Marquee Energy Ltd. is a Calgary based, junior energy company focused on high rate of return oil development and production. Marquee is committed to growing the company through exploitation of existing opportunities and continued consolidation within its core area at Michichi.
Background
Gloomy times prevail in Canada's oil patch. In today's regime of low oil and gas prices, a great many companies are now unprofitable. Many are being challenged by heavy debt loads. Many, especially the juniors, are finding it difficult to obtain financing on reasonable terms, if at all. There is a general atmosphere of pessimism: concern about the impact of a new regulatory climate in Alberta associated with a change in the provincial government, worry about the intermediate to long-term outlook for energy prices and the impact of competition from other parts of the world, a readjustment in expectations for export now that the Keystone XL Pipeline has been sidelined (for the time being) and the prospect that chances for the approval the Northern Gateway Pipeline are next to nil as the federal Liberal government has been on record as opposing it.
Layoffs are the menu de jour in the industry. Capital expenditures have been reduced significantly and many projects have been put on hold. In brief, many companies are in survival mode.
All is not doom and gloom. The new Alberta government is consulting with industry and environmental groups and it appears that reasonable minds have started to reach some common ground:
http://calgaryherald.com/business/energy/albertas-climate-strategy-a-step-in-the-right-direction
Meanwhile, some environmentalists refuse to be embarrassed by inane remarks:
When a clip was played of Saskatchewan Premier Brad Wall cautioning leaders to take into account the impact of climate change goals on jobs and the energy sector, “which is already suffering massive layoffs in our country,” Suzuki invoked the comparison to slavery.
“You know what I say to that clip? It sounds very much to me like the Southern states argued in the 19th century, that to eliminate slavery would destroy their economy. It did. It transformed their economy. They took a big hit. But who would say today that the economy should’ve come before slavery?” Suzuki said.
When Solomon suggested those in the oil industry might take offence to the comparison, Suzuki said, “they’re destroying the very atmosphere that we depend on.”
“I keep telling the fossil fuel industry, whoever will listen to me, which isn’t many, you’re an energy industry. Now surely to God there’s enough imagination to find other ways of extracting that energy.”
“But, boy, to compare it to slavery,” Solomon said.
“You’re damn right I do,” Suzuki said. “We’re talking about the very atmosphere that sustains our lives.”
Suzuki was not available for comment on Tuesday.
Layoffs are the menu de jour in the industry. Capital expenditures have been reduced significantly and many projects have been put on hold. In brief, many companies are in survival mode.
It's the usual story: those with "weak hands" will either fall by the wayside or be swallowed up by other actors with deeper pockets.
All is not doom and gloom. The new Alberta government is consulting with industry and environmental groups and it appears that reasonable minds have started to reach some common ground:
http://calgaryherald.com/business/energy/albertas-climate-strategy-a-step-in-the-right-direction
When a clip was played of Saskatchewan Premier Brad Wall cautioning leaders to take into account the impact of climate change goals on jobs and the energy sector, “which is already suffering massive layoffs in our country,” Suzuki invoked the comparison to slavery.
“You know what I say to that clip? It sounds very much to me like the Southern states argued in the 19th century, that to eliminate slavery would destroy their economy. It did. It transformed their economy. They took a big hit. But who would say today that the economy should’ve come before slavery?” Suzuki said.
When Solomon suggested those in the oil industry might take offence to the comparison, Suzuki said, “they’re destroying the very atmosphere that we depend on.”
“I keep telling the fossil fuel industry, whoever will listen to me, which isn’t many, you’re an energy industry. Now surely to God there’s enough imagination to find other ways of extracting that energy.”
“But, boy, to compare it to slavery,” Solomon said.
“You’re damn right I do,” Suzuki said. “We’re talking about the very atmosphere that sustains our lives.”
Suzuki was not available for comment on Tuesday.
http://www.calgaryherald.com/news/national/98it+moral+issue+david+suzuki+compares+oilsands+defenders+slave/11541668/story.html
Shameful ... and not helpful. This from a jet setter whose airline travel exploits contribute to global warming far more than the average Canadian ground dweller.
Shameful ... and not helpful. This from a jet setter whose airline travel exploits contribute to global warming far more than the average Canadian ground dweller.
Reversion to the Mean?
Oil prices are at record lows. Is it different this time? Will prices ever recover?
