Wednesday, August 31, 2005

A Shock to the System.

I have to go with my gut, and my gut says we've hit the tipping point, and we're about to go through a sea change as a result of this hurricane and the aftermath.

The effects are obviously devastating to New Orleans and the surrounding areas, but the shock seems to be spreading very quickly.

Gas prices are spiraling out of control. There's talk of shortages. That SUV is looking like a frightening liability. People are feeling vulnerable.

Are recessions about jobs and income, or are they about psychology? I think they're about psychology, and I think that may be running off the tracks.

I don't think this one will be a short, sharp one, like 2001, rather a more protracted shift of attitudes, a subtle belt tightening, a sobriety in spending habits.

Just one man's opinion..

Tuesday, August 30, 2005

Katrina: The Oil Storm?

Drudge Report: Gas Scare Hits Atlanta.


Metro Atlanta drivers are facing the possibility of paying considerably more than $3 a gallon for gas by Labor Day -- if they can get it at all, The Atlanta Journal-Constitution is reporting Wednesday.

The two pipelines that bring gasoline and jet fuel to the region are down -- powerless to pump as Hurricane Katrina wreaked havoc on electrical infrastructure.

The metro Atlanta region generally has about a 10-day supply of gasoline in inventory, said BP spokesman Michael Kumpf. The pipelines have been down for two days.

Alpharetta, Ga.-based Colonial Pipeline Co., cut off from its suppliers on the Gulf Coast, is now pumping gas from huge storage tanks, many in Powder Springs, Ga. Whether electric power can be restored to the pipeline pumps before supplies run out is "the great uncertainty ... that hangs over all of us," said Daniel Moenter, a spokesman for Marathon Ashland Petroleum, a major supplier of metro Atlanta's fuel.

MarketWatch: Asia markets mixed; crude oil weighs.


In U.S. energy markets, unleaded-gasoline futures jumped more than 20% Tuesday to an all-time U.S. closing high as traders assessed damage in the Gulf of Mexico from Katrina.

One analyst characterized trading in the spot market as "pure panic."

Supply concerns also boosted crude futures to a new record of $70.85 a barrel, while natural-gas prices rallied nearly 5%.

"There is clear desperation among physical players actually looking for wet barrels of gasoline, and their desperation is leading to eye-popping premiums above gasoline futures," said Tom Kloza, chief oil analyst at the Oil Price Information Service.

"The panic is greater than anything I have seen since the Iranian Revolution," he said. In most places, gasoline prices will be "north of $3 a gallon," he said. Read the full story on gasoline.

Unleaded gasoline for September delivery traded as high as $2.50 a gallon on the New York Mercantile Exchange. It closed at $2.4745, up 41.39 cents, or 20.1%.

NY Times: Carriers Are Stricken by Cancellations and Lack of Fuel.


The airline industry felt the brunt of Hurricane Katrina yesterday, with some airports running low on jet fuel and carriers canceling hundreds of flights. Meanwhile, Wall Street feared that the financial problems of the sickest airlines could grow worse.

The industry's trade group, the Air Transport Association, said the nation's supply of jet fuel had been cut 13 percent because of damage to refineries on the Gulf Coast.

The association arranged for supplies of jet fuel to be shipped by air tanker to airports in Charlotte, N.C., and Fort Myers and West Palm Beach in Florida, where supplies had dwindled, the group's chief economist, John Heimlich, said yesterday.

The group also planned to send jet fuel by tanker truck as well as plane to other airports, Mr. Heimlich said. Of particular concern are supplies at two big airports -Hartsfield, serving Atlanta, and Dulles, serving Washington. Both airports generally rely on supplies from refineries in Louisiana and in Memphis.

MarketWatch: Assessing Katrina's long-term impact.


If disruptions in Gulf energy supplies are limited, retail gasoline prices could top $3 a gallon for a couple of months, said Nariman Behravesh, chief economist for Global Insight. High energy prices would likely cut consumption and knock 0.3 to 0.5 percentage points off U.S. gross domestic product.

"We are not at the worst-case scenario," Behravesh told MarketWatch. "But we are moving in that direction" as companies assess the damage to their facilities.

