So I was looking at my fearless forecast the other day deciding whether to pat myself on the back or run for the hills, and I realized that it is time for my Q1 interim report card on my predictions.

So here goes nothing as they say in the popular vernacular.

Price of oil

In my ramblings, I held out that the price of oil would start to rally during the year. As a refresher, the year-end prediction was $60 a barrel for WTI and a $45 average price with most of the price appreciation in the second half of the year. As of March 31, the price of oil was $38.34 and the average price for the year to date was $33.71. So to hit my average price, we will need to see a significant and sustained rally into year-end which is still possible, but seems maybe a couple of quarters early at this point. If I had a do-over, I might bring the year-end price down to the $50 to $55 range and a $42 average, but I don’t so I won’t. I will stick to my guns and accept the fall-out. Just to stir the pot, I am picking $80 for end of 2017. Grade C+

Price of Natural Gas

Well, all I can say is that I hope no one loaded up on futures contracts from my predictions. Gas remains stuck sub $2 and the combination of massive over-production and a El Nino warm winter entering into the current injection season does not give me much hope we are going to see gas north of $2.50 until some of that supply comes off. My year end prediction was $3.50, which could conceivably still happen, but I don’t see how my average price of $2.75 can come to pass. March 31 price was $1.959 and the YTD average was $1.984

Now before any of you go too crazy on me, the single largest factor leading me to think $3.50 is possible is the massive reduction in capex that is occurring continent wide just as exports are increasing via pipeline to Mexico and LNG and production is flat-lining. With some companies not even drilling anymore (less than 90 rigs!) and very high initial decline rates, the supply/demand situation for gas actually has much broader swings than the oil market. Low gas prices into an early fall with even normal weather can lead to pretty dramatic price swings. Grade D

Production

In the forecast we discussed production across a range of producing regions.

The main part was an expected 500,000 bpd decline in the US. At this point, production is off by about 200,000 bpd and the declines are picking up some momentum, so this expectation looks pretty solid.

There was an expectation that Russia and OPEC would maintain current levels of production which appears to be the case.

Another expectation was a poorly defined “other non-OPEC, non-Russian” production being down a similar amount to the US. Presumably this covers South American and Mexico where the data is hard to get as accurately as desired, but all countries are expected to be flat or down this year by about 100,000 to 200,000 bpd this quarter alone. Add in Venezuela and its 300,000 bpd decline since this time last year and the production picture gets clearer.

I also said it was a stretch to see Iran add 500,000 bpd by April (or even the end of the year) as they said they would. They are at about 200,000, so not so bad.

Overall Grade B+

Activity Levels

I said 2016 was going to be a train wreck and for the first quarter it certainly was. Decade lows in utilization combined with an early breakup to produce one of the worst quarters the WCSB has seen since the late 1980s. Grade – Yuck. The chart to the right is the best illustration I’ve seen so far on the decline in Canadian drilling since 2004. (red is gas, green is oil, dark grey Alberta, light grey BC and bottom grey is Sask)

Canadian Dollar

I suggested that the Canadian dollar would likely rally through Q1 to about $0.75 based on what the Fed did and oil prices and it did. Good call. End of year is of course another matter – $0.80 to $0.85 – we shall see, but $60 oil should take it there. Grade A

M&A Activity

This is starting to pick up, but not as much as expected so far. What has been a bit of a surprise is the level of equity financing that occurred in the quarter, among the largest. Grade – NA

US Election

I predicted a Drumpf-caused implosion of the Republican party with a Rubio-Kasich ticket emerging and getting thumped by Hillary and the Democrats. While the result may be the same, the Republican ticket is likely to be different. Is a Cruz-Kasich ticket possible? It’s a stretch, but so is a puppy-monkey-baby, leading to the…

Super Bowl

Denver to win (yes!) vs Seattle (oops). Pretty good call on the AFC, didn’t see Carolina and the shellacking they would give both Seattle and Arizona in the NFC. I will accept all the congratulations for picking the winner though. Grade B

Infrastructure Projects Approved

Well, none have been denied yet!

Stock Picks

Well these guys don’t look as bad as I thought they might, although I thought I would be further ahead of the broader Canadian index.

All in all, a decent run so far. I look forward to the next quarter!

