Icarus failed to escape with his father from Crete because he flew too close to the sun. Now, some oil companies are now hoping that getting closer to the sun will bring them success.

Typically the extraction of heavy oil requires a tremendous amount of natural gas to create the steam needed to bring the oil to the surface. Seeking for a different means to extract the precious commodity, GlassPoint Solar is using the power of the sun.

GlassPoint's solar enhanced oil recovery (EOR) utilizes large mirrors are put in a glasshouse and reflect the sun on water-containing pipes. The water in the pipes becomes the steam that is used in the oil extraction.

A switch to this technology could potentially lead to significantly reduced operating costs as GlassPoint Chief Executive Rod MacGregor says that 60 percent of the cost of operating a heavy oil field is for the purchase of natural gas.

"Burning the product you're trying to produce is not that efficient, to say the least," MacGregor told AOL Energy.

GlassPoint isn't the only company out there harnessing Helios' chariot of the sun to get oil from the ground.

BrightSource Energy Inc. has been working in California with Chevron – the second largest oil company in the U.S. – to bring solar power into the oil industry. BrightSource's method is not incredibly different from GlassPoints, with mirrors being used to focus the sun's power on solar tower, where steam is created, reports Bloomberg.

Chevron Technology Ventures President Desmond King said there is a great amount of potential in the technology.

"This technology has the potential to augment gas-powered steam generation and may provide an additional resource in areas of the world where natural gas is expensive or not readily available," he said in a statement. 

The oil and gas industry has come under fire recently over the environmental impact of some of its extraction techniques for unconventional oil – such as shale gas and oil sands – but there are a number of alternatives out there.

Oil sands in particular have presented difficulties for the industry as a large amount of water – up to four gallons – needs to be used to to produce one gallon of oil in strip mining. In addition, steam injection requires a large amount of natural gas to be utilized, according to the New York Times.

Dr. Paul Painter, a professor of polymer science at Pennsylvania State University, thinks that ionic liquids – a salt that is still a liquid below the temperature at which water boils – could be a solution.

These liquids could potentially be used to separate oil from sand, which, as the name implies, is one of the major hurdles present in oil sands.

Other alternatives exist as well. Calgary-based E-T Energy, a private company, puts electrodes in wells surrounding the targeted well. These electrode wells are filled with water and heated up, thus warming the oil sands and allowing the resource to be extracted, reports the news source.

Companies have tried to come up with alternatives for the development of shale gas as well. Environmentalists and some politicians have come down on the fracking industry, claiming that fracking can pollute water – the U.S. Geological Survey and Duke University are currently testing these claims further, according to the Raleigh News & Observer.

The industry has been looking to potential alternative ways to compose their fracking solutions. In fact, one Halliburton executive went so far as to take a sip of his companies new fluid – which is reportedly sourced with ingredients from the food industry.

In addition to being more environmentally friendly, uncovering alternative ways of extracting unconventional oil could give certain companies a leg up on the competition.

The investor trend towards yield could have a big impact on the US junior oil and gas market, a new report by brokerage firm Raymond James suggests.

Energy Analyst Kevin Smith says the stocks of Upstream Master Limited Partnerships, or MLPs, are worth almost double their regular corporate counterparts (called “C-corps” in industry jargon).  And that big valuation gap could start some Mergers and Acquisitions (M&A) activity in the junior US energy space.

“We are not saying that you should expect a rash of Upstream MLP acquisitions of C-corps tomorrow, but we are saying we think that it is coming over the next few years,” he writes.

MLPs trade like stocks on American stock exchanges.  They have a big tax advantage in that they don’t pay corporate tax; investors are treated as owners of the company, which means they get the corporate tax breaks too. (Isn’t that a switch?)  This lowers the income tax paid on the earnings.

Then the MLP pays out most of its excess cash flow to shareholders in the form of a distribution — which can end up creating a big cash yield.  (That’s why I think the U.S. will see a LARGE increase in MLPs over the coming few years as interest rates stay low.   Investors love seeing this money dropped into their account, and price the stocks based on the yield they give.)