In a worst-case scenario, the storm could shut down deliveries of as much as 25% of U.S. energy needs for several months.

In that case, gasoline prices would average $3.50 a gallon for the next four to six months, Behravesh said, cutting U.S. growth to zero in the fourth quarter.

The key unknown is how much damage petroleum refineries suffered. The U.S. could conceivably import more crude petroleum to replace Gulf production, but it's almost impossible to replace lost refinery capacity.

Americans could be swimming in crude, but wouldn't have a drop of gasoline to run their cars.

Louisiana, Mississippi and Alabama are home to 24 refineries with daily capacity of 3.3 million barrels, said Michael Helmar, an economist for Sixteen of the refineries are on the coast.

The other major unknown is the condition of crucial ports to bring in imported petroleum and oil and gas produced in the Gulf.

The vital Louisiana Offshore Oil Port, the only U.S. port that can handle supertankers, apparently escaped major damage, the manager of the port told Dow Jones NewsWires.

The major onshore port at Port Fourchon, also escaped major damage, according to Dow Jones NewsWires. The port is the base for oil service operations for oil rigs in the Gulf.

However, the channel leading to the port may have suffered severe silting from the storm surge. Dredging the channel could take weeks or longer. There could be a "very large impact to the energy supply," if the port can't reopen, port manager Ted Falgout told CNBC.

The Henry Hub, the junction of several pipelines in central Louisiana that serves as the pricing point for natural gas, reopened Monday afternoon. The condition of pipelines leading to the Henry Hub from the coast is not known.

Monday, August 29, 2005

Start Counting.

WSJ: Storm Jolts Energy Markets As U.S. Output Takes Blow. [$]

Quotes & Irony:

Houston-based Citgo Petroleum Corp., owned by Petroleos de Venezuela SA, says it needs 500,000 barrels of crude oil from the Strategic Petroleum Reserve to keep its Lake Charles, La., refinery operational.

"The request was made to ensure the refinery operates normally," says Citgo spokesman Fernando Garay. The facility -- located 200 miles west of New Orleans and far from the brunt of Katrina -- is having trouble getting enough oil to run through its refinery, said Mr. Garay. He said the shut down of two major oil pipelines, including one that connects to the Louisiana Offshore Oil Port, is the problem.

In recent years, new and hugely expensive exploration and production projects have turned the gulf's waters into a crucial source of critically needed oil and gas -- and a potential choke point when a major hurricane spins through. Energy markets depend on continuous production from the gulf -- there's simply not enough inventory to keep the oil sector going for more than 10 days without new feeds of crude oil and gas.

Katrina's potential body blow to the industry comes as global crude-oil prices already have surged in recent weeks on concerns that spare crude production capacity is so thin that any disruption could drive prices up. "You've only got 1.5 million barrels a day of spare capacity in the world and it's gone," says Paul Sankey, an energy analyst for Deutsche Bank.

Much of the anxiety was because hurricane damage is often so unpredictable and difficult to assess quickly. When Hurricane Ivan, a slightly weaker storm, passed slightly to the east of the heart of offshore production last September, initial reports were encouraging. But the hurricane triggered hundreds of underwater mudslides that wreaked havoc on the pipeline system and took months to repair. Chevron Corp.'s Petronius, a $500 million platform tower that is taller than the proposed Freedom Tower in New York, appeared to suffer minimal damage from a helicopter pad that smashed into its sleeping quarters. But the tower wasn't running until March, nearly six months after the storm.

Saturday, August 27, 2005

Force Majeure.



A lot of people are going to be watching this track.

MarketWatch: Hurricane threatens Gulf oil production.


Hurricane Katrina strengthened Saturday and set a course directly for major oil and gas production fields in the Gulf of Mexico and New Orleans.

The National Hurricane Center now expects the year's fourth hurricane to make a second landfall near the major oil and gas hub at Port Fourchon, La., sometime early Monday, and then continue inland to New Orleans, which could be devastated by a direct hit by a major storm.

