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August 29, 2018 – Welcome


  1. Natural Gas Bull Market Just Around the Corner. Winter the Catalyst.

  2. Crude Oil Inventory Decline Ending – Inventory Build Should Drive WTI Below US$60/b.

  3. New Company Coverage: Whitecap and Vermilion

  4. Comments on the CQE Rights Issue

  5. Action BUY list, SER Ownership, and the Action SELL list

  6. Updated Coverage List

The trade war started this year by President Donald Trump is getting much uglier and costlier as new rounds of tariffs are applied. We see significant evidence of economic growth slowing on a worldwide basis. Current US stock values are priced for perfection by momentum investors (Chart #1 – Example – Price to Sales Ratio at record high and much above the 2000 high) and we see the rising risk of the bubble bursting. In September, followed again in December, the Federal Reserve is expected to raise interest rates which should strengthen the US Dollar and cause a roll over in stock prices.

Chart #1

Stock Market Overvaluation

Source: Wall Street Journal – Daily Shots August 8, 2018

President Trump’s network of friends, employees (including his personal lawyer and corporate CFO) and deal makers are getting arrested, some convicted and others making immunity deals with prosecutors. This will make the November US election cycle very messy. It is looking more likely that the House will switch to the Democrats which would stymie the Trump agenda and provide an opportunity to try to impeach the President. While the market gurus are jumping for joy about the S&P500 and NASDAQ reaching new highs, the fact that the Dow Jones Industrials has not gone to a new high and confirmed those averages is troubling and highlights the fractured stock market. At prior market peaks this non-confirmation was part of the topping process. Other markets around the world have already moved into bear markets (i.e. down >20%; the Shenzen in China is now down 29%, Turkey down 51%, Argentina down 29% and Russia down 21% – all as of last Friday’s close).

The S&P/TSX Energy Index is down by 2% or 4 points to 201 since our last SER Monthly of July 26th. While we saw positive bullish commentary on crude oil over the last month regarding Iran sanctions, this was fully offset by trade war fallout which is slowing world economic growth. In addition, US crude production has risen to a record of 11.0Mb/d (up 1.47Mb/d from last year) and Russia is in the process of raising production by 500Kb/d. While the S&P/TSX Energy Index had a modest decline this month we see much more pressure on energy stocks coming in the next few months.

Hold cash and wait for the next great buying opportunity expected in the coming months. Once the general stock markets breach support levels, a painful and sharp decline in stocks should occur into late 2018. We continue to expect a breach of US$60/b for WTI and for the S&P/TSX Energy Index to fall by >40 points into year end.

Some subscribers have asked about the delay in our view unfolding of lower oil prices and energy stock prices. We can only say that we watch the ever-changing facts and need to be patient. The stock market does not run on our clock. We try to stay focused on the facts and the fundamentals and over time we will be rewarded for our patience.

Sometimes the facts lead to immediate success like the Aveda investment and takeover, and sometimes they get delayed. The facts of today support our thesis and we remain resolute in our approach.

This month we introduce coverage on two new large cap dividend model investment ideas.

Vermilion Energy Inc. (VET-T $41.82) is an internationally focused oil and gas company which looks to grow production volumes moderately and also to be a high dividend payer. This year VET grew by acquiring Saskatchewan oil focused Spartan Energy for $1.4B adding 23,000 boe/d (91% oil). Their exit production level in 2018 should be north of 100,000 boe/d of which liquids are forecast at 52% of the total corporate volumes. The current dividend is $2.76 per share (paid monthly and raised this year) which provides a current yield of 6.6%. The stock would be an attractive BUY <$42.00 and a Table Pounding BUY <$39.00 per share. Our one year target is $50.00 and our 2023 Bull Market Peak Target is $70.00 per share. We see VET able to provide conservative investors with a 20% compounded annual return via dividends and capital gains as the new Energy Bull Market gets underway by the end of this year and which should last into 2023.

