I've delivered this talk and variations of this talk many times before. And,
in a market like this that's shifted a fair bit, I typically focus on a bit of
a how to, how does private equity work? Different types of structures, funding
vehicles, play analysis, et cetera, et cetera, and a little bit on charts, and
price action, and commodities.
Well, this market, as Richard outlined so eloquently, is all driven by price
action these days. Q1 was devastating because of the price action in commodity
markets in Q4, which were really, in many cases-- I mean, I spend a lot of time
in trading. These were six standard deviation events late in the year. It's
almost unheard of.
So, that being said, that set up Q1, as terrible as it was. But there's some
real interesting sort of dynamics that occurred, even in a terrible market. And
that's not to say that I'm an expert in predicting markets. The risk management
part is looking at charts and outlying what levels might be and how to manage
risk and opportunity based on what the market in sentiment is telling us, with
some forward looking indicators.
All right. There's going to test in the end, by the way. OK. Angle Capital,
we're family office. We focus a lot on originating our own deals, due
diligence. We ally with top operators and sponsor management teams. Doesn't
matter to us if it's conventional or unconventional. I would say asset
acquisitions with positive cash flows in the current market, although we're
probably leaning more towards a drilling market again. There's a first sign
that I'm pretty bullish on where the market's headed.
So drilling and leasing I think is-- in the current market is a really
strong opportunity. Projects are realistic economics. I always say equally
bullish on oil and gas, but the charts may or may not support that. Let's see.
So I'm going to talk a bit about-- a lot, actually, about crude pricing,
discussion, and charts, investor sentiment. I'll probably shrink that
discussion because Richard stole my thunder there. NPE activity, as well. A bit
of a sector financial update.
Here's a hint. I was going to spend a bunch of time on valuations on public
markets. They're really, really cheap right now. I mean, almost from a
historical perspective as a multiple of cash flow, public EMPs are very, very
cheap. I'm going to spend a lot less time on source of capital and structures,
and come back to charts, charts, and more charts.
Crude, where next? So technical analysis, which is what we spent a lot of
time over and above the usual, you know, does the play work? Do the economics
work? What are they doing that's unique? All that notwithstanding, then we
spent a bunch of time looking at charts.
And, from a market perspective, they're as important as fundamentals.
Historically, crude has a very low correlation to the actual fundamentals of
the market. And that continues here.
So the sentiment in the-- recent sentiment is driving price aggressively
higher. There's a question, you know, is-- it's hard to look at this as a
V-shaped recovery, but it is. So is this V-shaped recovery, is it for real? And
Capex discussion. So that's-- so what we've done-- what's happened recently is
we've cleared some technical levels.
There's a powerful breakout underway. I had to redo this presentation just
in the past seven to 10 days because we cleared some very important milestones
from a trading perspective. So the pricing is now strong enough for most plays
to generate strong returns. So that's flipping back to the fundamental side of
The upward price momentum from both fundamental supply and demand and--
which I'm actually not 100% sure on that. I'm not so sure of the fundamental
question is remaining as strong as I'd like. But, technically, this market is
looking very, very strong.
So crude is through key resistance level. Well, it's cleared multiple this
year. But the most recent one of 5950, it just blasted through it, I mean,
really like a rocket ship. And that's kind of what you want to see. It was a
second attempt at that level. It only took two to basically just fly through
So we're a large trading range to about 68. And, again, we're retracing
levels to last year's highs. From the 2017 lows to last year's highs are kind
of our benchmarks until we take out one or the other.
Lessons learned from hedging or not, basis in 2017-18, I mean, you can give
an entire talk on this. The market was very cruel in the past couple of years.
But particularly last year, where some companies I guess got exposed a little
bit financially on hedging crude out in 2017, accepting a pretty low price
compared to what spot was delivering, and to not hedging their basis. That was
kind of an expensive decision.
And then, as soon as some of those same companies unraveled those hedges,
well, then you had a price crash, as well, and the basis narrowed. So very,
very cruel indeed. So it's an ongoing story of hedging the major benchmark and
the basis, as well.
Backwardation is making hedging a delicate act. And the slope-- not to go
too far into this, but I like the stuff. So-- but the slope of the curve, the
crude curve, is also quite interesting. It isn't a straight backward slope.
It's kind of a flat and then a drop off. Again, it's a bit of a high wire act
for management teams that are using moderate to heavy leverage, which is pretty
All right. The fun stuff. So what in the world is this? If you can see the
green-- so we look at clouds as one major indicator. And I only have a few
charts to throw up here. I mean, I could go through an entire week of these
things. But if I wanted to show you one chart on a weekly chart for crude, this
would be it.
So green is bullish. Pink is bearish. If you're underneath a bullish cloud,
not so good. If you're above it, fantastic. If you're below a pink cloud, bad.
OK. So those are the general things we need to think about.
