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Frightening Oil Forecasts Could Mean Profit

April 20, 2006

By Keith Woolhouse
The Ottawa Citizen

No doubt about it, even without the Iran factor, this market has gone ballistic. The soaring price of energy and commodities continues to drive the benchmark S&P/TSX composite ever upward, and the end may not yet be in sight.

It's positively frightening to hear Toby Smith of ChangeWave.com forecast that the next major political flare-up or terror issue could drive oil to $100 U.S. a barrel.

It's equally disturbing to hear Tristone Capital executive managing director Tom Ebbern suggest that only much higher energy costs will curb consumer demand.

"Cost, that's the only limiting factor," says Ebbern, who heads Tristone's institutional research department at the Calgary-based investment banking firm that specializes in the energy industry. "Consumers have enjoyed a relatively low inflationary energy environment for such a long time that they now need to bear the true cost of what it takes to replace a barrel of energy."

Many analysts are expecting prices to ease off, but we could all be in for a surprise, Ebbern warns. And he said that before a barrel hurdled over $70 U.S.

Ebbern is even more sure of the prospects that lie ahead for Alberta's oilsands.

"If you believe $50 a barrel or higher is here to stay, then the growth of the oilsands will be limited only by the pace of development in terms of how quickly it can be built. It will be spectacular."

Unconventional gas still has a big role to play with prices in the $7-Mbtu (million British thermal unit) range, he says. That is equivalent to $50 U.S. a barrel for oil, not outrageously high, but it will bring on a lot more development for gas.

"Most of the oilsand plays have a fair bit of upside from an investment perspective because the long-term view on crude still doesn't reflect where ultimately it's going. Where's that? At least for the foreseeable future it's in the $55 to $60 U.S. band and, potentially, much more."

Heavyweights such as Petro-Canada, Talisman and Nexen are among traders' permanent favorites, but their shares have had a fair run-up over the past 12 months and may now be too pricey for small investors' pockets.

For those looking to dip a toe in the energy sector, Ebbern names Nexen Inc. (NXY/T), OPTI Canada Inc. (OPC/T) and Compton Petroleum Corp. (CMT/) among his top selections for their "significant upside room." OPTI Canada is a joint partner with Nexen in an Athabasca oilsands project at Long Lake. The project is due to come on line in 2008.

"This isn't a commodity-driven call. Oil doesn't need to go up another $10 a barrel for these stocks to go up. We know what these companies are sitting on. Their resources have been identified."

Most of Tristone's 63 Calgary staffers joined the firm from the oil and gas industry. "We spend a lot of time looking at the assets and reservoirs to find the most potential that hasn't yet been fully developed or recognized," says Ebbern.

"Each of these companies has material resources that don't carry a lot of risk. It's more execution and timing, in terms of when those resources get moved from possible to probable to proven, and when's the best time to start drilling."

Ebbern, a geophysicist, has in his research team a reservoir engineer and a geologist.

"We're not sitting in Toronto looking at a balance sheet. We're looking at what's in the ground. When management tells us it's going to bring on 10,000 barrels a day three years from now from a reservoir it hopes to develop, we look at it and, based on experience and due diligence, put a better risk factor on the probability of that happening within the cost estimates.

"The more hands-on industry experience you can bring to analyzing it, the better you can quantify the risk to the investor. And, frankly, that's what investing is all about: Matching risk and reward. Every project has risk to it and the highest investment returns are where the general market has overestimated or underestimated the risk profile with respect to the value placed on it."

Ebbern says that Tristone looks beyond major oil companies, such as Petro-Canada and Suncor. "Everybody in the world loves them and the market reflects that valuation. We try to find those companies that the market isn't so knowledgeable about, yet the assets are as good or better than some of these other brand-name companies."

Three junior oil and gas companies high on Ebbern's recommended list are Kereco Energy Ltd. (KCO/T), Cordero Energy Inc. (COR/T) and Bear Ridge Resources Ltd. (BER/T).

Tristone's 12-month targets are $16 for Kereco, $9 for Cordero and $7.50 for Bear Ridge.

"All three of these are run by management teams that have successfully run previous juniors that were sold or merged into a trust and the teams started over," said Ebbern.