Maison Energy Monthly · With the strong product consumption period of summer now behind us, the...

Maison Energy Monthly

September 26, 2012

Economies World Wide Continue To Weaken

Asset Prices Hold Up Due To Central Bank Alchemy

What’s Inside:

Raise Cash/Hold Significant Cash Reserves

S&P/TSX Energy Index (Now 260)

Target 200.

2. Maison Universe High Impact Drilling Watch List

3. Research Update:

Questerre Energy Corp.

Niko Resources Ltd.

Sea Dragon Energy Inc.

4. Introducing Coverage:

Petromanas Energy Inc.

5. Top Picks: No Picks This Month

6. Recommended Buy List

Buy Favourite Stocks During Tax Loss Selling Season to Come In Nov/Dec.

7. Coverage List

Oil

Josef I. Schachter, CFA 403.264.4413 [email protected]

COMMODITY PRICE TARGETS

US$4/mcf NYMEX Winter 2012-2013

<US$75/b

Gas

1.

Source: The Economist, August 18, 2012

Maison Placements Canada Inc. 2

Maison Placements Canada Inc.

Economies World Wide Continue To Weaken Asset Prices Hold Up Due To Central Bank Alchemy

3

Source: Federal Reserve Bank of St. Louis, April 2012

During my career I have been mostly in the bull camp, but sometimes the data and the economic reality require a less sanguine view. Central banks are adding massive liquidity to overcome inaction or insufficient action by profligate fiscal policy of governments. The ECB, the Federal Reserve (US$85B/month) and most recently the Bank of Japan have all agreed to massive bond and mortgage securities to lower interest costs and inject cash into their economies. They hope to stoke inflation in assets and entice spending, thus creating trickle down growth in their faltering economies. This has not worked in the past post the euphoric initial bounce in asset prices. In fact, this cash injection remains on the side-line long term, as holders of this cash repair their balance sheets, and hold off capital spending due to a lack of demand, intrusive government regulations, and the fear of rising taxes post the upcoming U.S. election. This hoarding has resulted in the velocity of money shrinking. What is needed is a sustained rise in consumer spending and hiring by business which this money printing strategy can’t achieve. Through the mid-1980’s to the late 1990’s velocity of money rose as usage was found for the dollars and the cost of money on the sidelines had a price. With interest yields falling to negative returns, the penalty for using cash in business or other activity has been removed, and hoarding has become common place. The current velocity of money is now at the lowest level on record. The central banks are trying to “push on a string” and they will fail once again. The issue has to be resolved at the fiscal level and until there is acceptance of living within one’s means and Trillion dollar deficits no longer take place in the U.S., this monetary stoking of the economic engine will only have a short term stimulative impact.

4


Source: Stockcharts.com, September 21, 2012


$USD

The move by the ECB to “sterilize” bond purchases of member countries to lower their punitive bailout level interest rates had a quick affect of lowering their short end of the yield curve and to boost the value of the Euro. This move over the last 2 months lifted the Euro by 10% to the 132 level. Spanish 10-year yields have declined from over 7.5% to <6% as a result of their moral suasion move. So far no actual bond purchases have occurred via the newly created “Outright Monetary Transactions Program.” The ECB will require countries wishing for the ECB to buy their bonds to meet stringent fiscal targets and this so far has held back official requests for help. In the meantime the intent to act has moved interest rates sharply lower reducing borrowing costs.

If fiscal targets are not met and with the massive strike action occurring across Europe (north of 100K protestors regularly in Portugal, Italy, Spain and Greece) this may occur as the backlash to spending cuts, higher taxes job losses and reduced pensions is fracturing the political landscape across southern Europe, and would impact the ability of the ECB to help. We expect yet another crisis window to come for Europe in the coming months and when this occurs, the Euro will fall to new lows for the year. The fiscal crisis will also come to the U.S. via the mandated sequestering at year end. The ongoing $T of deficits must end and both tax increases and budget cuts will be required over time to balance the U.S. budget. The rhetoric in upcoming weeks of the U.S. Presidential battle and debates will bring this to the fore. If the markets see a real move to resolve this crisis then we should see a rally in the U.S. Dollar and in the bond market. The bullish consensus on the U.S. Dollar has fallen to a very oversold 7% bulls. When the dollar was over 84 it traded >80%. We expect the next up leg in the Dollar to breach 84, possibly rising to the 87 level on the index. Commodities based in U.S. Dollars should decline materially if this occurs.

