ethopia, Nigeria, Burkina Faso and South Sudan, 2021 promises to be a volatile year for the whole continent.
Grade: So far in 2021, I will give myself a B-. The energy crisis is altering the landscape globally so we need to take a wait and see approach.
Energy and Environment
On the energy and environment front, I predicted that 2021 was going to be a year of transition.
How’s that for risk taking?
My theme for the year was going to be ESG and renewable energy as the Biden administration rejoined the Paris Accord, rolled out its massively ambitions green infrastructure agenda and the world continues to ambitiously pursue a net zero by 2050 agenda.
So far so good! Except for all the energy scarcity, supply hoarding and pleading phone calls to OPEC, I had it all perfect.
To be fair though, I did highlight the role for oil and gas in the energy transition and pointed out that pandemic ravaged capital programs are leading to pockets of energy shortages. Like all just in time worlds, while globally we may have access to ample supplies, local crises (like a cold snap or heat wave or hurricane or supply chain disruptions) can have lasting impacts.
Stop spending here, create a shortage there and cause a mini-boom in yet another place. I predicted quiet in the Permian (a slow recovery) but a big comeback for Canada’s oilsands in 2021 and 2022 – at least for shareholders. While we do tend to float under the radar a bit too much, Canada’s Free Cash Flow vomiting producers are ignored at your peril.
Finally, continued retirement of coal and nuclear generation facilities in the United States (2021 is going to be a BIG year for this) and abroad cannot be serviced by renewables alone which means that gas-fired generation will have to play a role. Or the lights go out. Like I actually said that. Are you paying attention to my predictive skills yet Texas? California? Germany? United Kingdom? China? Anyone?
So, a renewed focus on energy transition, ESG and a bull market for natural gas and Canadian Oil Sands.
Grade: Bro. This is a win. A.
Price of oil
Every year this is the flagship call. It is the Toronto Maple Leafs of forecasting. Always looks good to start and then completely craters as the year unfolds.
First off, I predicted oil and gas demand was expected to increase by about 2%-3%, as the pandemic recovery continues. US production is down from prior years and OPEC +++++ has cut significantly with Saudi Arabia taking the lion’s share of the pain, in order to support prices.
Inventories are rapidly declining and depending on the pace of global recovery from the pandemic, by mid year I figured we could be dipping into spare OPEC capacity and lo and behold I was correct. Supply issues and a lack of investment are creating a bit of a perfect storm for prices that will take some time resolve, even if Iran were to officially report its exports to China. OPEC+ is gradually adding barrels and is fielding the aforementioned calls from the Biden administration to step it up, which they may.
With all this, alternative suppliers will be unable to ramp up supply fast enough – Iran will likely still be under sanction, Venezuela is a gasoline importing basket case and producers in the Permian are currently acting like the alligator armed cheapskate at the pub when the bill comes.
This leaves Canada as a place that can actually provide a steady, low decline and predictable supply. Through some shiny new pipe to boot.
My year end WTI price is $65.23 and my average price for the year was $57.38. At the end of Q3 these numbers were $75.27 and $65.00 respectively
Grade: Doing surprisingly well so far, but suspect I have undershot! B
Price of Natural Gas
Ah natural gas, I can’t quit you!
Up until September and for the 55th year in a row, everyone’s favourite transition fossil fuel, natural gas, has been disappointing me and pretty much all of Canada with lousy pricing. Showing great potential at times before collapsing back to “super-cheap alternate fuel – why don’t we use even more of it” status. And like any true forecaster for natural gas, we watch the storage reports with bated breath and hope for a polar vortex or a heat dome to descend somewhere, anywhere really, in order to spike prices and prove our bullish forecasts right for yet another fleeting week before crashing back to earth.
Here’s the thesis. Gas consumption in the US is way up. Exports of LNG are growing rapidly and exports to Mexico are also rising. Thanks to a variety of price and COVID induced factors, supply in the United States has stalled out, even with the reliable Canadian relief valve. The catalyst for gas that was still a year or two out is now right in front of us – LNG Canada, more export capacity out of the US, the completion of the coal to gas power conversion. Demand in Asia and Europe was expected to be strong, with the phase out of coal and nuclear happening faster than renewables could accommodate so prices should firm up.
It’s a multi-year play, but I predicted that 2022 was going to be better than 2021 but 2021 was going to be better than 2020 which was an OK gas year.
Well all that stuff above? It all happened after Labour Day. Like seriously. All of it. No one had enough coal. Renewables shit the bed. Europe and Asia are going bananas for backup power and no one has any coal. So demand for natural gas, that fuel that everyone hates, went ballistic. And so did prices. Ah sweetness.
My year end price for natural gas (NYMEX) was $3.93 and the average price $3.07. AECO will again have a better year than I think many Canadian producers are used to, which, combined with oil sands prospects should be a welcome bonus for the Alberta government’s coffers. At the end of Q3, gas was a astounding $5.932 and mcf and the average was $3.34. Holy shit.
