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Notes from the Road – Canadian SMID Caps

Last week we traveled to Calgary, AB and met with the management teams at:

  • Peyto Exploration & Development (PEY.TO)
  • Paramount Resources (POU.TO)
  • Trilogy Energy (TET.TO)
  • Arc Resources (ARX.TO)
  • Bonavista Energy (BNP.TO)
  • Vermilion Energy (VET.TO)
  • Trican Well Service (TCW.TO)
  • Secure Energy Services (SES.TO)
  • Insite Petroleum Consultants (private)


PEYTO’s COO Scott Robinson gave us perspective that we don’t quite get from our usual discussions with CEO Darren Gee; production should be +67k boe/d at YE13 and Robinson has eyes on the 100k boe/d mark......PARAMOUNT was the best surprise of the trip and a name we want to dig in on.  It’s Musreau/Resthaven Montney play alone may be worth more than POU’s enterprise value today……At this point, we see TRILOGY as a Duvernay bet.  It’s core Montney oil and gas pools are maturing and will begin generating a lot of FCF – that cash will likely get plowed back into the Duvernay in 2014+……ARC RESOURCES may be the best dividend/growth E&P in western Canada.  It’s NE BC Montney gas properties are best-in-class (IRRs like NE Marcellus), as is the Company’s focus on capital and balance sheet discipline……With the highly-anticipated dividend cut behind BONAVISTA, investors will again focus on the operations.  But we don’t like to buy E&Ps just because they’re “cheap,” and we struggle to get excited about much in BNP’s E&P portfolio today……Probably the same could be said about VERMILION.  The international strategy has its advantages (premium product prices is the big one), but also its risks, which don’t seem reflected in the stock.  France is the cash cow (~$200MM in FCF in 2012), and that has us a bit uneasy……Business is solid for TRICAN in Canada, where it’s a household name in a more disciplined frac market – and increased Montney and Duvernay activity in 2014+ could surprise to the upside.  But the US business is a boat anchor and we don’t see it improving without natural gas and oil prices working higher at the same time – a bet we’re not ready to make.  Pure play Canadian pumpers (Canyon) seem like a safer play here……SECURE is a niche service/midstream company with competitive advantages in a high barrier to entry, consolidated market.  We wish we met this management team 18 months ago, but there’s probably still value at this price (we like it, but we need to do the modeling work)……Our meeting with INSITE was a valuable learning experience on the methodology behind booking tight sand and shale reserves.  A “proved + probable” number for Canadian E&Ps looks a lot like what US companies book as “proved”.



No change to our longstanding bullish view.  Operationally, PEY is in the upper tier of North American gas producers.  We don’t think anyone does it better in Canada, and we’d put it right there with SWN, EQT, and COG in the US.  It’s the low cost gas producer with decades of inventory and profitable growth ahead of it.

  • New volumetric mapping is yielding significantly more locations that Peyto previously thought.
  • The 10 rig program is comfortable for the operations team, and it’s likely that Peyto keeps the 10th rig on all year and pushes the capital budget up to $550MM.
  • Production should be at or above the high-end of YE13 guidance (67k boe/d).
  • YE14 production should be in the high 70k boe/d range, implying YoY growth ~20%, with a ~$600MM capital budget.
  • Slide 41 of the 5/9 corporate presentation shows production hitting 100k boe/d by YE17, though Robinson seemed confident that it can get there before then.
  • Most excited about the Falher and Wilrich formations.
  • Open Range deal was a “phenomenal acquisition” for Peyto; properties exceeding expectations.
  • Tight-lipped on the new area down at Brazeau, but willingness to invest ~$30MM this year is a positive.
  • Looked at the Fairborne Deep Basin properties that BNP acquired, but couldn’t make the deal work (or BNP outbid them).
  • Currently have three different frac contractors: SLB, Calfrac, and Trican.  Using Nabors and CanElson drilling rigs.


Paramount was the positive surprise of the trip and a name we want to do more work on.  We like management and the fact that the insiders own +50% of the Company; for obvious reasons, we like owner-operators.  The Musreau gas plant comes online late in ’13 and will bring on ~30,000 boe/d on behind pipe volumes.  2014 will be a massive production growth year.