As we can see, it's interesting, you can see that crude has popped right up
right underneath a bullish cloud. Hm, interesting. That cloud goes up to about
$71, $72. If we actually got north of there in the near term, would be
extremely bullish. It would be a race to test last year high of 7690, and then
levels around 90 would be the next levels.
However, that's not currently happening. But what we see here, if we look at
the price action from late last year where we hit 7690, we had something that
looked close to a triple top up with sloping upwards. So the market was willing
to ignore it. As you see, those three highs that were 7296, 7527, and then
7690, still looked OK. And then really when we went through about 68 was our
first sign to worry, is when we entered the bullish cloud, which we'd been
above for pretty close to a year.
Usually, when you're above a cloud like that, I mean, you're just ripping
higher. And that's what the market was doing. And then we kind of had a kind of
triple bearish event I would say in November of last year. Not extreme,
surprisingly. It could have actually got worse. But when we have lines on the
top, as well, and those all kind of aligns and were screaming bearish as the
market cleared about 57.
Now this is probably why the sell off exaggerated to the way-- to the levels
that it did because most markets these days are momentum driven. It's not like
we're the only ones-- and I'm the only one to come up with charts like this. So
major trading programs, basically the second we cleared 57, just pounded the
markets lower. And we set a low of 42 and change.
Now, interestingly, that number is hugely significant because that held the
bottoms of the 2017 lows, which was tested significantly. So while it might not
have seemed like a significant number, that was huge. I mean, it was huge that
we got right to that level and held it because that 42 level had been tested
multiple times. And that basically formed a triple bottom on a weekly chart, on
a weekly basis. Very, very bullish.
If you combine that with the price action that we had in 2017-- which is a
very tight and boring market, bouncing around 42 to 47, back to 42, up to 45,
back to 43, really boring. But the number one rule when the market's trying to
make a bottom-- which is what it was doing then-- is the bigger the base, the
higher the space. So that's what the market did in 2017 and parts of '16 as it
kept wanting to retest and go lower. Could they make lower lows? Could they go
back some to the 2016 lows?
And the market resisted, as such. And that's why, finally, we were in a very
bullish area as we went back to mid '17. And from there to late last year was
really a test of how high could it go? So now, as we-- now forward looking,
these clouds are also forward looking. That's what's so great about it. And you
see in May, we have this great big falloff, and this real narrow strip which
goes to a bearish cloud.
You don't want to be under the bearish cloud generally. It can set the stage
for a crappy second half of 2019, and even early 2020. It's not a huge cloud.
So it's not terrible. It is kind of interesting that there's kind of a ladder
step down from the mid 60s to the low 50s. So we could theoretically kind of
sneak through-- be on top of a bearish cloud and just kind of chop around.
That's my current bet.
So now let's look daily. Well, daily is kind of interesting, too. Again,
it's a different time horizon. It's a shorter time horizon. And that's where
you would make certain decisions. We entered into a pretty bullish scenario in
mid-February when we broke above a really large bearish cloud. The pink is
And it was confirmed as strongly bullish I would say in second week of
March, as we got above a pink cloud. So the daily on this is really quite
bullish. We're above a green cloud that has some size. The other momentum
indicators are all in-- you could say they're overbought. I mean, they are
overbought. But markets can stay overbought for weeks to months to years where
basically it's a one way trade. And certainly crude has been one way trade
many, many times in the past decade. But the daily chart is-- it's very, very
An then here's the opposite of that daily chart. Here's natural gas, just a
giant, bearish cloud. It's pink. It's horrible. It's thick. The other
indicators are bearish, and we're underneath it. So the markets will tend to
rationalize and give news to what the charts are telling you. Well, we have
just in time inventory for natural gas, therefore, that's why we have terrible
price action. Yeah, maybe. But that doesn't really explain what was going on
late last year when gas was ripping higher to almost $5 for the front month.
Why? Because we had a giant air pocket-- if we go back to November, we had a
huge air pocket. It was bullish. All indicators had turned bullish. And there
was nothing but space. And the gas market is a classic example of the bigger
the base, the higher the space. It has chopped around in 260, 270, 250s
forever, so it caught many traders by surprise and just screened higher.
So the daily on natural gas is, well, pretty much horrendous, right? It's
bad. The weekly tells an interesting story that's kind of different from that.
Definitely bearish. , However really the line in the sand is going to be right
around 3305. There's really not much stopping it.
Yes, we're under a bearish cloud. However, you see a bearish cloud in any
thin line up in any small green cloud. It could be that 32-- hang on a second
here. The 365, 370 area is this pocket that needs to be filled in over the
summer. Again, a lot of things have to go right for that to happen. We have to
have a supportive summer in terms of weather.
We all know the inventory is pretty tight. So if this were a bullish summer
in terms of weather or hurricanes, which don't have huge impact anymore, but
mostly cooling demands, then I would sort of wager a et that you'd better be
careful about 365 if you're a bear because we could get to that range and fill
in that range.