Whitecap Resources Inc. (WCP-T $8.69) is a Calgary based oil company with an excellent technical team focused on low decline assets across western Canada. They have grown both organically and via acquisitions to their current Q2/18 production level of 75,813 boe/d. Their last acquisition was Cenovus’s Weyburn assets (low 3.5% decline assets) for $940M in December 2017 which added 11,500 boe/d. They have now raised this production to 14,000 boe/d. WCP pays a monthly dividend of $0.027 per share or 32.4 cents annually, providing a current yield of 3.7%. Whitecap’s book value was $7.75 per share at the end of Q2/18. The stock would be an attractive BUY <$8.25 per share and a Table Pounding BUY <$7.75 per share, their current book value. Our one year target is $12.00 and our Bull Market Peak target in 2023 is $20.00 per share.

We expect to add both of these names to our Action BUY List over the next few months.


The next SER Interim Update is expected out on Thursday September 6th. Josef will be on MoneyTalks with Michael Campbell on Saturday September 8th at 10:00AM MT. The show starts at 9:30AM and goes to 11:00AM MT on the CORUS network. The next SER Monthly newsletter is expected Wednesday, September 19. Our first full-day SER conference will be held on September 29, 2018 at the Calgary Telus Convention Centre. Please come and meet many of the companies on our Coverage and Action BUY list. This will help you to become more comfortable to own the names for their long term potential.

Please see below or check the Events page, and visit the Appearances section for previous recordings.

BNN Market Call

February 28 @ 10:00 am - 11:00 am MST

March 2019 Black Gold Webinar

March 14 @ 7:00 pm - 8:30 pm MDT


Instantly stay in touch with Josef’s thoughts on the fundamentals of the energy sector, and receive timely communications reminders, through his twitter account. Click to follow.


It is nearly impossible to predict the absolute top or absolute bottom of swings in the stock markets, or even for individual stocks. So to help in measuring the risk/reward we have created this traffic control system to highlight when it might be a good time to make your investments and to highlight the key measures we use to analyze the tradeoff between risk and return.

Energy Market Indicators

VALUESER August 2018: Market OverviewSENTIMENTSER August 2018: Market OverviewTECHNICALSSER August 2018: Market OverviewOVERALL
SER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market Overview
SER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market Overview
SER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market OverviewSER August 2018: Market Overview

SER August 2018: Market Overview Green Light to Buy
Cheap Valuations, Sentiment not bullish, Technicals very attractive

SER August 2018: Market Overview Yellow Light for Caution
Some wavering on parameters, or parameters not clear. Some stocks may be attractive, others not so

SER August 2018: Market Overview Red Light to Stop or Sell
Parameters bearish, stay away, sell down, warning to wait for the next buy signal

50% SOLD



Latest added Exhibitors




Winter the Catalyst

Natural gas remains our favourite energy commodity for now and the longer term. It is cleaner environmentally, easily transported and is much cheaper than crude oil on a fuel efficiency basis (BTU basis). The apparent street consensus now, is that natural gas is dead for a few years as pipeline takeaway capacity is fully utilized, that no new egress pipelines are likely to be built and that the LNG story for Canada may occur but with the impact 4-6 years away.

We don’t BUY into this thesis.

Natural gas in storage is near record five-year lows in the US. Last week injections were only 48Bcf to 2.435Tcf (Chart #2). This is 21.9% below the storage level of 2017 at 3.12Tcf and 19.7% below the five-year average of 3.03Tcf. Into the start of withdrawal season on November 1st and using last year’s remaining injection levels, storage may only rise to 3.2Tcf just before the start of winter 2018-2019. This is much below the 3.6-4.0Tcf seen over the last five years (Chart #3). If injections continue to remain below last year, the first cold snap of the upcoming winter could spike up NYMEX prices and dragging up AECO prices in the spot market. Last week’s report has drawn the five-year band to a new low. This is being ignored by the markets for now.

The heat wave in Asia is causing a boost in demand for natural gas to create electricity for air conditioning. The price of gas has exceeded US$10/mcf (Chart #4) – over three times the current US domestic price and over 10x the AECO spot market. This price arbitrage we see shrinking over the coming years.

