I gotz mine, yo.
If any of you are debating on whether to sign up for a PPT subscription just fucking do it. I’m a complete n00b to this trading thing (just over 1 year). The last month has been unfuckingreal trading the long side and short side under the stewardship of The Fly and all the other contributors to our fine community. A special shout out to Jeremy as well for all his great efforts.
Unbeevable winship going on. Peace out, y’all.
Comments »Profile and General Stuff
Canadian Natural Resources consists of four primary units. You have North America Crude Oil, North America Natural Gas, International, and Horizon Oil Sands. The International segment is relatively small compared to the others. International operations consist of the North Sea region and offshore West Africa (Ivory Coast and Gabon).
The company’s main focus over the last few years was getting the Horizon project up and running. They got first Horizon production in 2009 and expect to ramp up to full production this year. Targeted daily production from Horizon is 110K bopd for the rest of the year. Management expects yearly production from Horizon to be 90 – 105K bopd. They have had significant equipment issues getting this project started. Production has been below original guidance from the get-go, but management thinks they are starting to get a grip on things. They release their Horizon production figures in monthly 8-K statements. If you are considering starting a position in CNQ then you want to keep an eye out for these releases.
CNQ retains a high working interest in their projects which allows them to control infrastructure and timing of development. They are the largest producer of heavy crude in Western Canada and retain one of Western Canada’s strongest natural gas positions.
The introduction section of the 10-K brags about how the company generates significant free cash flow and all areas of the business provide free cash flow. OXY in contrast relied on its oil and gas operations to carry the load for the overall company with some contributions from the other segments. CNQ doesn’t have the midstream and chemical segments of OXY so you would expect them (CNQ) to be better off in this regard. Finally, CNQ management was happy with their “improving” balance sheet.
Going through their financials was a bit of a pain in the ass. The reported figures are in Canadian dollars and you have to find what conversion rate they used. When we get to the Financials section further down in this post, I have already done the conversions. Those figures are in USD so later on we can do some direct comparisons between all the companies. Assume all other $ amounts are in USD as well. CNQ used an average conversion rate of 1.14. I’ve used the same.
!!! IMPORTANT SHIT HERE !!!
But before we go one step further, let’s look at something very strange about these Canuck bastards. Remember back in the first post of this series I pointed out 99.9% of companies in the industry use Successful Efforts accounting and only little piss ant operators use Full Cost accounting? Wrong. Despite being one of the world’s largest independent oil and gas companies, CNQ uses Full Cost accounting. A shock to yours truly.
Oh and to make it better, starting Jan 1, 2011 they are required to switch to the equivalent of Successful Efforts. That can’t be good when they start reporting under this system 1Q 2011. Buried deep in their 10-K they estimate an $815 mln ceiling test impairment coming up end of this year. Great. But they go on to say the full impact of the change is “not reasonably determinable” at this time. Oh boy, if that doesn’t set off alarms I don’t know what will. You never know how Wall Street is going to react to things like this. Maybe it’s already being priced in, but I cannot see this being a non-event and certainly not a positive.
Plenty of time between now and then to bank some coin in CNQ, but I would have to suggest extreme caution. You never know if they might start writing off some of this $800 mln impairment in the next few quarterly reports.
!!! END IMPORTANT SHIT !!!
2009 Highlights
Diversification
CNQ’s reserves consist of 85% oil, 15 % NG. From a production standpoint, approximately 62% of production is oil and other liquids. Main reason for this is the significant contribution to reserves from Horizon, but production from Horizon has not reached full capacity.
Geographically, 89% of reserves are located in North America. Approximately 86% of production comes from North America ops. Obviously CNQ is very “oily” and very reliant on conditions in North America. If you think oil is going to outperform then CNQ fits the bill. If you are looking for a natural gas play, stay away.
