Specious Argument

Long Term West Texas Intermediate Forecast Price And Uncertainty

2009-11-09T21:00:00Z

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don't know. But there are also unknown unknowns. These are things we do not know we don't know.

Former US Defense Secretary Donald Rumsfeld on 12 February 2002.

My recent article Do Not Believe Long Term Oil Forecasts caused some good discussion over at Seeking Alpha.

My prior article drew attention to a Wall Street Journal article that commented on the long term oil demand growth with price implications. In my article, I commented that it is difficult projecting West Texas Intermediate supply and demand as well as oil prices beyond five years. I discussed why these variables are hard to predict without referencing much numerical data by requesting that readers begin thinking of different scenarios. I wanted readers to think about possibilities rather than be anchored to numerical data. I also provided reference to Professor Bartlett's lecture that is recorded on YouTube. If Professor Bartlett's lecture is good enough for Jeremy Grantham, well known institutional investor and co-founder of GMO LLC, then it's good enough for me.

After investors thought of different scenarios, I further asked readers that, as investors, how might their views change toward various national oil companies such as: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., Petróleo Brasileiro S.A. - Petrobras (PBR); and oil sands companies such as: Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO); and large multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).

Please click through on the above charts to see larger versions..

As we can see from the historical WTI Prices chart, WTI began breaking free from its historical price range of $20-$30 per barrel near the year 2000. What about the future? Well, we can look at the CME Group's Light Sweet Crude Oil (WTI) Future's prices. And using the futures prices as a guide, I don't expect a return to a sustained price range of $20-$30 anytime soon.

Do professional consultants or forecasters have a different view? While I don't know all forecasts, I looked at oil price forecasts from GLJ Petroleum Consultants, a prominent and well respected oil and gas consulting company located in Calgary, Alberta. If you are interested, you can register at Sproule Associate Limited, another prominent and well respected oil and gas consulting company located in Calgary, to receive its forecasts. GLJ's forecast, dated 30 September 2009, has WTI nominal (as opposed to real) prices at $74.00 per barrel in 2010 and rising to $101.59 in 2018 and rising by $2% per year thereafter.

The challenge for creating long term supply, demand and price forecasts is that nobody knows the future. Setting aside the two Calgary consulting companies, if a consultant or forecaster provides you with a long term forecast, ask the following questions or requests:

Is your price forecast substantially different from the WTI futures? Often the forecast is materially different. Ask the consultant to explain why. They will often tell you that the futures curves are a) wrong, b) change with time, and c) are heavily influenced by Wall Street types who are not using fundamental analysis to arrive their futures prices.
If the consultant has strong conviction that its price forecast is correct and that the futures curves are wrong, then is it putting its money at risk? This is a rhetorical question meant to emphasize that few have strong conviction. In reality, this is an unfair question because the consultant would lose its credibility if it were playing the markets while providing price advice. It might, however, make the consultant worker harder when it has some skin in the game.
Has the consultant's price forecast changed or is it expected to change? The answer is yes.
Request to see the last two years worth of price forecasts. Note that the forecasts do change, often materially so.
Request to see its price forecast from the year 2000. Did it even allow for the possibility that oil prices would be sustained at or above $70 per barrel by 2010? Most likely not.
Ask the consultant to provide its methodology to arrive at its price forecast. This is just a general interest question. The reality is, it doesn't matter.

As we have seen from historical prices, futures curves, and one oil and gas consultant forecast, the prior range of $20-$30 per barrel for WTI does not look imminent. If prices are known fluctuate wildly, which would then change the future curves and consultants' forecasts, then why am I confident that prices won't return its prior range?

Last year, many oil companies had internal long term price forecasts of $70-$75 per barrel in real terms. Some might have been lower and others higher. And last year, I read that new greenfield oil sands develop projects required $70-$110 per barrel to achieve an economic return. While construction and operating costs have been reduced over the past year, they haven't been reduced much. Yet, many oil sands development projects by large and sophisticated companies are moving forward. Furthermore, look at the rate of returns most oil companies are enjoying at today's prices (they are not extreme), and then ask yourself what their returns would look like at sustained prices near $25 per barrel. Hint: it wouldn't be pretty.

It's interesting to watch the dynamics of senior executives of oil sands companies. As they plan and prepare for a new project, they all acknowledge that oil prices are volatile and that between now and the end of the project, there are likely going to be several stomach churning price drops. At this point, they are undaunted. Yet, when the prices drop, these same executives begin to reassess if they can scale back, postpone, or phase in projects over time. It's amazing how much influence short term prices have toward a long term outlook.