Grade: Actually pretty good but three months is way too much time for prices to collapse and crush my spirit. B-
Production
I predicted that for many producers in the Permian and continental United States, 2021 was going to be a weird year. While drilling will recover with prices over the course of the year, it isn’t going to be dramatic as players wait to see what the Biden administration rolls out. More impactful however will be the fallout from 2020’s collapse in the rig count and the number of wells drilled and completed. To maintain production against its epic decline rates, the US LTO industry needs to drill and complete thousands of wells every year. This volume was not met in 2020 and the production impact is going to reverberate throughout 2021 regardless of any drilling activity over the course of the year.
Capital for new drilling programs is scarce, the pace of completions has slowed to decade lows and the rig count was down 600 from the beginning of 2020. The monstrous DUC inventory has been mined and the dirty little secret of the DUC count is that probably a quarter of these were never going to completed anyway. Rig count is growing modestly as companies live within their means and target maintenance of production levels with modest growth as commodity prices allow. While in 2019 and 2020 a significant amount of capital found its way into the Gulf of Mexico, the Biden approach to offshore may slow that plan down. Never mind the hurricanes and calamitous shutdowns of fields in the Mexican part of the Gulf.
All of the preceding is my long-winded way of saying that I believed that US production would decline early in the year before recovering into year end. Year end production in the US was 11 million boepd and I picked the exact same level for year end.
Current production in the US is 11.1 million bpd.
Grade: Incomplete. B
In Canada, activity levels should over the course of the year more closely resemble 2019 than 2020. Pockets of conventional unconventional (tight oil, deep basin, condensate, liquids rich) activity in places like the Duvernay/Montney/Viking and the Bakken but not much in between. Rig count will also pick up in British Columbia as drilling to support LNG Canada picks up. Continued optimization and slow-footed brownfield expansion in the oilsands will continue, but not much more.
While the year will be bullish for oilsands producers and investors, the market signals are not all in for any material expansion. We are thinking not much growth above replacement of natural declines, notwithstanding recent record production levels. With Line 3 finally filling up with beautiful diluted bitumen, expect some whispers of announcements of expansion.
OPEC production levels will depend on what happens with the re-upped OPEC/NOPEC agreement at the various jump-off points through the year. The key to the agreement is the Saudi/Russia collaboration and unilateral Saudi cuts which are now unwinding. We expected that OPEC/NOPEC output should be flat year over year, with the extra Saudi cuts (implemented in 2021) unwinding as the market strengthens. The current plan to add 400,000 boepd of production appears to be a prudent market management approach, even if old Joe is concerned his ‘Vette needs cheaper unleaded.
In the rest of the world, we projected a limited growth scenario. New projects in the North Sea (Johan Sverdrup field) will continue to ramp up and investments in Africa will come on-line. Latin America will be sold as a growth area – look for Brazil to disappoint because that is what they do – but material growth is a couple of years out.
The fact that global supply growth is not expected to come from a slowing US shale sector and other regions should be concerning because it now starkly exposes the lack of investment in other regions and being such a capital dependent industry, production can turn negative as quickly as it ramps up. Inventories can draw down very rapidly and we have seen over the last few years how difficult it is to reverse a trend once it starts. As the global economy continues to recover from the pandemic induced consumption decline, it would not be surprising to see consumption snapping back above 100 million barrels of oil a day by year end which would constitute a supply crisis and the resultant price spike could stick a pin in the economic recovery. Goldman is calling for $100 oil and while I don’t think we are o that path without a full recovery in air travel, the runup in natural gas prices and coal scarcity are suggesting an allocation of oil for power which is going to cause some serious localized demand problems. It’s been so long since we had an oil bull run that no one really knows what to do. We can’t windmill our way out of this. We actually need production growth.
Grade: It is still too early to tell, but prices are suggesting it is time to spend some money. B
Activity Levels
On the Canadian side, notwithstanding my relatively bullish sentiment, this year is going to be a hard one to predict. 2020 was the worst year on record for Canadian E&P, so a repeat is unlikely.
That said, there is always a lot of uncertainty in the Canadian market given our well-documented egress issues, pricing dilemmas and purported federal government hostility to industry. While we no longer are subject to free natural gas for extended periods of time (props for AECO) and differentials have settled down, these price signals are taking their sweet time converting into upstream activity.
As I have explained previously, given Canada’s production mix, the need to drill isn’t consistent across the basin. With only about 25% of Canadian production subject to high decline rates, the incentive to drill isn’t always there because the pipes are full of heavy oil. Plus, we don’t have the intense drilling imperative that the US has, where more than half of their production has a 35% decline rate and lower production levels per well, so they have to drill like lunatics just to stay in one place.
Canadians are creatures of habit and in winter we drill, but breakup came early this year and the recovery over the summer was more muted than expected.
I predicted that activity in Western Canada would be … pretty much flat with 2019. This ironically will represent a spectacular recovery to what was an awful year. Capex in the first half of 2021 was expected to be restrained but activity was predicted to pick up in the latter stages of the year on the impending completion of Line 3. So less activity in H1 is going to trade off high relative activity in H2.