And in this tough junior oil and gas market, yield stocks are holding up the best.  The reason is that MLP investors are looking at yield for its primary valuation method. Regular corporations, or “C-corps” as industry jargon goes, investors are looking at earnings and cash flow valuation methods — and those are likely going to decline this year and next due to the weakness in the natural gas pricing. And overall market volatility is reducing valuations on the junior oils. That’s what’s making Upstream MLPs valuations (stock prices) much more sticky vs. the “regular” C-corps.

They’re holding up so well in fact, that Smith says it’s only a matter of time before the MLPs use their much better valuation — stock price — as a currency to buy regular junior oil and gas companies.

“While no (upstream) MLP has bought a producing C-Corp yet, I think it will, I think it’s inevitable,” Smith told me in a phone interview from Houston.

Upstream MLPs have bought many producing oil and gas assets, but they have yet to swallow an entire company.

“At some point, $100 million (asset) deals won’t quench your thirst… as MLPs grow, they will need to do bigger and bigger deals,” Smith says.

There is a tax issue when MLPs buy C-Corps, but the valuation difference between the two groups now make up for most of that.

LINN Energy (LINE-NASD) is the poster child of the new upstream MLPs that are going public.  In five years it has grown from a market cap of just over $500 million to now $7 billion, and is a Top 20 oil producer in the US.

So, as an investor in junior oil and gas companies, where should I be looking at take-out candidates?

While the difference in valuation between MLPs and natural gas-weighted companies are the greatest, Smith points to the oil producers.

“I would bet (MLPs buy) oil-weighted C-Corps that are under-loved.  The most active market is the Permian Basin. We have seen quite a bit of activity in this area over the last 24 months.  And some California plays will get some looks, with low decline rates.”

In his October 31 report, Smith said that public C-corps are trading at a discount to what many private E&P property packages can be purchased for today (5-6x EBITDA for sub $500 million transactions).

This game that Smith is talking about completely changed the way junior oil and gas companies operated in Canada.  In Canada, MLPs are called “Income Trusts,” and while there might be some subtle differences, they are basically the same tax-advantaged public company that allows big chunks of their cash flow to pass through to unitholders.

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How Oil Fields the World Over Are Getting a “Second Life”

Extending the life cycle of an oil reservoir — by years — could mean the difference of tens of millions of dollars to an oil producer.

That’s exactly what one company’s new technology does… It improves oil production rates while slowing the rate of decline.

Oil producers using this powerful system are finding it a huge success, often times almost immediately.

Adoption, meanwhile, is steadily increasing inside the oil & gas sector. In fact, this company’s technology is now employed by major oil producers — or soon will be — on 4 different continents.

To get the full story – and how you could profit – click here.

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First these trusts started buying intermediate producers, those producing over 10,000 barrels a day.  When they were gone, and the number of trusts kept increasing, they went after juniors producing only 1,000 barrels a day.

The number of junior companies soared as management teams now had an easy exit plan — build up production with a decent land base and get bought out fast by a trust.  They didn’t need to plan for the long term and, generally speaking, didn’t need to be as disciplined in how they spent their capital.

With all the shale plays being discovered in the US, could this be the beginning of the same type of mania that overtook Canada?

“We’re not quite to point where we were in Canada in 2005,” says Elliot Gue, editor of MLP Profits (www.mlpprofits.com), who specializes in US MLP investing.  “We are seeing a number of MLPs getting listed.  Some are small and hoping to get bought out.”

Gue says he is already seeing a lot of MLPs buying out private oil and gas companies.  “In the Permian Basin in Texas there are over 1,500 operators. Most only own a small amount of land. Those guys are selling out to MLPs.”

So there is definitely a trend here, similar to what Canada went through starting 15 years ago?

“We’re entering that growth phase now,” says Gue.

Smith says the new upstream MLPs could be a long trend: “With current interest rate trends, it doesn’t look like that valuation gap will close anytime soon.”

- Keith

A major partnership between a Canadian company and a major Japanese oil and gas producer was recently announced.

Calgary-based Nexen Inc. (NXY:TSX) will be paid C$700 million for part of its shale gas prospects in British Columbia by Inpex Corp. and partner JGC Corp., according to the Calgary Herald. Inpex is reportedly the largest oil and gas company in Japan and produces 400,000 barrels of oil equivalent per day.