The short-term outlook for long-side investors is gloomy - that is, unless you are invested in refiners (e.g. Holly Frontier )
http://www.bloomberg.com/news/articles/2015-11-26/biggest-oil-buyers-pick-themselves-as-winners-from-opec-meeting
The short-term outlook for long-side investors is gloomy - that is, unless you are invested in refiners (e.g. Holly Frontier )
http://www.bloomberg.com/news/articles/2015-11-26/biggest-oil-buyers-pick-themselves-as-winners-from-opec-meeting
Many commentators contend that things are different and that oil prices will remain low for an extended period of time. (I will not comment on the substance of the arguments as one always has to consider the agenda behind them.) The contentions:
- The world is awash in oil. New production is coming on line: countries such as Iraq are now more able to sell their oil, many countries (e.g. Saudi Arabia) are not curtailing production in order to maintain social programs etc. to foster social peace on the home front, other one-trick pony states dependant on oil continue production as they are desperate for petroleum revenues. Technological innovation has released huge new reserves for exploitation viz. fracking. Excess supply will persist for the foreseeable future.
- The nature of global energy consumption is changing: industry is becoming more energy efficient. This should result in reduced demand for oil and gas.
- "Alternative" forms of energy (solar and wind) are becoming more competitive and more favoured by policy makers.
- Some commentators advance the view that the world economy is in for a protracted period of slow growth, thereby reducing the need for energy.
I hold a different perspective.
Global populations are still increasing and affluence is still increasing. Click on the following link for an elegant interactive synopsis of the rise of affluence over time. (It is well worth exploring the various facets of this wonderful site.)
On a per capital basis, energy consumption has risen steadily.
Whereas the rate of increasing consumption has slowed in the developed world, it is projected to accelerate in emerging economies.
In earlier editions of The Financial Passage Maker, I noted that change in the mix of energy consumption is a gradual evolutionary process for a variety of reasons. It takes time and money to refine technologies and infrastructure for production, transportation, storage and consumption. The "human dimension" is just as important: forecasters have a penchant for greatly underestimating the dynamics of attitudinal change regarding the use of energy. (More about this later on in a discussion of energy markets.)
In my view, some people have conflated the recent decline in fossil fuel prices to the process of changes in the mix of energy sources. If anything, I consider that the low pricing regime has probably slowed the process of transition from petroleum energy sources to other sources as there is no cost-driven reason to change. Further, I don't think for a minute that developing economies will be willing to "compromise" the prospect of economic development through using more costly "green" energy sources as their manufacturing base increases. The governments of developing countries are loath to undertake any measure which might reduce the economic prospects of growing, youthful (potentially restive) populations.
Geopolitical risk is a very unpredictable factor. It has the potential to affect markets very quickly. The Middle East, in particular, appears to becoming more unstable. For example, my sense is that the world is becoming rather impatient with Saudi Arabia - no longer will it be prepared to tolerate the inconvenience of Saudi Arabia's export of Wahhabism as it has morphed into a monster:
The issue is less what the Saudis will do than how the US will react to an extremism whose consequences can no longer be denied by strategic considerations. For decades, US administrations have tolerated Saudi Wahhabism and the jihad, instability, and death it has fueled across the globe. Whether President Obama stressed the need for ending such activities during his January visit to Riyadh is unclear. The Saudis seem to think it is business as usual, with the two nations agreeing to disagree about religious extremism as a result of shared interests in energy policy and containing Iranian regional aspirations.
It is well worth reading the entire article from which this quote is extracted: http://www.worldaffairsjournal.org/article/saudi-connection-wahhabism-and-global-jihad
If you read some of the better journals on foreign relations, you will be able to detect a growing sea change in attitudes to Saudi Arabia. It no longer enjoys its former position as the major supplier of oil to North America. Other options are very viable, including domestic production. If anything, the U.S. has the agility, funds and tradition to do what is necessary to support major change when its national interests are threatened. My sense is that it will be joined by the rest of the world, including China and Russia, nations which also feel the threat posed by religious unrest (or the perception thereof). How this may change the oil supply situation remains to be seen, but change of any nature causes reactions on the part of the market, especially when strategic commodities such as petroleum as involved.
