I had the pleasure of meeting Keith Schaefer at the Montreal Investment Conference on November 5 of 2010. Keith specializes in Canadian oil and gas plays, he is the editor and publisher of Oil & Gas Investments Bulletin. In this exclusive interview with BeatingTheIndex, Keith will discuss the latest opportunities.
Q: Keith, it’s a pleasure to have you in Montreal today. Before we dive into the oil and gas sector can you please tell us more about yourself? Who is Keith Schaefer and how did you end up in the oil and gas sector?
A: After studying journalism at Carleton University, I started my career as a reporter and soon after joined investor relations with Vanguard Shareholder Solutions. I spent the next 20 years in mining assisting public resource companies in raising exploration and expansion capital. Following the crash of 2008, I wanted to do something different, something on my own. I discovered that the oil and gas sector lacked a newsletter the average person could understand.
My blog went online in January 2009 and my subscription service followed 6 months later. Coming from a mining background I had the skills to read research reports and tell if the analyst really believes what he’s writing or not. I picked up sector related knowledge as I went and received help from friends in the industry. Stepping into the oil and gas sector turned into a passion immediately, I had no idea it was going to be that much fun!
Q: Horizontal drilling and new completion techniques have opened up shale natural gas reservoirs all over North America. With so much drilling going on, supply has outpaced demand which resulted in the collapse of forward natural gas prices for the next 2 years. With hedging running out for everybody, is it still worth investing in this commodity at sub 4$ prices?
A: My short answer is yes, but you have to be nimble. Many investors impaled themselves in the past 18 months waiting on natural gas to turn around. Even though fundamentals are bearish, leading natural gas producers are breaking to new highs. This is a bullish undertone as stocks lead commodities.
Q: What would be the criteria to invest in a Canadian natural gas weighted company?
A: Pick your spot carefully; the team has to be good. Target the lowest cost producers as any uptick in natural gas prices will reflect positively on the share price. A respected team will also be able to fill the cash flow gap with equity, others won’t. Take into account the possibility of reserve write downs in the New Year as many basins in North America are no longer economic at these prices.
Q: Which Canadian producer would fit this criterion? Do you recommend any company in particular?
A: Peyto Energy (TSX:PEY.UN) would be the one to own.
Q: Are you worried that with all the increasing natural gas supplies coming out of the US, imports from Canada will drop because a lot of shale producers are positioned closer to the market?
A: Absolutely, this is a very big concern; the WCSB (Western Canadian Sedimentary Basin) has the ability to be the runt of the litter and get squeezed out. Canadian natural gas producers will need to get the export terminal at Kitimat, keep tar sands and heavy oil rolling because they use tons of natural gas. The government is not taking this issue as seriously as they should, putting thousands of jobs in jeopardy.
In order to see sustainable gas prices the shales in the US would have to see huge decline rates where a well gets shut within 4-5 years of first production. While highly unlikely, a fraccing ban by the EPA would turn things around for natural gas but you can’t count on that. You can’t count on the weather either; it’s a fool’s bet.
Q: Let’s talk about Canada’s emerging oil plays. There are several formations like the Cardium, the Viking and the Bakken amongst others. Where is Keith focused these days and why?
A: You’ll get the highest amount of reserves in the Bakken, I’ll tell you that. However, the formation doesn’t matter as much as how much land the company holds: the bigger the better. Also, how much did the company pay for its land package? Look at PetroBakken (TSX:PBN) they went from hero to zero because the market thinks they overpaid for their Cardium package. Even though the Bakken will get a premium, if a company has 200 sections of Viking vs. a company with 10 sections in the Bakken, the one with the bigger land package will get the higher valuation.
Q: Are you currently focused on a company in particular? Why?
A: Right now I’m closely watching Primary Petroleum (TSXV:PIE), they secured a nice land package in Montana in the Alberta Bakken Basin. There are 3 intermediate producers around them buying land like crazy, drilling like mad and saying nothing.
Q: It appears that the Bakken play is moving west into southern Alberta and northern Montana, an area known as the Alberta Basin Bakken. Do you think it’s a repeat of the Bakken story?
A: Too early to say, but it looks good. There has been one good well on the Canadian side, and like I said, there are three or four companies on the US side drilling a lot of wells now. However, I don’t see the same mania because some big intermediate producers already own big land positions and there are only a handful of juniors in the area.
Q: Given the strong price of oil, what do you think of heavy oil producers? Which company would be your pick?
A: Heavy oil is still good, the price differential to light oil has increased lately but no one knows what it will do next. If you have a decent land position and a good team, you will be rewarded. Emerge Oil and Gas (TSX:EME) would be my pick, I love the company and what they are doing.
Q: A portfolio manager recently mentioned they have 2 decent years of drilling ahead, what happens after they exhaust their drilling inventory, then what?
A: The team needs to put together a longer larger strategy for the market. The market is also telling them they need a bigger play.
Q: You are obviously focused on the energy sector, one imagines that it makes up 100% of your investments. Is your portfolio diversified?
I only invest in what I know. I have half of my portfolio invested in oil and gas and the other half invested in mining stocks.
Q: What’s your stand on QE2? Do you think it will impact emerging economies?
It’s short term gain for long term pain. The US is trying to inflate themselves out of problems. The danger is we could end up with another boom bust cycle, not to mention turning India and China into bigger bubbles. Think of it as a very high stakes poker game.
Q: Can you please give us a brief description about your newsletter?
I read the daily research reports that I receive from all the Canadian brokerage houses, and some US firms as well. I determine who has the big land positions, who is making the discoveries, which financing to be involved in and take it from there. Subscribers get access to my newest recommendation and an archive of research reports, alerts and guest commentary.
I am not a technical oil and gas industry person; the regular investor appreciates my gift in explaining things in very simple English. No one needs to be an oil and gas guru to make money in this sector. My subscribers also love the fact that I have my own skin in the game – I invest in and put my own money on the line with my investment ideas. I also offer a 60 day, 100% money back guarantee. If you don’t like my service, up to 2 months in, you’ll get a 100% refund.
Thank you for your time Keith, I hope you enjoy your stay in Montreal.
Keith Schaefer of the Oil & Gas Investments Bulletin writes on oil and natural gas markets. His newsletter outlines which TSX-listed energy companies have the ability to grow, and bring shareholders prosperity.
1) Mich: I personally and/or my family own the following companies mentioned in this interview: Primary Petroleum. I personally and/or my family am paid by the following companies mentioned in this interview: None.
2) Keith Schaeferâ€”I personally and/or my family own the following companies mentioned in this interview: Peyto Energy, Emerge Oil and Gas and Primary Petroleum. I personally and/or my family am paid by the following companies mentioned in this interview: None.