Specifically, the deal calls for Nexen to give up 40 percent of its ownership at its properties in the Horn River, Cordova and Liard basins. Inpex will receive 82 percent of this portion, while 18 percent will go to JGC.

"Inpex plans to dispatch its experts as secondees to this project, which help the project benefit from Inpex's wide range of gas development experiences around the world," the Japanese company said in a statement.

The Horn River basin has been described as a major play, with some estimates putting the resources there as high as 100 trillion cubic feet of natural gas.

The move by Inpex is just the latest example of a foreign firm moving into Canada.

China has been active in Canada with the state-owned Sinopec taking over Calgary-based Daylight Energy (DAY:TSX) for $2.2 billion in October. Some industry experts believe that this is just one of China's first steps into foreign unconventional gas plays.

South Africa has also made its presence felt in Canada with Sasol agreeing to two C$1.05 billion deals with Talisman Energy (TLM:TSX) to not just develop shale gas in the Montney formation but to create a facility to convert natural gas to gasoline, according to the Herald.

Nexen's stocks closed at C$15.95 on November 29 and appear to be responding positively to the news of the Inpex deal.

Russia is not known as an environmentally conscious country but that hasn't stopped the world's largest producer of natural gas from claiming that exploiting shale gas comes with high environmental risks.

The board of directors from Russia's Gazprom said that not only are there environmental risks associated with shale gas extraction but getting at the resource can be prohibitively expensive.

"The production of shale gas is associated with significant environmental risks, in particular the hazard of surface and underground water contamination with chemicals applied in the production process," the board said in a statement. "Europe presently lacks for the equipment required for shale gas fields development. Thus, the prime cost of shale gas production in Europe will be twice as high as in the USA."

Despite Gazprom's assertions, the fact remains that Russia sits on a significant amount of shale gas reserves. According to the U.S. Geological Survey, there are more than 80 deposits of oil shale in Russia, with some of the best being located in the Leningrad and Perelyub-Blagodatovsk deposits.

The USGS reports that some believe that there are more than 107 billion tons of oil shale in Russia and the states that made up the former Soviet Union.

In addition, Russia is home to the largest natural gas reserves in the world with 1.68 quadrillion cubic feet of the resource, reports the U.S. Energy Information Association. That figure represents about 25 percent of the world's reserves. By comparison, Canada has only 61.95 trillion cubic feet of the resource while the U.S. has about 285 trillion cubic feet.

Russia is the top supplier of natural gas to Europe, and has been watching the development of shale gas to its top customer. Russia is highly dependent on energy exports for its hard currency exchange.

In recent months no other shale gas formation in the United States has drawn as much attention as the Marcellus.

The formation, which covers parts of several states, most notably Pennsylvania, New York and West Virginia, has been hotly debated in state legislatures as lawmakers seek to accommodate the environmental concerns of citizens while not shackling the industry too much.

West Virginia Governor Earl Ray Tomblin is planning to call a special session in December with the intent of getting new natural gas regulations established, reports the Charleston Daily Mail.

Lawmakers have reportedly debated the potential legislation for two years and the committee in charge of it recently reached an agreement. However, it is believed by some that Tomblin will tweak the bill, putting its passage in jeopardy.

"The governor's changes could throw it up in the air again," state Delegate Tim Manchin told the news source. "That bill is a very delicate balance and there are delegates and senators who have strong feelings about various provisions in that bill and changing those can certainly jeopardize the bill."

Industry officials are reportedly not enthused with the bill, which will require gas wells be created at a certain distance from water sources, among other rules.

Still West Virginia hasn't jumped to harsh decisions in the same manner as other states have when it comes to fracking. New Jersey placed a one-year moratorium on the practice in August.

New York also has a moratorium on fracking but Governor Andrew Cuomo said he hopes new regulations will be in place by next year, which will put an end to the halt, reports Reuters.

Regardless of what rules and regulations states and muncipalities put on fracking the fact remains that the Marcellus Shale presents a tremendous opportunity. In August, new estimates from the U.S. geological survey put the amount of undiscovered, technically recoverable natural gas in the formation at 84 trillion cubic feet. 

