Canadian Oil

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Canadian Oil Gas

• Minting Money Growing Fast

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What to talk about?

• Why should you care?
• Oil Types, volume, prices
• Gas Volume, prices
• Implications of War
• Valuing Oil Gas
• Kyoto You

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Why should you care?

• Our most valuable resource!

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This is why you care
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A few interesting facts

• The WCSB has a reserve life index of 182 years
• Saudi Arabia has a reserve life index of 87 years
• Value of Oil Reserves (_at_ 25.00 / barrel) 65
  trillion

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A few interesting facts

• At 35 / barrel 91 TRILLION!!!
• And that does not include value of Canadas
  natural gas reserves!

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Oil

• Its not all the same
• Sweet Crude
• Light Crude
• Conventional Crude i.e. conventional means of
  extraction
• Heavy Oil
• Various Grades
• Bitumen heaviest (tar-like substance)

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Heavy Oil Extraction

• Open Pit Mining
• Syncrude
• Steam Assisted Gravity Drainage (SAGD), i.e.
  Suncors Firebag
• Has limited applications (paving)
• So is refined
• Cracked

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Heavy Oil Pricing

• Traded at a Differential from Sweet Crude
• Has slight seasonality from road paving
• Affected by its own supply demand, refining
  capacity/requirements
• But mostly dependent upon price of crude

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Crude Oil Prices

• To know how its priced, need to know how its
  used

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Crude Oil Prices

• How an average barrel is broken down
• 42 gallons per barrel total volume of products
  made has and additional 2.2 gallons of processing
  gain

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Crude Oil Prices

• The supply side
• Organization of Petroleum Exporting Countries
• Founding Members
• Iran, Iraq, Saudi Arabia, Kuwait, Venezuela
• Later Additions
• Algeria, Indonesia, Libya, Nigeria, Qatar, UAE
• Seen as the puppet master
• But are they?

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Crude Oil Prices

• Market Shares
• OPEC 50 in 1975 to 36 in 2001
• Gulf OPEC 35 in 1975 to 29 in 2001
• U.S. Dependency on OPEC 80 in 1960 60 in
  1980 48 in 2000
• U.K. Dependency on OPEC 60 in 1980 to 12 in
  2000
• Saudi Arabia 17 in 1980 to 11 in 2001

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Crude Oil Prices

• U.S. Crude Market Suppliers
• Canada 1.3 mmb/d in 2001 500,000 b/d in 1992
• Venezuela 1.2 mmb/d in 2001 800,000 b/d in 1992
• Saudi Arabia 1.6 mmb/d in 2001 1.6 mmb/d 1992
• South Atlantic Basin 46 - 48

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Crude Oil Prices

• Oil Production Volumes (Feb 2002)

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Crude Oil Prices

• So what does this tell us?
• Oil prices are very international!
• Are based on a large number of players
• Then its just supply and demand
• Factors affecting supply OPEC, weather (ie Gulf
  of Mexico), refining capacity, government/industry
  stocks
• Factors affecting demand health of global
  economy, weather
• Watch out for political speculation
• More on this later

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Natural Gas Prices

• Who uses natural gas?

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Natural Gas Prices

• So who are the big international suppliers?

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Natural Gas Prices

• Really not important
• Natural gas is hard to transport
• You typically need a pipeline (duh)
• So natural gas prices are highly regionalized
• Liquified Natural Gas (LNG) has potential to
  change this
• Not for a while yet though

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Natural Gas Prices

• The Supply / Demand Equation
• Factors affecting supply Market Price, Weather
  (Gulf of Mexico)
• Factors affecting Demand weather, economic
  conditions, price
• Cold winters and hot summers tend to increase the
  demand for natural gas for heating and cooling

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Implications of War

• We go to kick Husseins ass
• Youll get mid 40 oil
• We dont go to kick Husseins ass
• Prices will remain around 30 on fear of war,
  until new stable status quo can be established
• Minimal effect on natural gas prices

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NOW FOR THE FUN!!!

• How to pick and Oil Gas Company

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Step 1 Commodity Prices

• Industry is HIGHLY cyclical
• So must project commodity price
• After that, narrow down potential companies
  according to production profile
• Gas Prices on the rise? Buy gas producer
• Oil Prices on the rise? Buy oil producer
• Small Differential? Buy heavy oil producer
• Large Differential? Buy refiner

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Step 2 Wholl get the value?

• Upstream Find the oil gas
• Midstream Move the oil gas
• Downstream Refine and sell oil gas

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Company Types

• Integrated Oil Gas
• The big boys
• Have upstream, midstream, downstream
• Petro Canada, Husky, Shell Canada
• Senior Producers
• Also big
• Have upstream, sometimes midstream
• Encana, CNQ, Talisman
• Intermediate, Junior Producers
• More growth potential
• Strictly upstream
• Navigo, Peyto, Paramount

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Step 3 Ratios

• Same financial rations can be used
• P/E, P/C, EV/EBITDA, D/E, ROE
• When doing comps, compare integrated to
  integrated, senior to senior, etc
• Are some sector specific metrics

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Step 4 Other Metrics

• EV / BOE/d
• Rule of Thumb Around 25,000 per BOE/d
• Shows how much value the market places on every
  barrel of present production
• Watch production breakdown compare natural gas
  producers to natural gas producers

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More Metrics

• Per Barrel Netbacks
• Takes average per barrel selling price then
  subtracts per barrel costs
• Measures per barrel returns
• Some barrels of production are more valuable than
  others
• Due to lower op costs, or higher realizable price

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Still More Metrics

• Recycle Ratio
• Gross Netback / Finding Development Cost
• A ratio of 1/1 shows company is just treading
  water no value created
• Some companies grow production quickly, but if
  theyre spending too much, no value is created
• Ratio of 2/1 shows that for every dollar spent,
  get back 2 in profit

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So what should you do?

• If you think there will be a war
• Buy Oil
• If you think well have an abnormally cold Jan
  and Feb
• Buy Gas
• As for Kyoto

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Kyoto Protocol

• Low per barrel costs
• But is very misleading are actually large
  capital expenditures that will scare off
  investors
• Suncor recently stated that they could afford the
  change
• CNQ, Encana, Petro Canada, all fighting against
  it
• Cost benefit
• Will have an annual cost of 100B, to delay the
  melting of the ice caps from 100 year to 106
  years
• For that cost, could provide everyone in the
  world with clean drinking water
• So is it worth it?