Schaefer’s “How To Beat The Saudis At Their Own Game” Pitch

Schaefer says, "My #1 Oil Stock for 2016 is Poised to Soar"

Keith Schaefer has driven a lot of questions our way over the last ten days or so with a strongly worded pitch implying that he has found the one oil stock that can “beat the Saudis at their own game” by making money with low oil prices… and, of course, making even more money if oil prices rise.

The ad has gone around under a few different headlines, including “You’ll Never Guess Who is the Lowest Cost Producer in the World” … and that’s essentially what it’s about, a western oil company that can produce oil for $2 a barrel from conventional reservoirs, without worrying about the high costs of shale oil or deepwater offshore discoveries.

So who is it? Well, we get a few clues that we’ll throw into the Thinkolator for you, but first let me give you a little taste of the ad for Schaefer’s Oil & Gas Investments Bulletin

Schaefer makes two big points… first, that he thinks oil is going up, big time, and then, that it doesn’t matter because his favorite stock will do well at current prices…

“No fewer than FOUR of the world’s most successful investors – as I’ll show you in a moment – are calling for an imminent spike in oil prices.

“And this includes the man who has successfully called every single turn in the oil markets for the last 10 years.

“This fast-moving rise in oil prices is now just a matter of time – and is expected to come within the next few weeks.

“And when it does, it will trigger a huge move in the share price of my #1 Oil Stock for 2016 – easily making for triple-digit profit potential.

“But here’s the thing…

“Even if all four of these market experts are wrong – and oil prices don’t move higher…

“My #1 Oil Stock for 2016 still makes money because of its historically low production cost.”

And this is not really about a secret new way to extract oil cheaply, or a technology development… for the most part, Schaefer’s point seems to be that “this company has found some large, conventional reservoirs” — and that it’s conventional oil, the kind you just drill vertically for and don’t have to work too hard to extract from the well, so it is far cheaper than shale oil that has to be exploded out of the rock and coaxed from the earth (in effect, you do this by throwing lots of money at it).

Three of those four experts who Schaefer refers to as predicting higher oil prices imminently are…

  • Pierre Andurand, a hedge fund manager who has made some big and successful oil calls (he’s the one Schaefer says ha “called every major oil market turn in recent memory” — the WSJ mostly backs that up, though they also note that his prior fund had some terrible years when oil wasn’t making big moves)
  • Kyle Bass, another well-known hedge fund manager who thinks energy is the most appealing big opportunity these days (he thought so a year ago, too, and had a bad 2015, but reiterated back in January that he thought the first half of 2016 was the time to build positions in energy)
  • Andy Hall from Astenback Capital, who has been lauded as a “God” for his commodities trading wins (he had a bad year last year, too, but he does see $60-80 oil according to this piece from Business Insider)

He doesn’t name the fourth expert, at least not that I noticed in the ad, but presumably it’s someone else who thinks oil is going to rebound. And to some degree, oil has already recovered pretty sharply from those mid-February panic lows (pretty much everything else has recovered since then, too) — though it’s worth noting that although I’m sure those three investors know a lot more about oil markets and forecasting prices than I do, they’ve all been wrong for at least a year. They all lost a lot of money in 2015 betting that oil would bounce back last year, and this prediction that now it will really start rising seems really to be just a continuation of the bullishness they’ve had for more than a year.

That doesn’t mean they’re wrong, of course — it just means that in any given period, the probability of them being wrong is much higher than zero. Experts are often wrong, which is why it doesn’t do us much good to follow them blindly.

But anyway, the idea is that this company will be fine whether oil is at $35 or at $80 — so let’s get to some more specific clues:

“Urgent Profit Scenario Unfolding: My #1 Oil Stock for 2016 is Poised to Soar

“The Oil Company That “Cracked the Code” and Beat the Saudis is Now the Lowest-Cost Producer in the World!

“The single largest opportunity in the energy markets to come along in decades is on the verge of exploding.

“At this moment, a fast-growing, conventional producer has ‘cracked the code’ – finding and developing oil for just $2 per barrel.

“This number has been verified by independent third-party reservoir engineers and is confirmed to be an absolute fact.

“It is not an estimate…it doesn’t have an asterisk beside it…and it’s not a ‘hypothetical.’

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“This is a conventional producer right now finding and developing oil for just $2 per barrel.”

More clues:

“When oil prices were high – from 2011 to 2015 – this company grew production at insane rates. During that period, this company’s production quintupled! ….

“How can anyone do that—beat the Saudis?

1. By drilling the same kind of reservoir the Saudis have.

2. By having the lowest cost production—possibly in the entire world. Yes, they may even have lower cost production than Saudi Arabia.

3. And by having no debt. In fact, this company has a mountain of cash.

“They don’t have to slow down production at all if they don’t want to. With no debt, every dollar of cash flow can grow the company.

