I adore the Independent Petroleum Association of America's (IPAA) periodic investor symposiums. One reason is that these conferences bring together a broad swath of tiny, small, and medium-sized energy players -- exactly the sort that sometimes offer big-time buying opportunities. Pull up a five-year chart of Petroleum Development (Nasdaq: PETD ) , Core Laboratories (NYSE: CLB ) , or BPZ Resources (AMEX: BZP ) to see what I mean.
Another great thing about this conference is that the proceedings are archived online. That means you don't have to miss a single presentation from the three-day event now underway in New York -- even if you're a relatively late-to-rise West Coast person like me. Over the next few days, I'll be writing about some of the companies that I find most compelling.
These stocks reek of peak
On Day 1, I tuned in to talks by two of the larger presenting companies. Both promise a steady upside from oil production over the years and decades to come, and all the oil is located right here in North America. Of course, there's a catch -- unconventional methods are required to slurp all this oil to the surface.
While only one of the companies explicitly connected its fortunes to peak oil, I find both companies to be sound plays on a long-term increase in the price of oil.
Healthy, wealthy, and wise
First, I heard from Canadian Natural Resources (NYSE: CNQ ) , one of the biggest independents around. It is Canada's second-largest natural gas producer, after EnCana (NYSE: ECA ) , but I'll stick to the oil side today.
The first thing to strike me about Canadian Natural was the exploration and production company's stated goal of creating long-term shareholder wealth. Not accounting earnings, not subjective value, but actual wealth. I appreciate the distinction.
Of course, nothing focuses the mind on wealth creation like a giant ownership stake. I was aware that Vice Chairman and energy super-investor Murray Edwards holds a lot of shares, but the presentation slide comparing Canadian Natural's insider ownership with that of other leading independents was still striking. At the end of 2007, management and directors owned more than $1.6 billion in common stock. Runner-up Devon Energy (NYSE: DVN ) clocked in at $192 million. Management's well-committed, so let's seek the source of future wealth-creation wizardry.
Heavy, heavier, heaviest
While Canadian Natural has oil assets in the North Sea and offshore West Africa, these are viewed as generating free cash flow in the near term. Most production upside is located much closer to home.
Basically, the further north into Canada one goes, the heavier the oil gets, and the more challenging it is to extract. The upshot is that it also gets more bountiful. Starting in Central Alberta, Canadian Natural has access to conventional heavy oil, which flows to the surface without prodding. Then, moving north toward Fort McMurray, the oil deposits start to require things like steam injection to help coax out the crude. These thermal projects are expected to grow 15% annually through 2020.
Finally, up in oil sands country, there's the huge Horizon project, which is an open-pit mining operation. Half of Canadian Natural's capital spending is being poured into Horizon this year, so all that money and effort had better be worth it. How does about a billion dollars in annual free cash flow, stretching on for decades, sound? And that's just phase 1.
CO2: From pollution to production
Speaking of phasing in production, Denbury Resources (NYSE: DNR ) has a very deep development pipeline of its own. The producer, based in Plano, Texas, is planning to double its daily oil output by 2012, all thanks to a proven technique called the CO2 flood. Denbury's not the only one harvesting oil patch gains using this method, but the company is rather unique in its access to high-quality carbon dioxide.
Like money, CO2 doesn't grow on trees (quite the opposite, actually). Until man-made sources become cheaper to capture and purify, the lowest-cost bulk CO2 comes from rare natural reservoirs, such as Denbury's Jackson Dome property in Mississippi. When the company picked up this field in 2001, proved reserves were 800 billion cubic feet. At year-end 2007, reserves stood at 5.6 trillion cubic feet, with several trillion more possible. This gas supply, paired with significant pipeline investments, is what fuels Denbury's flooding programs.
This year marks the beginning of phase 3 of eight phases. Each step targets one or more marginal oil fields, purchased on the cheap. The carbon dioxide gets piped in, mixes with oil that primary recovery left behind, and helps bring more to the surface. Denbury models about a 17% additional recovery of original oil in place for its future CO2 floods, based on results from phase 1.
This all sounds great in a world of $100-per-barrel oil, but maybe we're not quite ready to jump on the permanently high plateau bandwagon. Does the Denbury model break down if we fall back to $60 per barrel? Actually, Denbury estimates that its economic breakeven level on these enhanced oil recovery projects is about half that level. This indicates that profits are not about to be punctured.