Nawar Alsaadi

Value, contrarian, long-term horizon, activist investor
Nawar Alsaadi
Value, contrarian, long-term horizon, activist investor
Contributor since: 2007
Company: Semper Augustus Capital
Richard,
Thank you for the article, and the many informative articles you have written over the years. I do have a question about this paragraph, especially the last line:
I would argue, however, that if a cyclical recovery occurred within a year, the industry would have difficulty resuming growth - at, let's say, 5% annual aggregate growth rate - without WTI price exceeding $65 per barrel. Over time, however, this threshold may trend lower.
Your last statement about the $65 threshold possibly moving lower overtime is advocated by Goldman Sachs as well. However, it is not clear if your statement or Goldman's for that matter is taking in consideration the saturation/exhaustion of the sweet spots especially as the industry drills exclusively in the sweet spots for an extended period of time? I tend to believe that by 2017 improvements in productivity maybe offset by the industry moving into lower quality rocks, thus ensuring that the $65 threshold is not reduced and even perhaps increased as technology reaches its physical limits (as was the case with conventional production).
Shell's CEO had a comment to that effect in July in an article in the FT (http://on.ft.com/1FeRK6T), from the article:
Mr van Beurden stopped short of predicting a sharp slide in US output, arguing that companies’ efforts to cut costs and improve efficiency meant that production was likely to continue “for a while to come” at about current levels, until “the sweet spots start running out”.
I would welcome your thoughts on this issue.
Regards,
Nawar
Great article, I believe the assumptions in your model are realistic and the projected supply and storage levels are in line with my expectations, even though mine are a bit more aggressive and I expect supply to hit 8.7m by year end compared to your 8.7m barrels projection for March 2015. I also believe demand will continue to surprise to the upside due to the combination of low prices and higher employment, this should further accelerate inventory draw-downs in Q3 and Q4.
Regards,
Nawar
"I disagree with you about calling Opti's asset one of "low quality". It was an expensive asset (just like some of PWT's) with a lot of problems but its share was 1.8 billion bbl."
Ed, Opti Canada was a low quality asset, and it was their only producing asset. The fact it was expensive does not change the fact that the geology at Long Lake was not conducive for a high quality SAGD operation with a low SOR ratio, not to mention the Israeli technology OPTI used to substitute NG burning didn't preform as expected. I know OPTI very well as I traded the stock "profitably" at the time. (Likewise with Compton, I actually met with their CEO in May 2012 in Calgary as their were liquidating the company, and I reviewed their assets in detail, and concluded that they have not much value and can not be compared in any way or fashion to Penn West.)
Penn West production base is vastly different from an oil sands developer such as OPTI , Penn West produces from thousands of conventional and tight oil reservoirs, their assets are spread over a host of formations (Cardium, Viking, Slave Point, Seal...etc). Penn West has enough asset depth to liquidate what is required to clean the balance sheet. Will their NAV take a hit as a result of the balance sheet repair, you bet they it will, but the stock price is so far below NAV that even a meaningful haircut will hardly reduce the 100%-200%+ upside from current levels.
I really don't think listing names of bankrupt companies (both in the energy sector and a dying yellow pages business!) adds any value to the discussion other than fear mongering.
Having said all the above, you are fully entitled to your opinion, it is a free country, you can speculate any outcome you see possible or probable, however I do think events will prove you wrong in the next few quarters.
All the best,
Regards,
Nawar
"Opti Canada, Oilexco, Compton Petroleum"
The fact that the author is comparing Penn West to those 3 companies is highly indicative of lack of understanding of the energy sector and the fundamental differences between the above mentioned companies and Penn West. Opti Canada was a single asset company that collapsed due to the failed Long Lake reservoir which operated at more than double the budgeted SOR ratio, thus rendering the operation highly uneconomic. Oilexco had over $550m in debt against a mere 2P reserves of 66m barrels ($8.3 in debt per barrel vs. $3.36 for Penn West) and being a deep water developer Oilexco was highly dependant on a handful of very expensive projects meeting their production estimates such as Brenda Nicole which produced half what was expected despite hundreds of millions of dollars in commitments. Finally Compton was an NG company with B class NG assets in a very depressed NG pricing environment.