Chart #2

Weekly Natural Gas Storage Report

Source: EIA Weekly Natural Gas Report August 23, 2018

Chart #3

US Natural Gas Storage

Source: Schachter Energy Research Services Inc. August 17, 2018

Chart #4

LME Aluminum Prices

Source: Wall Street Journal – Daily Shots Aguust 23, 2018

Chart #5

NYMEX Natural Gas Prices

Source: – August 24, 2018

In the past we have had price spikes for natural gas from as early as the beginning of winter to right into the end of winter. Depending on the length of cold spells and the significant size of drawdowns from storage (markets react to >200Bcf weekly drawdown numbers), price spikes have occurred and during a winter season natural gas price can double or triple from the low to the high (Chart #5).

There have been seven major moves in natural gas prices as tight supplies and cold weather drove gas prices to doubles and triples since 1996.

  • In 1996 the price of NYMEX rose from US$1.74/mcf to US$4.61/mcf at the start of winter 1996-1997.
  • In 2000 the price of NYMEX rose from US$3.60/mcf to US$9.95/mcf at the start of winter 2000-2001.
  • In 2002 the price of NYMEX rose from US$2.64/mcf to US$10.10/mcf during the winter 2000-2001.
  • In 2005 the price of NYMEX rose from US$6.30/mcf to US$15.78/mcf during the winter 2005-2006.
  • In 2008 the price of NYMEX rose from US$7.00/mcf to US$13.69/mcf during the winter 2008- 2009.
  • In 2009 the price of NYMEX rose from US$2.41/mcf to US$6.11/mcf during the winter 2009-2010.
  • In 2013 the price of NYMEX rose from US$3.15/mcf to US$6.49/mcf during the winter 2013-2014.

NYMEX closed at US$2.92/mcf last Friday and a breach above US$3.06 (Chart #6) would set the stage for a major romp to the upside as winter 2018-2019 commences. When we get cold spells there usually are weekly drawdowns from storage of over 200Bcf. Last year we had our first drawdown of over 300Bcf in history (359Bcf – week one of January 2018). With climate change volatility and the very hot summer of 2018 we may see a colder winter this year. If so multiple weeks of >250Bcf should drive NYMEX over US$4.00/mcf. If there are multiple weeks of >300Bcf drawdowns we could see NYMEX exceed US$5.00/mcf. If this occurs AECO should exceed $3.50/mcf which would be glorious for the industry in Canada.

If prices even exceeded $3.00/mcf for AECO there would be a lot of hedges put on to protect companies cash flow and capex plans. Natural gas stocks would go nuts on the upside if this occurred.

Chart #6

NYMEX Natural Gas (Price/mcf)

Source: – August 24, 2018


Natural gas is extremely cheap and with low storage in the US and Canada, upcoming winter cold spells will drive prices up sharply as they have done in the past. A doubling of NYMEX and AECO this winter per mcf is likely.



Should Drive WTI Below US$60/b

US crude production has risen back to a record 11.0Mb/d last week (Chart #7). This is up 1.472Mb/d from the prior year. In addition other products are now 664Kb/d above last year for a total boost in US liquids of 2.136Mb/d despite a shortage of pipeline capacity in the hot shale areas of Texas. These pipeline issues are expected to be resolved during 2019 so production is the US will rise again materially in 2019.

The EIA’s most recent forecast for demand growth in 2018 and 2019 is for 1.6Mb/d each year (Chart #8). The US alone can add more than this volume so there is surely going to be a build in inventories. In addition, OPEC and Russia have lifted production to more than offset the forecasted sharp decline in Iranian production and the ongoing supply issues in Libya and Venezuela (Chart #9).

Chart #7

US Growth In Production Exceeds World Demand Growth

Source: EIA Weekly Petroleum Report August 17, 2018

Chart #8

Crude Oil Demand Outlook 2018 & 2019

Source: EIA Short-term Energy Outlook, August 2018

Chart #9

Crude Oil Inventory Build 2018 & 2019

Source: Federal Reserve of Dallas Energy Slideshow August 2, 2018

Chart #10

Crude Inventory Cycle

Source: Frontline presentation August 18, 2018

This inventory build expectation is confirmed by crude shippers. Frontline AB, one of the world’s largest tanker companies, sees crude inventories building materially from Q4/18 numbers starting in Q2/19 (Chart #10). When the build occurred starting in 2014, the price of WTI crude fell from US$107.68/b to <US$45/b in seven months.