If you ran an oil company and believed that $20 per barrel prices were imminent and didn't want to play the futures market, then you would likely stop investing in new projects and wind down or sell existing production, fire all but essential staff, and just bide your time. When oil prices hit $20 per barrel, there will be many distressed assets available at fire sale prices. Moreover, many oil and gas companies will be shutting down, throwing their talented workers on the street. At that point, you could relaunch the company with better (lower costs) and greater (more production and reserves) assets than you had previously. I am unaware of any company embarking on this strategy.

As you do your own research and analysis, remember that the treadmill gets steeper as world production increases. What do I mean by that? Most oil fields (oil sands being an exception) experience a natural decline rate. For argument sake, let's assume that at some time in the future we have the following conditions: a) annual oil production at 100 million barrels per day; b) annual supply and demand growth rate of 1%; and c) a natural decline rate of 7% annually. Then, just to maintain production for the following year, an additional 7 million barrels per day of production must be found. And, another million barrels per day must be added as part of the supply growth. As annual production increases with the same decline rate, more reserves and production must be found.

I am neither in the bearish camp that says the sky is falling nor in the bullish camp that says we have plenty of oil at affordable prices. I believe we do have challenges in front of us. Furthermore, I believe we will have significant changes. It's best to keep an open mind and watch for signs that indicate abrupt changes are about to take place.

One last closing comment: I am glad that I do not provide long term oil and gas price forecasts—there are too many known unknowns and too many unknown unknowns.

Disclosure: I am long shares in Canadian Oil Sands Trust, Suncor Energy, and Exxon Mobil as well as long and short puts in Exxon Mobil.

On Sunday, 18 July 2009, I photographed Fish Creek in Fish Creek Provincial Park, which is located within Calgary. And, if you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Do Not Believe Long Term Oil Forecasts

2009-11-07T21:00:00Z

On 4 October 2009, The Wall Street Journal ran an article World Need for Oil Expected to Ease (subscription might be required), where the author, Spencer Swartz, wrote:

The International Energy Agency next week will make a "substantial" downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world's thirst for oil.

...

If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade -- the biggest reason for crude prices hitting a record $147 a barrel last year -- may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm.

The reality is that no one knows what the long term future holds. The IEA itself struggles with the Bull versus Bear oil outlook. Ask yourself, how many pundits foresaw the mess we are in now and anticipated the dramatic easing of oil demand?

Sure, one can gather relevant information and make a reasonable guess as to oil demand next year and the year after that. But after five years, the potential paths of demand growth become unwieldy. How will economic growth be sustained over the next five years? Will the OECD countries lag emerging countries? Will China and the rest of Asia power ahead and create substantial demand? If Asian countries do power ahead and create many millions of middle class citizens, will they demand their own vehicles and tickets on jet planes to see the world? Will Brazil and other South American countries enjoy strong economic growth? Will the Middle East be stable over this period? Will Iraq resume its full production capabilities? As you see, one can begin asking any number of questions that are impossible to answer with an accuracy or certainty and that might have a major bearing on demand or supply or both.

What do we know? We know that for a long time, oil prices were usually within $20-$30 real per barrel. Now those prices are laughable. No reasonable person expects the world to return to those prices any time soon. Many major oil fields around the world are in decline. Oil companies are searching in more remote and sometimes more unfriendly regions of the world to develop further existing fields and to discover new fields. And, the rise of oil prices has given new prominence to some national oil companies. A sample list, though incomplete, of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. - Petrobras (PBR).

If we were to accept the 1% annual growth of oil demand mentioned in the WSJ quote for a long duration, what would that mean or imply? A child born tomorrow will see by her seventieth a doubling of daily world oil production from about 85 million barrels per day to 170 million barrels per day. Moreover, during her seventy years, the world will have produced more during that time than the total cumulative amount prior to her birth. Call me a skeptic, but I am unable to see where we would find that much additional oil to produce at such high rates for such a sustained period.

To be clear, neither the article nor the IEA is suggesting that we endure a 1% growth forever. Rather, I wanted to use this seemingly small innocuous number of only 1% growth to draw attention to its implication. If the long term growth were 2%, then in 35 years the daily world oil production would double to 170 million barrels per day and the oil produced during those 35 years would exceed the prior total cumulative amount of oil produced.

Two excellent sources of information to learn more about oil, oil demand, oil prices and various policy initiatives, I recommend two sources:

Statistical Review of World Energy from BP p.l.c. (BP). I found the link to the Adobe pdf document toward to the bottom on its homepage.
Monthly Oil Market Report from the International Energy Agency. The link is to the webpage that hosts the document that is released two weeks after the initial release date. Subscribers receive immediate access through a different link.

Both documents are extremely helpful. I find the BP document provides concise information and historical context. The IEA document provides the agency's latest thinking and forecasts.

