wtf, omg, fml - seeing value in chaos
TRANSCRIPT
1
WTF, OMG & FMLSeeing the value in chaos
January 28th, 2016Shaun Connell
2
Agenda
• Content• Energy Primer – World Energy Demand
• A brief lesson in commodity pricing
• Historical price analysis – The First 5 Waves
• Forward price analysis – The Final 3 Waves - How to profit riding each wave
• Q&A
3
Energy Primer
World Energy Supply and Demand Fundamentals
44Source: BP Statistical Review; ARC Financial
World Energy Demand by Source - Historical and Forecast to 2025
0
50
100
150
200
250
300
350
1965 1975 1985 1995 2005 2015f 2025f
Con
sum
ptio
n (M
MB
OE/
day)
Hydro
Oil
Coal
Natural Gas
Renewables
Nuclear
55
0
10
20
30
40
50
60
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)0
2
4
6
8
10
12
14
16
18
20
1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0
2
4
6
8
10
12
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0
1
2
3
4
5
6
7
8
9
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0
1
2
3
4
5
6
7
8
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0
1
2
3
4
5
6
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0.0
0.5
1.0
1.5
2.0
2.5
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Con
sum
ptio
n (M
MBO
E/da
y)
Energy Appetite and Diet of NationsPatterns of Development
Vietnam
Oil
Coal
Netherlands
Oil
Gas
UK
Coal
Oil
India
Brazil Canada
CoalGas
Africa
Russia China
Oil OilOil
Oil Oil Oil
Gas
Renewables
Gas
Gas
Hydro Hydro
Coal
Coal
66
US Market Share of Fuels: All Energy
0%
20%
40%
60%
80%
100%
1635 1785 1890 1953 1968 1983 1998
Mar
ket S
hare
(%) Wood
Coal
Oil
Natural Gas
Nuclear
Renewables
Hydro
77Source: BP Statistical Review; ARC Financial
World Energy Consumption by Source
0
10
20
30
40
50
60
70
80
90
100
Oil Natural Gas Coal Nuclear Hydro Renewables
Ener
gy C
onsu
mpt
ion
MM
BO
E/da
y
+5.1%
+1.5%
+3.3%
-5.4%+3.4%
+12.8%
88
0
5
10
15
20
25
30
35
N. America S. America Europe M.E. Africa Asia
Oil
Dem
and
(MM
BO
E/d)
Oil Demand by RegionAnnual 2002 to 2012
-0.9%
+3.6%
-2.5%
+4.0%
+3.1%
+3.7%
99
USA
Rus
sia
Saud
i Ara
bia
Chi
na
Iran
Iraq
UA
E
Kuw
ait
Mex
ico
Can
ada
0
2
4
6
8
10
12
Mill
ions
of B
arre
ls p
er D
ay
Average Annual Oil Production by CountryCrude Oil Plus Lease Condensate; 2013
Source: EIA, ARC Financial Corp.
10
A brief lesson in commodity pricing
How is energy priced and why is this important?
11
Calories – Apples vs. Oranges
• Question: You’re on a tight budget and need to eat. Based on the cost per calorie for the apple and the orange, which fruit should you purchase?
APPLE100 Calories
$1.00
$0.01/ Calorie
ORANGE100 Calories
$1.00
$0.01/ Calorie
• Answer: They both cost the same per calorie – you can choose based on what you think will taste best.
12
Calories – Apples vs. Oranges
• Question: A hurricane hits the coast of Florida and wipes out this years Orange crop. The price of Oranges rises to $4.00/Orange. You’re still on a tight budget and starving for food. Which fruit do you choose to purchase?
APPLE100 Calories
$1.00
$0.04/ Calorie
ORANGE100 Calories
$4.00$0.04/ Calorie
• Answer: Obviously, you purchase the apple. Why pay 4 times more per energy calorie? However, If money was no object and I loved Apples, I may still buy the apple.
13
Calories – Oil vs. Natural Gas
• Question: You have a car that can fuel switch between oil (gasoline) or natural gas. Based on the cost per calorie for each fuel, which do you choose to purchase?
Oil600 Calories
$6.00
$0.01/ Calorie
NatGas100 Calories
$1.00
$0.01/ Calorie
• Answer: They both cost the same per calorie. You choose whatever you fancy for the day.
