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Agcapita June 4 2012


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Discounts Hiding in Plain Sight (Natural Gas) Peters & Company, one of Canada’s most experienced oil & gas investment banks, recently published an excellent report on the rate of return on North …

Discounts Hiding in Plain Sight (Natural Gas) Peters & Company, one of Canada’s most experienced oil & gas investment banks, recently published an excellent report on the rate of return on North American oil &
gas plays ranging from “Barnett Shale” to “Mississippi light oil horizontal wells”. Lloydminster conventional heavy oil, vertical wells were amongst the best performers in the North American energy sector.

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  • 1. Agcapita UpdateJune 4, 2012
  • 2. Bl ue sk y Ll Sea M oyd l M ROR Ba is m u 0% 50% 100% 150% 200% 250% kk sis in ltila en sip ste te Ho pia r V rals riz n H ert o o ica Sp Wa nta rizo ls ea bis ls (< nt rfi ka a sh w 1,7 ls Vi Sh Ho 00m kin Pe o r g kis rt H izon ) Ho riz Sha G ko oriz tals on un lau Ho o ta av co riz nta Agcapita Update l- o n o ls Ea Do n L ite nta gl Mo dsl owe Hor l Oi e an r iz l Fo ntn d Ho on rd ey U t Sh Ho nc rizo al ale riz onv nta - G ont ent ls as al - ion - C Ka al on ybo de b Ca Ea nsa DISCOUNTS HIDING IN PLAIN SIGHT rd iu G gle te m Ca ra F Ho No rdiu nite ord riz on rth m W ta Da Ho ash l- ko rizo Pe Ca ta nt m na Ba al beaten down North American natural gas sector. bi kk ra - W Ca M W oo Nio en using simple, conventional, vertical well technology. rd es df br iu on tU o a m tn nc rd ra Ho ey o S riz Ho M nve hale Oil Plays a & gas investment banks, recently published an excellent on riz Conventional Heavy Oil: Conventional heavy oil is not be of two asset classes in the energy space. One is a less- be confused with its capital intensive and costly brethern focused on part of the Canadian oil sector - conventional ta on W rce ntio A few weeks ago I wrote about the investment prospects l- t ll n Peters & Company, one of Canada’s most experienced oil unconventional heavy oil or “oil sands”. It is heavy oil - less G al - ilrich us S al Ca ar than 20 API - but it can be drilled and flows from the ground rd rin Daw Ho ha le heavy oil in the Lloydminster area - and the other is the much iu gt m on son rizo n Ho Bo Un /Pa tal riz M ne co rkl on on Sp nve and ta tn l - ey Not rin ntio Natural Gas Plays M Pem Ho ikew g/L na on ri e l tn bira zon in H ona ey Ea tal oriz rd Ho s - o riz t U Re nta on nc sth l ta on av l- v e G ent n re i Ba Fay ate ona De rne ette r To l ep tt vil w Ba Sha le S n Ha sin le A hale yn Ga ve es s rag vil - A e le l Ha Sh ber Ar yn ale ta ko es W - L Ea ma vill olf A gl e c e - W Sh am Fo o a p rd od le - Sh for TX ale d S Ho - ha rn Dry le Ri ve Gas Sh r S all hal ow e G as NORTH AMERICAN OIL AND NATURAL GAS PLAYS: RATE OF RETURN AT CURRENT STRIP PRICES1
  • 3. Agcapita Update (continued)report on the rate of return on North American oil & In addition, the wells are inexpensive and shallow,gas plays ranging from “Barnett Shale” to “Mississippi entailing less risk. All of these factors go tolight oil horizontal wells” (Read Full Report Here). generating higher rates of return.Lloydminster conventional heavy oil, vertical wellswere amongst the best performers in the North Natural Gas: For the extreme value oriented investorAmerican energy sector with an average rate of return with a long-term horizon, NG is trading at historicof 150% - the second highest in the industry. Only lows. More research from Peters & Company shows“Bluesky Seal Multilaterals” with a return of just over that prices have to recover to around $4/mscf to200% were superior. $5/mscf from current levels at $2/mscf in order for operators to make money.When investing in conventional heavy oil inwestern Canada, you benefit from two discounts: If prices do not rise then production will decline.1) the discount of heavy to WTI prices and 2) Or more accurately, operators are going to shut inthe discount of WTI to global prices. As such, production (voluntarily or via bankruptcies) which inLloydminster conventional heavy oil represents a turn will drive prices back to break-even levels.relatively inexpensive oil BTU. We also believe thatfundamental drivers are in place for continued low We believe that NG assets with large reserves andand even declining heavy oil differentials: modest production levels necessary to maintain– Declining heavy oil production from Venezuela & leases can be re-structured to create a low cost-of- Mexico carry long position - one which demonstrates distinct– Improved pipeline capacity projected over long cost, volatility and return advantages over: term – traditional long NG futures exposures which due– Heavy oil refining has highest margins relative to to contango currently in the forward strip incur other crudes material roll losses; and NORTH AMERICAN SHALE GAS PLAYS: CANADIAN NATURAL GAS PLAYS THAT MATTER:BREAK-EVEN NATURAL GAS PRICE (HALF-CYCLE) BREAK-EVEN NATURAL GAS PRICE (HALF-CYCLE)US$/mcf C$/mcf$6.00 $4.50$5.50 $4.25 $4.00$5.00 Median: US$4.49/mcf $3.75 Median: C$3.58/mcf$4.50 $3.50 Strip Price: C$3.38/mcf Strip Price: US$4.05/mcf $3.25$4.00 $3.00$3.50 $2.75 $2.50$3.00 Marcellus Granite Cana Eagle Ford - Fayetteville Haynesville Barnett Haynesville Arkoma Eagle Ford - Horn River Glauconite Montney at Cardium Hz. Wilrich Hz. Notikewin Hz. Montney at Montney at Montney at Deep Basin Wash Woodford Liquids Rich Louisiana Texas Woodford Dry Gas Hz. Kaybob Hz. Dawson Hz. Town Hz. Resthaven Hz. Gas Verticals Gas 2
  • 4. Agcapita Update (continued)– investments into operating NG producers which – Lloydminster conventional heavy oil assets in come with 1) material bankruptcy risk and 2) have 2012 at a rate of return more than 50% higher built in cost structures which make shutting in than most North American energy plays their entire production bases and going passive – Small Medium Enterprises (“SME”) in western long NG difficult. Canada at around 4-5 times earnings, generating rates of return almost 4 times private equityObviously this is more an investment for deep value averages in other developed marketsinvestors with a long investment horizon but to find – Natural gas assets at $2/mscf when industrya large, liquid asset class with such a pronounced break-even levels may be 2 to 3 times higher thanmargin of safety in today’s markets is rare and must thisbe considered (Read More). None of these investments were/are particularlyIn many ways these two investments speak directly hidden or hard to analyze - hence the conceptto the idea of “discounts hiding in plain sight”. Many of “discounts hiding in plain sight”. It is just ainvestors are sceptical that deeply discounted, straightforward matter of looking beyond the short-value investments can be found in today’s efficient term and trying to understand the underlying valuecapital markets and yet as an investor you could/can drivers.acquire:– Farmland in Saskatchewan in 2008 at an average of $400/acre, while today prices average over $600/acre 3
  • 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