As the world struggles to find new sources of oil, there will be dramatic changes. I have already discussed some questions we should ask ourselves as we contemplate future oil demand growth. Of course, many more questions need to be considered. And I have indicated that some national oil companies have gained strength and prominence with higher oil demand and prices. As investors, we should also think about what long term oil demand growth means for oil sands companies such as Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO), and for large multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).

As demand continues to rise, I am curious what will happen. Will scientific breakthroughs help? How will the world cope with the environmental consequences? How will people adapt to possibly much higher prices? How will countries and regions change because of either having or lacking domestic oil supplies? If the world does experience higher prices, what are the implications for global world trade? And do higher prices imply that people will travel less and have less of an understanding of other regions? These questions are just a small sample of what investors should begin considering.

A few years ago, Professor Bartlett gave a compelling lecture, captured in a series of YouTube videos, to some students at the University of Colorado. In his lecture, he discussed oil demand growth. The lecture starts a bit slow; however, when you reach the latter part of the third video, you'll see how the prior information is relevant to his discussion on oil. In other words, because they are important, don't skip the initial video segments and jump to the third. I urge you to watch the complete video series.

And after you've watched the videos, ask yourself, "What time is it?" This question will make sense once you've seen the videos.

When I initially saw the WSJ article, I was drawn by the long term forecasts. My personal bias is that most longer term things in life are difficult, if not impossible, to forecast with any reasonable degree of accuracy. Then as I read the article, I saw the 1% growth number, which by itself seems very innocuous. But if you think about what 1% growth means over a long and sustained period, you quickly realize there are going to be changes. Moreover, the world has already witnessed a significant shift in oil prices over the last decade. We are no longer in our prior historical norm of $20-$30 per barrel. Some might argue that we are now in unchartered territory. As part of that possible unchartered territory, I wanted you to think about some larger questions. The questions mentioned in this article are just off the top of my head without much thought. I am sure you can think of many more. And last, I wanted to draw your attention to Professor Bartlett's excellent lecture. His lecture will make you think about oil demand (and others) growth differently. I hope this article causes you to further your own research.

Disclosure: I am long shares in Canadian Oil Sands Trust, Suncor Energy, and Exxon Mobil as well as long and short puts in Exxon Mobil.

Book Review: Options Volatility Trading By Adam Warner - Part II

2009-11-07T00:15:00Z

Building on my prior article on Adam Warner's book, Options Volatility Trading: Strategies for Profiting from Market Swings, I will comment on the next four chapters.

Chapter 3: Understanding the VIX. This is a critical chapter because it serves as the backbone for the book. You learn what volatility is and how it is represented through VIX. VIX is how many investors and traders express fear and complacency. However, VIX is not perfect and this chapter explains why.

Chapter 4: Nuts and Bolts VIX. You learn that VIX represents the expected volatility of the SPX, the S&P 500. Notice that it is an expected volatility. For example, a VIX of 32 implies a roughly 2 percent range in the SPX on any given day. You also learn that volatility has two key components: volatility of individual S&P 500 component stocks and correlation among those stocks. That is, if stocks are extremely volatile but uncorrelated, then the VIX will be lower than when the stocks are undergoing the same volatility but are tanking in unison.

Chapter 5: Volatility Timing. With regard to buying and selling options, you learn that not every day is created equal. There are better days within the expiration cycle to either buy or sell options. And, there is seasonality to options as well.

Chapter 6: How Do Trader Trade Volatility. This chapter is where the real fun starts. Now, you are beginning to use your knowledge from the previous chapters to think about how you want trade. If you buy or sell options, what are your considerations with regard to volatility, delta, and gamma? Can a buyer and seller of the same options both make money, and if so, how? Do you prefer a high or low volatility environment, and why? What does volatility mean to options traders?

In a few days, I will provide another update.

On Sunday, 18 July 2009, I photographed Fish Creek in Fish Creek Provincial Park, which is located within Calgary. In a larger version of this photograph, you can easily see one of the many bridges in Fish Creek Park. And, if you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Disclosure: As part of the Amazon Associate program, I receive remuneration for each book sold by clicking on the Amazon.com links in my article.

Book Review: Options Volatility Trading By Adam Warner - Part I

2009-11-04T22:05:00Z

I have begun reading Adam Warner's new book Options Volatility Trading: Strategies for Profiting from Market Swings. For those of you who don't know, Adam writes the excellent and influential blog Daily Options Report. I started reading Adam's writing when he co-wrote the options column on Street Insight (part of the TheStreet.com family) from spring 2003 to spring 2005. He is currently Options Editor at Minyanville.com. You can read his profile at his About on his blog.

