Agcapita June 20, 2012 Update


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From 1936 to 1945, Alberta was in default on its provincial debt, managing only partial coupon
payments and no principal repayments. Out of cash and out of options, Alberta did what every bankrupt EU country wishes it could do again - Alberta started
printing its own currency. Of course Alberta didn’t call it that, this fiat currency came with the nifty moniker of Alberta Prosperity Certificates (“APCs”).

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Agcapita June 20, 2012 Update

  1. 1. Agcapita UpdateJune 20, 2012
  2. 2. Agcapita UpdateCAN THE MARGINAL COST OF PRODUCTION TELL USANYTHING ABOUT FUTURE OIL PRICES?Oil prices have recently dropped on concerns relating toboth growth and supply. Falling back on first principles, canwe make any predictions about prices over the mediumterm? Obviously, it is the cost of the marginal barrel of oilthat sets prices at any given level of demand. According torecent analysis by Bernstein and the Wall Street Journal,in 2011 the production cost of the incremental barrel ofproduction was “$92.26 for the 50 largest listed oil and gascompanies and will reach $100 a barrel” in 2012. RISING COSTSMarginal cost of oil production Europe Brent crude-oil, weeklyfor the 50 largest energy spot price per barrelcompanies, price per barrel $150$100 100 75 50 50 25 0 0 2001 ‘03 ‘05 ‘07 ‘09 ‘11 2001 ‘03 ‘05 ‘07 ‘09 ‘11Sources: Bernstein Research; U.S. Energy InformationAdministration (oil price), The Wall Street JournalUnsurprisingly, the WSJ stated that incremental barrelcosts are “rising because much of the extra oil added toworld supply has come from more technically challengingareas such as deep water or the Arctic” which resultsin “a combination of higher material costs and reducedproductivity per well.” 1
  3. 3. Agcapita Update (continued)Viewed another way, how much would demand have and out of options, Alberta did what every bankruptto fall to create sustained $80 prices? Looking at EU country wishes it could do again - Alberta startedthe chart produced by Cambridge Energy Research printing its own currency. Of course Alberta didn’t callAssociates (“CERA”) below, it is on the order of 10 it that, this fiat currency came with the nifty monikermillion bopd or around 10% of daily demand i.e. of Alberta Prosperity Certificates (“APCs”):if demand were to fall to around 80 million bopdthe last 10 million bopd on the right side of thechart would be unprofitable production and wouldeventually be shut-in.ALBERTA’S FORGOTTEN DEBT DEFAULT -PROSPERITY CERTIFICATES WITH NEGATIVENOMINAL INTEREST RATES TO BOOT!From 1936 to 1945, Alberta was in default onits provincial debt, managing only partial couponpayments and no principal repayments. Out of cash 100 Other South and North America 90 Canada Oil Sands Nigeria Deep WaterCost of Production (2007) dollars) 80 Angola Deep Water US Gulf of Mexico Deep Water 70 Brazil Deep Water 60 UK North Sea 50 Mexico Other South Other 40 Libya America, Europe, North China Eurasia, and Africa America 30 20 Russian Saudi Other Middle Arabia Federation 10 East 0 0 10 20 30 40 50 60 70 80 Cumulative Oil Production (mbpd) 2
  4. 4. Agcapita Update (continued)Name notwithstanding, fiat currency was effectively Canadian Farm Receipts Increase, Farmwhat it was. The APCs were introduced in August Consolidation Trend Continues - The 2011 Census of1936 and were used to pay government bills. Most Agriculture revealed higher Canadian farm revenuesinteresting, under the plan, the recipient of the APC and an increase in farm size reflecting a continuationwas required to purchase a stamp equal to 1% of of the land consolidation trend in the industry...the face value each week. The stamps had to beplaced on the back of the APCs for them to be valid. Oil Price Per Barrel For Biofuel Break-Even - FromFor bearers of the APC, the result was that they Goldman Sachs research into biofuel efficiency - theexperienced a 50% loss of purchasing power during following table outlines the cost per barrel equivalentthe course of a year if they failed to spend them. of a range of biofuels - or in other words the prevailingVoila, negative nominal interest rates! Talk about oil price at which they are competitive substitutes...increasing the fabled “velocity of money”. Surely ascheme like this is the consummation of the secret Some Quotable Quotes - Ben Bernanke - “Thedreams of every consumption obsessed, Keynesian always entertaining if not particularly prescient Bencentral banker on the planet. Let’s not tell them shall Bernanke, Chairman of the Federal Reserve: “We’vewe? never had a decline in house prices on a nationwide basis. So, what I think what is more likely is thatSOME LINKS TO OTHER ARTICLES YOU MIGHT house prices will slow, maybe stabilize, might slowFIND INTERESTING: consumption spending a bit...”Austrian True Money Supply - According to the True How Green are Biofuels? - Some interestingMoney Supply (“TMS”) measure as defined by the questions arise from the increasing use of foodAustrian School of Economics, US money supply has commodities as an input into an industrial process togrown at a rate of over 12% in the last year... create energy - are biofuels as “green” as suggested and are they competitive against conventionalDiscounts Hiding in Plain Sight - Natural Gas - “A few petrochemical energy sources?...weeks ago I wrote about the investment prospectsof two asset classes in the energy space. One is a BIS - Unsustainable Public Sector Fiscal Path - Someless-focused on part of the Canadian oil sector - interesting quotes from a recent study by the Bank ofconventional heavy oil in the Lloydminster area - and International Settlements (“BIS”)...the other is the much beaten down North Americannatural gas sector...” 3
  5. 5. DISCLAIMER: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither AGCAPITA nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to AGCAPITA and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting AGCAPITA or its relevant affiliate directly.#205, 120 Country Hills Landing NW Tel: +1.403.608.1256 www.agcapita.comCalgary, AB T3K 5P3 Fax: +1.403.648.2776Canada