14
Calories – Oil vs. Natural Gas
• Question: War breaks out in the middle east causing a shortage of oil and a price spike to $24.00 per barrel. Now which fuel do you choose for your car that has the ability to fuel switch between oil and natural gas?
Oil600 Calories
$24.00$0.04/ Calorie
NatGas100 Calories
$1.00
$0.01/ Calorie
• Answer: Given oil now costs 4 times more per calorie of energy, you choose to switch to Natural Gas. Friends of yours that have cars that only run on gasoline are forced to pay 4 times more than you at the pump. Sucks to be them.
15
Key Take Away
The world needs energy – not oil.
16
Historical Price Analysis Waves 1,2,3,4 and 5
Introducing the first five waves and a price analysis for oil, natural gas, and USDCAD.
17
Waves 1 – 5 - Historical Pricing - Oil, NatGas and Oil/Gas Ratio
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-86
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-9
3
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-9
8
Oct-99
Sep-0
0
Aug-01
Jul-0
2
Jun-0
3
May-04
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-0
8
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
0
5
10
15
20
25
30
35
40
45
50
Wave Name DateWave 1 – Deregulation (D-REG) 1983 – 2004
Wave 2 - China 2004 - 2008
Wave 3 – Financial Collapse and Fracking (FC&M) 2008 – 2009
Wave 4 – Digitization, Distributed Generation, Decarbonization (3D’s) 2009 - 2013
Wave 5 – What the fuck? (WTF) 2013 – 2015
Wave 1D-REG
Wave 2CHINA
WAVE 3
FC&F
Wave 43D’s
Wave 5 WTF
18
Wave 1 - Deregulation
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-86
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-9
3
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-9
8
Oct-99
Sep-0
0
Aug-01
Jul-0
2
Jun-0
3
May-04
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-0
8
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
0
5
10
15
20
25
30
35
40
45
50
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 1Deregulation
• Wave 1 – Deregulation (1983 to 2004) • Oil started trading in 1983 and averaged $23.06/barrel from 1983 to 2004
• Natural Gas began trading in 1997 and average $3.73 from 1997 to 2004
• From 1997 to 2004, the oil/gas ratio was 7.4
19
Wave 2 - China
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-86
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-9
3
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-9
8
Oct-99
Sep-0
0
Aug-01
Jul-0
2
Jun-0
3
May-04
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-0
8
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
0
5
10
15
20
25
30
35
40
45
50
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 2CHINA
• Wave 2 – China (2004 to 2008) • China’s energy consumption doubles over 4 years – entry into middle class and
vehicle ownership – surge in demand for gasoline (oil).
• Oil price spikes from $30 in 01/04 to $134.02 in 06/08. Natgas spikes from $6.00 to $13.00 over the same time period.
• The Oil/Gas ratio averages 9X with a peak of 14X in 08/08.
20
Wave 3 – Financial Collapse & Fracking (FC&F)
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-86
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-9
3
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-9
8
Oct-99
Sep-0
0
Aug-01
Jul-0
2
Jun-0
3
May-04
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-0
8
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
0
5
10
15
20
25
30
35
40
45
50
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 3
FC&F
• Wave 3 – Financial Collapse (2008 to 2010) • Demand fell off a cliff – price of oil dropped – it took 8 months to drop from $134
in 06/08 to $39 in 02/09.
• Fracking technology unlocked in the US – MASSIVE supply hits market causing natural gas prices to trade lower than levels reached at oil bottom.
• This causes the oil/gas ratio to expand to a high of 25X in 09/09.
21
Wave 4 – 3 D’s (Decarbonisation, Digitalization, Distributed Generation)
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-86
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-9
3
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-9
8
Oct-99
Sep-0
0
Aug-01
Jul-0
2
Jun-0
3
May-04
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-0
8
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
0
5
10
15
20
25
30
35
40
45
50
Historical Pricing - Oil, NatGas and Oil/Gas Ratio
OIL NatGas Oil/NatGas
WAVE 43D’s
• Wave 4 – 3 D’s (2010 to July 2014) • Climate change is front and centre. Massive amounts of government subsidy’s
pumped into new technologies to reduce GHG’s (i.e. Tesla)• Oil prices continue to rise with global demand. Natural gas prices continue to reach all
time lows based on technology advances in fracking. This technology begins to be applied to the “tight oil” plays in the US.