Readers should know that I correspond occasionally with Adam and have tremendous respect for him. I have learned a tremendous amount from his articles and from his answers to my questions. Moreover, I admired his warning readers that they might wish to exercise caution when following Lenny Dykstra's options articles on The Street.com. His warnings were long before Dystra's problems became fodder for the mass media, including CNBC. Adam is a friend and thus I will likely be biased in my review of his book.

So far, I have just covered the Introduction, Chapter 1: Who Am I? Why Am I Here?, and Chapter 2: Know Your Greeks. The introduction is great because Adam sets out that the book will not be a cookbook with easy to follow recipes for success nor will it be steeped in heavy mathematics or formulas. Instead, the book will be focused on how to use information and data to manage an active account or portfolio with an ever changing set of circumstances. Adam provides his personal background in Chapter 1. I found knowing his background interesting for a couple reasons. First, I was amazed at how primitive the options markets were only a few years ago. And second, because of Adam's experience as a floor trader at the Amex Option Exchange, I know that Adam has a well honed intuitive feel for the markets and is able to think rapidly on his feet. In Chapter 2, Adam provides the reader with a high level overview of the major Greeks in options trading. As stated earlier, Adam skips over the mathematical treatments and provides the reader with the essential information.

If you are just starting out with Options, this book is not your best starting point. You should have a basic understanding of calls and puts. If you don't have that understanding, the free educational videos at Options New Network ONN.TV are a good resource. You don't require an in-depth understanding of options to read Adam's book. However, you should know what calls and puts are and understand their basic payoff diagrams.

So far, I am thoroughly enjoying Adam's book. After a few more chapters, I will provide another update.

On Sunday, 18 July 2009, I photographed the Weaselhead area in North Glenmore Park in Calgary. I know that Adam enjoys riding his bike, so I thought this photography from one of my bike rides was an appropriate photograph to include with my review. And, if you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Disclosure: I am long TheStreet.com stock. And as part of the Amazon Associate program, I receive remuneration for each book sold by clicking on the Amazon.com links in my article.

Calgary Model Anya In Banff National Park

2009-11-01T19:50:00Z

On Thursday, 10 September 2009, I worked with Calgary professional model Anya on a photo shoot in Banff National Park. We left Calgary at about 11 am and returned at about 11:30 pm. It was a long, but fun day.

Our first location was at Lake Minnewanka. When we arrived, it was windy and cool, at about 18C or low 60sF. We took several shots for about an hour or so before taking a lunch break.

For lunch, we went to into Banff townsite and ate a quick meal. Afterward, we enjoyed a brief tour of the Cascade Gardens beside the Administration Building. I wanted Anya to have some time to enjoy Banff.

Please note that the previous links to the Cascade Gardens and to the Administration Building were from a prior visit to Banff.

After our brief tour, we settled upon a location near the Administration Building but across the Bow River. These shots have Mount Rundle in the background. Because it was direct and strong, the sun forced Anya to keep her eyes closed except for brief periods when I took the photographs. A scrim or other device would have been helpful.

In the early evening, I took our last series of photographs near Bow Falls (link from prior visit to Bow Falls). In these shots, Anya looks as though she is lit by the setting sun. In fact, were it not for my Canon 580 EXII speedlights, she would have been a complete silhouette. At this particular location, there were mountains behind us that shielded us from the sunlight. The foreground, however, was still brightly lit. With the setting sun came cooler temperatures. We worked until about 7 pm.

After our last location at Bow Falls, we packed up our things and then went for supper. And we finally arrived back in Calgary at about 11:30 pm.

Working with Anya was a positive and rewarding experience. While serious about her professional modeling career, she was relaxed, enthusiastic, confident, energetic, and fun. She incorporated new ideas and suggestions easily as well as utilized many of her own creative ideas. Knowing that I am still experimenting as I continue to grow and develop my photography skills, she was patient, encouraging, and enthusiastic. In summary, Anya is a genuinely beautiful person, in all respects, who is a pleasure to work with.

I highly recommend Anya as a professional model, and she can be contacted through her modeling agency I Model Management.

On Thursday, 10 September 2009, I photographed Anya at Lake Minnewanka in Banff National Park. You can view a Flickr slideshow of my photographs of Anya from our Banff photo shoot. And, if you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Quick Update on Exxon Mobil, Pan American Silver, And Blue Nile on Halloween 2009

2009-10-31T20:00:00Z

This post is just a quick update on three positions that I have discussed in the past—namely, Exxon Mobil Corporation (XOM), Pan American Silver Corp. (PAAS), and Blue Nile, Inc. (NILE).

Back in mid-August, I provided an update on my ExxonMobil position. My positions remain the same. Until this past week, I was doing extremely well. On Thursday, ExxonMobil released its earnings and slightly disappointed the street, and the stock dropped modestly—largely in sympathy with the overall markets. I have yet to read Seeking Alpha's XOM transcript, but will do so before the end of this weekend. My quick take is that I will likely continue to hold XOM into year-end.

