Keith Schaefer Interview at The 2011 Montreal Investment Conference

My favorite part of visiting Montreal’s annual Investment Conference is meeting up with my friend Keith Schaefer as we get to discuss the oil and gas sector at length. Keith is the editor and publisher of the Oil & Gas Investments Bulletin and I got to interview him on November 19, 2011.

Mich: Keith it’s a pleasure to see you again in Montreal.  This year hasn’t been kind to investors as it was packed with wild volatility. Do you believe, given the persisting uncertainty out there, that investors can still make money in oil and gas?

Keith: Oh yeah, there are lots of places to make money in this market and the easiest place to make money is the services sector particularly with stocks that pay a dividend. They are still growing quiet strong and the dividend is supporting the stocks in a volatile market.

You want to own slightly larger companies like Calfrac, Trican and Canyon as things would have to be very sour for those companies not to make money next year. You also need to use volatility to your advantage, what it really means is during times like early October when the market looks really bad, you have to be willing to buy stocks with the confidence that the world will not fall apart. You have to buy stocks on those days. Keep your eyes on a basket of strong stocks that you like that are preferably dividend paying companies.

Mich: What was your number 1 pick for 2011 and why?

Keith: Poseidon Concepts (PSN.TO 0.27 [0.00]), they came out with the right product at the right time. It’s a simple low tech solution; it’s basically heated above ground swimming pools which replace water tank farms and open water pits. PSN’s product is environmentally friendly and solves problems such as water freezing in North Dakota when it’s cold or water evaporation in Texas when it’s hot as the pools can be covered. It takes 4 hours to set up and 4 hrs to dismantle after the job is done with a total of 2 trucks needed to get the stuff in and out compared to 50.

Mich: Would you still buy it in this market?

Keith: Absolutely, I would buy more PSN if we see another small market meltdown.

Mich: But Poseidon is a 1 trick pony, what about the competition? Recently, Ridgeline services announced a similar product while Total Energy Services also showed an interest in entering the market.

Keith: I’ll believe it when I see it. With Total, we’ll have to wait a couple of quarters to see what they come out with. As for Ridgeline, right now they are still in development and are only selling the product to companies using their water purification system.  In any case, PSN’s product has so little penetration in this market that there’s a lot of room for competition. Furthermore, I’m not worried because by building agreements with the majors PSN will shut down the competition.

Mich: What is your number 1 pick for 2012?

Keith: I’d have to go with 2 picks, Golar Energy which is in the LNG shipping sector and Poseidon. Both companies enjoy very high margins and are on big growth curves.

Mich: Where do you see oil prices?  Is oil still the place to be?

Keith: Oil is still the place to be as I believe strong oil prices are sustainable and if the Europeans get their act together we might even see a spike in the price. But it’s tough to see oil above $120 a barrel because the world economy screams “uncle” above that level. The world has shown that Brent at $115 where it’s been for the last 3 months really hasn’t hurt that much.

Mich: Do you think reversing the flow on the Seaway pipeline helps with the WTI Brent spreads?

Keith: We saw improving spreads on WTI-Brent following the announcement but I think this will be the only impact in the short term as domestic production is still rising in North America like in the Bakken. We definitely need new pipelines going to the Gulf and to Canada’s west coast in order to eliminate the spread.

Mich: What about Natural Gas?

Keith: I think we will be seeing abject pain for the next 2 years. It will take a wicked Canadian winter this year to dent supplies. There are currently 2 trends that are not helping NG prices:

  1. The NA majors have become good at developing shales using foreign money
  2. The rise of natural gas weighted trusts in the US—they can raise money much more efficiently than regular producers

Mich: In terms of resource plays, which one do you think will hold the “sex appeal” in 2012 and how do investors profit from it?

Keith: The Duvernay is going to be all the rage in Canada in 2012—the question is: will it be economic? If the answer is yes, you go out and buy all the fracking companies out there because it means the next 3 years Canadian drillers and frackers are guaranteed a full backlog of jobs.

Mich: How about E&P companies with Duvernay exposure, who would you pick?

Keith: Angle Energy and Bellatrix Exploration. The small guys that are going at it alone will see the biggest moves. Right now there is a lot of people watching BXE drill their first Duvernay well in February.

Mich: Finally, what is your outlook on the markets?

Keith: As this European drama goes on, at some point in time they have to monetize the debt. They have no other choice and this volatility reflects the “do we or do we not monetize the debt” game. The problem is it might take a whole year before we get a final decision from these guys.

Outside of Europe, the world economy is doing great; even the US is showing signs of improvement which might explain why oil is so high. But all of that is getting lost because you have half a dozen southern European nations stealing the thunder. If the European drama wasn’t on stage, stock markets would be a lot higher. At the end of the day, no one knows where it’ll go.

Thank you for your time Keith, I hope you enjoyed 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.