This said, here is a different take on the situation. It suggests that the U.S. and Saudi Arabia are conspiring to keep prices low.
http://www.middleeasteye.net/columns/us-saudi-war-opec-prolong-oil-s-dying-empire-222413845
Whoever controls the price of oil can play god with the global economy - that’s why the US and Saudi Arabia are leading the way to smash OPEC and re-create a new global oil cartel
Geopolitical risk is a very unpredictable factor. It has the potential to affect markets very quickly. The Middle East, in particular, appears to becoming more unstable. For example, my sense is that the world is becoming rather impatient with Saudi Arabia - no longer will it be prepared to tolerate the inconvenience of Saudi Arabia's export of Wahhabism as it has morphed into a monster:
The issue is less what the Saudis will do than how the US will react to an extremism whose consequences can no longer be denied by strategic considerations. For decades, US administrations have tolerated Saudi Wahhabism and the jihad, instability, and death it has fueled across the globe. Whether President Obama stressed the need for ending such activities during his January visit to Riyadh is unclear. The Saudis seem to think it is business as usual, with the two nations agreeing to disagree about religious extremism as a result of shared interests in energy policy and containing Iranian regional aspirations.
It is well worth reading the entire article from which this quote is extracted: http://www.worldaffairsjournal.org/article/saudi-connection-wahhabism-and-global-jihad
If you read some of the better journals on foreign relations, you will be able to detect a growing sea change in attitudes to Saudi Arabia. It no longer enjoys its former position as the major supplier of oil to North America. Other options are very viable, including domestic production. If anything, the U.S. has the agility, funds and tradition to do what is necessary to support major change when its national interests are threatened. My sense is that it will be joined by the rest of the world, including China and Russia, nations which also feel the threat posed by religious unrest (or the perception thereof). How this may change the oil supply situation remains to be seen, but change of any nature causes reactions on the part of the market, especially when strategic commodities such as petroleum as involved.
This said, here is a different take on the situation. It suggests that the U.S. and Saudi Arabia are conspiring to keep prices low.
http://www.middleeasteye.net/columns/us-saudi-war-opec-prolong-oil-s-dying-empire-222413845
Whoever controls the price of oil can play god with the global economy - that’s why the US and Saudi Arabia are leading the way to smash OPEC and re-create a new global oil cartel
The Boom and Bust Cycle
It will not be different this time. Good times will return. It's just a question of timing.
Here is a concise article which describes the cycle. Note that it is always dangerous to predict future demand and pricing as made in the article since there are simply too many variables.
Here is one seasoned investor's approach to the energy cycle. It is similar to mine.
http://www.investingdaily.com/23826/turning-an-oil-loss-into-a-tax-win-2/
Efforts to predict future pricing regimes are hampered by the "unreliability" of information. For example, statistics on supply and demand are often suspect for a variety of reasons: information is often "shaped" for competitive or other strategic reasons; assumptions about supply and demand can change significantly with the advent of new technologies, black swan events can trash previous assumptions, and so on.
The wild card in all of this is the human response to perceived change over time. The following article is interesting:
Energy markets are, at their cores, made up of people—producers, traders, suppliers, investors, consumers, etc. This means that markets are not only vulnerable to human emotional reactions such as anxiety, confidence and fear, but that they are also shaped by humans’ limited ability to predict what will happen in the future. This article explores how psychological reactions influence pricing in the oil market, and also how fluctuations in pricing are informed by market behavior and speculation. A review of the energy crises and price shocks of the 1970s and the 2000s provides a historical perspective on market and consumer reactions to planned and unplanned events.
http://www.hydrocarbonprocessing.com/Article/3050927/The-psychology-of-energy-pricing-A-look-at-market-behavior-during-oil-shocks.html
http://www.investingdaily.com/23826/turning-an-oil-loss-into-a-tax-win-2/
Efforts to predict future pricing regimes are hampered by the "unreliability" of information. For example, statistics on supply and demand are often suspect for a variety of reasons: information is often "shaped" for competitive or other strategic reasons; assumptions about supply and demand can change significantly with the advent of new technologies, black swan events can trash previous assumptions, and so on.
The wild card in all of this is the human response to perceived change over time. The following article is interesting:
Energy markets are, at their cores, made up of people—producers, traders, suppliers, investors, consumers, etc. This means that markets are not only vulnerable to human emotional reactions such as anxiety, confidence and fear, but that they are also shaped by humans’ limited ability to predict what will happen in the future. This article explores how psychological reactions influence pricing in the oil market, and also how fluctuations in pricing are informed by market behavior and speculation. A review of the energy crises and price shocks of the 1970s and the 2000s provides a historical perspective on market and consumer reactions to planned and unplanned events.
http://www.hydrocarbonprocessing.com/Article/3050927/The-psychology-of-energy-pricing-A-look-at-market-behavior-during-oil-shocks.html
I have perused a few theoretical models about the "boom/bust" cycle for petroleum. None of them have great predictive capacities in my view. Shell Oil, a company with seemingly limitless resources, has been singularly unable to predict the future.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10580630/Shells-gas-gamble-has-left-a-sour-taste.html
So what to do? Muddle Through and Hope
I believe that there are opportunities for investment in the oil and gas sector. I have adopted the following approach:
a) Underlying Assumptions
- Energy prices will rebound at some point and industry profits will increase.