I am bullish on most commodities, especially oil, gold, and silver. Pan American Silver, as the name obviously suggests, is a silver mining company. Silver prices have done well this year since starting at about $11 per ounce and presently at about $16 per ounce, though prices were modestly higher recently at about $18 per ounce. On 30 October 20009, Pan American announced that it has mailed out its friendly takeover of Aquiline Resources Inc. bid circular and directors' circular. According to the documentation (see Pan American's website), the value of the acquisition is about $626 million. On Wednesday, 11 November 2009, the company will hold its third quarter earnings conference call, when I am sure we will learn more about this takeover. Given that I am bullish on silver and that company and its stock have been performing well, I am likely to keep Pan American as a core holding.

Blue Nile has performed extraordinarily well this year. Back in February when the stock was at $20 per share, some commenters at Seeking Alpha thought I was nuts to believe the stock would go up. Well it has. In fact, the stock closed at $60.05 this past Friday, off from its highs of about $66 per share earlier in October. The stock shot up recently on the back of Amazon.com, Inc. (AMZN) positive earnings. Blue Nile will be releasing its earnings 5 November 2009. After I listen to the conference call, I will comment further.

Like many investors and traders, I remain uncertain about the direction of the markets for the remainder of the year. I tend to believe that the economy is weak and not getting better as quickly as most hoped. We are also approaching year-end when markets have a tendency to defy gravity.

One of my constant themes is that commodities should continue to do well. If you haven't seen Professor Bartlett's video series, I urge you to do so. After watching his lecture series on YouTube, you'll think differently about commodities.

After Pan American's and Blue Nile's conference calls, I will provide follow-up articles.

Disclosure: I am net long with respect to Exxon Mobil Corporation. I am long shares, long puts, and short puts. I am also long Blue Nile and Pan American stock.

On 12 July 2009, on my bike trip I photographed a young woman and young man playing catch in Prince's Park in downtown Calgary. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Professor Bartlett: An Important Series of Videos

2009-09-01T17:00:00Z

Many of you have read Jeremy Grantham's 2Q 2009 letter. Like you, I thoroughly enjoyed reading Grantham's thoughts on the markets. At the very end of his letter, however, he provided his reading and listening list. And, one of the items is as follows: Bartlett, Albert A. The Most Important Video You’ll Ever See, Arithmetic, Population, and Energy. 2009. The Most Important Video You’ll Ever See is a series of eight videos, each lasting nearly ten minutes.

I highly recommend setting aside some time and watching all eight videos. I watched four videos one day and four the next. After you finished watching all eight videos concerning the world's population growth as well as demand for various commodities, including fossil fuels, you'll have a stronger appreciation about their implications. This stronger appreciation will cause you to think differently about your investments. Thus, I encourage you to watch Professor Bartlett's informative videos:

After you have watched all eight videos, have your views changed when you hear various pundits talk about North America's endless supply of natural gas? And does it give you pause when you think about dwindling oil supplies, such as Mexico's Cantarell oil field? Again, I encourage you to watch the videos.

And if you found this series of videos helpful, please tell your friends and colleagues by sending them a link to this article.

Went Long Exxon Mobil On 17 August 2009

2009-08-18T02:55:00Z

Today I went long Exxon Mobil Corporation (XOM). I indicated in a prior article, I had no position. Since that article, I have traded Exxon Mobil long and short.

Exxon has performed poorly this year. On 2 January 2009, the stock was at 81.64, and today it closed at $66.55, down about 18.5%. Oil prices are about $67.22, which is a reasonable and healthy oil price for most integrated oil companies to perform well.

Please note that you can click through the above chart to see a full-sized chart and that the data for 17 August 2009 is not shown.

Of course, I am unsure whether today's market selloff is the beginning of a larger correction or simply random noise. I am less sanguine on the overall economy than most pundits and economists. However, with the Fed running its nuclear powered printing presses at full power, I am fearful of inflation and bullish on commodities. Time will tell if I jumped the gun today by getting long Exxon Mobil too early.

In this past weekend's lead story Quality Counts for Barron's (subscription might be required), Exxon Mobil is highlighted:

The oil giant is the industry's clear leader, with the highest returns, strongest balance sheet, best management and most stable earnings among the "super majors." Exxon shares normally command a sizable premium to those of such peers as Chevron, Royal Dutch Shell (RDS-A) and BP (BP), but that gap has shrunk this year as Exxon shares have fallen 14%.

Exxon doesn't look cheap, trading for 18 times projected 2009 profits of about $4 a share. The stock, however, looks more reasonable based on 2010 earnings. The consensus calls for $6 in earnings next year, but one energy maven tells Barron's that profits could hit $7 merely if futures-market expectations for energy prices pan out. A forward P/E of 10 isn't bad for one of the world's best-run big companies.