"Right now they are predicting the storm in the worst-case scenario for us," said Ted Falgout, director of Port Fourchon, according to Dow Jones Newswires. "It's not going to be a pretty sight if it goes as projected."

[Did we tick somebody off? Is Pat Robertson in New Orleans? I digress..]

Thursday, August 25, 2005

Michael Economides on CNBC 08-25-05.

Prior appearance on March 14.

Economides is joining the oil is going to $100 club.

He stated three primary reasons.

1.) Russia - "First Yukos was destroyed and taken over by Rosneft, now you have Sibneft, the fourth largest, being taken over by Gazprom, so 50% of Russian oil production is being re-Sovietized, and the Soviet Union did not have a very good track record in oil production."

2.) Chavez - "Even before the assassination insinuations he was militant enough, and I'm sure he's not going to be a happy camper for us."

3.) China - "The yuan has been re-valued and it will make it a lot easier for China to buy oil. They have gone beserk already last year, look for China to increase it's energy demands and oil purchases significantly."

"All of these things are a hurricane level 5, perfect storm to increase the price of oil towards $100."

On OPEC: "OPEC is not very relevant; inadvertently OPEC is not relevant because it has no excess capacity to manipulate the market. If anything, every time the price of oil goes up, OPEC's exploration and production budgets go down, because what is their incentive? Make no mistake: they like $100 oil."

On whether Americans are being gouged: "No, we are not. Because we don't really have an oil policy in this country. The recent energy bill was a bloody disaster when it comes to that. You cannot talk about energy independence unless you address the transportation issue. It doesn't matter how many degrees you change your thermostat and air conditioning for example, it won't change the oil imports, because you don't use any oil for power generation. There are a lot of facts that people just simply avoid talking about."

"It's the first time ever that we have reached a real parity between supply and demand, so any one of these little events that we are talking about, have an amazing effect on the market."

Wednesday, August 24, 2005

Sayonara Tim Evans.

I've always been mildly entertained by Tim Evans, watching as he railed against the rising price of oil. He was consistently wrong, but I thought I should read his stuff to understand what the counterargument was. Now, unfortunately, I realize he's just not too bright.

Here's the problem:

Hawaii has a price fixing plan for gasoline.

Sounds nice, right, but governments don't produce gas, companies do.

Hawaii has tied it's prices to the mainland, but it's not on the mainland, nor, I believe, does it have it's own oil. Since Hawaii is an island in the middle of nowhere, and not as big a market as New York or Los Angeles, the transportation costs per barrel to Hawaii are higher and the number of competitors serving the market are fewer. So Hawaii puts this plan into place, tying it's prices to markets that are easier for companies to serve.

The fly in the ointment: As oil goes up, the price of transporting it goes up too. And if oil goes up enough so that the margin specified by Hawaii for gasoline over the mainland no longer covers these costs, what happens? The companies might just leave Hawaii a little (or a lot) short, as they focus their resources on more profitable activities. Given the fact that the reason for a large increase in price might be a shortage to begin with, Hawaii might find it has doubled it's bet - and lost out big time.

The only idiots who don't seem to understand this are legislators and Tim Evans.


"The fact that their pricing mechanism is market-related minimizes the risk that a physical shortage would arise," said Tim Evans, senior oil analyst at IFR Energy Services in New York.

"They are attempting to go about this in an intelligent fashion," he added.

Tuesday, August 23, 2005

BMO Nesbitt Burns on Suncor.

BMO Nesbitt Burns report on Suncor (SU), includes on page 6 their price targets for several major oil sands firms.

It appears, based on the comments of the gentleman who sent this out and also the footnotes, that these price targets are based on $40 oil.

Sunday, August 21, 2005

Gentlemen: Stop your engines.

On NBC News, the CEO of Chip Perry, saying that they now have more than 1 million used SUVs listed for sale, which is up between 40 and 50% versus last year.

Saturday, August 20, 2005

Don't rush the monkey, and you'll get a better dance.

[Must ... resist ... temptation...]

Well . . .

