23rd July 2013
To be successful, shale gas production will require oil prices to trade above $100 a barrel argues Angelos Damaskos CEO of Sector Investment Managers and fund adviser to the Junior Oils Trust.
The key measure will be West Texas Intermediate which has risen in price and narrowed the differential with Brent Crude recently. This rise would appear to be run contrary to conventional wisdom about supply and demand given the US and Canadian shale revolution but Damaskos suggests it may be more to do with logistics within the US market rather than the shale gas game changer.
“The price of WTI rose significantly last month and has now almost caught up with Brent. Whilst the price of Brent probably includes a geopolitical premium due to the situation in the Middle-East, it was hitherto believed that WTI was cheaper due to growing supply from Canada and the shale revolution. “It now appears that the discount was largely due to storage and transportation bottlenecks at Cushing, Oklahoma, which are gradually being resolved by the opening of new transport routes. As the US driving season started, consumption rose and oil inventories have been falling. We continue to believe that the new supply of oil and gas from shale rocks will come at high cost requiring WTI to trade well above $100/barrel to justify development.”
Talking about his own trust Damaskos says: “The Junior Oils Trust has recently benefitted from improved performance of some core portfolio holdings, as well as general sector recovery. In particular, Questerre Energy, the fund’s largest holding and one of the best relative performers this year, announced new resource assessment of its Montney acreage, with the best estimate by independent resource engineers showing prospective resources of 100 million barrels of oil equivalent (boe) and economic contingent resources of 32 million boe.
“The assessment was conducted on approximately 44% of the company’s acreage so there could be scope for further increases. Furthermore, the company has been making progress in its other projects, in particular the joint venture with Red-Leaf and Total that develops shale-oil production technology and aims to start production in the beginning of next year.
He says another core holding Parex Resources has announced provable reserves of 47% to 27 million boe with potential after-tax net present value of $615 at 10% discount rates.
“Parex also said that its monthly production had grown to over 16,000 boe per day and the finding, development and acquisition cost was assessed at $18/barrel, confirming the healthy net-back margins and cashflow generation.
“We believe that several other portfolio holdings are making great progress in their business models and the market will come to recognise the undervaluation potential. If current low valuations persist, cash-rich industry majors are likely to increase corporate activity.”