Penn West has no resemblance to any of the above, based on recent transactions for light oil by Raging River and Torc, Penn West can liquidate 15% of its production (20% of oil production) and pay HALF its debt at today's transaction prices.
What ultimately establishes the value of an energy company is the quality of its asset base. The value of those can not be derived from the company current capital structure, but rather measured interdependently based on their own merits. OPTI, Compton and Oilexco failed because they had low quality assets that failed to cover their debt obligation. Penn West assets are worth materially more than the company debt burden.
Regards,
Nawar
The issue that is most often overlooked when discussing shale is geology. Both shale operators and analysts talk about drilling moving to the most productive areas, hence shale oil is profitable and economic at $60 or below. Yet several sources indicate that the most productive areas (sweet spots) present 15% to 20% of the total area of a given shale basin, hence can those areas sustain the ongoing 4m barrels in shale oil production and even grow that number?. The whole reason the industry moved to shale is due to geology, we basically run out of accessible onshore conventional reserves, thus any discussion of production growth is incomplete without a proper evaluation of the available sweet spot inventory.
Regards,
Nawar
Chris, I appreciate the article, however have you attempted to calculate total cost including capex to drill and develop new fields?. This is quite relevant since Russian oil production is steadily declining (11% decline rate for the major western Siberia oil fields) and thus Russian companies must continuously invest in new reserves to maintain supply.
Regards,
Nawar
"Under these price assumptions, I estimate that Continental will generate ~$2.2 billion in discretionary cash flow in 2015. In addition to that, Continental will have realized ~$520 million from the recent hedge monetization and the sale of interest in Northwest Cana to its JV partner."
Richard, what I gather from your analysis is that without monetizing the hedges and selling assets, CLR wouldn't be able to show any growth in 2015 at $60 crude?. Would you know by how much their production would have evolved if they were limited to only their discretionary cash flow of $2.2B for capex?. It seems to be me at $2.2B CLR production would have declined.
Regards,
Nawar
Excellent article, it captures very well the underlying dynamics of the oil market. I believe prices will start to adjust meaningfully higher in 2H-2015 due to the factors you describe above. Traders are too focused on the short term (next few months), but oil companies produce their oil for decades, thus what matters is the long term price. The long term price can't trade below the marginal cost of production for an extended period of time. Having spent years studying the oil market, I can comfortably state that to supply the world with an adequate amount of crude, we need prices in the $75 to $85 range or an average of $80. This range is lower than the previous average of $90 to $110 due to improved shale productivity of late, I believe this new range will hold until shale oil production tops out in the latter part of the decade.
Regards,
Nawar
Over the last many weeks and months, we have heard multiple times the assertion that Saudi Arabia is repeating the 1985/1986 orchestrated price collapse to gain/maintain market share, and thus by implication, Saudi Arabia is ready to scarify substantial revenues to gain market share.
On the surface, the logic presented above by the media (either by purpose or omission) appears sold but it omits a crucial difference (among several differences) : In 1986, Saudi Arabia did indeed cause a sharp price collapse as it changed its swing policy, but it also substantially increased its exports from 2.3m barrels in 1985 to 3.9m barrels in 1986 or a 70% increase in production as prices declined from an average of $26.5 in 1985 to $14.65 in 1986 or a 55% decline, thus their maneuver was largely revenue neutral. Between 1985 and 1986 Saudi Arabia’s revenues declined by only 6.5% or roughly $1.4B less revenues per year, this was a much smaller drop in revenues than for the rest of OPEC and the rest of the world (except for Kuwait and UAE which followed the same Saudi strategy).