U.S. Dollar Index

Euro Dollar Index

Target

Target


5


$SSEC


DJI BULLISH

China’s economic problems continue to weigh on the environment for world economic growth going forward. Last week the China PMI was released showing the 11th month below the 50 level (indicating a shrinking economy). The Shanghai stock market has been falling and is now at new lows for 2012 and much below the low of 2010. If China was doing well and leading world economic growth then we should be seeing record levels for their stock market – not new lows. At the margin, economic activity is worsening as the evolving island battle with Japan harms trade between these two largest Asian economies.

The new ongoing confrontation with Japan is one with painful memories for the Chinese. Japan wanting possession of historic China islands is reminiscent of the invasion and rape of China in the 1930’s and 1940’s. Mass protests have occurred in both countries and a resolution is needed. This issue is not just about the land on the islands but about the 200 miles around them that may contain large reserves of natural gas and oil that both countries covet. The stimulus by central banks has lifted equity prices particularly in the U.S. If we see another period of duress in the economy, then the markets will correct meaningfully. The index of bullishness is near record highs, and we expect a decline down <25% in coming months.

Shanghai Stock Exchange Composite Index

SELL Level

BUY Level

DJIA Bullish Percent Index

Economic Releases Warn of More Trouble Ahead

Europe Despite reassurances by the ECB, Spaniards continue to withdraw money from their

domestic banks. In July 76B Euro’s were taken out (7% of GDP). The flight by educated and entrepreneurial citizens to other countries continues. According to releases 30,000 Spaniards registered to work in Britain – a 25% increase from the prior year.

The ECB plan to supervise Europe's banks is floundering as getting a new bureaucracy in place to supervise over 6,000 banks is running into local country opposition. There are not enough trained regulators available and the loss of sovereignty is facing strong opposition including from austere Germany.

China China’s demand for energy has been one of the key drivers of higher oil prices over the last

few years. At the beginning of this year the EIA and other forecasters were using demand numbers in excess of 10Mb/d for their consumption in 2012. However, the economic slowdown in the country is taking its toll. Thomson Reuters recently reported that China’s demand for oil in August was at a shockingly low 8.92Mb/d and was below the year-to-date level of 9.39Mb/d. The release noted that the largest decline in demand had come from the industrial and manufacturing sectors.

BYD – the Chinese car maker backed by Warren Buffett saw a substantial slowing in demand and profits fell for the first half of 2012 by 94%.

U.S. The U.S. payroll picture for August was horrendous at only 96K jobs created. The

participation rate fell again (to 63.5% - the lowest level since the mid-1970’s), and there were negative revisions to previous months jobs data. Payrolls remain 261K lower than when Obama took office in January of 2009.

FedEx and UPS both highlighted in recent reports, a global slowdown in shipping orders. Overall orders are down and customers are choosing the least costly options versus speed of delivery. Both noted profits would be down in upcoming quarters and the outlook for 2013 was even worse.

We continue to watch for “at the margin problems” in the world economy that would highlight an upcoming synchronized slowdown and problematic period. These are some of the recent events that are weakening the underpinnings of the current positive consensus view and may indicate that many parts of the world will face a pronounced slowdown in coming months and recession in 2013.


OIL:

Raise Cash/Hold Significant Cash Reserves S&P/TSX Energy Index (Now 260) Target 200

1.