  • Long-term production goal is 1 Bcf/d plus liquids.
  • Celtic/XOM Montney lands adjacent to POU’s Musreau/Resthaven play.
  • Spent ~$75MM acquiring 125,000 net acre Montney position in 2010-11 after impressive Celtic well.
  • Attractive Montney project economics, ~50% IRR on large-scale, repeatable project.
  • Plan is to replicate Musreau 5-10x.
  • Liquids ratios vary across the Montney play between 10 – 300 bbl/MMcf, but in a predictable trend (liquids yield increases from SE to NW.
  • ~$800MM of investments ($600MM in TET).
  • Looking to raise enough equity capital to fund Cavalier’s Hoole Phase 1 (~$500MM).


A well-run, low cost producer with two core Montney assets that are entering their “drill-to-fill” stage.  Production is 40,000 boe/d today and there’s a line of sight to 60,000 - 70,000 boe/d over the next 2-3 years.  At that stage, the Duvernay will likely take over, though TET will wait for others to delineate that play.  We like TET, but would rather participate in the upside through POU.

  • 2013 capital budget of $350MM is mostly drilling/completion capital as opposed to higher infrastructure spend in 2011-12, which should lead to lower F&D costs.
  • Management believes its Montney gas pool is worth $1.0 – 1.5B and its Montney oil pool $2.0 - $3.0B.  Add in its Duvernay lands and the PV-10 of its 2P reserves, it comes up with a NAV of $55/share “based on what we know today.”
  • Testing extended reach horizontal wells in its Montney gas pool.
  • Duvernay will get $75MM of capital in 2013 (5 net wells) – really just holding acreage and testing the play for next two years.  Let other big players in area do the heavy delineation work (ECA, Shell, CVX).
  • Need to spend ~$100MM in 2014 and 2015 to hold its Duvernay lands.
  • Challenge in the Duvernay will be how to handle the NGLs.  Light on infrastructure now.
  • Financially conservative, keep capex near FFO.
  • Not hedging gas here, looking for ~$4.50/Mcf to start hedging.


In our view, Arc is one of the premier growth/income E&Ps in western Canada with a focus on and history of creating value.  Arc’s Montney Dawson play is one of the most economic dry gas plays in North America, with after-tax IRRs ~44% at $3.50/Mcf.

  • Engineering focus; 2/3 of the team are engineers.
  • “Imperial Oil-like” with top quartile returns, low volatility.
  • Majority of shareholders are long-only funds that seek stability, growth, and income.
  • Will not let corporate decline rate get above 25% (22% currently).
  • #3 producer of Montney gas behind ECA and Shell.
  • Ante Creek – target to exit ’13 at 15,000 boe/d; keep facilities full for 10 years (50/50 gas/oil).
  • Rate restrict Montney wells ~5 MMcf/d to keep sand in the well and not wear out the PVF.
  • Not all Montney wells created equally – Arc well performance 50% better than average.


After months of speculation, the dividend was finally cut in January 2013 to a more sustainable level, and investors can again focus on BNP’s operations.  We like BNP’s push to consolidate the asset base, focus its capital and attention on the Deep Basin, and its counter-cyclical investment strategy; but we can’t see a reason to own this over PEY, which does it all better and is already 100% Deep Basin.

  • Long-term organic growth target of ~5% per year.
  • Targeting 6% growth in 2013
  • Looking to sell $50 -$100MM of assets per year.  Will continue A&D program to consolidate the asset base; looking for opportunities in the Deep Basin.
  • Good time to “drill oil and buy gas.”
  • Not interested in selling its BC Montney acreage; only needs to spend ~$12MM per year to hold it.
  • West Central Glacounite play – repeatable, predictable.  Expect 5-10% annual production growth for 5-10 years.
  • West Central Cardium – higher risk, results more variable across the play.  Has been a challenge.
  • West Central Ellerslie – reminds management of Glauc play 4 years ago.
  • Deep Basin – want to make it a larger part of the portfolio, looking for opportunities.


A mid-cap E&P that has a significant international presence (France, Netherlands, Ireland, Australia), and 80% of its products are levered to oil (Brent oil, WTI oil, NGLs, European gas).  The Canadian portfolio is one of the less exciting asset bases we’ve seen, and the Company may soon do a cold-flow heavy oil acquisition.  Potentially a short if negative on Brent crude and/or France.

