O&G Activity – USA

About a month ago I went over the International Oil and Gas activity. Today I’ll take a high level look at the US, with the focus being on rig count. It’s quite topical as oil has now come back into fashion for investors. I’m going to use WTIC as the benchmark for US oil.

For some additional background, I think this podcast with Todd Sullivan on The Contrarian Investor Podcast goes over the current landscape for US.

WTIC history

I was able to find some data going back to 1946. It’s interesting to see how oil seems to trade sideways for a long period of time. Below is the average nominal price per year and in a logarithmic scale.

Taking a look at the inflation adjusted price tells an interesting story. It looks like the inflation adjusted price has been the same for an entire generation.

70s boom

In the previous post I mentioned the 1970s oil boom. Looking at just the US in isolation, the rig count in the late 70s/early 80s dwarfs all the other time periods.

Of course, rigs have advanced immensely over the last couple decades. 100 rigs in the 1970s does not equal 100 rigs in the 2010s.

The boom of the 70s was related to several factors; US production peaked sometime in the 1960s, continual increase in consumption, the Arab oil embargo, Yom-Kippur War, and other factors all contributed to prolonged higher prices and increase in investment to discover and produce oil domestically.

Mid 1980s to 2000s

After the 1970s boom, oil was left for dead for about 15 years. You can see in the chart below that the price essentially went sideways from 1985 until 2000. The rig count remained under 1,000 for most of this time.

2000s

After the tech bubble and 9/11 marked the start of a gradual recovery in oil activity. The US rig count went from around 1,000 in 2003 to nearly 2,000 in 2008 right before the GFC.

Despite the increase in investment in the 2000s, the production of oil slowly declined.

https://www.eia.gov/todayinenergy/detail.php?id=43015

FWIW I remember many experts calling for $200 oil when I was first getting into picking stocks in 2006/07. This was during the last commodity boom when we thought China was just going to consume everything.

GFC

Of course, oil crashed hard during the GFC. Oil went below $40 (from over $140) for the first time in 5 years. Though, it bounced back above $60 in short order.

Shale boom

The shale boom really started to move the needle on production after the GFC. There was a ton of interest around shale and the sharp increase in production. In a very short time, the US went from an importer to an exporter of oil. The price remained in the $80-100 from 2011 to the end of 2014.

2015/16 Bear Market

The ever increasing supply, strong US dollar, stable OPEC production, removal of sanctions against Iran, weaker than expected global demand all led to a sharp contraction in price. Oil went back under $40 for the first time since the GFC. This was a very sharp contraction in activity.

Late 2016 to 2020

The stabilization in price eventually led to a rebound, although muted. You can see the 2017/18 rig count wasn’t much more than half of the rig count from 2011-2014. As an investor, I noticed a more conservative tone from the producers when allocating capital to drilling and exploration relative to other cycles.

It’s interesting to see the different regions and how they all contribute to the overall rig count.

Today

After the sharp decline in demand due to the covid lockdowns (which resulted in negative prices temporarily), we are now in phase of higher prices. There is so much noise with covid variants, lockdowns, supply chain challenges, OPEC spare capacity, EV transition, political challenges, etc. that producers with long term reserves have prioritized cleaning up their balance, paying dividends and buying back shares over expanding existing production.

After the covid lockdowns, there has been a very slow increase in rig count. Though the rig count has essentially doubled year over year, it’s only at the same level as the previous cycle’s trough.

When looking at the rig count when oil is $80, we have a long way to go before activity gets back to prior levels. Having said that, I’m not sure that is our path. President Biden has put a halt on new leases for drilling on federal lands. Specific regions are affected more than others, for example the Permian is less affected than others. As well, the Keystone XL pipeline was halted as the permits were revoked. This additional layer of complexity by the current government(s) make allocating capital to anything hydrocarbon related murky at best. High prices may not be enough to get the large producers to open up the capital budgets.

I have no idea how this all pans out eventually. At the same time that we are having more and more political pressure to lower hydrocarbon production and transition to EV; consumers, businesses, and politicians are once again remembering how much we depend on oil. My sense is that the risk is to the upside from an activity standpoint.

Anyone have thoughts on this?

Dean

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Macro Enterprises ($MCR.v) – Quick Update

About 6 months ago I posted about a position I have in Macro Enterprises. At the time shares were trading at $2.40 vs. $2.50 today. This is slightly outperforming the TSX over that time. My blended ACB position has performed slightly worse FWIW.