Source: Short-Term Energy Outlook, September 2012

OPEC Surplus Crude Oil Production Capacity

U.S. Crude Oil Stocks

Source: Short-Term Energy Outlook, September 2012


7

With the strong product consumption period of summer now behind us, the large and excess crude inventories world-wide are beginning to lean on prices. Oil breached US$100/b in mid-September as the war drums between Israel and Iran elevated fears of a closure of the Straits of Hormuz. However, with the Presidential election underway, and painful sanctions hurting the Iranian economy, President Obama does not yet see the need to move against Iran and is restraining Israel from acting unilaterally. A large scale 12-day naval exercise off Iran’s Gulf coast by 25 nations led by the U.S. (including three aircraft carriers) for mine clearing should deter Iran from any hostile action. U.S. British and French naval presence will remain in place thereafter.

OPEC production is now running at the 36.6Mb/d level (including liquids) – 2Mb/d more than current lower shoulder season demand. With rising production in Iraq, Libya, Kuwait and Saudi Arabia more than offsetting the falloff of exports from Iran, overall excess capacity from OPEC is growing. Non-OPEC production is expected to rise from 52.4Mb/d in 2012 to 53.7Mb/d in 2013 (EIA estimate) and overall world demand is expected to grow by only 800Kb/d in 2013, thus non-OPEC will take all this market growth and OPEC will need to but back even further in production. With the financial needs of many OPEC countries at the pressure point due to the Arab Spring issues and growing populations, unless Saudi Arabia cuts back production materially (now 9.9Mb/d) excess inventories should put significant pressure on oil prices especially when there are weaker economic reports out of the U.S. and China – the two largest consumers of crude.

8



WTI Chart


Last week’s inventory data for the U.S. exhibited how large the inventory overhang is. Crude inventories grew by 8.5Mb for the week and overall stocks grew by 11.4Mb. Inventories at 98.2 days of supply are over 15 days, higher than normal at shoulder season. If we see more weeks of inventory growth over the next month or so and inventories breach record levels over 100 days, then a meaningful correction in prices could ensue prior to winter. We would not be surprised to see WTI/b down in the mid-$70’s.

Target

Light Crude Oil Spot Price

S&P/TSX Capped Energy Index

Target



Source: U.S. Energy Information Administration, January 4, 2012

Strait of Hormuz

9

Fear of closure of the Straits by Iran, and the round of quantitative easing by central banks all added to a robust rally in the energy sector from July – September. We are now at an excess bullish level near 98% normally an extreme overbought reading. Any further build in inventories or of weaker economic data world-wide, would justify a material price decline for oil. Bottoms in the sector usually occur at levels <18% bulls and we await the next time this occurs to return to the bull camp. We recommend investors hold an underweighted position at this time and hold large cash reserves. If overinvested in the sector sell/raise cash immediately.

S&P Energy Sector Bullish Percent Index

SELL Level

BUY Level

2. Maison Universe High Impact Drilling Watch List

Canada:

Play Area SAMI Covered

Companies Target Location

Ownership

Working Interest

Leverage Potential to

Upside Success

Est. Chance of Success

Timing

Montney Multi-Frac, Extended-reach Horizontal

Program

Delphi Energy (DEE)

Liquids-rich Montney formation

Bigstone, AB ~92% >$3/share 50% Ongoing

Duvernay Guide

Exploration (GO) Tight Oil Dawson, AB 80% $1/share 20% Q4/12

Normandville/

Girouxville

Guide Exploration (GO)

Montney Liquids Peace River

Arch, AB 80% $1/share 50% Ongoing


South America & Caribbean:



Ownership

Working

Interest


Upside Success


Timing

Putumayo

La Vega Este-1 Azar

Gran Tierra Energy (GTE)

Oil Exploration Colombia 40% $0.50+ 33% Results Q4/12

Putumayo

Verdeyaco-1


Oil Exploration Colombia 100% $1+ 25% Q4/12

Block 95

Bretana-1


Exploration Peru, Maranon

Basin 60% $1+ 10% Dec/12 spud

Central Range Trinidad

Niko Resources Ltd. (NKO)

Deep Oil Prospect Tigre on shore

100Mb

Trinidad

Central Range Block

32.5%/40% $5+ 20% 2013

NCMA-2 Niko Resources

Ltd. (NKO)