My bold prediction was 4,000 – 4,250 combined oil and gas completions in 2021. Capex should be up 15%, with an upside for 20%.
Rig count in Canada at this stage of the year is actually ahead of 2019. So far, so good. Fingers and toes crossed.
It’s already been discussed elsewhere but I predicted that in the US, drilling activity will be flat and capex will be up 5%. True to form, a lot of rigs have been added in the first half of the year, but nowhere near the levels the last time prices were this robust. Production growth in the US has been, negligible.
Grade: Incomplete as it’s a year end thing, but so far I am on the mark. B
M&A Activity
I predicted that a late 2020 robust M&A trend would continue through 2021 as property consolidation, non-core asset sales and private equity investment all pick up as the industry adjusts, yet again, to a new normal. M&A activity was predicted to be broadly based – upstream, downstream, oil, gas, services and everything in between.
On the Canadian side, M&A activity should pick up as portfolio rotation out of the Permian brings American and international investors back to Canada and our absurdly high Free Cash Flow yields start to attract interest.
Capital was predicted to become easier to access as the year progresses and the prospects for the industry firm up.
As always Canadian companies that are historically undervalued cash cows will attract interest as investors tire of Elon Musk, Tesla, AMC and scammy ShitCoins.
I predicted a prominent Canadian name or two would find themselves with new foreign owners as the year progresses. This may play out in the gas space as opposed to oily names with construction on LNG Canada progressing. Right now this isn’t happening. Instead we are seeing an exodus of greenwashing pension funds attract attention to their ESG bonafides by divesting Canadian producers are precisely the time that they should be doubling down. Oh well. See ya later Caisse de depot.
On the services side, we are very bullish on energy infrastructure and related industries and see that as an area where Canada will see a fair amount of activity. Mid and downstream oriented companies will continue to be of interest to strategic consolidators and private equity. We figured upstream M&A would pick up in H2.
So far we have seen some pretty robust activity in Canada. Our close to $30 billion in deals so far represent 16% of global transaction value. TAQA’s assets are for sale apparently. Highlights include:
- Brookfield buys Interpipe
- Secure Energy Services buying Tervita
- Arc Resources and Seven Generations
- Spartan and Velvet
- Crescent Point and Shell Duvernay assets
- Ensign Energy Services and Nabors Drilling
- Waterous and Ossum
- Tourmaline and Black Swan
- Surge Energy and Astra Oil
- Whitecap and Kicking Horse
Canadian Dollar
The prediction was for the Canadian dollar to reach perhaps as high as $0.80, maybe even $0.82. Current price $0.79
Grade: Duh. A
Infrastructure
Finally, right? I know in the media things look bleak, what with Trudeau and Biden, ESG and the energy transition and all that jazz, but we are of the view that we are kind if in the early to mid stages of an infrastructure supercycle in Canada which will continue well into the mid-2020s. Here’s my prediction:
- Line 3 complete and operational by year end – good call there.
- TransMountain Expansion well underway with multiple spreads operating during the year in Alberta and BC. Aside from the moronic protestors, yup.
- Coastal Gas Link continuing notwithstanding challenges (see above – moronic protestors). Yup
- Keystone XL, a Biden victim. He will give Trudeau a win on a different file, which may or may not help Alberta but is most likely to be Line 5.
More infrastructure positivity:
Some 70% of the planned spend on commercial wind and solar projects in Canada for the balance of the decade are planned for nasty carbon spewing Alberta. Nothing has changed that. Take that Laurentian elites! Combine that with continuing Petchem investment, Site C in BC, the NGTL expansion and other initiatives such as Carbon Sequestration and Storage and the conclusion is inescapable. People are spending money. In Western Canada. Imagine if we got a battery play. People’s heads would explode.
Grade: For some reason I’m batting 1000 on infrastructure. Maybe not on heads exploding. A
Stock Picks
True to my rules, I picked two Canadian E&P’s as well as two service-oriented companies and, finally, one non-Canadian producer and a service company. If you recall my rules for oil and gas investing, one of them was to Trust Murray and I am thematically consistent with at least a third of my picks.
Pick #1 is Canadian Natural Resources. One day we will all be working for Murray Edwards, but for now, Murray’s company works for my Forecast.
Pick #2 is Cenovus. So yeah, I’m going hard on oilsands. Deal with it. Cenovus has been dumped on for years and recently swallowed Calgary icon Husky.
Pick #3 is Ensign Energy Services. Ensign is one of the largest land-based drilling companies in the world and also materially owned by, you guessed it, Murray Edwards.
Pick #4 is my renewable play Innergex Renewable Energy. Why them? Why not.
Pick #5 is Phillips 66. What? That’s right. A big refiner.
Pick #6 is a tanker business called Scorpio Tankers Inc. based in Monaco, where Murray Edwards parks his boat.
Here’s how they are doing:
That’s it! Staggering outperformance held back because of… my renewable pick. That tells you all you need to know about the energy transition in 2021. Wonder where Trudeau’s money is.
Grade: WTF. C
My time here is done. It’s late.
Invest wisely.
Happy birthday Everett
