Category Archives: Random Thoughts

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

1 Comment

Filed under Random Thoughts

Some Thoughts on Oil & Gas Activity – International

As an investor, I look for mispriced bets. I tend to be somewhat industry agnostic as long I feel that I can get an understanding of the mechanics of the industry. Though I like to take long term concentrated bets on individual businesses, I have taken top down bets when I feel it’s appropriate. Parts of the Oil & Gas industry is something that I feel I understand well enough to commit capital to. As such, I follow the rig count consistently to sniff out a potential disconnect between share prices and activity. I prefer to find more service focused companies rather than producers, so the focus on marginal drilling activity drives the businesses.

This post will take a quick look at the industry with a emphasis on international rig count.

Demand

Like any commodity, oil is subject to supply and demand. Though there are differences in the types oil in the various geographies, oil supply and demand should be looked at globally (in my opinion of course). When prices stay below the marginal cost to extract oil then we see underinvestment and vice versa when prices are high.

Here is one (of many) sites that provides supply and demand numbers.

Supply

Obviously the cost curve is important. Below is a global comparison with the average cost of production in 2020.

You can purchase a very detailed report here, although I just stole the free image.

Looking at the cost curve at a set point in time can be misleading. Currency fluctuations, transportation infrastructure, refinery capacity, remaining reserves, unplanned additional supply, depletion rates, EV transition cadence, local government agendas and political risks are some of the thing I try to keep in mind when investing in the space. EIA gives regular updates like this one.

Historical Prices

Of course, price drives investment. Though this post talks about International rig count, I can only find inflation adjusted data for WTIC. Regardless it provides some interesting context.

OPEC

You can’t google anything related to oil without getting a bunch of news on OPEC and what they are doing or planning to do with supply. Understanding the intentions of OPEC at any point in time is difficult. Countries come and go, production is raised or lowered, and sometimes the countries can’t agree on production quotas.

I have no advantage over anyone else in predicting what OPEC will do or won’t do. Therefore, I don’t trade off short term news and expectations. I wouldn’t go so far to say that I ignore what OPEC is doing, but I tend to focus on what happens and what the impacts are after that. I have made premature decisions when OPEC says they will raise or lower production, only to get caught off guard when it doesn’t happen.

Rig Count Globally

Interesting to see the role that the various geographies have played in the contribution to the total rigs being utilized. Also noting that the total rigs deployed peaked in the 1980s. Given the equipment required to extract oil has only increased in complexity, we can see how many drilling rigs are needed today relative to the past. One could make the argument that we are underinvesting in oil discovery and production today, but the count is still lower throughout the 2000s than the late 1970s and early 1980s.

Looking at the previous chart in an area form, the US drilling activity from the 1970s proportional looks pretty impressive.

The spillover effects from the 1973 oil embargo made a lasting impact through time, though it was officially lifted in 1974. The devaluation of the US dollar coupled with the supply reduction drive prices higher. I’m going to go a little more about the US into this in a separate post.

When removing North America from the global rig count with monthly data rather just annual average, gives an interesting perspective on activity. The Middle East has been growing rig count while Latin America is utilizing lower than previous.

How I Think About the Industry

I have found that over the years I utilized EIA more and more as I tend to find myself following data and not speculation on what will or won’t happen. Understanding the type of investor I am and my behavior to news and price swings is important if I want to commit capital to the industry. I find the focus on service companies, having a 9-24 month timeframe, invest with high integrity management teams, focus on stable balance sheets and keeping positions small is the what works for me.

Anyone else follow the rig count closely?

Dean

9 Comments

Filed under Random Thoughts

Jan 2021 Update – $OSS.v, $ISV.to, $STC.v, $VLN.to, $VMD.to, $SYZ.to, $MCB.to, $FRII.to, $RELL, $MTLO.v, $DWSN

Trying something new this month to catalogue some recent market activity and my thoughts around it.

Thoughts on Market Activity

I’m sure you’ve heard of activity around wallstreetbets reddit board and the short squeeze on some heavily shorted names (Gamestop being the most well known). Sorry to disappoint, but I won’t be participating in the short or long side of that corner of the market. It’s too risky for me. It is absolutely fascinating to witness in real time. I have been overly curious to understand what the thought process is for the individuals on each side. I will admit I have probably spent too much time listening to finance and non-finance people explain why they feel the way they do about it. Anyone interested in hearing some anecdotal data I’ve collected can send me an email or DM on Twitter.

I am not a macro guy. I can say that I have been finding interesting ideas lately, but I have not stumbled across businesses that I feel warrant a very large position in the portfolio. I am sitting on a higher than normal amount of cash, but that can change in a few weeks.