Exploration - Gas target 5 Tcf +

Liquids

Offshore Trinidad 70% $40+ 30% 2013

Block 4(b) Niko Resources

Ltd. (NKO) Exploration – Mainly

gas Offshore Trinidad 100% $30+ 20% 2013

Block 2(ab) Maestro-1 prospect

Niko Resources Ltd. (NKO)

Exploration oil and gas

Offshore Trinidad

In area 20Mb Oil 4 Tcf Gas

55% $10+ 20% Nov/Dec results

Guayaguayare Niko Resources

Ltd. (NKO) Oil Target 250Mb Offshore Trinidad 65/80% $25+ 20% 2013


11

Europe, India, Indonesia, and the Middle East:



Ownership Working Interest


Upside Success


Timing

Jayarani-1 Niko Resources

Ltd. (NKO) 2.5 Tcf

Offshore Indonesia

100% $20+ 10% Spud mid Oct/12

Kofiau Niko Resources

Ltd. (NKO) >2.BB on block

Offshore Indonesia

57.5% $20+/prospect

total >$200 10%

1st well Ajek #1

Q4/12 >200Mb OOIP

West Papua Niko Resources

Ltd. (NKO) >1 Tcf + liquids

Offshore Indonesia

40% $10+ 10% Cikal #1 2013

North Makassar Niko Resources

Ltd.(NKO) >400 Mb

Offshore Indonesia

30% $10+ 10% Pananda 2013

SE Ganal Niko Resources

Ltd.(NKO) >500 Mb

Offshore Indonesia

100% $50+ 10% Rajageri 2013

Block 2-3 Petromanas

Energy Inc. (PMI) >200Mb Albania 50% $1+ 25%

Spud June 30 news late 2012 to early 2013

Block A-B Petromanas

Energy Inc. (PMI) >50 Mb Albania 100% $0.75+ 25% Q4/12

Ioana, Eugenia, Pelican Blk

Sterling Resources (SLG)

Oil and Gas Offshore Romania 65% $2+ 20% Spud Ioana late Sept/12,

Eugenia Nov/12

Upper Bakhtiari 3 wells

WesternZagros Resources (WZR)

20Mb+ Iraq/Kurdistan 40% in “Contractor

Group” of PSC. ~6% Net $0.20 33% Q1/13

Hasira-1 WesternZagros

Resources (WZR)

50 Mb+

Jeribe, Oligocene

Iraq/Kurdistan 40% in “Contractor

Group” of PSC. ~6% Net $0.50+ 33% Spud Q2/13

Kurdamir-2 WesternZagros

Resources (WZR) >500 Mb Gross Iraq/Kurdistan

40% in “Contractor Group” of PSC. ~6% Net

$1+ 50% Test results Oct/Nov

Kurdamir-3 WesternZagros

Resources (WZR) >500 Mb Gross Iraq/Kurdistan


$1+ 50% Spud late 2012/early 2013

Baran WesternZagros

Resources (WZR) >100 Mb Iraq/Kurdistan


$0.50+ 33% Spud Q2/13


3. Research Update: Questerre Energy Corp.


13

Research Update: Niko Resources Ltd.

15


Research Update: Sea Dragon Energy Inc.


17


19

4. Introducing Coverage: Petromanas Energy Inc.

20


6. Recommended Buy List:

Source: Schachter Asset Management Inc., August 21, 2012

5. Top Picks: No Picks This Month


21

7. Research Coverage List

Source: Schachter Asset Management Inc., August 21, 2012



23

Analyst Disclosure

Disclosure Key: 1=The Analyst, Associate or member of their household owns the securities of the subject issuer. 2=Maison Placements

Canada Inc. and/or affiliated companies beneficially own more than 1% of any class of common equity of the issuers. 3=<Employee name>

who is an officer or director of Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member

of the issuer. 4=Maison Placements Canada Inc. has managed co-managed or participated in an offering of securities by the issuer in the

past 12 months. 5=Maison Placements Canada Inc. has received compensation for investment banking and related services from the issuer

in the past 12 months. 6=The analyst has paid a visit to review the material operations of the issuer within the past 12 months. 7=The

analyst has received payment or reimbursement from the issuer regarding a visit made within the past 12 months. T-Toronto; V-TSX

Venture; NQ-NASDAQ; NY-New York Stock Exchange

Disclosures

Rating Structure

Analysts at Maison Placements Canada Inc. use two main rating structures: a performance rating and a number rating system.

