The Invico Diversified Income Fund (“IDIF” or “the Fund”) is celebrating its tenth anniversary this year. Over the past decade, the Fund has continued to increase its exposure to energy markets as part of its strategy to deliver consistent and high yields and is now targeting an energy weighting of 30-50% in its portfolio. IDIF consists primarily of direct ownership in non-operated producing assets across the Western Canadian Sedimentary Basin in Alberta, the Denver-Julesburg Basin in Colorado, the Powder River Basin in Wyoming, and the Williston Basin in North Dakota and Montana. A small average ownership spread across over 2,400 well bores and four basins allow for diversification through exposure to oil and gas markets across multiple play types. IDIF has grown its production through steady capital deployment from approximately 600 boe/d in the first quarter of 2020 to over 3,000 boe/d as of Q2 2023. The current producing product mix is well-balanced and provides exposure to both oil and gas markets. As of Q2 2023, IDIF’s production was approximately 60% weighted to oil and liquids.
The prevailing oil market theme for the remainder of 2023 is the presence of a market deficit created by extended supply cuts in the face of growing oil demand. While oil prices have come off their stellar highs in early 2022, they hit fresh 12-month highs in mid-September. There are many indications that we are in an undersupplied market, which is likely to continue over the coming months. The supply cut commitments announced by Saudi Arabia and Russia have been extended through to the end of this year, removing 1.3 million barrels from the global market and consequently resulting in Asian buyers having to shift more towards North American barrels. Compounding this increase in demand are continued indications of strained North American supply. Over the past few months, the EIA Drilling Productivity Reports have continued to show dips in forecasted U.S. shale oil production and expect output from the Permian Basin to be at its lowest level in six months as of October 2023. These supply pressures and continued growing oil demand should support an attractive WTI price environment for the remainder of 2023.
The gas market, in contrast to the deficit themes of the oil market, is expected to be a delicate balance. NYMEX prices have been range-bound at $2.40 – $2.80/MMBTU for most of 2023, though some indications support a positive move. The remainder of the year is expected to break from that range as we enter winter, when gas demand traditionally increases. Gas storage is higher than it was in 2022, so it is unlikely that we will see prices similar to those of the last winter season. Several unknowns could bring a further positive impact, such as the delayed hurricane season in the Gulf of Mexico and the possibility of shutdowns as hurricanes approach. Overall, we expect that gas will remain balanced with the likelihood of some strengthening through the winter.
IDIF’s energy portfolio is well-positioned to capitalize on these positive pricing indications for the remainder of 2023. Production is anticipated to grow through the last quarter of the year, with two additional non-operated drilling programs expected to come online. Firstly, a non-operated working interest in a three-well drilling program in Wyoming’s oil-weighted Powder River Basin was acquired in the second quarter of 2023. Operations are underway on this project, and the operator is working towards production coming on stream in November. Secondly, production from two new non-operated Montney drills has remained behind pipe in anticipation of stronger winter gas pricing. These gas-weighted wells were drilled and completed in the Kaybob area of Alberta earlier in 2023 and are production-ready. The operator anticipates bringing these online in October to maximize cash flow by capturing the wells’ high initial production rates with the forecasted increase in gas pricing as we head into the winter season.
IDIF’s current allocation to direct energy interest is approximately 45% with the balance of the portfolio in private debt which we will profile in a future issue. This allocation to energy provides balanced exposure to the energy space through its diversification in product mix, play type, and geography. Growth is forecasted from both sides of the Canada/U.S. border and from both oil-weighted and gas-weighted play types. This anticipated production growth of IDIF’s energy portfolio, combined with the positive short-term outlook for commodity pricing, makes this ideal timing for investment.
As IDIF commemorates an entire decade of generating positive annual performance and looks to further capitalize on opportunities in a growing energy market in the coming years, investors who are interested in learning more or taking advantage of investment in real assets can visit the Invico Capital Corporation website: https://www.invicocapital.com/investing.