I'm going to refrain from making any comments on the above quote [we have standards here after all - and I'd like to keep it family friendly], which Boone Pickens passed on to CNBC's rather attractive Melissa Francis as words of wisdom. I'm sure he was referring to investing, but boy, oh boy.. Where's Joe Kernen when you need him?

Anyway, here's a video clip from CNBC of Boone Pickens (his mother didn't like the 'T', apparently) with him highlighting his favorite stocks. He likes.. coal, oil sands, and companies that don't have to buy reserves.

Go to MSN Video, delete all the clips it loads automatically, and play the one labeled "Pickens Bets on $75 Oil". They do expire these eventually, so I may well post some notes later. You might also have to search for it via the Video Search box on the left, try "Boone Pickens".

There's also one "A Day in the Life Of Boone Pickens", which is fairly useless. I see more of this stuff and I'm selling everything.

Thursday, August 18, 2005

So you wanna be a Rock and Roll Star Oil and Gas Investor?

Funny how sentiment can turn in an instant, eh? I suggest either dollar cost averaging or using a technical trading discipline to keep yourself out of trouble. If we're really in a long term bull market for energy stocks due to Peak Oil, then your main objective is to avoid losing money getting caught up in the short term spikes and corrections that happen along the way.

So, let's see..

Goldman Sachs raises their oil price forecast. Note that this is another part of GS, not the 'super spike' group.

Interesting view on why, quotes from Reuters article above:

Goldman Sachs on Thursday raised its U.S. oil price forecast for the rest of this year by $13.50 to $67 a barrel as demand outstrips supply and the industry sits on billions of dollars it could invest in finding new oil.

Goldman Sachs blamed the lack of investment on uncertainties over cost.

"With the potential for costs to fall or a competing technology to prove less expensive -- driving long-term prices lower and making higher-cost investments unprofitable -- investors are motivated to delay investment and need a premium in long-dated prices to compensate for the increased investment risk," it said.

Among the factors that have added to the cost uncertainty are barriers to accessing reserves in oil-rich nations and the increasing complexity of projects as more easily extractable oil runs out.

Pulled off one of my favorite stock market focused sites, Alchemy of Trading:

"Dougie Kass, over on our sister sight SI, is forecasting the end for oil. While not his first forecast for the top, he might be correct this time. Oil is due for a pullback.However, my favorite large cap integrated stock is still too cheap to sell. I know, the stocks will follow the commodity. Blah, blah, blah. If only sound bite investing were that simple.

That stock discounts oil in the high $30's. While this is the highest implicit price for oil since the rally began, the spread between the spot price and the implied price is wider than ever! Get that? $62 per barrel spot price-$39 implied price=$23 spread. If you want to short oil, you should short the commodity, not cheap oil stocks!

When oil gets to $40, I will begin to worry. All the hand wringing over what to do with the stocks is misplaced in my opinion. Didn't these same calls about cyclicals occur last spring at the bottom?" -- Bob Marcin,, August 18, 2005

Original quote is from, and for reference, I believe Bob Marcin's favorite oil is COP.

And from Chuck Jaffe of Marketwatch: "How to tell cheap gas is gone for good."


Chatting with a friend at the checkout of the nearest gas station last weekend, we couldn't help but notice the banner headline on the August 22 issue of the Weekly World News. It reads "No More Oil! World supply will be gone in six months." The subheads read "Economy will collapse!" and "Millions will starve!"

The big concern for consumers should be that this does not appear to be any sort of bubble, or temporary spike. Events -- like the release of oil inventory numbers -- are going to push the market around, and prices at the pump could retreat back to the now lovingly-recalled time at the beginning of the month, but it's hard to find the event that is going to change the trend.

That may actually be good news for investors, who are reaping big returns from oil and energy stocks and who want that rally to continue.

If you forget the conspiracy theorists who think the price of crude oil is being entirely manipulated and controlled by hedge funds -- and I find it ironic that the Weekly World News has somehow missed that angle -- and focus on the fundamentals in the industry, you can see why things will stay as they are for awhile.

