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  • Parsley Energy: Strong Production Growth Ahead, But Outspending Is A Concern [View article]
    Richard, are you able to explain with reasonable clarity how the "non- controlling interest" is calculated in the P&L? I assume it's due to the company not owning all the rights to certain production etc... but in this case it begs the question as to why the non-controlling interest is not already excluded from the production and revenue numbers to begin with. Inherent within my question is the implication that the EBITDA multiples that are used are even more stretched from a valuation perspective if one backs out the non-controlling interest from the production and revenue and the EBITDA data at the outset.

    In Parsley's most recent quarter the non-controlling interest group took a full 65% of the combined after-tax profit leaving Parsley shareholders with just 35%. Hence, unlike most companies, this non-controlling interest subject is a very substantial item for Parsley shareholders.

    At a minimum I'd like to see some transparency regarding the non-controlling interest calculations and in particular I'd like to know if there are any family ties between this non-controlling interest group and management and/or the major family shareholders. Too many times I've seen opaque arrangements ultimately hurt common shareholders.

    Thanks for whatever you can provide.
    Nov 24, 2015. 03:49 AM | Likes Like |Link to Comment
  • Could Parsley Energy Be Eaten? [View article]
    A problem with Parsley Energy (PE) is that shareholders don't actually know what they really own or what they are likely to earn in the future because the "non-controlling interest parties" take such a large piece of the pie.

    For example, during Q3 2015, the company reported that - inclusive of non-controlling interest parties - they made $2.643 billion profit after tax. However, of this a full 65% or $1.734 billion is backed out of the P&L because it goes to the non-controlling interest people. This leaves $909 million, or just 35% of the total after-tax profit, for PE shareholders.

    I have examined the SEC filings but alas they contain no explanation as to how the non-controlling interest is calculated. Furthermore, I have written to the company but they have declined to provide any related information.

    I think it safe to assume that what is going on with the Parsley reports and filings, including quarterly earnings reports etc, is that PE is including in their production and sales date numbers relating to production that does not rightfully and wholly belong to PE shareholders.

    Normally, when a company such as PE has a partial interest in a particular oil well they only include in their P&L that portion of the production which is rightfully theirs. But PE is, for reasons only they know, apparently opting to publish accounts that suggest they have much greater production and revenues and profits than actually belongs to Parsley shareholders.

    This would not usually be an issue for shareholder if the portion of after-tax profits attributable to non-controlling interest parties was negligible. Unfortunately this is far from the case. As highlighted above, during the most recent quarter the non-controlling interest group took a full 65% of the after-tax profits leaving only a 35% minority share for PE shareholders. Note that whilst the allocation to the non-controlling interest group changes from quarter to quarter it is always a large number.

    I wouldn't get too excited about the upside potential for PE shareholders. The problem is that, as a PE shareholder, you won't know how much of the supposed upside goes to you and how much ends up going to the non-controlling interest group.
    Nov 19, 2015. 11:17 AM | 4 Likes Like |Link to Comment
  • Oil Setting Up For Another Leg Down [View article]
    No discussing whether $60 won't be a ceiling for now, surely we all agree. The title of the article is that oil is setting up for another leg down, that's the discussion. WTI was just over $52 when the call was made.

    Oil prices are largely determined by global supply/demand metrics. As well as Iran coming back, and demand growth of 1 million b/day for 2016 on top of 1.5 million b/day in 2015, you've also got diminishing production in many areas that already underway (i.e. not just a prediction) such as in Mexico, the North Sea etc. Global picture is definitely tightening in late 2015 and into 2016.

    Shale producers are unlikely to show production increase of any significance next year because of worsening financials due to a lack of hedges compared to 2015 i.e. look for more cautious management of balance sheets next year. Besides, shale production is only around 4.5 million b/day. That's less than 5% of global supply. A 100k or 200k b/day delta won't make a difference one way or another, that's just 0.1% or 0.2% globally. The delta really is insignificant.

    Other than a temporary spike - like the Greek/China/Iran triple headline combo - no further leg down below current levels of any significance. Instead buy the dips from here on.
    Jul 8, 2015. 11:28 AM | Likes Like |Link to Comment
  • Oil Setting Up For Another Leg Down [View article]
    Ok, but WTI on Monday was near $52, similar to the Tuesday. Whether you choose Monday or Tuesday price, which were largely the same, I still don't see the down leg you are calling for from these levels. It just doesn't make sense to me.
    Jul 8, 2015. 10:08 AM | Likes Like |Link to Comment
  • Oil Setting Up For Another Leg Down [View article]
    This article is dated July 8. WTI closed yesterday July 7 at $52.33. Aside from a temporary small spike lower driven by an event such as the repeal of the Iranian sanctions, WTI is very unlikely to experience another leg lower from these levels.

