Keith Schaefer: Predicts Market Rebound After Solution to
European Debt Crisis
Source: George Mack of
The Energy Report
Oil and gas producers have come to rely on the know-how and
skills of an innovative group of service providers that create
efficiencies through novel technologies and products. Keith
Schaefer, editor and publisher of
The Oil and Gas Investments Bulletin,
believes investors can both derisk their portfolios and achieve
growth with energy services companies that dramatically improve
profits of producers. In this exclusive interview with
The Energy Report,
Keith stakes out some ideas that could yield big upside and add a
cushion during volatile times.
The Energy Report:
With this debt ceiling debate behind us now, the markets are
frayed. What's your take on this across-the-board selloff that we
saw the last week of July through the beginning of August?
This is a normal crescendo of fear in the markets that we're
getting each year or so after the financial crash of 2008. The
financial crash of 2008 has prepared us for all the debt talk.
The political system and the monetary system know what to do to
get us out of this problem. It's the indecision in taking action
that's causing all of the turmoil. Everybody knows that there
needs to be a restructuring of debt where both the private and
public sectors take a bit of a haircut and move on. I don't think
that we're going to see a global recession that will have any
huge impact on equity valuations.
You just used two words that caught my attention: "restructuring"
and "haircut." Are you talking about Europe-Spain, Portugal,
Yes. Right now, the European situation is by far the most
important driver of this stock market pullback. As soon as the
market can figure out that it is resolved, the rest of the
issues-the lingering U.S. unemployment, the high debt in the U.S,
the declining dollar-will all be managed, maybe with a bit of
pain, but they will be managed. It's the indecision and turmoil
around resolving the European debt crisis that is giving us this
problem. Once this gets done, and everyone swallows the medicine,
you're going to see a pretty big rebound.
How badly is this going to affect the oil and gas sectors and for
For natural gas, none of this economic turmoil is going to make
any difference. Around the world, gas is still a relatively
regional commodity that doesn't have any politics in its price.
Natural gas prices and the market are completely insulated from
all this political turmoil.
Oil is a completely different story. It's a very political
commodity. It goes up and down with politics, if not more, as
with fundamentals. I see oil having a bit of a range. The market
and the world economy have said in very clear terms earlier this
year that when oil gets to $120/barrel (bbl.), it starts to price
in recession and the oil and gas stocks stop moving. I'm going to
suggest that if oil does start to get up there towards $120/bbl.
again, the market is going to start pricing-in a recession that
will cause the oil price to come down. It might come down to
$85/bbl. I think that the range is probably going to be a little
bit higher. I see Brent and West Texas Intermediate (
) crude trading in a range here that's going to be somewhere
between $90 and $110/bbl.
You're talking about WTI coming down to $85/bbl.?
I would love to see oil stay at $85/bbl. for the next two or
three months for a couple of reasons. If oil can stay under
$100/bbl. as we move into the Northern Hemisphere's heating
season this fall, that would be great for oil stocks. One, it
would convince the market that we're not going to see such a high
oil price that the world will fall into recession again. That
would give investors a lot of confidence in buying oil and gas
stocks. Two, the valuation on the juniors has gone through the
roof over the last year. Part of that is quite deserved because
of the new technology of horizontal drilling and fracking, which
has enabled us to get a lot more oil and gas out of formations
and increase profitability of the sector. The valuations got very
high. Now you're seeing valuations come back down to a much more
historical norm. That is a great place for investors to reload on
the junior energy stocks that have been beaten up. A lot of fear
has come into the market and weeded out a lot of the weak
holders. This is a great opportunity for investors to pick up
some of their favorite stories very cheaply.
Do you see this as a combination of value story and point of
Yes. I say that cautiously because this pessimism and this value
could still last for another one to three months. Personally, I
don't think so. I think we're going to end up getting this
situation resolved sooner than that.
You tweeted on Aug. 4 that the put:call ratio was 1.2:1, which
you said usually signifies a bottom.
That particular ratio at 1:1.2 is a very strong, historical
turning point for markets.
