David Berman, Financial Post Published: Friday, March 10, 2006
Henry Groppe, the legendary oil and gas forecaster and co-founder of Houston-based Groppe, Long & Littell, has been making prescient calls on energy prices for decades. He correctly forecasted that crude oil prices would continue to decline in the mid-1990s. Then, in 1998, he called for a resurgence in oil prices, thanks to strong economic fundamentals. The Financial Post's David Berman spoke with Mr. Groppe during his visit to Toronto yesterday to learn his current views on crude oil and natural gas.
Q: How much is the political instability in Iraq, Iran and Nigeria influencing oil prices?
A: It's having a significant effect. I would say currently that they are contributing about US$8 to the price of oil. Volatility is enormous, and will be from here on out. Forty percent of total oil production comes from six countries which have great instability: Russia, Venezuela, Nigeria, Saudi Arabia, Iran and Iraq.
Q: Does Canada's stability make its oil assets particularly attractive?
A: Absolutely. We concluded about 12 years ago that Western Canada would be the single most attractive place to invest in oil and gas. It has a huge resource base, it is about a quarter as intensely exploited as the U.S. in terms of the number of wells drilled per square mile and it is located adjacent to the largest energy market in the world. There is no place else in the world that has that combination of features.
For a dozen years, all of my family's assets have been invested in oil and gas -- and the majority of that has been in Canadian equities.
Q: Given these features, are Canadian oil and gas assets attracting a premium in terms of valuation?
A: I don't think all of this has been recognized yet. Of course, you don't place much credence in this if you believe the world will soon be swimming in oil or liquefied natural gas is going to swamp the United States. But what will inevitably emerge is the recognition that that's all wrong -- and when it does, there will be a tidal wave of interest.
Q: Natural gas prices have fallen about 50% from their highs in December. What's causing this decline?
A: It's almost entirely weather-related. The big demand for gas in the United States is in December, January and part of February. In most regions, the United States had the warmest January on record. The result was far less gas used, and that always depresses prices.
As well, if you don't have an exogenous event, oil and gas prices are always at the bottom from February to the middle of April because that is the end of the heating season. And then they always reach a peak in August, September and October. You can bank on it.
Q: Does this make gas producers like EnCana Corp. a "buy" right now?
A: Yes, any of the big gas independents. A lot of these stocks are down 30% to 35% from their peaks last fall. Unless something very unusual happens, they'll be back where they were -- or higher -- next August or September.