    In early 2015 WTI dipped to the $45 region. At that time there was a global surplus supply/demand of 2 million barrels per day. Since then global demand has picked up by 1.5 million barrel per day. Iranian production will come in at 600k b/day and in 2016 we're looking at demand increasing by 1.0 million barrels a day. Essentially, in early 2016 the global supply/demand picture will begin to move towards balance.

    Against such a prospect the idea of WTI taking another leg down from the July 8 level, the date of this article, with WTI now trading around $52.50, is highly unlikely.

    I think we all agree that $60 should be a cap for now.

    However, with regard to any softness into or below the low $50s these are likely to be very short term and great buying opportunities and from here on I'd recommend buying the dips.
    Jul 8, 2015. 09:40 AM | Likes Like |Link to Comment
  • Can Higher Summer Demand For Oil Break The Fracklog? [View article]
    Most of the fracklog is a natural phenomenon due to the migration towards multi-well pad drilling away from single well drilling. As of September 2014 - i.e. before the oil price downturn - the entire backlog was approx. 3,000 wells. That would suggest that a maximum of about 1,700 of the 4,700 wells may come back into the market if producers choose to bring 100% of the true underlying fracklog into production. That potential 1,700 wells does not translate into a big Boe/d production boost.

    As usual, the media is making a mountain out of a molehill.
    May 27, 2015. 01:41 AM | 3 Likes Like |Link to Comment
  • Don't Be Fooled By Parsley Energy's Seemingly Poor Earnings Report [View article]
    The major problem with Parsley is that, as a shareholder, you don't actually know what you're getting. That's because of the existence of various unexplained deals with outside parties, possibly relating to the Sheffield family. These outside deals hit the P&L in the form of the "Non Controlled Interest". Nobody would bat an eyelid if these hits to the P&L amounted to say 3, 4 or 5% of the Net Income but, unfortunately, they typically represent a huge proportion of the Net Income. Example, for the year to December 2014 the Net Income before Non Controlling Interest was $56.7 million. From this, the Non Controlling Interest people took a whopping $33.3 million leaving just $23.4 million Net Income for Parsley Shareholders. Every quarter it's the same story, the 'take' by the Non Controlling people varies but always it is a very material figure and it is never explained.

    It's fine and dandy speaking of such and such acreage, or hedges, or % oil or whatever various assets. However, Parsley shareholders do not get the profits on these various assets, they only get a significantly reduced portion of the profit and essentially - unlike other companies where the shareholders effectively own 100% of the assets - Parsley shareholders only partially own the assets.

    At a bare minimum, I would expect for transparency purposes that Parsley would explain in reasonable detail how the Non Controlling hit to the P&L is calculated each quarter, but they don't, they never do.

    Ultimately, Parsley shareholders do not know what they own and they cannot form any reasonable view as to what the future profitability might be because of the sheer size of the take by the Non Controlling group.
    May 15, 2015. 01:20 AM | 3 Likes Like |Link to Comment
  • David Einhorn's Scathing Anti-Fracking Thesis Is Literally A Joke [View article]
    Overall good work Joseph. I found his assumption that capex would increase year after year from recent high levels to be a glaring blunder.

    However, I do agree with Einhorn that PXD is richly valued. The rich valuation relates in good part to the ~10 billion potentially recoverable resource the company has. That 10 billion potentially recoverable resource does require higher oil prices than we have today before it all becomes economic. How much of this resource is economic at $70 is questionable.

    The product mix at PXD is only 51% oil. Sales during Q1 2015 before taking account of hedges amounted to $29.28 per Boe. Mid point guidance for Q2 2015 is LOE $14, DDA $17, G&A $5, Interest $2 and Ad Valorem taxes about 8%. All told this amounts to over $40 per Boe. Against sales revenue per Boe of only about $30, PXD is a long way from break-even without the benefit of the hedging program and the company says that they don't expect further big cost reductions from those already achieved by Q1 2015. The problem is that hedging programs are temporary and, with a product mix of only 51% oil, it is questionable if PXD can get to break-even within the next couple of years without substantially higher oil and NGL and nat gas prices.

    Another mistake in Einhorn's analysis was in citing Whiting as a possible short.

    1. Unlike PXD, Whiting will be cash flow neutral (including capex) and profitable in Q3 this year without any hedging benefit. This is based on Whiting's current guidance which is consistent with its Q1 2015 results. It helps that Whiting is 81% oil. In the next couple of years, as Whiting replaces old production with more recent highly efficient wells thus skewing the costs per barrel much lower, it is inevitable that Whiting will be highly profitable with oil at Einhorn's strip pricing and without any hedging benefit.

    2. From Einhorn's beloved "proved reserves Vs market cap" perspective: PXD has proved reserves of 745 MMboe (oil 318 MMbo) against a total market cap of $24 billion. WLL has proved reserves of 780 MMboe (oil 644 MMbo) against a market cap of $7.5 billion.