Reserves As indicated in the following tables, the vast majority of CNQ’s reserves are domestic. Anybody care to venture a guess as to when the SEC decided to allow oil sands mining to be counted as normal oil and gas activity? I’ll give you three guesses and the first two don’t count. If you are still having difficulty figuring it out, call 1-800-IMA-DUMAS. Operators are standing by.
Production
We see a drop in production between 2007 and 2008, but then it kicked back up last year. This is without a significant contribution from Horizon. For 2010, management has guided 2010 daily production between 586 – 642K boepd. I went back through the previous three 10-K’s to see how management’s guidance compared to actual results. Overall they do very good. They are always within the stipulated range. Doing an average comparison and applying to 2010 guidance I got a reasonable estimate of 410K bopd (oil) production and 1,162 MMcf / d natural gas production. This works out to 604K boepd daily production. Use that figure however you wish. If they hit this number it is another yearly production rate increase.
Reserve Life Ratio
As you can see in this table, being able to count Horizon reserves has provided a huge gain. Note to those of you that never figured out when the SEC changed the rule and could not get through to an operator on the 1-800 number, the answer is 2009. Clear? Make sense now?
Production Replacement Ratio
Hopefully this table is readable. I noticed on the OXY post I had no problems reading the table on my laptop’s small screen, but on a regular size monitor it was complete garbage.
Main thing is, once again being able to count Horizon has saved their asses here. Until then they were consistently producing more volumes than they were replacing. Remember, it is EXTREMELY critical that an oil and gas company replace reserves faster than they use them up. Horizon buys them some time. Personally I don’t like the trend prior to Horizon getting added to the books. However I do like the fact that almost all their reserve replacement is done organically. In other words they are not going out into the open market throwing cash around chasing reserves. Overall we can live with this but it could be better.
Well damnit, the table is unreadable on my monitor. I assume it’s the same for others. Just in case, here are the relevant numbers:
PRR “All-Sources”: 2007 = 0.96, 2008 = 0.82, 2009 = 8.43
PRR “Organic”: 2007 = 0.96, 2008 = 0.75, 2009 = 8.42
Reserve Cost Ratio
I had to get a little creative with this one. Since they were able to drop Horizon into 2009’s reserves it greatly increases the reserve portion of the ratio. However the costs associated were doled out in previous years. What I did was back out the reserve volume increase due to Horizon to see how these dudes did on a comparable basis. You can find those figures at the bottom in the “Net SCO Revision” portion. Their RCR has been increasing each of the last three years. And not increasing by just a small amount either. We are looking at about 30% increase each year since 2007.
Financials
All per share ratios below have been adjusted for the recent 2:1 split. All financial figures have been converted from Loonies to Greenbacks. As of year-end 2009 CNQ was trading at a historical premium in all regards except Price / Book Value per Share. This is similar to what we saw with OXY. Even with Friday’s closing price of $32.80 the same situation applies.
Some other notes regarding their financials:
Other Notes from the 10-K
Conclusions
CNQ has been an all-time favorite of mine. I guess a 1,400% return will skew your opinion in a positive direction. For the last year it has been a great swing trade with somewhat predictable tops and bottoms. However, after reading their 10-K I do have concerns. I knew CNQ was pretty high beta compared to peers, but finding out that hedges, forex swaps, etc. are a main contributor to the volatility scares me more than just a little bit. Also, the problems they have been experiencing with Horizon are another problem. But the biggest problem I have is the potential shock when they switch from Full Cost accounting to Successful Efforts. I could be over reacting with that one. Maybe they have something up their sleeves to make this a positive, but to me the risk is too high.
Final opinion… CNQ is great for some short-term swing trading, but the easy money from a long-term hold perspective has already been made. Invest in CNQ with caution.
I’m gonna come correct on my views of CNQ. Overall it’s been my biggest money maker ever percentage wise. Everybody has their first home run, CNQ is mine. Bear with me as I tell a little story. Tomorrow or the next day will be the official CNQ analysis post, but I want to get this out there first.