Because this weekly chart is very, very choppy. Generally, when you have a
market screen higher, there's all kinds of gaps and holes in it and markets like
to fill in those gaps.
Here's a little chart on basis and to support Richard's view that there's
many different markets to pay attention to. This is gas in the Permian. It's
just a horrible market. Looks like the Canadian markets, basically. Too much gas.
Too much product. More product every day. Not enough takeaway. So you have to
pay to take it away. Or pretty much zero.
So that's an interesting dynamic. And, again, for producers, or new
entrants, or companies looking to execute drilling programs in basins they have
a fair amount of gas, this is at least as important, if not more important,
than all the other charts I've shown you. And all of the analysis that I just
did, we can apply that to any of these basis differentials, as well.
Now for the rig count. I mean, this is not new to anybody. But it is
interesting how the rig count keeps decelerating. We're down to 816 as of last
count. This is the one year. Interesting dynamic, for sure.
We pay more attention to the super spec market. I think a rate count in and
of itself is not a great indicator anymore. The utilization and the super specs
is going down a little bit. I think it's high 80s last I checked. It used to be
mid to high 90s. So there's a little bit of slack there.
But this is-- if there were a fundamentally bearish component-- potential
component to the market, could be that these rigs can be assembled pretty
quickly and brought to market, which will bring on a whole bunch more
production. So it is definitely something from a fundamental perspective that
now there seems to be a little bit of a ceiling on short-term production. But
it's amazing how quickly these can be deployed. Puts-- built and deployed.
So there's 160-plus more rigs that can be added to the super spec inventory.
And if crude follows through on what it looks like it might do over the next
few weeks, few months, then probably you'll get builds in super specs. And,
again, that means more drilling and that means more production.
Sustained $60-plus WTI you will absorb the few idled rigs that are out
there. A bit of a newer dynamic as contractors seeking term agreements before
converting the remaining fleet, which is a smart thing to do in a tough
business. And the increased super spec inventory could substantially increase US
production potential beyond current estimates. So that's a fundamental-- the
fundamental side of the equation that, despite the fact we spent a lot of time
looking at charts, it's important to consider that, as well.
The key takeaways from a financial summary, Capex, with the key ones-- I
don't have a chart on that-- but it looks like it's contracting mid, single
digits. We're still early enough in the year you could get mid-year revisions.
And we probably will see mid-year revisions. It wouldn't surprise me if Capex
this year actually ended up pretty similar to 2018 now that we have what looks
like a V-shaped recovery.
Tight super spec inventory is keeping a lid on further production growth.
But, again, that's subject to change. The debt coverage ratios for public
employees are still very modest compared to 2015. And, again, we look at that
as an indicator of potential spending ability. So companies can certainly
accelerate through taking on more debt.
Modest backwardation in year one points to profit taking opportunities. The
year one WTI is pretty close to last year's WTI. Doesn't feel like it, but it
is. And expect a robust D&D market upcoming-- well, I hope so, right? We
all hope so-- as many companies are in the position to execute substantial leveraged
buyouts. Again, it's all-- in our view, in my view, it's all driven by price
Not going to spend too much time on deal structures. But coming from venture
capital 20 years ago, in a different sector, when I look at oil and gas private
equity, it really looks-- a lot of it looks more like venture capital and
private equity. And that's not a bad thing. That's actually a good thing.
So I think that teams need to kind of delineate what type of capital do they
really need. Is it a type that wants to lease improve or something different?
And the venture capital is finding its way to service. And, lastly, the
relatively high price deck means companies can grow via drillcos. I think
drillcos will be back in vogue in Q2 and beyond. Often less dilutive, alignment
of interests when the sun, the stars, and moon align.
OK. Conclusion, crude oil upside targets, we're looking at 66. I didn't put
68 in there. But that's a big target. 71 and 77. These are all levels that we
hit last year. So we're trying to fill in the blanks. Downside, 5950, 5750,
5450. These are always rolling targets, right? As you take them out, there's
Rig count declining. Capex finding its way to various tight shale plays.
Bakker, PRB, and conventional offshore differentials are improved on most
basis-- most basins. Hedging strategies ever increasing in importance. Do I
have anything on the Bakken in here? No, I didn't. But that's-- I'll take some
On your technical slides, can you explain what that shape, duration, and the
breadth of a cloud really represents?
Well, the cloud is created by the price. And it goes back a certain amount
of time, and it looks forward a certain amount of time. So a flat market is not
going to have these giant clouds, such as we're seeing. A market like we've
been through in both oil and gas where it's gyrating, the price is going up and
down, tends to create these very large clouds. Because you've gone from a super
bullish to a super bearish, and now going back up again. And it creates-- then
it creates thin lines, and gaps, and all sorts of things.
So it's really-- it's backwards and forwards looking representation of price
So you read bars where your actual weekly or daily prices and the cloud is
some combination of things that have happened before and the expectations going
forward and some calculation yields the shape of that cloud?
Pretty much, yes.