  • International focus has two key advantages – Brent-linked oil and gas prices, and less competition for asset deals.
  • Defined growth through 2017 – low decline rates, high netbacks.
  • #1 oil producer in France, producing ~11,000 bbl/d, or ~65% of France’s oil.
  • Acquired the French assets from XOM, TOT, and ZaZa
  • France generated ~$200MM of free cash flow in 2012.
  • Will take on debt to fund Corrib (Ireland).  Does not want to issue equity.  First production target now late 2014.
  • VET has 175k acres prospective for the Duvernay in the Edson area.  Thinner pay zone here.
  • Will let larger industry players delineate the Duvernay for now.
  • Positive on the Manville (below the Cardium).  Going to disclose meaningful inventory numbers soon.
  • Interested in a cold-flow heavy oil acquisition, which seems natural given new COO Tony Marino’s history at Baytex.


It’s a tale of two markets for this pressure pumper.  Trican is a household name (along with Calfrac) in a more disciplined market in western Canada, but its aggressive push into the US is weighing on the Company as that market remains oversupplied, and Trican is still trying to make a name for itself.  It’s not the right time in the cycle for us.

  • Canada is “okay” with pricing down 19% YoY but stabilizing.  Maybe another 100 – 200 bps of pricing to give up.
  • Canada is fully-booked for 3Q and a little softer for 4Q.  Believes that activity will be up YoY in 4Q.
  • Spot prices in Canada will be driven by gas price/activity.
  • In the US, 90% of revenues are frac, though slowly adding cementing and coiled.  Coiled has been tough in the US due to excess capacity.
  • Believes that US frac market is 20 – 30% oversupplied.  Needs an additional 200-300 rigs to improve utilization meaningfully, which must come from a pick-up in dry gas drilling.
  • Permian has been toughest market for TCW – high start-up costs and competitive.
  • Longer-term a believer in US market – gas activity will come back, already starting to see more activity in NE Marcellus.
  • Utilization more important than pricing in the US.  Needs to find consistent work to increase utilization from current 60 – 65% level.
  • If by mid-2014 the US frac market has not improved, TCW will consider strategic options, possibly moving equipment out.
  • Russia will grow as the pie goes.  Not overly optimistic on Russia, it has been somewhat of a disappointment.
  • Australia is solid – not enough wells drilled there to fill LNG plants.  Some signs of "panic" among operators.
  • “Not that hard” to generate $750MM of annual EBITDA with existing equipment.  Needs improvement in US market and a 22-25% company-wide operating margin.


Secure Energy Services is a quasi OFS/midstream company that operates mainly in western Canada.  It processes and disposes of oilfield waste; recycles waste oil, muds, and frac water; and treats, markets, and terminals crude oil.  It’s been a great story since the seasoned management team split from the industry leader CCS (private) and began taking market share.  It’s expensive at 12x EV/EBITDA, but probably built to stay that way.

  • Insiders own 20%.
  • Targets 30% annual EBITDA (per share) growth.
  • Looks expensive compared to OFS peers, but management argues for a midstream-like multiple given the stable nature of their services through cycle.
  • Regulatory approval for PRD facilities is difficult, expensive, and time-consuming to attain – a high barrier to entry.
  • Healthy industry structure with CCS, Newalta, and Secure the 3 key players, and Secure taking market share from both competitors (which have their own issues).
  • Peer CCS was taken private and saddled with debt (~7x debt/EBITDA); difficult for them to grow.
  • Operating margin ~60%, should remain fairly constant.
  • Long-term plan is to add 5 facilities per year for the next 5 years, which should cost ~$200MM per year.
  • Projects have an IRR ~20%.
  • Will continue to seek acquisitions (roll up model).  Can do deals for 4 – 5x EBITDA.


We met with Insite Petroleum Consultants, independent reserve engineers that have both Peyto and Trilogy as clients.  We gained knowledge on the reserve booking process in general, how US and Canadian companies differ in booking reserves, and on some of the most popular plays in western Canada today including the Wilrich and Duvernay.