• Oil to gas ration explodes to 53X in 04/12 (Oil = $103.35, NatGas = $1.95)
22
Waves 1 through 4 - Alberta Population and Migration
03-01-1983 03-01-1986 03-01-1989 03-01-1992 03-01-1995 03-01-1998 03-01-2001 03-01-2004 03-01-2007 03-01-2010 03-01-2013
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
35000
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
NetMigration Int'l Prov'l Population
Wave 1 Wave 2 Wa v e 3
Wave 4 Wave 5
• Alberta population will continue to grow – disposable income will decline• During the oil crisis of the 80’s, Alberta population growth was flat – interest rates were
18% - people were forced out of home ownership and left the province.
• Today, interest rates are 3% - not likely to squeeze as many home owners. Disposable income will decrease with lower paying jobs.
• There is a global trend towards urbanization due to wealth opportunities and energy efficiencies – i.e. Millennials take public transit vs. own vehicles
23
Price Analysis - USDCAD vs. Oil – Wave 1 to 4 (1983 to 2015)
Apr-8
3
Mar-8
4
Feb-8
5
Jan-8
6
Dec-8
6
Nov-87
Oct-88
Sep-8
9
Aug-9
0Ju
l-91
Jun-9
2
May-93
Apr-9
4
Mar-9
5
Feb-9
6
Jan-9
7
Dec-97
Nov-98
Oct-99
Sep-0
0
Aug-0
1Ju
l-02
Jun-0
3
May-0
4
Apr-0
5
Mar-0
6
Feb-0
7
Jan-0
8
Dec-08
Nov-09
Oct-10
Sep-1
1
Aug-1
2Ju
l-13
Jun-1
4
May-1
5 $-
$20.00 $40.00 $60.00 $80.00
$100.00 $120.00 $140.00 $160.00
$0.800 $0.900 $1.000 $1.100 $1.200 $1.300 $1.400 $1.500 $1.600
Oil vs. USDCAD - 1983 to 2015
OIL USDCAD
$- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $0.800
$0.900
$1.000
$1.100
$1.200
$1.300
$1.400
$1.500
$1.600
f(x) = − 0.00420176117720661 x + 1.43801722169516R² = 0.566607983871845
Scatterplot - Oil vs. USDCAD - 1983 to 2015
24
USDCAD vs. Oil – Wave 2 to 4
Jan-
04
May-0
4
Sep-0
4
Jan-0
5
May-0
5
Sep-0
5
Jan-0
6
May-0
6
Sep-0
6
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-
13
May-1
3
Sep-1
3
Jan-
14
May-1
4
Sep-1
4
Jan-1
5
May-1
5
Sep-1
5 $20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$0.850
$0.950
$1.050
$1.150
$1.250
$1.350
$1.450
Wave 2 to 4 - 2004 to 2015
OIL USDCAD
$25.00 $45.00 $65.00 $85.00 $105.00 $125.00 $0.800
$0.900
$1.000
$1.100
$1.200
$1.300
$1.400
$1.500
f(x) = − 0.00415775510392366 x + 1.4277515169648R² = 0.721631328216071
Scatterplot - Oil vs. USDCAD - 1983 to 2015
25
USDCAD vs. Oil – Wave 2 to 4
$27.00 $31.00 $35.00 $39.00 $43.00 $47.00 $51.00 $55.00 $59.00 $1.050
$1.100
$1.150
$1.200
$1.250
$1.300
$1.350
$1.400
$1.450
f(x) = − 0.00734138730503002 x + 1.61032223949164R² = 0.69283962893354
Scatterplot - Monthly Oil vs. USDCAD Wave 2 to 4 ($34 < OIL < $61)
• Wave 2 to 4 with Monthly Crude Range ($34 < OIL < $61) - Findings• Significant R squared value of 69% when selecting crude value range ($34 to $61)
• Two dots in the blue circle represent recent USDCAD high on Jan 21/16 current USDCAD on Jan 27/16. They are both above the trend line.
• When the price of oil is between $47 and $51, the USD CAD was between $1.19 and $1.31.
26
Annual Path for USDCAD vs. OIL (2004 – 2015)
30 40 50 60 70 80 900.95
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35Series1; 1.3008 1.29
f(x) = − 0.00444010425716768 x + 1.4222105531422R² = 0.691822098051323
USDCAD vs. OIL - Annual Averages (2004 - 2015)
• Relatively strong R-squared of 69% - if relationship was to continue to hold, this would mean that you would sell the USDCAD when its above the line, and buy the USDCAD when its below.