Back in 2003, the Pimp was going through some hard times. Recent divorce damn near wiped my ass out, eyeball deep in debt inherited from that fucking bitch of an ex-wife, you get the point. Originally I had a plan to pay off all these bills over the next 3 years. After about two months of that crap I decided I didn’t like being in debt so went all in on credit card payments. For the next year I survived on absolute bare minimum and used every spare nickel to my name to pay off debt. Once I was done paying that shit off, money started building up in my bank account quite nicely.
Enter March / April 2004 when things made a turn for the better. Right before then, I got a new position in the company overseas where the company paid for my housing (i.e. no house note or rent payment to worry about). My company proceeded to send me on a 6-week lovely assignment to beautiful Dhaka Bangladesh. It’s as nice as you can imagine a typical third world Asian shit hole being. But the good thing is I was 100% on the company dime the entire time. I did not spend a cent of my own money for a month and a half. During this period I also banked a very nice bonus check. I never had this much money in my bank account before so I thought I was rich. Things were great.
At the same time another engineer in my company came through Bangladesh and left behind a copy of Wired magazine of all things. Don’t know why, but instead of tossing it in the trash I read the thing. There was a very interesting article about oil sands and the companies that stood to profit from them. This is right before the huge run in oil prices, but those of us in the industry could feel something was about to happen. Everybody was getting busy as fuck.
In the magazine article they went into quite some detail about Canadian Natural Resources and their upcoming oil sands development. When my assignment in Bangladesh was over, I looked up Canadian Natural on the innernets and thought it sounded like a good investment. At this point in my life I didn’t even have a trading account and never bought a stock other than what was done in my 401-k.
I decided what the hell, and put the money I saved while working in Dhaka plus the bonus check all into CNQ at about $25 / share. Since I knew fuck all about the stock market this was a “buy and hold” all the way. I rode this bitch through two 2 for 1 splits and cashed out in the high 90’s back before the meltdown. In sum over four years I had a 1,400% return. So indeud, CNQ holds a special place in my “trading career”.
Since then I’ve made some more profits with CNQ both long and short. I’ve had some very small losses as well, but in the end CNQ has been the best stock ever for me. I apologize for the personal stuff, but it might be good to have a bit of perspective when you read the upcoming analysis post.
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“And on the 8th day, Jah created pimpin'” – Po Pimp (or maybe it was Big Daddy Kane, Ali G, or some other great philosopher. Whatever.)
First, I would like to say thanks to all that voted for yours truly as KOPG. It is an honor to serve in this important role within the hallowed halls of IBC. As some of you know, I have a most unusual work schedule where I am abroad for a month working my ass off then at home for a month with absolutely no responsibilities. Some people would go batshit crazy with that kind of “throw the switch” lifestyle, but I absofreakinglutely love it. Unfortunately I am currently in “work mode” so things are hectic to say the least. Still, the people have spoken and I have a responsibility to my fellow coin bankers.
Here is how I am going to handle this month with respect to the PG. I will finish off the Independent Oil and Gas series. We still have four companies to look at and plan is to knock those out within the next 10 days or so. It takes quite some time to put those posts together and with a full work schedule at the moment spare time is not abundant. In between the O&G series posts I’ll make some quick and dirty posts about whatever is on my mind at the time.
Also, while I am at work the only internet access I have is at the office. This most definitely sucks ass, but nothing I can do about that. My glorious company has a very strict firewall so no Youtube videos will be included in posts. Not that this is a big deal, but there you have it. Also, with a wonderful 14 hour time difference posts will be made at some very strange hours. Again, no big deal since they will still be there when the loyal readership returns to IBC.
So there you have the plan forward. I plan to have the next installment of the O&G series ready this weekend. Next company in the list is CNQ. After that we’ll take a look at DVN, followed by SU then wrap things up with APA. I’ve already given a lot of thought to a final post with a comparison of the 5 companies. I’m pretty sure this will happen.
Again, thanks for the honor and I’ll do my best to live up to expectations.
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