"By the end of the year, we are going to be consuming everything we produce, and having so little spare capacity to increase production adds to the risk premium that people are willing to pay," says Brian Hicks, manager of U.S. Global Investors Global Resources fund (PSPFX: news, chart, profile) . "The price is representative of the fundamentals of the oil market. ... Near-term, it is possible we could see a retrenchment for a short time, but we're heading into the peak demand period for heating oil, and we are still in the summer driving period and so you just can't expect a significant change in demand right now."

That should ease the mind of investors looking to cash in on energy's continued ride.

Many have been worried that the rally in oil and gas are about to end, and they fear the kind of crash they saw in tech stocks back in 2000, but the situations are distinctly different.

Whatever is happening with energy, it is not a repeat of the Internet stock bubble. Energy companies have real earnings and sales growth, they have proven reserves and are paying dividends, and they are trading at multiples that are normal, rather than in the defying-gravity range. That's no guarantee that the stocks won't get whipsawed, especially if crude prices and energy costs drop dramatically next spring, in the post-winter heating/pre-summer air conditioning demand period.

Says Hicks: "Maybe when the supermarket tabloid is predicting the end of the oil industry, it's the sign of a market top."

I went to the Weekly World News web site [WARNING: NOT OFFICE FRIENDLY.] to check out if perhaps Matt Savinar was quoted in the article, but I couldn't find it. I did find lots of other entertaining items though. [Sorry, it just kinda went with the post title..]

Monday, August 15, 2005

2005: The Day the Music Died?


Oil spiking. [You need a link?!]

Natural gas spiking and prices look to go higher.

Utility plants have run down supplies of coal, and prices are rising.


DVD sales softening?

DVD Player/Recorder sales softening?

[A connection? I dunno. But DVDs are the new impulse items (witness their placement near the register next to the batteries and candy at Target), and sales appear to be weakening.]





Moneytalk Freak Show.

Man, what a Freak Show on Bob Brinker's Moneytalk radio show this weekend.

I didn't catch all of it, but the parts that I did were mostly about oil, and included appearances by (I kid you not):

- The woman who's brother invented the 100 mile per gallon carburetor that the auto companies bought and are suppressing. (Yeah, yeah, I know, fuel injection and all.. But the woman sounded so sincere.)

- A guy who's boss invented the engine with 2 moving parts that gets 200 miles per gallon. (I forget what happened here, I was only half listening. Was it the neo-cons or the Arab League suppressing this one?)

There were various other solutions to the oil problem, and a guy who asked Bob Brinker if he believed in Peak Oil, to which Bob replied something like "Absolutely!" I found that a rather strange admission, since Bob gives his caller's little advice on oil investments, except for maybe "I wouldn't invest with oil at $65."

Anyway, be advised that we seem to have hit the sentiment tipping point. Moneytalk callers were mostly focused on real estate lately, and now they're talking oil.

Is it the beginning of the end, or the end of the beginning? (And of what? Oil? Real estate?)

Wednesday, August 10, 2005

Who can make oil rise?

Who can make oil rise,
up a buck or two
get the pits a hoppin'
and the shorts in a screw...
The candyman,
Oh the candyman can,
The candyman can 'cause he knows just when
to drop a bomb and make oil jump real good

Who can take a 75 quote,
Wrap it in a sigh?
To hell with the oil inventory report
We're having sweet potato pie!
The candyman?
The candyman can…
The candyman can 'cause he charmed Melissa Francis
and made oil investments look real good…

The Candyman makes
every prediction he bakes up
Satisfying and delicious.
Go ahead and dream those millionaire wishes.
You'll no longer have to wash dishes!

Who can take the futures,
Make 'em start to scream?
Break the backs of shorts and collect up all the cream,
The candyman?
The candyman can, the candyman can…

The candyman can 'cause he mixes it with 'aw shucks'
and makes it all sound real good..

And the oil goes up
'cause the candyman thinks it......s-h-o-u-l-d!

T Boone Pickens predicted $75 oil within a year yesterday to Melissa Francis on CNBC.

His successful predictions so far:

- In 2003, he predicted $28-32 over the next 2 years.
- On May 16th, 2004 he predicted $45 'pretty quick', which it hit in 3 months.
- In July 2004, he predicted $50 before $30.
- On September 29th, 2004, he predicted $60 before $40, and said he didn't think we'd ever go back to $35 again.