Prices as at April 8, 2016 (April 1, 2016)

• The price of oil ended the week up
  • Storage posted a surprise decline
  • Production was down
  • The rig count fell
  • Mixed signals about the Doha freeze meeting introduced some volatitlity
• Natural gas rose during the week on a last winter blast in the Northeast

• WTI Crude: $39.54 ($36.79)
• Nymex Gas: $2.018 ($1.956)
• US/Canadian Dollar: $0.7603 ($ 0.7677)

Highlights

• As at April 1, 2016, US crude oil supplies were at 529.9 million barrels, a decrease of 4.9 million barrels from the previous week and 57.5 million barrels ahead of last year
  • The number of days oil supply in storage was 32.9, ahead of last year’s 30.8.
  • Production was down for the week at 9.008 million barrels per day. Production last year at the same time was 9.408 million barrels per day. The decrease in production this week came from the Lower 48. US production should have broken below 9 million barrels this week – expect it to next week. This is a psychologically important barrier.
  • Imports declined during the week
  • Refinery inputs increased during the week
• As at April 1, 2016, the traditional end of the winter heating season, US natural gas in storage was 2,480 billion cubic feet (Bcf), which is 54.4% above the 5-year average and about 68.5% higher than last year’s level, following an implied net injection of 12 Bcf during the report week.And yes, even in the face of these numbers, I still think gas prices are going to end the year much higher than they are now.
  • Overall U.S. natural gas consumption was flat for the week across all sectors
• Oil rig count at April 8 was down to 354 from 362 the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up to 89 from 88.
  • Rig count at January 1, 2015 was 328
• As of April 4,with break up in full force, the Canadian rig count was at 42 (6% utilization), 30 Alberta (6%), 9 BC (11%), 3 Saskatchewan (3%), 0 Manitoba (0%)). Utilization for the same period last year was about 10%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
• Offshore rig count was at 25
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• Sanjel, one of the most prominent private upstream energy service companies in Calgary announced a “strategic transaction” whereby it was selling its Canadian and U.S. pressure pumping and cementing businesses to, respectively, STEP Energy Services in Caanda and Liberty Energy Services in the US and simultaneously filing for creditor protection under CCAA.
  • Read between the lines, and one of the premiere companies in the Canadian oil patch is the latest to fall victim to the decline in activity in the basin.
  • According to the CCAA filing, Revenue and EBITDA fell from $1.8 billion and just under $200 million at year end April 2015, to less than $600 million and negative $58 million for the 9 months ended January 2016. Gross profit YTD on $600 mm in revenue was $137,000, or zero.
  • The company had a staggering $900 million of debt on its balance sheet. 4.5 times debt to EBITDA at April 2015 was excessive. Negative interest coverage in January is bankruptcy.
  • The sales are expected to net the company up to $400 million.
  • The other operating subsidiaries of Sanjel are being actively marketed
  • Sign of more dominoes to fall or isolated incident? Hard to tell, but the upstream sector is getting hit hard
• CAPP – the Canadian Association of Petroleum Producers announced that since the decline began, capex in Canada has been cut by 62% or $50 billion from the $81 billion peak of 2014, the largest percentage drop since the first major oil discovery in 1947
• TransCanada shut down its Keystone pipeline system after a leak was reported in South Dakota. The spill is small and contained but in an era of laser focus on pipeline operators, the Company is excercizing an appropriate level of caution in dealing with this.
• Veresen announced it had signed another deal for offtake from its proposed Jordan Cove LNG project in Oregon, providing support to a project that had been iced by the US regulators because it wasn`t able to demonstrate demand for its output.
• The US Justice Department sued in Federal Court to block the merger between Halliburton and Baker Hughes saying the merger would lead to less competition and innovation and higher prices. While the deal has always seemed to me like a bad idea as it would create a firm so large it might collapse in on itself, the reasons cited do in a way ignore the reality on the ground in the service sector and what is happening to those companies that don’t partner up – see Sanjel, above.
• Drumpf Watch – Donald Drumpf got whupped in the Wisconsin primary by the Canadian Trojan Horse – Lyin’ Ted Cruz. Next up, New York, where Drumpf is expected to win “huge”, because he knows lots of people, lots of the top people there.