Do you feel like there's a lot of cash on the sidelines right
There is a ton of cash on the sidelines and not just for the
market but also corporately. Corporate America, which is still by
far the largest economy in the world with 25% of global
production, is full of cash. And the buyside in the investment
market is full of cash. So there is a huge opportunity to see a
lot of sustained buying coming into the market. Fear and
volatility mean that interest rates are going to stay very close
to zero. People think economics is the main driver of the market,
but that's not true. Cheap money is just as much a driver of the
We're actually seeing a negative interest rate right now where
the large deposits are being charged a fee by some of the money
That's right. I just tweeted that. Everyone wants to go to cash,
and Federal Deposit Insurance costs the banks money. So the banks
are now charging clients to own cash. I think that's hilarious
where they're saying, "We don't want your money." The market is
saying, "You need to have your money in the stock market." There
is just no incentive for investors to hold cash.
You've written extensively about the Bakken as "source rock" and
fracking to harvest the resources in the formations. Now we're
starting to see more media reports about fracking, and they have
been on the negative side. What will be the ultimate outcome of
this added attention?
The biggest outcome from all this added attention is going to be
more regulation and more paperwork, which could translate into
higher fracking costs. We've heard Obama talk about fracking a
couple of times, so this issue is already at the highest levels
of the U.S. government. Over the next year, we are going to start
to see much greater regulation and paperwork. The flipside is
that we haven't hit the limits on fracking yet. We're still
improving that technology, not annually, but quarterly. That's
the flipside, even though it's going to cost more to do all this
Would you talk about some of your ideas that you've been telling
I've been saying for several months to leg out of small, junior
oil and gas producers and move into the energy services
sector-the drillers, the frackers and the chemical companies.
There's a whole supply chain of companies in sub-industries that
supply a lot of equipment and manpower to the energy producer.
New high-tech products coming out in these supply chain areas
have fantastic financials. This is now the only sector that has
pricing power in the market, and you're seeing energy service
rates go up probably 5%-10% a year, and sometimes 5% per quarter.
Demand is strong for these types of products because they
increase the profits of the producers so much that the producers
can afford to pay. These companies have a backlog of sales to the
producers for probably the next three to five years, whether oil
goes to $50/bbl. or $150/bbl. These energy services stocks take a
lot of the risk out of the equation.
One of my absolute favorites right now is
Open Range Energy Corp. (TSX:ONR)
. This is a very interesting hybrid company. It was a gas
company, and it is still a gas company producing almost 4,600
barrels of oil per day (bopd.) of natural gas in western Canada.
It has developed what it calls the Poseidon Concepts system that
handles water and fracking fluids for producers. It allows oil
and gas producers to hold large amounts of water in heated tanks.
They're very cheap to install, cheap to build and they save
companies two days of transport costs. This product is remarkably
profitable for the company. Gross margins in its last quarter
were 89%-unbelievable profitability. It's growing like crazy. I
see that as an absolute must-have in the oil and gas sector. I'm
buying the stock consistently at ever-higher prices because it
could be a huge winner over the next one to two years.
Open Range shares have more than tripled over the past 52 weeks.
Even in the last three months, it's still up 26% even after this
stock battering. Wouldn't this be one of the first companies that
people would sell in this kind of environment?
Not when you have that kind of profitability.
You said 89% gross margin, right?
On this frack fluid handling system, Poseidon Concepts.
Another services company idea?
One of my favorites is
GasFrac Energy Services Inc. (TSX:GFS)
. The fracking companies right now are absolutely on fire. One of
the larger companies in Canada,
Calfrac Well Services Ltd. (
, just reported its Q211 numbers and beat
by almost double. That is almost unheard of, and it's still
growing and increasing its capacity 48% this year. That's a huge
growth curve, but the demand is there. GasFrac has a special,
patented technology where it does fracking and horizontal
drilling with propane rather than water, thus eliminating a lot
of environmental problems. Water is expensive. There are water
treatment costs and the regulation around water is going to get
bigger and tougher.
I just love
Canadian Energy Services and Technology Corp. (
, a company we mentioned in our
. The company has done so well. It just split the stock 3 for 1,
so now it's only $12. The business is growing quickly. The
management team has been so disciplined in its acquisitions, and
its performance has been so strong in growing the business. It's
Canadian Energy had been down about 8% over the past 12 weeks. Is
it a value?