Can the streak last?

P.S. We may already have peaked.

Kenneth Deffeyes has a blurb in his book about how although he predicts a peak for Thanksgiving 2005 (or thereabouts), it's possible we may already have peaked.

Amusingly, if you look on the EIA's website, at page 333 of this PDF document [warning: the document is huge and takes a long time to load], you see some interesting figures:

World primary energy production by source, 1970-2002
Quadrillion btu

Year | Crude Oil | Total

1994 | 130.46 | 354.75
1995 | 133.32 | 363.84
1996 | 136.64 | 372.33
1997 | 140.52 | 380.26
1998 | 143.15 | 383.94
1999 | 140.79 | 384.77
2000 | 146.50 | 396.28
2001 | 145.25 | 403.33
2002 | 142.86 | 405.12 - Preliminary estimate

(Total = Coal + Natural Gas + Crude Oil + Natural Gas Liquids + Nuclear Electric + Hydroelectric + Geothermal and other)

Notice anything funny here?

Why is it that crude oil is apparently hitting a ceiling, while the overall total appears to be rising?

When you go look at the original table, you will see the other items broken out and see that the other hydrocarbons are in rising trends, while oil appears to be in a leveling off trend. And the fact that the overall total still rose suggests the crude oil figures might not have been due to economic contraction.

Uh oh.

Tuesday, August 09, 2005

Ben Bernanke Ain't Gonna Like This.

Dallas Morning News: Is there a bubble in energy investing?


The idea of regarding energy as a separate portfolio asset began just before I wrote The Coming Generational Storm (MIT Press, 2004) with economist Laurence J. Kotlikoff.

In the book we lay out the liabilities our government is creating for the future with Social Security and Medicare. We suggest those liabilities will be paid for with large amounts of inflation and newly printed money.

We came to the conclusion that energy should be treated as its own asset class because the British thermal unit is the ultimate "currency" of industrial society.

The producers of paper currency are working hard to create a global oversupply, while the producers of BTUs are having difficulty meeting demand and replacing reserves.

Unlike the dot-com bubble, oil companies have real assets, real earnings and solid dividends – and below-market multiples of earnings, book value and cash flow. They look like a cautious, value-oriented investment, which is why I bought shares of many energy companies, to create a kind of reserves-based index.

An energy development of Internet proportions could change the prospects of oil prices.

That development could be a breakthrough in efficient solar power, successful fusion power, sudden acceptance of nuclear power, or some development that would lead to a dramatic reduction in hydrocarbon demand.

Is it likely? I hope so.

But I'm not holding my breath.

Alberta endorses Operation Alberta Freedom?

cnews: Poll: Westerners considering separation.


In the survey, 35.6 per cent of respondents from Manitoba, Saskatchewan, Alberta and British Columbia agreed with the statement: Western Canadians should begin to explore the idea of forming their own country.

Albertans, at 42 per cent, were most apt to consider independence, followed by Saskatchewan at 31.9 per cent.

I guess they're not looking forward to sharing all that oil sands revenue with Quebec for the next 40 years.

Me neither.

Charles Maxwell on the CERA Report.

maxwell@weeden: Will Oil Markets Loosen or Tighten in the Next Five Years?

It's not too long, read the whole thing if you can, otherwise skip to the bottom for the conclusion.

Hat tip: The Big Picture

Sunday, August 07, 2005

SEC, IMF to endorse Operation Alberta Freedom?

Big Oil Set to Pounce in Alberta: expert.

Donald Coxe speculating big oil companies may be looking to takeover oil sands companies if the SEC changes it's rules on booking reserves from oil sands.

Friday, August 05, 2005

The simple truths of the energy spike.

MarketWatch: Don't ask the experts.


So it's important to filter out the disinformation. If someone says they're an "expert" trader, beware. See what they have to back it up -- and that comes from, well an expert who at least knows enough to know he doesn't know everything.