“No debt repayments. No interest payments. Just keep making more money.

“My #1 Oil Stock has grown production by some 500% in the last four years—into the tens of thousands of barrels—and they have no debt.”

Schaefer also includes a few specifics on the company’s assets, which will, no doubt, be a nice boon to the Thinkolator in chewing through the clues… he says that the company had Finding & Development (F&D) costs per barrel of $2 for their 1P reserves in 2015, and 88 cents for their 2P reserves… and Finding, Development & Acquisition (FD&A) costs of $2 and $3.57, respectively. That’s where the “produce oil for $2 a barrel” bit comes from.

And shows a chart of the break-even thresholds for U.S. shale projects, ranging from $40 to nearly $200 to cover their “all in” costs.

So in case you weren’t doing in the math, he points out that…

“$50 Oil Works Better For My #1 Oil Stock Than $ 100 Oil Does For A Shale Producer”

So what is this company that Schaefer is hinting has “The Upside Of A Small-Cap With The Safety Of A Major?”

Thinkolator sez: This is Parex Resources (PXT in Toronto, PARXF OTC in the US), a sub-$2 billion Canadian oil company whose important (and producing) assets are in Colombia.

It was a pretty good match on most of the points already, but then I noticed that the chart Schaefer uses to illustrate the low costs was pulled directly from Parex’s latest investor presentation — so there’s not much room for doubt on this one.

Is Parex really “beating the Saudis at their own game?”

Well, they do say they have low-cost reserves — and they are cash flow-positive in their operations even with lower oil prices (they generated a bit more than C$200 million in operating cash flow last year)… but, of course, they also have large depletion and depreciation charges and, like most oil companies over the past 18 months, some significant asset impairments, so they aren’t actually profitable on the income statement.

This is not just a matter of having found a large reservoir and using the cash flow from that reservoir to pay for more development, they do not have any debt, which is good, but they do have a large line of credit that they could tap if they wished, and they continue to have to issue shares… their capital expenditures are far higher than their operating cash flow, and have been for several years.

Which might make sense, given the opportunity they have to invest to grow their production. They have been on a good track, growing both reserves and production on a per-share basis, but they’re not exactly gushing cash at current oil prices — they include a graphic in their presentation that indicates their sensitivity to Brent Crude prices (that’s the seaborne price for crude oil, used as a standard for most folks who aren’t selling into the US pipeline system), and it indicates that they have a cash netback of $4 at $35 Brent, and $12 at $45 Brent.

That $12 netback at $45 Brent is essentially the situation they were in for the fourth quarter of last year and that was another negative cash quarter for them (they had about $6 million in cash from operations, after allowing for noncash things like depletion and asset impairments, and capex of about $29 million) — there are a lot of costs that don’t come under that “finding & development” definition, including large transportation costs, taxes, royalties, etc., so it looks to me like their current operations, assuming they’re consistent, require something like $40-45 Brent Crude prices for the company to roughly tread water on a cash basis and keep reinvesting enough to at least maintain production. That’s not a very rigorous analysis, I just essentially looked at the financials for the fourth quarter, during which oil prices averaged about what they are today.

They have made some larger discoveries in recent years, and they may well have the potential to increase production significantly more than they have in the past — particularly if oil prices do rise this year. That guess is a bit beyond my ken, and I won’t make a forecast about oil prices (that’s because I’ve never been able to predict them and have been surprised many times, so you can thank me later for failing to provide another uninformed forecast), but they do have plenty of cash for at least their near-term capex needs, their wells are generally economically viable and worth producing at current prices, and they don’t yet have any debt. So from what I can tell after a quick glance at the books they’re not currently in trouble, which, in the world of smallish oil producers, is fairly impressive in its own right.

With that I’ll send you off to thinkolate on the company for yourself — or, I suppose, you can subscribe to Schaefer’s newsletter if you think it’s an exciting idea and you want him to follow it for you (newsletters aren’t all evil, it’s just that there’s no sense in subscribing to a newsletter just to hear about a “hot tip” of a stock, that will set you off on a bad road and make you extra inclined to believe in the information you paid for… I think it’s better to get several perspectives about a stock right away, but it’s often hard to weigh opinions and analysis if you paid a lot of money for one of those perspectives, and that’s doubly true if you paid for the first thing you read about a stock).

Most analysts rate Parex a buy, but at C$12 it’s also already well above the average analyst price target of about C$11. And they’re not expected to report a profit this year, but to break even (on the income statement, not just cash) in 2017 … of course, those estimates are driven in large part by what those analysts think the oil price will be.

So… do you find Parex interesting as an oil play? Do you think the prognosticators will be right about $60-80 oil this year? Let us know with a comment below.

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