I had been thinking about going long Exxon Mobil, and today's broad market selloff seemed to be a good opportunity to establish a long position. Should Exxon Mobil go down further, I might increase my long position.

Disclosure: I am net long with respect to Exxon Mobil Corporation. I am long shares, long puts, and short puts.

I took the photograph titled Great Throw on 12 July 2009 when I went for a bike ride across Prince's Island in downtown Calgary. The young woman has a great arm for throwing amazing spirals. She is good at catching footballs too. If you click on the above photograph, you will taken to my picture at my Flickr account, where you can see more of my pictures.

Pan American Silver 2Q 2009 Conference Call

2009-08-17T19:05:00Z

I will discuss the Pan American Silver Corp. (PAAS) second quarter conference call held on 12 August 2009 by providing the conference call's major themes in point form. In listening to the conference call, I did not place heavy emphasis on detailed financial information. For example, I am not too fussed about such items as noncash foreign exchange losses. Instead, I listened to how the company performed over the last quarter and expected to perform for the duration of the year. For example, I am focused on the company's silver cash cost. Because I believe the company is well managed by seasoned and competent professionals and because of my concern with potential inflation, Pan American Silver remains one of my core holdings.

In addition to transcripts of the company's conference call (see Seeking Alpha for the transcript and company's website transcript (PDF, 76 kb)), I used the company's press release (PDF, 47 kb). The press release is reasonably and well worth reading for a quick snapshot.

General Comments

New quarterly production record of 5.8 million ounces of silver, a 28% increase year on year;
Gold is the company's most significant byproduct at 18% of total revenue;
Consolidated cash cost remains at $5.99 per ounce of silver;
$23.5 million in operating income;
Cash flow from operating activities was $32 million or $0.37 per share; and
Quarterly adjusted net income was $13.5 million or $0.16 per share.

Manantial Espejo, Argentina

Outperforming projections in large part because of additional gold output;
Over 1 million ounces of silver at a cash cost of negative $0.93 per ounce, which is the result of about 18,500 ounces of gold production that more than covered all operating costs;
Although the plant experienced some mechanical problems, it processed over 144,000 tons of ore, which is nearly 80% of plant design capacity; and
Named Argentine 2009 Mining Company of the Year by the primary Argentina Mining Press and Argentina’s association.

Peru

Produced slightly greater than 1.9 million ounces of silver, which was slightly ahead of target;
Cash costs were much higher at $10 per ounce than the expected $8 per ounce;
High costs were attributable to Doe Run smelter shut down;
Anticipate producing slightly above 2 million ounces per quarter at our Peruvian operations for the second half of 2009 at approximately $9.50 per ounce; and
Company awarded 2008 Peruvian Company of the Year from the Peruvian Association of Civil Companies.

Mexico

Alamo Dorado mine produced 1.4 million ounces of silver at a cash cost of $4.23 per ounce;
Smelt over 4,000 ounces of gold production that was forecasted at 3,300 ounces;
Alamo Dorado overcame the five day suspension of operations in May because of the influenza outbreak;
La Colorada mine produced 835,000 ounces of silver at a cash cost of $7.23 per ounce, 12% below expectation; and
Expect continued solid performance from both mines.

Bolivia

Startup of our San Vicente project in Bolivia yielded production of over 616,000 ounces of silver at a cash cost of just over $9 per ounce;
Projected cash costs to decline to below $7 per ounce in Q3; and
Mine is operating well and Company looks forward to better results in the near future.

General Comments

2009 silver production forecast is 21.5 million ounces, excluding Quiruvilca mine, which is moving toward care and maintenance;
Cash costs are forecast at $6.00 per ounce of silver;
2009 gold production forecast is meet or exceed 85,000 ounces;
Continue to ramp up San Vicente mine in Argentina; and
Drill and develop the La Preciousa project, within an hour's drive from Durango, in Mexico.

Questions and Answers

I found only two noteworthy questions and answers.

Company might engage in acquisitions to keep growth continuing; and
For the La Preciousa project, a feasibility study might be ready within three years.

My Overall General Impressions

Wrapping up, I am long Pan American Silver because I believe that it is an extremely well managed company. As mentioned in my prior articles, I further believe that there is a strong chance that with central bankers printing money as fast as they can, there will be inflation once the true recovery takes hold. Higher inflation will cause higher commodity prices, including higher silver prices. Put differently, there will be a greater increase of dollars in circulation tomorrow than an increase of gold and silver in existence. And that should bode well for the shareholders of Pan American Silver.