So the next time I'm asked at a party if oil going higher, I know my answer:

"The 1970s oil shocks occurred when U.S. oil imports were far lower than today. America now imports well over half its oil compared with about 35% in 1973. This level of dependence on imports, nearly 60%, is the highest in this nation's history, and will continue to increase as we use up domestic resources.

"The vast majority of the world's oil reserves are concentrated in the Middle East, 65% to 75%, and controlled by the members of OPEC.

"The United States accounts for about 25% of global oil consumption but has only 3% of proven global oil reserves. So you tell me!

"Hey, are those pigs in a blanket over there? Time to deplete another reserve."

Wednesday, August 03, 2005

WSJ dips it's toe in the Peak Oil debate.

WSJ: Drilling for Broke? Experts Debate "Peak Oil".

It's free for everybody to read and features the author of the blog Econobrowser.

Tuesday, August 02, 2005

Total/France endorses Operation Alberta Freedom.

Probably in cahoots with them Quebec &*&^#%#&.

Reuters: Total to expand in Canada with $1.1 bln takeover.


PARIS/CALGARY, Aug 2 (Reuters) - Total SA (TOTF.PA: Quote, Profile, Research) launched a friendly, $1.1 billion bid for Canada's Deer Creek Energy Ltd. on Tuesday to gain control of what is seen as one of the country's last big available oil sands opportunities.

The French oil major's cash bid of C$25 ($20.50) a share is 39 percent higher than Deer Creek's (DCE.TO: Quote, Profile, Research) Friday closing price, a rich premium one analyst said is necessary to win over investors in the developer of the Joslyn oil sands project in northeastern Alberta.

"Total definitely paid up, but they had to pay up if they wanted to get in," said Kyle Preston, analyst with Salman Partners in Calgary.

"Deer Creek had one of the last remaining oil sands leases that someone could potentially come in and buy. For the past several months, Deer Creek knew they were in the driver's seat and could wait for the right price or the right partner."

The acquisition gives Total, the world's No. 4 oil firm by market value, access to the multistage Joslyn project, which has bitumen, or extra-heavy crude, reserves pegged at more than 2 billion recoverable barrels of bitumen.

"It's a relatively small deal for Total ... but it does provide some foundation for production growth for the next decade, and that should reassure investors," a London-based analyst said.

The deal is subject to regulatory approvals and acceptance by holders of at least two-thirds of Deer Creek's stock.

Deer Creek shares soared 38 percent to C$24.83 on the Toronto Stock Exchange. In Paris, Total gained 1.3 percent to 209.20 euros.

Surging crude prices and scarce secure supplies have prompted a boom in spending to develop Alberta's oil sands, which rival Saudi Arabia's conventional reserves in size but are far more expensive to develop.

The energy industry estimates oil sands output will nearly triple to 2.7 million barrels a day by 2015, pushing overall Canadian oil production to 3.9 million barrels a day.

Oil sands have also lured Chinese companies, and some analysts figured Deer Creek would be a target for them, too.

Deer Creek -- which has an 84 percent stake in the Joslyn lease -- had been searching initially for a partner with know-how in upgrading tar-like crude from the oil sands into refinery-ready oil, as well as refining and marketing.

"As you talk to people about their ideas, sometimes other ideas come forward. As a result of the characteristics of the proposal that came through from Total, it was a value-creation level that the board felt merited consideration," Chief Executive Glen Schmidt told Reuters.

Besides the bid, Total brings expertise in developing bitumen, or extra-heavy crude, with steam-assisted drilling technology as well as upgrading in Venezuela, Schmidt said.

Total once had conventional oil and gas operations in Canada, but sold them in the early 1990s. It returned a few years later to scout out oil sands opportunities and secured a 50 percent stake in the Surmont project, 125 km (78 miles) south of Joslyn.

Schmidt said Total was not the only company interested in the Joslyn project.

"Deer Creek had discussions with parties that had the capabilities we were looking for, and through that the Total process developed," he said.

Total said it aimed to submit an application to Alberta regulators in early 2006 for the first phases of the mine and related extraction facilities. Production is scheduled to begin in 2010 and hit a plateau of 200,000 barrels a day.