  • Deep Basin is unique in that it does not produce any water.
  • Canadian producers tend to be conservative in booking reserves (at least compared to US peers).
  • A “2P” number in Canada may be closer to what US companies book as “1P.”
  • A Canadian PUD must have a PDP well on at least 3 sides.
  • TET’s and POU’s decision not to book PUD’s is unique and considered conservative.
  • Insite uses a 6% porosity cutoff in the Deep Basin, but may revise that cutoff lower if wells continue to outperform type curve.  It’s still early but starting to have those discussions.
  • Proven reserves should increase over time (positive technical revisions), as they are booked at a 90% confidence level.
  • Investors often underappreciate companies that own their own facilities.  Economics can be vastly different if the operator has to pay 3rd party processing fees.
  • Insite is positive on the Duverney.  It’s early days but quality resource is there, expect technology to catch up.
  • Peyto has huge potential in the Cadomin (basement gas play), though it may be a few years away.


Kevin Kaiser

Senior Analyst

Dollar Devaluation Good?

Takeaway: Does any historical data actually exist that supports currency debasement as a fruitful economic policy?

Late last week, we joined the Peterson Institute for International Economics for its Twelfth Annual Stavros Niarchos Foundation Lecture titled: “Globalization, Multipolarization, and Currency Wars: The Imperative of Systemic Reform”. The lecture, given by PIIE senior fellow and director emeritus C. Fred Bergsten, argued that currency manipulation is the single biggest challenge facing the world economic system and costs millions of US jobs. He also offered bold proposals for countervailing intervention and ties between the IMF and WTO in evaluating currency misalignments.


From our vantage point, Bergsten’s speech centered on five key points, which have subsequently paraphrased below:

  1. Currency wars are very sizeable, widespread and could get worse;
  2. Currency wars have very large economic ill-effects on the US economy and the economies of the EMU periphery;
  3. These developments stem from a gaping hole of int’l economy architecture;
  4. Policies could and should be adopted to counter ill-effects; and
  5. US should multilaterally initiate a major effort and be ready to act unilaterally, if necessary (i.e. “it’s time to declare war on int’l currency war”).

Regarding point #5 as articulated above, Bergsten suggested that the US – even if on its own – should immediately pursue one or more of the following rectifying actions through existing int’l agencies:

  1. Countervailing intervention in the open market;
  2. Imposing taxes on the FX reserves of manipulating countries;
  3. Applying duties to the imports of manipulators; and
  4. Submission of its case to the WTO to apply for across-the-board import restraints.

In so many words, Bergsten basically argued – as he has developed a reputation for doing – for a de facto 1971-style adjustment of US monetary policy. Essentially, he feels that the US should wage an all-out war on currency manipulators, with the ultimate result a likely USD devaluation akin to when President Nixon abandoned the international gold standard.


Did we miss something?


If we can recall – or better yet, pull up the charts – the 1970s turned out to be the worst decade in modern US history from an economic perspective. Politicized agents such as President Nixon, Treasury Secretary Connally, Fed Chairman Arthur Burns, President Carter, etc. all conspired to weaken the US dollar vis-à-vis its international counterparts – perpetuating a near decade-long stagflation in the process.


It wasn’t until President Reagan and Fed Chairman Paul Volcker came in the early 1980s and completely inflected US monetary policy (and the expectations embedded therein) that the US was finally able to overcome stagflation and recessionary levels of economic growth. A similar inflection occurred in the mid-to-late 1990s when a similar bout of USD hawkishness helped the US escape recession, generate wealth and alleviate poverty on a large scale.


No sir, the data doesn’t lie; the strongest periods of economic growth (i.e. the 1980s and 1990s) the US has seen in the modern era  have coincidentally occurred when the USD was strengthening and/or persistently at very high levels (using the US Dollar Index as a time-tested proxy). While some might accuse us of conflating correlation with causation, we market practitioners don’t really care to make the distinction. Charts often tell stories that even the “smartest guys in the room” fail to comprehend.


What we do care to demarcate, however, is the FACT that no period of sustained USD debauchery has produced anything on the order of sustainable economic growth. Certainly not in the 1970s when the Nixon/Carter/Burns trio was breaking the buck; nor in the 2000s when the Bush/Obama/Greenspan/Bernanke foursome were inflating bubble after bubble (particularly in housing and commodities) in a spectacularly-failed attempt to create economic growth.



President Reagan said it best: “I was very pleased to read a prediction that the price of gold will nosedive,” and we echo his sentiments exactly. If the price of gold is signaling anything to us today, it’s that we may be at another historical inflection point in US monetary and fiscal policy that, like the others before it, will only be broadly recognized after the fact.