Given that I focus on business fundamentals as a large portion of my investment thesis, my timeframe is typically 9-36 months. However, for Macro there have been a couple of relatively big announcements that seem to have been overlooked by the market. Below is a quick summary:

  • May 19, 2021 – signed a construction contract for the Deep Valley South Section and Colt Sections of NGTL System Expansion Project. Scheduled to start Q3 2021 and finish Q1 2022. Estimated value was in excess of $190 million.
  • May 27, 2021 – released Q1 2021 and held AGM. During the presentation they confirmed $250 million in revenue for 2021.
  • August 19, 2021 – announced Q2 2021. Results were positive from an operations standpoint. They upped the estimated revenue for 2021 to be $300 million. Subsequent to quarter end they confirmed that they received the $20 million that was marked as receivables related to JV with Spiecapag.
  • September 7, 2021 – construction contract with Kiewit TMEP Corp for segments of the TMX along the Coquihalla-Hope corridor. Estimated value was approximately $180 million. As a result they are now expecting revenue to be $350 million in 2021. They will also increase the capex program from $8-$10 million to $20 million to meet demand. To me this demonstrates that they can still win high value contract as an independent.

Putting this all together I see the company as having being de-risked. They have more revenue visitibility than they had 6 months ago. In the short term we should see continued strong trend in EBITDA and revenue.

Risks

I went through some risks in the previous post, but I think they are worth looking at again.

  • There is a chance that they are unable to win more contracts in 2022 and they could see materially lower revenue at some point.
  • The political risks associated with pipelines and hydrocarbons in general.
  • The margins on the recent contract wins could be lower than prior contracts.
  • Using tangible book as a downside scenario could be incorrect.

Downside

Using the current tangible book value and $200 million in revenue coupled with prior multiples I derive a blended downside of 15-20%.

There are only a handful of times where the company traded below half of tangible book value for longer than a week or two over the last 10 years. I am comfortable using that as a worse case downside scenario.

The company could trade below these multiples of course. The business does have more project work and less recurring maintenance work than prior.

Upside

The upside uses a blend of $250 million in revenue for 2022, my estimated EBITDA and analyst estimated EBITDA.

Summary

I believe the share price in MCR does not reflect the recent developments. Of course, the market could have digested this news already and MCR could possibly be fairly priced at today’s prices.

Despite the headlines of oil hitting multi-year highs, MCR is still out of favor in my mind. Yes the business is capital intensive and lumpy, but I believe the price paid is at such a discount that MCR represents a decent bet here. If I didn’t have a position already, I would take one here.

Anyone else own MCR?

Dean

*the author is long MCR at time of writing

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September 2021 Update – $OSS.v, $ISV.to, $STC.v, $FTG.to, $VMD.to, $URB/A.to, $MCR.v

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below. They recently did an update that has added some more features.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

Nothing worth noting.

What I’m Reading

  • I have been spending most of my free time this month focused on the build out of my garage gym. Shoot me a message if you ever want to chat lifting.

Posts this month

Developments on Companies Mentioned

  • OneSoft Solutions – $OSS.v
    • Notice of the CEO selling some shares
      • He still has about 8.8% of the outstanding
      • This is something to monitor if it continues
  • Information Services Corp – $ISV.to
    • Upped dividend from $0.80 to $0.92
    • Now yielding over 3%
  • Sangoma Technologies Corp – $STC.v
    • Held Special AGM and passed motion to consolidate shares in plans to uplist to US exchange
    • Released Fiscal 2021 results and held conference call
      • Results were slightly ahead of previous guidance
      • Issued new guidance for fiscal 2022
        • Higher than expected EBITDA margin
        • Slightly higher than I expected for organic growth
      • Continuing to pursue uplisting
      • I would have thought the stock would have responded better to this news
      • I’m going to listen to the call again to see if there is anything I missed
  • Firan Technology – $FTG.to
  • Viemed – $VMD.to
    • has been hitting new 52 wk lows consistently
  • Urbana Corp – $URB/A.to
    • Renewal of NCIB announced
      • Any purchases at this large of a discount to NAV should be highly accretive
    • NAV continues to march higher
  • Macro Enterprises – $MCR.v
    • Announced Subcontract for Trans Mountain Expansion Project
      • Revenue to reach 350 mil in 2021 with some additional investment in PPE
      • I thought the stock would have popped even more given how much visibility they have into next years revenue

Have a good one.

Dean

Long $OSS.v, $STC.v, $VMD.to, $URB/A.to, $MCR.to

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