Unless my fundamental outlook changes or Pan American Silver begins disappointing, it will remain a core holding. That said, it is a volatile stock, and those that are able to aggressively trade might wish to pick their opportunities. For example, on 13 August 2009, the day after the earnings release and conference call, Pan American Silver jumped $1.94 or about 10% to $20.74. Moreover, as I write this article, the stock is down $1.93 or about 9.5% to $18.37.

Disclosure: I am long Pan American Silver Corporation shares.

Approaching Downtown is the title of the photograph above, which is hosted at Flickr. I took this picture while biking and approaching downtown on 12 July 2009. The weather was great with temperature in the high 20s, low 30s C, (~85F). If you click on the picture, you will be taken to where you can view a larger version and see even more of my pictures.

Long Bike Ride Through South City Parks

2009-08-02T01:20:00Z

Last Saturday and today, I went for long bike rides. Each time, I rode for about 75 kms (~50 mi) through Edworthy Park, Glenmore Park, across Fish Creek Park, Carburn Park, Inglewood Bird Sanctuary, parts of downtown, Calgary Zoo and back to Edworthy Park.

For both rides, the weather was great with temperature in the mid 30s C, (~95F). For the most part, the bike and pedestrian paths were not busy. The busiest locations were in the downtown core and at Edworthy Park.

The circuit takes between four to five hours, depending on how fast you want to go as well as how often and how long you want to break. I am not a speed demon and go at moderate speeds, though I tend to take few breaks.

As mentioned, the route is not busy, except for a few locations. Even then, it is great to people watch. It is a large circular route, so I don’t double back on any paths and I get to see a large portion of the city. And, for a large portion of the circuit, I am traveling through various scenic parks, especially through Glenmore and Fish Creek parks. It is a fun, reasonably quiet, and scenic ride.

If you decide to travel this route, I encourage you to stop frequently in Fish Creek Park to check the maps. It is a large park and it is easy to lose your way. You can always ask people nearby for directions. Last week I took a few wrong turns and explored more of Calgary than I anticipated. That, however, is part of the fun.

Also, make sure you have a bell on your bike and use it. Unless the person ahead of you signals that he or she has heard you, you should assume that the person is wearing an iPod. Slow down and provide lots of room. Watch for dogs, as they often move in an unpredictable fashion. Furthermore, wear sufficient sunscreen to protect yourself.

Even though it was hot both Saturdays, I didn’t drink a lot of water. I brought one water bottle with me and refilled at Fish Creek and Edworthy parks.

A great resource for those who enjoy biking is the Calgary Pathway and Bikeway Map - 2006. The map can be purchased online for two dollars plus an additional dollar for delivery. If this link is broken in future years, try going to the City of Calgary website and then finding the online store. From there, search for paper maps. For the pathway and bike map, according to the website, you can contact Guy Beavers by email or by phone at 403.537.7560.

You can also view the maps online at Calgary eMaps. In addition, I encourage using Google Maps to get a sense of your route. I like having a visual idea of various markers before heading out.

The photograph above of Pretty Woman With Orange Pants And A Big Black Dog was taken while leaving the downtown core and on my way to Edworthy Park. I have stopped at this particular location a few times because it offers a great view of downtown. The pictures are hosted on Flickr, and if you click on the top picture, you will be taken to Flickr where you can see more pictures.

Social Media, Twitter, And Links To Articles

2009-07-19T15:10:00Z

Until recently, I ignored the whole social media thing. I just didn't want to bother having to keep another site active. Keeping my blog current was and is challenging enough. Much to my surprise, however, I found I enjoy Twitter.

So what's so special about Twitter? My answer is that it's fast and light. When I spot something interesting, I can quickly blast off a tweet, and I'm done. The vast majority of my tweets are simply articles that I have found interesting. Occasionally, I respond to someone else's question or concern. Oddly enough—at least to me—I actually read a substantial number of tweets from those that I follow. When I fire up TweetDeck, I scroll back in time and quickly review everyone's posts.

I follow an eclectic mix people. Most are related in some way to financial markets. Some are related to photography. A few are writers, and the rest are just a general assortment. Now that I am following more people than I can keep up with, I am reluctant to follow more. In fact, I probably should prune my list to reduce the noise level. For those that do want to follow me on Twitter, you can find add me @Stecyk. As mentioned, I am following enough people now, so I am unlikely to reciprocate.

Switching emphasis, I will provide a list of some of the recent articles that I highlighted in my tweets. Please note that Financial Times, Wall Street Journal, and Barron's are all paid subscription sites. You might need to be a subscriber to see their articles. The New York Times requires a free registration.