Posts this month

Relevant News from Companies Profiled Recently

  • OneSoft Solutions ($OSS.v)
    • Another customer signs on to integrate CIM into their pipeline operations
      • 4th customer in 3 months
      • This is a big positive and shares are up a bit for the month (about 15%)
  • Information Services Corp ($ISV.to)
    • They announced that they ratified a collective agreement with their in-scope unionized employees
      • They did this virtually which is good to hear
      • Provides 6 years of stability with the members with modest wage increases
  • Sangoma Technologies Corp ($STC.v)
    • Update on cyberattack
      • Had no material impact on sales or additional risks to the business
    • Huge acquisition announced
      • The had a call on Jan 29th to discuss
      • More details to come in the next few weeks
      • On the surface the acquisition seems like it is a good fit for the business and will further increase their value to customers, but the valuation is not cheap
        • This is common for Sangoma; all previous acquisitions looked a little off at first glance, but ended up being very well executed
      • I’ll likely to a more in depth post to help myself digest the news
      • As of this morning the shares are halted
  • Velan ($VLN.to)
    • CFO resigned to join a private owned company
      • Doesn’t seem a material event on the surface as he is staying to help transition the role
      • Would like to see a new CFO within a reasonable amount of time
    • Reported fiscal Q3 2021
      • The quarte was better than expected though covid is still having an impact on the business
      • They were able to execute the V20 plan remotely
      • They have the highest backlog in 8 years
      • Sale of the montreal plant resulted in a gain on the balance sheet
        • To me this gives additional margin of safety as looking at this as net-net gives no value to PPE which obviously has some value
    • I honestly think that this is one of those weird names that could earn more ebitda in a few years than the market cap in 2020
      • But that needs to be monitored
    • The bulletin boards are dead from this
  • Viemed ($VMD.to)
    • Released details of a recent Non-invasive vent study
      • Study was led by their CMO
      • Data was between 2012 and 2018
      • Seems like a good validation of NI vents and a helpful data point to bring to the table
  • Sylogist ($SYZ.to)
    • CI purchased shares
      • Bought 1.032 shares since Nov 10, 2020
      • About 40% of trading volume
      • These likely happened at the start of December as there was a spike in volume
    • New CTIO announced
      • Pedigree seems well
      • 225 options at $11.78
        • 5 year term that vest in equal tranches on 1st, 2nd, 3rd anniversary of $15, $17 and $19
  • McCoy Global ($MCB.to)
    • New board member announced (Cory Janssen)
      • Was co-founder of Investopedia
      • He’s quite connected as McCoy commercializes some of their digital products
  • Freshii ($FRII.to)
    • Alternative Monthly Report stating that Silver Ring Value Partners Fund LP
      • During the month ended December 31, 2020, Silver Ring acquired 195,500 Common Shares through open market purchases on the facilities of the Exchange, resulting in Silver Ring holding an aggregate of 2,806,233 Common Shares as at December 31, 2020, representing approximately 10.65% of the issued and outstanding Common Shares.1 Prior to December 1, 2020, Silver Ring owned, or exercised control or direction over, 2,618,733 Common Shares, representing approximately 9.95% of the issued and outstanding Common Shares.
      • Seems like a decent value shop
      • Nice to have a capital allocator own a large amount of the shares outstanding
    • Update on Special Meeting Circular announced
      • Reason for the special meeting is to reduce the stated value of the A shares so they can institute a NCIB
      • This is a step in the right direction
  • Richardson Electronics ($RELL)
    • Reported fiscal Q2
      • Results were better than expected and guidance was strong
      • Looks like wafer side of their business is rebounding and the current cycle could match or eclipse previous cycle
      • The CT tubes are seeing an increase in demand versus what was previously communicated, particularly seeing strength in Europe
        • looks like they could get the healthcare part of the business to break even closer than anticipated
      • shares spiked 20% on the news
  • Martello Technologies Group Inc ($MTLO.v)
    • Provided an update on operations
      • GSX (which was acquired in May 2020) is now fully integrated
        • Gizmo coupled with solutions MTLO already provides is set to take their DEM strategy to another level
        • Sales from all GSX and Savision were about 58% of rev in Q2 fiscal 21
      • Reiterated that legacy products have been declining and will mask core business growth
        • They noted that expenses related to managing the legacy part of the business are minimal
  • Dawson Geophysical – ($DWSN)
    • Wilks Family disclosed a passive stake of 2.28mil shares or 9.7% of the outstanding shares

2 Comments

Filed under Company Updates, Random Thoughts