The bounce last week in WTI prices occurred as US commercial inventories fell by 5.8Mb on the week. This was fully due to a decline in US imports of 1.06Mb/d or 7.4Mb for the week as trade war issues are impacting the movement of crude oil around the world.

The decline in imports last week came as Saudi Arabia shipped 329Kb/d less to the US or 2.3Mb on the week (Chart #11). Angola, another OPEC member, shipped 288Kb/d less or 2.0Mb on the week and OPEC member Ecuador shipped 138Kb/d less to the US, removing nearly another million barrels. So almost all of the decline in US commercial stocks was due to fewer imports from OPEC. Surprisingly, Venezuela shipped 256Kb/d more or a total of 606Kb/d to the US. Canada, by the way, shipped 106Kb/d less at 3.35Mb/d. However, Canada has a 41.5% market share of US imports. While a decline on the week, Canadian exports to the US are up 4.8% from last year and up 11.1% from two years ago.

As we near the end of the summer driving season, the US has too much gasoline in storage (Chart #12). Days of supply are above last year’s and total inventories are pulling the five-year average up. So once the summer driving season is over and refineries start their turnaround to make winter grade product, there will be a slower ramp up as they move to lower their summer grade inventories before filling the storage tanks for the winter. This implies that commercial stocks will lift quite fast as refiners hold off converting the crude to product too quickly.

Lastly, we disagree with the view that Iranian crude exports will plunge to negligible levels as US sanctions are implemented. Only Europe may fully end importing Iranian crude. In Chart #13, Europe was importing over 850Kb/d of Iranian crude in March which had fallen to 300Kb/d by July as the US sanction deadline neared. Even if this falls somewhat more, the Iranian crude can find a home in China, India and Turkey (defined as part of Europe). China has already switched to Iranian tankers and is increasing imports as the price is at a discount to other similar product imports. By using Iranian ships it bypasses those shippers using US insurers which are subject to the US sanction laws.

Chart #11

US Imports Fall From OPEC

Source: EIA Weekly Petroleum Report August 17, 2018

Chart #12

Gasoline Inventories

Source: EIA/Wall Street Journal – Daily Shots August 23, 2018

Chart #13

Who Imports Iranian Crude

Source: Wall Street Journal – Daily Shots August 9, 2018


Iran sanctions will not limit overall sales very much as Asian buyers can pick up whatever Europe does not buy at bargain prices. Crude oil prices are vulnerable to a decline below US$60/b in the coming months.



  • We expect that the S&P/TSX Energy Index (Chart #14) will decline from last Friday’s close of 201 to below 160 during Q4/18 as crude prices fall below US$60/b.
  • Tax-loss selling during November and December may become nasty providing some great buying opportunities for the upcoming new Energy Bull Market.
  • The Bullish Percentage Index for Energy stocks is now at 41.9% (Chart #15) and we expect it to decline during Q4/18 to below 10% which is clearly a BUY signal. If it gets to below 5% we will be in Table Pounding BUY territory. Conversely, when it reaches over 80% Bullish, it’s a warning signal and at over 90% you’re clearly in SELL territory.
Chart #14

S&P/TSX Energy Index

Source: – August 24, 2018

Chart #15

S&P Energy Bullish Percentage Index – Current

Source: – August 24, 2018

  • In 2008 we had double bottom at miniscule levels (below 2%) in October and November – this was a Table Pounding BUY window (Chart #16).
  • In 2011 we had double bottom at miniscule levels (at 2%) in August and October – these were Table Pounding BUY windows (Chart #17).
Chart #16

S&P Energy Bullish Percentage Index 2008-2009

Source: – May 29, 2009

Chart #17

S&P Energy Bullish Percentage Index 2011

Source: – December 30, 2011

  • In 2015-2016 we had double bottom at miniscule levels (at 0% and 2.5%) in August 2016 and January 2016 respectively – these were also Table Pounding BUY windows.
  • The technicals on oil are breaking down from the long term trendline (Chart #18) and as seen by a UK based technical analyst (Chart #19) .
Chart #18

WTI Crude Oil Breakdown

Source: – August 24, 2018

Chart #19

Technical Review of WTI Crude Oil

Source: Clive Maund, August 8, 2018


Hold cash for a table pounding buying opportunity during Q4/18.



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