Today, the situation is very different. Saudi Arabia is taking a real hard price cut of about $40 per barrel (from the Brent average the last 4 years) without a corresponding increase in production. Thus, they are losing over 40% of their revenues or close to $100 billion per year due to their decision not to swing produce.
Those who believe that Saudi Arabia will maintain this strategy for more than few months are sorely mistaken, if prices don’t adjust higher in early 2015, Saudi Arabia will likely adjust course regardless of whether they have achieved their political goals (even in 1986 they adjusted their production lower in the latter part of the year). The price Saudi Arabia is paying today to maintain its current strategy is too costly in comparison to a slight adjustment in production over the next couple of years. If anything, this price swoon will convince all participants to adhere to their quotas and may even get Russia to pitch in as well, and we will hear once more that the death of OPEC was greatly exaggerated.
Regards,
Nawar
Excellent article Value Digger, I share your outlook on oil as well. I would strongly advice reading this article as well in regards to the significant risks of $150B in cancelled oil capex in 2015 and a subsequent supply crunch later in the decade. At current prices up to 12.2m barrels in new supply are at risk between today and 2025:
http://bit.ly/12EquNo
Regards,
Nawar
I just saw this post as I was quite busy with my book tour. The only thing I can say to you Chris: It is truly pathetic to see the level you stooped to in your personal attacks.
Regards,
Nawar
Canexus is still one of the best ways to get exposure to the Canadian bitumen by rail trade:
http://seekingalpha.co...
I wouldn't be surprised if TransCanada or Enbridge makes an offer for their NATO terminal or at least partner with them on the project.
Regards,
Nawar
By the way, where do you see the stock down 50c?. The stock is showing green on my side. It looks like the market cares about fundamentals after-all.
Regards,
Nawar
Chris,
The fundamental value of the company has not changed, and Canexus continues to be an attractive investment with a potential upside in the $7+ area at some point in 2015. Worrying about the dividend level is a concern for a speculator, thus only those who speculate for a living worry about dividend levels.
Regards,
Nawar
Lavee,
DOT 111 regulation could effect their manifest business, however this is a small portion of their operation and different from the unit train operation. Also, we need to keep in mind, the industry has 3 years to replace or retrofit older DOT-111 rail cars, so there is no immediate impact. Finally, to my knowledge Canexus does not own the rail cars, it is their clients who own them, thus any concern is likely related to a possible disruption of service rather than a direct financial cost to the company.
Regards,
Nawar
John, that's correct, I do touch on that in the article as I compare undiluted bitumen train transport economics vs. pipe. Once you remove the diluent, rail is actually cheaper than pipelines for uncommitted shippers.
I would recommend listening to MEG Energy conference call from yesterday, MEG highlighted that once their diluent recovery unit is constructed their rail shipment costs will diminish by a third:
http://bit.ly/1fwGaaK
There is an extensive discussion of rail and its advantages in that call, Canexus is the company serving MEG for its bitumen by rail transport.
Regards,
Nawar
Alavee,
Canexus' unit trains transports heavy oil in coiled heated cars, virtually all of those of cars are newly built and already up to standard, the new DOT-111 regulations have the most impact on companies transporting light oil, which is not the case for Canexus.
Regards,
Nawar
Hi Larry,
Interesting article, I have looked at the rails as a way to play a delay/rejection of KXL, however I came to the conclusion that the impact on smaller players such as Canexus and Gibson Energy would be more pronounced (http://seekingalpha.co...). I am curious to know your thoughts on those?.
Regards,
Nawar
Jason,
Thanks, glad the idea is of interest. As to your question, there is certainly no difference between the TSX and OTC beside the liquidity matter you have highlighted.