- It is not possible to predict when and how.
- Investment opportunities will probably be "safer" in the more stable jurisdictions where production can take place without interference by conflict etc. and where products can be moved easily and safely to markets.
- It is possible to identify opportunities for investment i.e. companies which have the ability to survive in today's hard times and yet prosper when the good times return ... as they surely will.
b) Desirable Attributes of Companies in order to Minimize Risk
- Great management with a solid track record. Ethical. Creative. Flexible. Focussed. Demonstrated record of husbanding resources and using them efficiently.
- Petroleum reserves relatively easy to extract and without great operational risk/cost. Low geological risk.
- Good supporting infrastructure which is readily accessible.
- Sound financial condition with a cash flow capable of sustaining the company in today's low price environment.
- A sound track record of containing costs e.g. invocation of cost efficiencies through the use of more productive technologies - a demonstrated ability to reduce costs e.g. cost of drilling.
- A sizeable resource base where production can be ramped up quickly in a cost-effective way when conditions improve.
- An understandable business plan which makes sense in today's environment.
To date, I have limited my research to the smaller Canadian producers for the following reasons:
- They are generally easier to understand than their larger cousins as their operations are focussed on a few plays.
- I figure that the days of making "extra" money through the increase in the value of the $US are largely over, hence my disregard of US companies for the time being.
- The number of companies is not all that great so it is not all that difficult to sort through them.
- I believe that the upside potential is quite significant following oil price recoveries - this as opposed to the larger companies which tend to be somewhat more stable in terms of price movements.
- The smaller guys are generally out of favour. The difficulties encountered by some of them are "colouring" investor outlooks on the rest of the community.
Marquee Energy Ltd. (MQL)
An informative overview of the company is provided here:
Investor Presentation October 2015
... or if you want to see it live, click here:
https://www.youtube.com/watch?v=e6-nFabuBmg
Sometimes it's worth viewing interviews with company presidents.
https://www.youtube.com/watch?v=ZIkZx3MaB1Q
Desirable Attributes
- The company is led by capable people who have had about 20 years experience in the junior oil and gas sector and who have experienced "hard times".
- Marquee is focussed: it has assembled a significant, contiguous series of properties and has control of key infrastructure with the result that it can bring wells on stream quickly. (Frustration with bringing new wells on line was an infrastructure issue which emerged in a few of the companies I investigated.) Further, the properties are readily accessible the year round and landowner attitudes are favourable.
- MQL has a strong balance sheet and no issue with its lenders.
- MQL has been able to maintain a positive cash flow even in today's climate of low oil prices.
- The company has a low risk drilling program and has significant experience in working in the Michichi area.
- It has demonstrated an ability to reduce its drilling costs: partly due to lower servicing costs in the sector and partly due to a greater understanding of the geology and operating conditions at the drill site. In my estimation, continuing operations such as Marquee will enjoy the benefits of an oil services sector that will go to extraordinary lengths to maintain revenue streams. It's in a sweet spot.
- I am interested in the potential for a pilot water flood project to increase production. It could be a catalyst for an increase in the share price regardless of the state of oil market. In my view, markets will react quickly to good news in this area, particularly as MQL is well covered by analysts.
Cautions
- I expect that the share price will be volatile. Sentiment is not good and there is always the potential for the market to over-react to bad news during these hard times in the oil patch.
- Since the company is so small and depends on a small drilling program, operational difficulties or dry wells will have an impact which is greater than in the case of much larger enterprises.
I established an initial position with the thought that I would add to it in the event that oil and gas markets showed signs of improvement. Why?
- There is nothing like having cash in the game to focus one's attentions on company activity and the state of western Canada's oil patch.
- Limiting the initial stake is one measure to address an investment with a fair amount of risk. Speaking personally, I am very tolerant of major fluctuations in the value of my holdings in small companies once I have established a position. For example, I waited several years for Questor to take off.
- The market for MQL shares is liquid meaning that it will be possible to add to the position without too much difficulty.
My search continues
I am researching royalty companies in Canada and U.S. I may comment on them at greater length in the event that I select one or more for my portfolios.
I am researching royalty companies in Canada and U.S. I may comment on them at greater length in the event that I select one or more for my portfolios.