Number Rating: Our number rating system is a range from 1 to 5. (1=Strong Sell; 2=Sell; 3=Hold; 4=Buy; 5=Strong Buy) With 5 considered among

the best performers among its peers and 1 is the worst performing stock lagging its peer group. A 3 would be market perform in line with the TSX

market. NR is no rating given that the company is either in registration or we do not have an opinion.

Analyst’s Certification: As to each company covered in this report, each analyst certifies that the views expressed accurately reflect the analyst’s

personal views about the subject securities or issuers. Each analyst has not, and will not receive, directly or indirectly compensation in exchange for

expressing specific recommendations in this report.

Analyst/Consultant Compensation: The compensation of the analyst/consultant who prepared this research report is based upon in part; the overall

revenues and profitability of Maison Placements Canada Inc. Analysts/consultants are compensated on a salary and bonus system. Some factors

effecting compensation including the productivity and quality of research, support to institutional, investment bankers, net revenues to the equity and

investment banking revenue as well as compensation levels for analysts at competing brokerage dealers.

Analyst Stock Holdings: Equity research analysts and members of their households are permitted to invest in securities covered by them. No Maison

Placements Canada Inc. analyst, or employee is permitted to effect a trade in the security of an issuer whereby there is an outstanding

recommendation for a period of thirty calendar days before and five calendar days after the issuance of the research report.

Dissemination of Research: Maison Placements Canada Inc. disseminates its hard copy research material to their clients using the postage service

and couriers. Samples of our research material are available on our web site. Electronic formats are available upon request.

General Disclosures: This report is approved by Maison Placements Canada Inc. (“Maison”) which is a Canadian investment- dealer and a member

of the Toronto Stock Exchange and regulated by the Investment Industry Regulatory Organization of Canada (IIROC).

The information contained in this report has been compiled by Maison from sources believed to be reliable, but no representation or warranty, express

or implied, is made by Maison, its affiliates or any other person as to its accuracy, completeness or correctness. All estimates, opinions and other

information contained in this report constitute Maison’s judgment as of the date of this report, are subject not change without notice and are provided in

good faith but without legal responsibility or liability.

Maison and its affiliates may have an investment banking or other relationship with the company that is the subject of this report and may trade in any

of the securities mentioned herein either for their own account or the accounts of their customers. Accordingly, Maison or their affiliates may at any

time have a long or short position in any such securities, related securities or in options, futures, or other derivative instruments based thereon.

This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in

any jurisdiction where such offer or solicitation would be prohibited. As a result, the securities discussed in this report may not be eligible for sale in

some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any

jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction.

This material is prepared for general circulation to clients and does not have regard to the investment objective, financial situation or particular needs

of any particular person. Investors should obtain advice on their own individual circumstances before making an investment decision. To the fullest

extent permitted by law, neither Maison Placements Canada Inc., its affiliates nor any other person accept any liability whatsoever for any direct or

consequential loss arising from any use of the information contained in this report.

For more information, please visit our website: www.maisonplacements.com

Analyst Disclosure

Company Name Trading

Symbol *Listing

Disclosure

Code Rating

Argosy Energy GSY T 5 3

Bankers Petroleum BNK T 1

Delphi Energy DEE T 1 5

Guide Exploration GO T 5

Gran Tierra Energy GTE T 3

Niko Resources NKO T 4

Petromanas Energy PMI V 5

Questerre Energy QEC T 4

Sea Dragon Energy SDX V 1 5

Sonde Resources SOQ T 2

Sterling Resources SLG V 3

WesternZagros WZR V 3

Rating: 5 - Buy - 2 Avoid

4 - Accumulate - 1 Sell/Short Sell

3 - Hold

http://www.maisonplacements.com/





Maison Energy Monthly · With the strong product consumption period of summer now behind us, the...

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Transcript of Maison Energy Monthly · With the strong product consumption period of summer now behind us, the...