Regards,
Nawar
JFF7, yes there is room to add additional unit trains, room to develop their salt caverns (two already almost fully developed + room for 12 more) and there is the prospect of rising condensate handling (as back-haul on trains transporting bitumen). It is my believe however that CUS will partner with an experienced industry partner should it decide to expand those businesses, possibly a 50/50 joint venture. It is also worth noting that NATO as is has been valued between $500m and $700m, a 50/50 venture could net them $250m to $350m, and they would still be able to capture much of the future upside.
Regards,
Nawar
Prudent, here is the definition from Investopedia:
"A provision, written into a contract, whereby one party has the obligation of either taking delivery of goods or paying a specified amount."
http://bit.ly/1d7lFed
Thus in the case of Canexus the bitumen producers either have to utilize the booked train capacity or pay for it throughout their 3 to 5 years contract. Those contracts are considered very low risk since the provider of the service is guaranteed to be paid regardless of the actual transported volume.
Regards,
Nawar

John, you make an excellent point. I also would like to add the KXL delay could boost the Board confidence in the likelihood of NATO being fully contracted, hence increasing their confidence in future cash flows, which should reduce the impetus to adjust the dividend.
While the some analysts have been predicting a dividend cut, it is far from being a done deal. Also, it is worth stating that a truly harmful dividend cut is when the dividend is cut due to fundamental permanent deterioration in business, but in the case of Canexus any cut will be temporary in nature as cash flows are expected to approach a record in 2015 while capex will decline by over 90%.
Regards,
Nawar
Prudent, "take or pay" means the customer has to pay for the contracted capacity whether they use it or not. So for example, if an oil sands producer contracts with Canexus for two trains a week for 3 to 5 years, they would have to pay for this capacity even if they don't use it.
Regards,
Nawar
Mkarpoff, for a review of Canexus' dividend sustainability, please review this this excellent article by Canadian Small Cap:
http://seekingalpha.co...
Regards,
Nawar
How To Profit From Keystone XL's Indefinite Delay
http://seekingalpha.co...
Regards,
Nawar
Small Cap, thank you for the informative comment. Just one slight correction the remaining free capacity at NATO is 30% to 40%. Also, it worth adding that TD mentioned in a recent report that an additional 20% will be signed next month with a refinery partner, I presume with the delay at KXL, contracting will be accelerated and operating at 100% capacity by Q4/2014 is a given.
Regards,
Nawar
That's a shame. By all means, I very much appreciate the great input you have provided, don't be a stranger!.
Regards,
Nawar
John, indeed bitumen is safer to transport through rail than light oil. As for HCL, you are correct that HCL is most effective in carbonate rich formations. According to SLB almost two-thirds of the world’s remaining oil reserves are contained in carbonate reservoirs: https://www.slb.com~/media/Files/reso...
In Canada Salve Point and the Duvernay are prime candidates, right now Salve Point (which is close to our unloading facility at NATO) is where most of the demand is coming from (average well consumes a massive 15000 cubic meters of HCI (http://bit.ly/1nhSKwG), when the Duvernay picks up that would be an additional source of local demand, but as you have indicated HCI is used through out the drilling and fracturing process in different concentrations, thus any growth in the O&G industry does translate into increased HCI demand. It is also worth noting that HCI is also used in food processing, pharmaceuticals, water treatment .. etc among other uses, thus overall economic growth leads to higher overall demand.
In terms of supply, while the phasing out of fluorocarbons as a source of supply has been positive, the industry is adding incremental capacity (mainly chlorine burners) thus while I am bullish on HCI pricing long term 2014 will remain quite weak; and even longer term I apply only $30m EBITDA for the Chlor-Alkali segment, despite a much higher EBITDA number in the past ($50m 2011 and 2012).
By all means, I view the chemical business as a background story to NATO right now, NATO could generate $60m in EBITDA in 2015, and once the salt caverns are developed, condensate handling volume is increased we could move to $80m in EBITDA in 2016, this is a massive number in comparison to their historic chemical business of $120m.
Regards,
Nawar
You state the following: "The North American paper business is a dying business.", couple of comments:
- Was the paper business thriving when you were bullish on Canexus a year ago?.
