Buy recommended Cimarex Energy (XEC) accelerates oil drilling while expanding at a lesser rate in natural gas in a sign of the times reflected by some 70 companies at the Enercom conference in Denver, August 23-26, 2010. Among small cap independents in our coverage, XEC, and Whiting Petroleum (WLL) are in stock price up trends compared to the 200-day average while the remaining six stocks in the group are trending lower in price by the same measure along with oil and natural gas. Executives of oil drillers Berry Petroleum (BRY) and Denbury Resources (DNR) feel more confident about their spending while managers of natural gas producers Ultra Petroleum (UPL), Range Resources (RRC) and Petrohawk Energy (HK) are more concerned that current industry drilling activity is too high. Income payers Penn West Energy Trust (PWE) and Enerplus Resources (ERF) are seeing an improved volume trend with the shift to more reinvestment in advance of converting from trusts to corporations in the next few months.
PWE announced a value-creating joint venture with Mitsubishi to develop natural gas that ultimately may be shipped in liquefied form to Japan. On the cautious side, negotiations are going slowly apparently as general partner DNR of Encore Energy Partners (ENP) seeks a deal to apply carbon dioxide enhanced recovery to the Elk Basin oil field in Wyoming. We hope the independent committee evaluating such a proposal will apply the standards of Dorchester Minerals (DMLP) and the royalty trusts we cover in respecting the rights of ENP’s limited partners.
Ideas to Watch
Creative executives of companies not in our current coverage shared new ideas, too. We were surprised to see that oil and gas production earnings had reached 85% and 52% respectively at long-time dividend paying natural gas utilities Energen (EGN) and National Fuel Gas (NFG). NFG finds itself in a unique position in the Marcellus Shale Trend in Pennsylvania with 700,000 net acres of which more than half grant NFG both the royalty and the working interest. In another seemingly heretical development, NFG has the unique opportunity to reverse its pipeline from Canada to provide an outlet for Pennsylvania natural gas in Ontario.
Like PWE, Progress Energy Resources (PRQNF.PK) has an intriguing natural gas resource for export to Japan in a northwest extension of the Montney play in British Columbia. Along the theme of new natural gas exports to Asian markets, Interoil (IOC) has attracted stock price recognition for its proposed liquefied natural Gas (LNG) project inPapua New Guinea. Investor’s early anticipations may be validated if IOC can reach agreement with its Japanese partner on a joint venture that would set a value on IOC’s large resource.
While the focus of natural gas excitement extends to future years, oil is the here and now for operating companies. Venoco (VQ), headed by a former Unocal executive, seeks newly economic accumulations of oil onshore California in the same Monterey formation that is prolific offshore. VQ is a concentrated play on large cap buy-recommended Occidental Petroleum's (OXY) new oil exploration interest onshore California. Long-time California oil producer BRY could be a Monterey player if circumstances fall into place.
Finally, two new companies surprised us when we learned that both were Rockies companies renamed and renewed with new generation leadership. SM Energy (SM) is the successor to St. Mary Land and Exploration, a successful conservatively-financed independent producer now finding opportunity in the Eagle Ford shale among other places. PDC Energy (PETD), successor to Petroleum Development a long time operator of drilling partnerships for individual investors, offers a concentrated play on the Niobrara oil shale trend.
All the ideas to watch along with the stocks in our coverage demonstrate how market capitalism fosters creative responses to price signals. Future demand and supply of oil and gas are just a matter of investment and time. Today’s futures market for the next six years says oil will balance out at $83 a barrel and natural gas at $5.50 a million btu. Yet, the futures market is only a consensus, leaving investors to judge how that consensus will change. Currently, the short-term trend in the consensus is down, a signal that patience and financial strength may be tested before the trend turns up again as we believe it will.
Originally published on August 27, 2010.