Jim Cramer endorses Operation Alberta Freedom.

I guess we've hit the big time. Mad Money Wrap-up

Oil Sands Plays

Cramer asked investors if they knew where the second-largest oil reserve in the world is. It's in Alberta, Canada, Cramer said. But people rarely talk about Canadian oil because it's trapped.
But Kinder Morgan's (KMI:NYSE - commentary - research) $3.1 billion purchase of British Columbia-based Terasen, an oil sands play, tells Cramer that the oil sands business is now profitable. The acquisition, Cramer said, tells him that the companies trying to tap into Canadian oil sands will continue to move higher. It also tells Cramer that companies with exposure to oil sands are undervalued.

Cramer points to French company Total (TOT:NYSE ADR - commentary - research), which launched a $1.1 billion bid for Deer Creek Energy on Tuesday, as more proof that oil sand plays are for real. Deer Creek, an oil sands play, had climbed almost 95% prior to Total's bid. Deer Creek climbed another 39% on Tuesday.

So who is going to benefit from this pin action in Kinder, which ended Tuesday up more than $6, and Total? Cramer said that investors should be looking at Suncor Energy (SU:NYSE - commentary - research), which is a pure play that gets all of its oil from tar oil.

Investors should also be buying Canadian Natural Resources (CNQ:NYSE - commentary - research), which will move higher once it gets its Horizon oil sands project up and running. Investors should be in that one before the project is fully operational, though -- if they want to make money.

Cramer said that investors should be looking at Husky Energy, a Canadian company, which could be spinning off its oil sands assets soon.

Cramer also said that Petro-Canada (PCZ:NYSE - commentary - research), which trades at 19 times earnings, is another name that investors should be looking at.

EnCana (ECA:NYSE - commentary - research), which trades at 17 times earnings, is the most undervalued stock in the group, Cramer said. And it will go higher. Indeed, Cramer called EnCana the cheapest and best play of the lot.

Monday, August 01, 2005

The Long Emergency Profit Making Opportunity.

'nuff said.

Kinder Morgan endorses Operation Alberta Freedom.

WSJ: Kinder Morgan To Buy Terasen, Tap Oil Sands


Hoping to capitalize on a vast store of oil under development in western Canada, U.S. pipeline operator Kinder Morgan Inc. said it is purchasing Terasen Inc., of Vancouver, British Columbia, for $3.1 billion in stock and cash and the assumption of $2.5 billion in debt.

Houston-based Kinder Morgan operates 35,000 miles of natural-gas and oil pipelines across North America, as well as 145 storage terminals. But it lacks a significant presence in Alberta, Canada, where the world's second-largest deposit of oil rests locked in gritty oil-sands deposits.

Extracting and processing the molasses-like bitumen -- the type of crude oil found in oil sands -- is much more expensive than producing and refining conventional crude oil, but recent high oil prices have made bitumen projects more viable. Analysts have estimated that oil-sands developments need long-term prices averaging $25 a barrel or more for benchmark crude -- well below recent levels.

Kinder Morgan's move shows one of the pipeline industry's largest players expects elevated prices to sustain development. "For the last year or so we have thought that a great megatrend to be involved with was the oil sands," Kinder Morgan Chairman and Chief Executive Richard D. Kinder said in an interview yesterday.

Terasen operates pipelines linking Alberta with the U.S. Midwest and Canada's West Coast. It also is the largest natural-gas distributor in British Columbia.

The big opportunity in the deal, said Mr. Kinder, was the prospect of building pipelines, particularly as oil-sands production is expected to grow from one million barrels of oil a day to two million sometime in the next decade. "There's a tremendous need for midstream energy infrastructure," he said. Midstream is the gathering and processing of oil and gas, the link between rigs in the field and the large interstate pipelines that carry oil and gas to consumers.

While the U.S. is the main market for exports from the oil sands, China has shown growing interest. China state oil company PetroChina Co. in April agreed with Canadian pipeline company Enbridge Inc. to share the costs of building a $2 billion pipeline from Alberta to the West Coast.