Fracking has helped the United States maintain the world's number one economy, but the exploitation of unconventional gas is also catching the eye of the world's second largest economy: China.

In April the U.S. Energy Information Administration estimated that China contained 1.275 quadrillion cubic feet of "technically recoverable" shale gas, a figure that is larger than the combined total of such resources in Canada and the U.S. America has an estimated 862 trillion cubic feet of shale gas.

China's Ministry of Land and Resources geological exploration department head Peng Qiming said that his country intends to produce 360 million tons of oil equivalent in 2015, a 23 percent increase over the 280 million tons that was produced in 2010. By 2030 Peng says the country hopes to up that total to 450 tons, reports OilPrice.com.

One way that China hopes to accomplish this goal is through the use of hydraulic fracturing, or fracking. The news provider reports that by 2020 the country is hoping to produce 80 billion cubic meters of natural gas a year, which will likely need to be accomplished through fracking.

China has already flexed its muscle on the international energy production stage.

In October the Chinese-state owned Sinopec took over Calgary-based Daylight Energy (DAY:TSX) for $2.2 billion, which analysts believe was an indication that the country plans to move into unconventional gas production.

"It seems that Sinopec is potentially eyeing longer-term development of those for [liquefied natural gas] exports to the Asia-Pacific market, building on what Canadian companies are trying to do," Neil Beveridge, a Hong Kong-based analyst with Sanford C. Bernstein & Co, told the Calgary Herald.

China has shown a great deal of interest in a number of companies that might have undervalued assets, with at least two other companies being taken over or bought into for billions in the last few years.

According to the news provider, Encana Corp. (ECA:CN) is another possible target for a takeover, along with Vero Energy (VRO:CN).

"We have seen numerous investments in the Canadian oilsands and now we're starting to see the Chinese get more and more involved in the shale gas opportunities, and at some point in shale oil," Lanny Pendill, with Edward Jones, told the Star. "They've done it in oil and now we’re seeing it in gas and I would not think that this is the end of it."

One place in China where a large amount of investment in shale gas might come is the Sichuan basin, a 81,500 square mile area where natural gas was first exploited in the country, according to the EIA. The region has a developed network of pipelines to carry the natural gas along with a number of potential industrial markets for the fuel source in the area. In addition, there are a number of well drilling services in the region.

Preliminary data obtained by the EIA shows that the shale in the Sichuan basin has low clay content, making them potentially prime candidates for fracking. But at the same time the U.S. agency warns that the complex structure of the shale also poses risks.

The main targets within the Sichuan shale are Silurian- and Cambrian-aged formations, according to the EIA.

While the shadow of the dragon begins the loom over the sector, America hasn't hesitated to give (or at least give the appearance of) help to China in terms of shale gas production. In 2009, President Barack Obama met with Chinese President Hu Jintao and the U.S.-China Shale Gas Resource Initiative was launched, which is intended to allow China to share technology related to shale gas extraction. 

The recent Bakken results from Torquay Oil Corp. (TOC/A:TSX VENTURE) appear to be underwhelming.

Canadian brokerage Canaccord Genuity downgraded the Calgary-based company to HOLD from BUY after results for its most recent wells in the Bakken and Ratcliffe formations were not successful. Canaccord described company's results at its Lake Alma property as "discouraging."

The company's most recent Lake Alma Bakken well produced for four days before it encountered sand issues. The two Ratcliffe wells also had problems: the first broke out of the oil-producing zone and into water and the second only produced about 10 barrels of oil per day over a 12-day period, according to Canaccord.

Despite Torquay's recent setbacks the Bakken remains a very viable play. The U.S. Geological Survey estimated in 2008 that there were between 3 and 4.3 billion barrels of technically recoverable oil that has yet to be discovered.

Exploration and production has been going at a lightning clip in the Bakken with the amount of discovered resources outpacing the region's capacity to send it out. A recent estimate by the U.S. Energy Information Administration put the amount of natural gas flared in North Dakota – the state where much of the Bakken activity is centered – at 35 percent.