Financial Times Microsoft in free software assault on Google;
The New York Times Exxon to Invest Millions to Make Fuel From Algae;
The New York Times Updates to Google Voice;
King World News Bill Fleckenstein podcast;
King World News Jim Rogers podcast;
The Wall Street Journal One Small Step for Man, One Giant Mess in the Spacecraft (be sure to view the Interactives;
The New York Times Driven To Distraction: Drivers and Legislators Dismiss Cellphone Risks; and
Barron's Gold Still Has That Glitter.

On 18 July 2009, I enjoyed a 50 kms (30 mi) bike ride through the Weaselhead Park area and onto Fish Creek Park. I was looking west when I took the picture above from a bridge in the Weaselhead area. If you click on the picture, you will be taken to Flickr where you can see more pictures.

Calgary Model Ana Avramovic

2009-07-08T16:10:00Z

Ana Avramovic is a full-time finance professional and part-time model—that is, she models as a creative hobby. We had an opportunity to meet in advance of our photoshoot. If it is convenient, I like to meet potential models for coffee in advance of a photoshoot. This provides an opportunity for us to meet each other and confirm that we want to go ahead with the photoshoot. During our coffee meeting, we discussed our backgrounds briefly. I thoroughly enjoyed meeting Ana and learned that we shared some similarities in our backgrounds but also some vast differences. Our similarities were interesting because they allowed us to form common understandings and shared experiences. However, I found our vast differences more interesting because I was able to ask questions and learn more about her character. If you ever have an opportunity to meet Ana, I am confident that she will impress you with her intelligence and friendliness.

On Thursday, 4 June 2009 we met at Heritage Park for our photoshoot. Unbeknownst to us, this was the same day that the park was hosting seven thousand children as part of the AMA school patrol. The first sign that things were different was there were lots of police in the parking lots directing traffic and there were lots of school buses.

Once we arrived at the park and got set-up, we were notified that we would not be allowed to shoot. There were too many children wondering about. Ana had already changed and we were getting ready to leave when a senior manager approached us. He asked a few questions, with two important questions: First, Were we professionals or shooting for a magazine or something similar? And second, Didn't we know about the kids' day at the park?

We replied, "No, we are just amateurs looking to have some fun modeling and photographing. And we were surprised by all the children that were present." Luckily, he reversed the prior decision requiring us to abandon our photoshoot, and Ana changed once again. We then began our photoshoot.

I am grateful to the manager at Heritage Park who allowed us to stay. I can understand the Heritage Park's dilemma: on one hand, they want to ensure the privacy and safety of the children; and on the other hand, the park should be accessible and open to all. Sometimes these two objectives collide as they did on fourth of June. Ana and I did our reasonable best to avoid the children. In the early part of the shoot, the kids were listening out on the lawn to the grownups drone on. And after the lawn meeting ended and the kids dispersed around the park, we generally tried to find areas where it was quieter.

In the photograph above, we found that just as we set up, the kids and accompanying adults started filling the area around Wainwright Hotel. So we didn't stay and photograph here as long as we would have liked. So we just moved from location to location.

Heritage Park is a great location for kids to enjoy themselves. Even though we had make allowances by working around the kids, we enjoyed ourselves and had a productive day. And again, I am grateful to the manager who trusted us and allowed us to stay.

My picture of Ana is hosted at Flickr. If you click on the picture, you will be taken to Flickr where you can see more pictures.

Canada Day 2009

2009-07-01T15:25:00Z

Today, Canada celebrates its 142nd anniversary of confederation. I hope all my fellow Canadians have a terrific Canada Day.

I took this picture of a Canadian Girl in 2007 during Canada Day celebrations at Prince's Island in Calgary, Alberta. If you click on my picture, you will be taken to my Flickr site where you can see more of my pictures.

Massive Computer Challenges - June 2009

2009-07-01T03:00:00Z

I have been battling and continue to battle major computer problems. This weekend, I will be reinstalling Vista for the fourth time in a month's time

I hope to beat my computer problems into submission shortly and resume posting to my blog.

The New York Times: What Your Credit Card Company Knows About You

2009-05-15T03:00:00Z

Those of you who use a credit card—and who doesn't these days—must read Charles Duhigg's terrific New York Times article titled What Does Your Credit-Card Company Know About You? (free registration might be required). And for those of us who like to think about how credit cards might influence the economy, here's an interesting quote from the article:

If a credit-card company detects unsettling patterns, it might start cutting credit lines, raising interest rates or accelerating repayment schedules. (Companies are expected to withdraw $2.7 trillion of credit by the end of 2010, according to a March report from the Meredith Whitney Advisory Group, a banking-analyst firm.)

This smokey and hazy photograph of the Bow River in Banff National Park was taken in 2006 when there was a large forest fire in Washington state. The picture is hosted at Flickr. If you click on the picture, you will be taken to where you can view a larger version and see more of my pictures.