A deviation from perpetual QE, burgeoning federal debts and deficits, etc. would all be hugely positive for the US economy at large. What is bullish for the US’s consumption-based economy is not further currency debasement, but rather a policy to backstop the US dollar from the politicized elite, many of whom astutely realize that inflation, not real economic growth, is the only thing they can actually produce at the stroke of a keyboard. And as our friends at MIT’s Billon Prices Project and at Shadowstats have shown, inflation exists – even if it is no longer politically palatable to accurately report it.


It’s either that or the price of gold has been lying to everyone for twelve consecutive years… Whatever you do, don’t pull up a chart(s) of $100-$150 crude oil (or $4-5 gas) or $8 corn or $4 copper or $200 cotton – all of which are priced internationally in previously-deflating US dollars.


For thousands of years, politicians have resorted to currency debasement when times have gotten tough economically. By our count, not one economy in world history has come out on the other side of currency debasement better off without a marked deviation from those policies to inflate. If anything, currency debasement has historically been a coincident indicator for sustainably slower economic growth and a leading indicator for the collapse of entire empires.


We’d be utter fools to make such a prediction for the US of A at the current juncture. We will, however, warn of the pending collapse in the credibility of the international economist community. For far too long, academics have been espousing their theories upon economies and the politicians and financial markets that dictate them without any empirical proof of their validity or effectiveness.


The US is not an export economy. Please stop recommending policies to devalue and inflate in the hopes of pursuing your elixir of life that is exporting goods and services to Mars. If you fine folks need something to replace the gaping hole in your respective schedules that will inevitably come with a cessation of such practices, try digging up some historical data that actually supports currency debasement as a fruitful economic policy.


That’ll keep you guys busy…

Dollar Devaluation Good? - Strong Dollar Strong America

Bullish: SP500 Levels, Refreshed

Takeaway: The immediate-term TRADE overbought signal we issued last week didn’t last long.



The immediate-term TRADE overbought signal we issued last week didn’t last long, but the down -0.5% move we had the day after was the biggest down move in 10 days. We call these bear scraps within a very Bullish Formation.


Intraday Thursday was actually the 1st time I was net short (in #RealTimeAlerts) since November 29th, so I think the call got  some attention. But so should have my covering shorts and getting back to net long on Friday morning.


That Consumer Confidence reading (+10% m/m in May vs April was that good, and all support lines for SPY held).


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1678
  2. Immediate-term TRADE support = 1647
  3. Intermediate-term TREND support = 1558


In other words, I listen to my wife and my machine (in that order). Overbought was as overbought did (for a day), as it will again (higher) and oversold will lower.




Keith R. McCullough
Chief Executive Officer


Bullish: SP500 Levels, Refreshed - SPX

WWW: Presentation Materials for 1pm Call

Takeaway: See attached link to presentation materials for today's 1pm conference call on WWW.

See attached link to presentation materials for today's 1pm conference call on WWW.


  • Date: Monday, May 20th at 1:00pm EDT
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 465419#
  • Materials:CLICK HERE



We are keeping our 15-20% growth forecast for the full month of May following another solid week in Macau.  Daily table revenue averaged HK$885 million the past 7 days, up 22% YoY.  Month to date ADTR has climbed 18% YoY.


In terms of market share, MPEL, our favorite stock in the group, was the significant mover from last week with share growing to 14.1%, right in-line with recent trend.  MGM and Wynn continue to track above trend, while SJM and LVS are below.





Weimar Nikkei

Client Talking Points

Weimar Nikkei

The Nikkei jumped another 1.5% overnight, and Japanese equities are up 77.3% since November. Wow. That’s what happens a country debases its currency. Yields on Japanese government bonds (JGBs) rose 5 basis points overnight, and now are above Keith’s long-term TAIL risk line of 0.81% to 0.85%.

Gold and Silver

Silver prices are down 4% this morning, the biggest percentage move this morning. Gold itself is immediate-term oversold now that consensus is starting to lean on the short side (74,432 short contracts in the CFTC futures/options data this morning is the highest since the data has been available in 2006.)

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


As volatility seeps into the Japanese government bond complex, the game of interconnected risk rolls on.”-- @KeithMcCullough


“If you’re going through hell, keep going.” – Winston Churchill


$1.1 billion, the price that Yahoo! Reportedly is paying for Tumblr

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.