It's both a value play and a growth play. It trades at a bit of a
premium to its peers, but the growth curve more than justifies
Is there a non-technology services play that you're following
One interesting company is
Black Diamond Group Ltd. (TSX:BDI)
. I don't own the stock because it's a $30 stock, but it's a
nuts-and-bolts play. This team has been able to grow its business
so strongly. Black Diamond was up 80% last year, and it is really
doing a great job of providing high-quality accommodations to oil
sands workers. Only a few years ago, housing for these workers
was very rudimentary and not very pleasant, but the game has
changed a lot. You better have nice accommodations and high-speed
Internet because competition for the workforce is intense. Guys
can just walk across the street and go work for a different
Keith, what about international or global plays?
Usually that's where the big risk-reward scenario is for
investors because sometimes you are dealing with countries that
have a little bit of extra political risk so you need to have a
bigger prize in the ground to warrant spending the money. One of
my favorites is
Coastal Energy Co. (TSX.V:CEN)
. The company has been having huge success drilling wells in the
Gulf of Thailand. It hit two big wells a couple years ago, and
the stock had a great run before it fell off. Since then, its
team has been able to figure out the geology and its last nine
wells have all been successful. These wells have come in at
greater-than-expected flow rates. This company is going to double
production from 8,000 bpd. and that is slowly getting priced into
the stock. It's a great opportunity for investors here with this
What else are you looking at globally?
Globally, one of my favorite stories has been
Tag Oil Ltd. (TSX.V:TAO)
. This company has way outperformed all expectations. It was one
of the first to discover an international shale play. It's in New
Zealand, so it's in an Anglo-Saxon country with English rule of
law. Tag Oil is about to drill their first big well into this
asset, probably in November. So the market is very excited about
this story. But in the two years leading up to this drill, it has
actually been able to find a lot of oil, but mostly gas, in a
different basin in New Zealand. Like Coastal Energy, Tag Oil has
discovered a lot of oil and gas, almost more than 5,000 bpd.,
which will be brought on stream over the next 6-10 weeks. It is
going to go from 1,000 bpd. to 6,000 bpd. over the next three
months. Their high impact east coast shale play is thick; all the
early indications are that it's going to be a Bakken lookalike.
Of course, until the drill comes back on the first hole, we won't
A domestic play?
Painted Pony Petroleum Ltd. (TSX.V:PPY.A)
remains a very strong story. The company has fantastic land
packages in both the oil patch in the Bakken in Saskatchewan and
in gas in the Montney play in Alberta. President Pat Ward has
done just a fantastic job on assembling land packages and quality
joint venture partners, and he's executed flawlessly. The stock
has had a run from $6-$14 in the last year, but I can see this
stock having even greater upside.
You've been writing about companies drilling just outside the
Bakken to tap into that.
What I said on that topic is actually not on the periphery of the
Bakken. It's an entirely new basin of Bakken play called the
Alberta Bakken. The first few wells have come in with mixed
results, but we're going to start to see a much larger number of
wells get reported over the next couple of months. I really
believe this play is going to be a winner. I've been telling my
subscribers that they need to own some stock in this play. That
would be companies like
Primary Petroleum (TSX.V:PIE)
, which could have a fantastic run, if successful, in 2012;
DeeThree Exploration Ltd. (TSX.V:DTX)
on the Canada side;
Argosy Energy Inc. (
Bowood Energy Inc. (TSX:BWD)
. They are all stocks that have medium to large land positions in
the Alberta Bakken. If that play proves up as I expect it to, it
could be very positive.
Thank you very much. It's been enlightening.
Thank you, too.
Also, we would like to extend a special offer to your
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
3) Keith Schaefer: I personally and/or my family own shares of
the following companies mentioned in this interview: Bowood
Energy Inc., DeeThree Exploration Ltd., Primary Petroleum,
Painted Pony Petroleum Ltd., Coastal Energy Co., GasFrac Energy
Services Inc., Open Range Energy Corp., Canadian Energy Services
and Technology Corp. I personally and/or my family am paid by the
following companies mentioned in this interview: None.
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