- Sodium Chlorate is used in packaging and tissue bleaching as well, and I doubt toilet paper is going out of business anytime soon.
- Neither me nor the author are pricing any growth in Canexus' chemical business, and this is despite the strong growth in the HCI market, yet the company NAV is still substantially higher than the current stock price.
As finally for your comments about your energy names having no relation to KXL, all oil producers in Canada compete for the same pipeline space, a bottleneck for oil sands producers does impact none oil sands producers. Canexus is uniquely positioned to capitalize on the scramble for rail transport in the coming years, even if CUS was to rally by 10% on Monday it would still be a great buy.
By all means Chris, as the author mentioned, it is healthy to hear an opposing point of view, this in the end is what makes a market, please keep researching and sharing all adverse developments and information that comes your way.
Regards,
Nawar
Thanks for the link, this is why it is great that Canexus is converting 60% of its Chlorine into Hydrochloric acid, which has much higher margins and is enjoying a growth in demand. Also, I presume if some producers' Chlorine is not being transported, this has to be positive for prices.
Regards,
Nawar
Haole, there is a good discussion around Canexus' dividend in this article:
http://bit.ly/1mmoCjy
I fully agree with the article, I don't believe a dividend cut is a done deal at CUS. The way, I usually invest is buying something if it is already cheap enough rather than wait for it to get cheaper; it is true if the dividend was to be cut, the stock will swing down and could offer a better entry point, but considering the fundamentals, any such move will be temporary, and wont change the investment thesis around NATO and the chemical business. Basically I don't wish to miss a 30% to 40% upward move from current levels because of a possible dividend cut and a possible associated short term down swing.
Regards,
Nawar
Chris,
I have to say I that I disagree with your analysis. The Sodium Chlorate market is an oligopoly, and prices are not as volatile as you seem to claim. Two weeks ago, I had drinks with the M&A guy at the world 2nd largest pulp company, and he was complaining about the inelastic pricing nature of Sodium Chlorate in North America.
Chlor-Alkali is a different story for sure, but you can’t argue with the fact that the Asian producers are running at a loss, and the Canadian dollar is a tailwind for Canexues. Also, when you look at current oil prices, you can’t but assume a considerable jump in demand for Hydrochloric acid. Not to mention, both Axiall and Olin (which are quite well covered by US analysts) are arguing for a bottoming in Chlor-Alkali prices.
Finally, even you admit that the Brazilian business is quite stable, thus with only Chlor Alkali (20% of EBITDA) quite volatile, I would attribute a certain stability to CUS cash flows.
Most importantly, you seem to be ignoring the elephant in the room: Keystone has just has been delayed indefinitely. This is a game changer for CUS, and will insure the NATO facility running at full capacity for several years, not to mention the potential for further expansion, possibly in collaboration with an industry player.
I saw from your well written articles that you were quite bullish on Canexus a year or two back at the $8/$9 level. Certainly no one is calling for a move to such a level anytime soon, considering the dilution since, NATO bad’s execution and a weaker chemical pricing, but a move to the $6 to $7 range is perfectly achievable.
As for your comments on oil stocks, I have a been a bull on Canadian energy for many years, and have owned sizable positions in the sector, but you can’t argue that the negative news on KXL and the recent negative news on Northern Gateway won’t put a damper on things, expect money to move out of the sector over the next few months as the transport bottleneck issues come back to the forefront. A partial reason for that 50% upward move you mentioned was a prevailing optimism about KXL being approved in May. Longer term though Canadian energy is the place to be, but short term the likes of Canexus and Gibson is where money is going to go.
One final note, I know the author of this article, and he is one of the smartest analysts around, he is not relaying on banks for his work on CUS, even though he is referring to their work in his analysis. I have seen his DCF and valuation work on the company, and I would consider his DD and work quality top notch.
Best of luck,
Regards,
Nawar