Phil Skolnick, Managing Director, Equity Research, Eight Capital.
Phil Skolnick is Managing Director, Equity Research, and Senior Oil & Gas Analyst at Canada’s Eight Capital.
He formerly was Managing Director and head of global energy research at Canaccord Genuity.
He received an MBA from Texas Christian University. He also received an economics degree from Bethany College.
In this 2,430 word interview, exclusively in the Wall Street Transcript, Mr. Skolnick emphasizes his research on the smaller independent exploration and production companies in Canada as a sweet spot for investors in 2022.
“The COVID pandemic caused the whole industry in 2020 to basically go into survival mode.
They had to cut back dramatically on capex spending, not just on the exploration side or growth side, but in some cases even on the maintenance capex side. And they had to figure out ways to reduce their breakeven costs.
And so what we’ve been seeing as the consequences of that on the supply side — particularly on the U.S. oil production side — production is down roughly 1.5 million barrels a day still today from the peak of the pre-pandemic levels.
Activity level still remains somewhat low. And now with supply chain issues, we’re seeing cost inflation happening as well.
And so, because of all this, we’ve been bullish on oil prices.
Back in probably June or July of 2021, we made a call that oil is headed into the $90 range. And it hasn’t hit that point yet, but it’s been very close here of late. And we still do see that happening. We can see, like many others have been saying, $100 at times as well.
The companies have been focusing on returns to shareholders for the most part.
What that means is that they’re trying to maximize free cash flow generation. And rather than putting all that free cash flow back into the drill bit, they’re returning it to shareholders in the form of dividends and/or share buybacks.
Because of that, we’re seeing these companies, for the first time since I’ve been covering the space, since 1997, where you’ve had free cash flows that in some cases are as high as 50% on strip pricing.”
This leads Phil Skolnick to direct his investors into specific smaller-cap oil producers.
“The one thing generally we’ve been recommending since late last year, and we reiterated, is that the market is rewarding the smaller companies that are able to actually grow because they don’t impact the supply picture.
If they can do it on a positive debt-adjusted basis, that means increased value to equity holders.
We’ve been favoring the smaller-cap companies and the ones that screen the best on those metrics for us are InPlay (OTCMKTS:IPOOF), Spartan Delta (OTCMKTS:DALXF), Gran Tierra (NYSEAMERICAN:GTE), PetroTal (OTCMKTS:PTALF), and Tamarack Valley (OTCMKTS:TNEYF).”
These plays hit the investment benchmark for Phil Skolnick:
“One measurement that we’ve been watching here since October of 2021 is the free cash flow yield plus debt-adjusted production per share growth.
And InPlay, Gran Tierra, PetroTal, and Tamarack Valley show probably the best on those metrics and what we call the combination of adjusted free cash flow and adjusted production per share growth.
We call it debt-adjusted total return, because this is all about returns to equity holders.
PetroTal has over 200% 2022 estimated total debt-adjusted return and Inplay has about 200%.
And that dwarfs the other companies that are anywhere from 10% to 100%. Gran Tierra is about 50% and Tamarack Valley is well over 50% on a debt-adjusted total return basis.
The ones that really stand out the most though of those names that we are highlighting or favoring are Inplay, PetroTal, and Spartan Delta — these companies are trading at two times or less EV-to-debt-adjusted cash flows on this year at strip pricing.
So not only are they showing tremendous debt-adjusted total return potential, but they’re trading at basically bargain valuations that we have not seen in this space.”
The imminent expansion of the Alberta to British Columbia pipeline will bring a significantly positive development to the oil producers of Canada:
“The two pipelines, the big ones.
You have the TMX, which is the Trans Mountain expansion. And that’s almost 600 thousand barrels a day of new capacity that’s expected to come online, possibly as early as sometime next year.
The key about Trans Mountain expansion is that it will give you the gateway to Asia. And with Asia, you’ll get premium pricing for Canadian oil, especially for the heavy oil.
And so, we could see at times where Canadian heavy oil could trade at a premium to Brent pricing, because it is in such high demand.
In Asia, with the petrochemical build out — especially China wants to be the dominant player in the pet-chem business as well.
Increasing pet-chem demand yields increased demand for heavy oil. The pandemic slowed things on that growth a little bit, but as we’re coming out of the pandemic, you’re going to see that demand for heavy oil continue to rise…
The thing about the U.S. is there’s no new refineries being built.
There’s nothing going on in terms of increased demand. But what is happening is that as you have increased demand from Asia, and when Trans Mountain expansion comes online, that’s going to be an even further headwind for the U.S., particularly in the Gulf Coast and the Midwest markets, because those are heavy oil consumers that do rely on Canadian heavy oil as feedstock.
And so if they’re going to have to start fighting more and more for those barrels against Asia, that’s just going to be further headwinds on refining margins in those two regions.
In terms of the whole energy transition, the move for carbon emissions reduction, it is an impediment to growth.
It’s not only just the policies, but you’re seeing the shareholders as well, where activism is going on in the space and getting the majors to decarbonize themselves.
That just means less spending on upstream.
What that does is to put further downward pressure on supply, which then puts further upward pressure on oil prices.
Now in Canada, they’re looking to work with the industry in terms of the whole carbon sequestration and we’re still waiting for some agreement to come out between the government and the oil producers, the oil sands producers.”
Get the full detail and all recommendations from Phil Skolnick by reading the entire 2,430 word interview, exclusively in the Wall Street Transcript.
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