Canaccord reduced its target price for Torquay from C$2.20 to C$0.55. Torquay closed at C$0.33 on November 28 and hit a 52-week high and low of C$2.30 and C$0.28, respectively.  

With all of the attention that has been focused on the Bakken in North Dakota and the Marcellus shale in the Mid-Atlantic, it is easy to forget that California is one of the top oil producing states in America. However, Canadian brokerage Canaccord Genuity did not {forget}, as it initiated its coverage of Solimar Energy Ltd. (SXS:TSX VENTURE) with a Speculative Buy rating, in large part due to its position in California's San Joaquin Basin.

Solimar has about 21,000 acres in nine focused areas of the Basin. According to the United States Geological Survey, the San Joaquin Basin has the following amounts of undiscovered, technically recoverable hydrocarbon resources: 18.8 trillion cubic feet of gas, 393 million barrels of oil and 86 million barrels of natural gas liquids.

Canaccord – which gave Solimar a C$0.25 target price – said that the company has solid upside due to its positions in the Basin and may have an even higher upside if one of its properties is successful in the next 12 months.

In addition, the brokerage firm said that Solimar has reduced risk because of its diverse holdings. The nine focus areas – which cover both conventional and unconventional opportunities – allow the company to grow without relying on the success of a single site.

Solimar recently had an independent Resource Assessment Report on its Kreyenhagen Project conducted. Sproule Associates – a consulting firm – found that the property, which covers 11,647 gross acres, has 129,500 barrels of contingent resources from heavy oil in Temblor sandstone, based on best estimates.

Solimar closed on November 21 at C$0.09 per share. Its high, since it began to be traded on the TSX, is C$0.10.

THE MACRO DILEMMA – PART 2
By Cory Mitchell, CMT

Part 1 suggested the macro force of “peak oil” which will constrain global oil supplies, will push the price of oil higher.  Yet if peak oil occurs, it implies peak debt and GDP.

Without GDP growth, a stagnant economy implies downward pressure on the price of oil.

In part 2 I look at which factor is more dominant in moving the price of oil, which country looks favourable in such an environment and where I believe the most opportunities lay in terms of oil stocks.

Canadian oil stocks are one of the best places for investors.

Canadian oil stocks benefit from rising oil prices, and the global supply constraints of “peak oil” should push oil prices higher.

In spite of the potential for peak oil production, which would stunt global growth, there will be strong demand for oil for the next couple decades.

This is good for Canada as its oil production is increasing, while global oil production has already levelled off.  Canada has relative strength in oil compared to the rest of the world, and this means opportunities for investors in the Canadian oil sector.

Global oil production levelled off in 2005, as OPEC levelled off.  Non-OPEC production had actually flat lined at least a few years before this.   While OPEC claims to have spare capacity there is little evidence in the way of their actions to support this.  Even as the price of oil screamed higher in 2007 OPEC production barely budged.

European production has been declining since 2001, Mexican production since 2004.  No more giant fields are being discovered. Couple this with rising demand in China, India and emerging markets and a long-run strain on production is inevitable.  Add to this that most countries around the globe are consuming more of their own production.  This basically means that exporting countries or regions are exporting less as their own demand for oil rises.  Figure 3 shows OPEC as well as non-OPEC production flat lining.

Figure 3. Oil Production and the Price of Oil

Source: http://www.theoildrum.com/node/8268.  Figures based on EIA data.

The levelling off and eventual decline in global oil production should outweigh opposing factors in pushing the price of oil higher.  Even in economic contraction oil consumptions drops very little.  This means demand keeps up while production wanes.  The long-term impact is steadily higher oil prices in the years to come.

While global oil production is sagging (good for pushing oil prices higher), Canadian oil production has been rising and is expected to continue to rise, or in the worst case level off, according to the National Energy Board of Canada as shown in Figure 4.

Figure 4. Canadian Oil Production Forecast

Source: National Energy Board of Canada

How Does This Help Canada?