• The past 3 years have settled “above” the line – which could just be noise, but could also mean a structural shift in the relationship.
2004 2015
27
Summary – Oil and USDCAD
• Crude oil prices have historically had a strong impact on the USDCAD
• If you believe that we have seen a bottom in crude prices and the USDCAD behaves in a manner similar to the past 10 years, there is a lot of upside to selling the USD at current levels.
• The table to the right illustrates where the USDCAD should be worth with oil prices ranging between $25 and $50. This assumes no structural changes between the relationship between Oil and FX.
• Wildcards – New Federal Leadership, Interest Rates (US raising rates, Canada is dropping rates)
28
Forward Price AnalysisWaves 6, 7 and 8
Introducing the final 3 future waves. If they are correct, what surf board works best in riding the wave?
Historical Waves DateWave 1 – Deregulation (D-REG) 1983 – 2004
Wave 2 - China 2004 - 2008
Wave 3 – Financial Collapse and Fracking (FC&M) 2008 – 2009
Wave 4 – Digitization, Distributed Generation, Decarbonization (3D’s) 2009 - 2013
Wave 5 – What the fuck? (WTF) 2013 – 2015
29
Waves 5 through 8 – July 2014 to 2020+
Jul-1
3
Oct-13
Jan-1
4
Apr-1
4Ju
l-14
Oct-14
Jan-1
5
Apr-15Ju
l-15
Oct-15
Jan-1
6
Apr-1
6Ju
l-16
Oct-16
Jan-1
7
Apr-1
7Ju
l-17
Oct-17
Jan-1
8
Apr-1
8Ju
l-18
Oct-18
Jan-1
9
Apr-1
9Ju
l-19
Oct-19
Jan-2
0
Apr-2
0Ju
l-20
Oct-20
$25.00
$35.00
$45.00
$55.00
$65.00
$75.00
$85.00
$95.00
$105.00
$115.00
$0.800
$0.900
$1.000
$1.100
$1.200
$1.300
$1.400
$1.500
OIL USDCAD
Wave 5 WTF
Wave 6 OMG
Wave 7 FML
Wave 8 Rebirth
Wave 4 3D’s
30
Historical and Future Waves (1983 – 2020)
Historical Waves DateWave 1 – Deregulation (D-REG) 1983 – 2004
Wave 2 - China 2004 - 2008
Wave 3 – Financial Collapse and Fracking (FC&M) 2008 – 2009
Wave 4 – 3D’s (Digitization, Distributed Generation, Decarbonisation) 2009 - 2013
Wave 5 –WTF (What the Fuck?) 2013 – 2015
Future Waves DateWave 6 – OMG (Oh My God) 2016
Wave 7 – FML (Fuck My Life) 2017–2Q2018
Wave 8 – Rebirth 3Q2018-2020+
31
Waves 5 through 8 – July 2014 to 2020+
$25.00 $35.00 $45.00 $55.00 $65.00 $75.00 $85.00 $95.00
$105.00 $115.00
$0.800
$0.900
$1.000
$1.100
$1.200
$1.300
$1.400
$1.500 Wave 5 WTF
Wave 6 OMG
Wave 7 FML
Wave 7 Rebirth
Wave 4 3D’s
5 – WTF (07/14-12/15) 6 – OMG (2016) 7 – FML (01/17-06/18) 8 – Rebirth (07/18 ++)
Story Disbelief. This is just another boom bust cycle.
OMG – the boom may not happen. What now?
FML – jobs slashed, fire sales, panic.
Diversification of Alberta economy. Shift away from natural resource based economy.
Physical Winners
None – All physical assets lose value.
Some – Begin to aggregate heavily discounted assets. Be patient – more value to come.
Buy deeply discounted physical premium assets that deliver 15% IRR to individuals who still have cash to buy.
Ride your physical asset winners.
Financial Winners
Commodity – Sell OilFX – Buy USDCADEquity – Sell highly leveraged O&G companies – emphasis on heavy oil producers who own USD debt.
Commodity/FX – Buy OTM call options on crude and put options on USDCAD.Spread Trades – 1- Buy CNRL, Sell CVEBuy Boardwalk, sell DREAM REIT.
Commodity/FX – Less value – reality sets in with crude fair value between $40 and $50.Equity – Buy undervalued AB companies that were pulled down with market (i.e. Boardwalk)
Uncertain.
32
Q&A