Since Canada is largely reliant on oil production (and price) as a contributor to GDP, in the event that other countries see a decline in GDP, Canada is likely to be at least partially protected from such a decline.  Rising oil prices also help produce relatively strong returns in Canadian oil stocks. There are several reasons Canada is insulated and should see strong oil stock performance:

1. Canada has a lower debt level than many other countries.  This means there is room for growth.  Canada has money, debt availability and resources to invest in projects which are profitable – one of these is the Canadian oil sector.  Countries such as the US on the other hand are facing a peak debt scenario (as discussed in part 1) and are unlikely to be able to generate sustainable growth for some time.  Canada is much farther away from peak debt, indicating a decade or more before the Canadian economy plateaus.  The Canadian economy will not plateau until Canadian oil production declines, which is not forecast to happen any time soon.
2. Global peak oil production will dampen economic growth and eventually lead to a global economic decline.  Canada is insulated from this; as Canadian oil production increases and sells at a higher price, Canadian GDP is likely to rise while many countries face economic declines.  An increase in Canadian oil production means Canadian companies sell more oil, which is good for GDP and stock returns.  That attracts investors. A global decline in oil production indicates a supply constraint, which means Canadian companies sell more oil at a higher price (higher margins).  It comes down to simple math—if Canadian companies can produce more oil and sell it at a higher price, Canadian oil stocks are likely to outperform in good and even poor global economic conditions.  Again, this shows relative strength, which is where investors want to be.
3. Rising Canadian oil production draws investors not only from Canada but also from outside.  The transparent and developed oil market attracts liquidity from around the globe. Canada is also a friendly place for new start ups, which means more opportunities arise as companies push to tap more and more of the Canadian oil reserves – currently third largest in the world according to the CIA.

How to Find the Best of the Best

After determining Canada has relative strength globally in oil, making it one of the best places to invest, investors should look at which oil stocks are showing relative strength – a phenomenon discussed in a prior OGIB article, Oil Stocks & Relative Strength: What to Look For.  This can be summed up as buying strong stocks which are holding up very well in a weak market, and move aggressively higher in strong markets.

This doesn’t mean plunging headlong into every Canadian stock.  Potential global supply constraints will continue to create volatility, which means buying companies that hold up well in tough economic situations is essential.

Canadian Energy Services (CEU.TO) is an example of this and was highlighted in my relative strength article.(Disclaimer: Cory Mitchell does not own shares or have any affiliation with this company; Keith Schaefer does own shares.)

While the stock has had a wide range (on a percentage basis), the stock held above January and February levels even as the overall TSX plunged below its January and February levels – in other words CEU held up well in a tough economic environment.

Since early October, oil and the stock market have crept higher, while CEU has exploded to near all time highs – the TSX Composite remains negative for the year, while oil is close to break-even.  Figure 7 shows CEU.TO (blue) compared to the TSX Composite (red).

Figure 7. Canadian Energy Services (blue) vs. TSX Composite Index (red), Year to Date

Source: Free Stock Charts

The chart shows that even during tough times for the economy, there are excellent opportunities.  As stock markets and economies decline, looking within the Canadian energy space for stocks which form a base and hold at or above support levels will provide the best opportunities.  These same stocks that show strength in overall market weakness usually exhibit outperformance type strength when the overall market is flat or moving higher.

Conclusion

The Canadian oil sector is looking good.  I expect Canadian stocks to do well relative to many other bench marks.  As long as Canadian production increases, Canada should also remain insulated from economic declines which other countries may face due to “peak oil” and “peak debt.”  The main reasons are:

• Canada increasing oil production while the rest of the world declines means more demand for Canadian oil, pushing Canadian oil stocks and GDP higher.  That show Canada’s oil market has relative strength to the rest of the world.
• Declining global oil production pushes the price of oil higher, which means Canadian companies producing oil can sell at a higher price, increasing margins (good for stocks).
• Debt levels in Canada are low relative to many other countries.  Unlike debt constrained nations which face limited growth prospects, Canada is not likely to face a long-term decline in the economy until its oil production begins to decline, which is not currently forecast.
• The Canadian market attracts liquidity from around the globe.  The market is transparent and the potential for relative outperformance and the strong Canadian dollar are likely to continue to attract investors.

Patience is still required when making trades, but Canada stacks up well whether the global economy does well or poorly.  If anything, the clash of these giant macro forces will create amazing opportunities in the sector, due to the volatility that is created.

- Cory Mitchell, CMT