    Einhorn is making a fairly easy call on Pioneer but his inclusion of some of the other companies as possible shorts, especially Whiting, shows a significant lapse of judgment, or knowledge or just plain hard work, on his part.
    May 7, 2015. 07:25 AM | 4 Likes Like |Link to Comment
  • Petrobras: Take Warren Buffett's Advice [View article]
    "Warren Buffett is famous for saying "Rule No.1 is never lose money. Rule No.2 is never forget rule number one.""

    Rule number 3: There are no rules.
    Apr 23, 2015. 08:47 AM | 25 Likes Like |Link to Comment
  • Oasis Petroleum - Solid Liquidity, 100% Upside [View article]
    For clarity and transparency I prefer to use a certain assumed WTI pricing, multiply the production by it to arrive at a product sales number and then add in the hedge gains/losses as a separate line item to arrive at total sales. It's how I've seen other do it too. See summary P&L above.

    Yes, agree about the reserves calculation i.e. simple average of 1st day price for prior 12 month. I had based on a Bloomberg article which I've now corrected.

    Banks: A credit facility review is done for the bank by their account relationship manager. To retain the confidence of the bank, and keep the relationship solid, it is critical for the CFO to make sure that the a/c relationship manager is aware of what is likely to occur in the next 6-12 months, both good and not so good. This means that whilst the reserve valuations would be done using the industry standard PV-10 calcs both the CFO and the a/c relationship manager would also know what those reserves would look like using lower oil price assumptions. Together they would try and manage the situation pro-actively. That's why recently you may have seen some companies restructure their credit facilities even though the facility wasn't formally due to be reviewed. A bank will always want to know that it has protection and security for its loans in the real world. So, they will have their numbers, and modified numbers, and they will also take on board a view on the outlook for the industry. It's not a precise science but it should all be ok so long as the bank doesn't feel uncomfortably exposed.
    Apr 2, 2015. 11:04 AM | Likes Like |Link to Comment
  • Oasis Petroleum - Solid Liquidity, 100% Upside [View article]
    Yes the unrealized gains/losses from open hedge contracts are booked each specific period to the P&L and B/Sheet in the SEC filings.

    However, the cash benefit or cost on settlement of each of the hedge contracts is a different thing. That cash benefit or cost only comes into the cash flow when the individual hedge contracts are realized on maturity. That's why I calculated that OAS will have a cash benefit of $320 million in 2015 relating to the hedges that mature in 2015, and $63 million in 2016 relating to the hedges that mature in 2016.

    Additionally, because these 'open' hedge contracts at December 2014 relate specifically to 2015 and 2016 they will be excluded by analysts from the normalized earnings as recorded in the 2014 SEC filed results and will be worked into the 2015 and 2016 earnings as part of the earnings normalization process for those two years.

    As to the calculations, you have to calculate each hedge contract separately and compare to the assumed WTI oil price at settlement. As stated in the article, the assumed WTI price for 2015 is $54 and for 2016 is $63. So, by way off example the 5,263,500 barrel $90.81 swap hedge maturing in 2015 will have a cash profit in 2015 of $36.81 per barrel = $179,749, 435 whereas the 263,500 barrels 3-way swap contract will only have a profit of $20 per barrel (the diff between the $90.59 floor and the $70.59 sub-floor) = $5,270,000 and so on for each of the hedges. Working off $54/bbl WTI gives you a total cash profit of $320 million in 2015 and using $63/bbl WTI in 2016 gives a total cash profit in 2016 of, coincidentally, $63 million.
    Apr 1, 2015. 05:37 AM | Likes Like |Link to Comment
  • Whiting Petroleum - What The Future Holds [View article]
    All, thank you for your comments. I agree with many sentiments expressed although, from my many years of working experience in this arena, I am confident that Whiting's tight liquidity situation is both temporary and entirely solvable.


    Gordon Haave; refer to SEC filings, the 10ks and Qs. Point taken about the concerns about liquidity, I've requested Seeking Alpha to amend the bullet point. Be aware that covenants with relationship banks are usually waived when the company demonstrates solid operational and profitability progress. Whiting is doing this, a waiver can be expected. Besides, the long term notes market is still available at reasonable prices.

    rgtichy; From what I've read it seems the CEO, who is already into his late 60s, doesn't have the stomach for a fight that may last a couple of years. Additionally, whilst Whiting does have very good properties and an excellent team in place, I suspect the CEO doesn't have full faith in the VP Finance - he obviously should have done much better with both the hedges and with the funding going into the Dec'14 Kodiak acquisition. I agree (and mentioned) that reserves will be lower after Q1 but even for a severe cut of say 50%, that still leaves Whiting with a highly respectable ~400 million barrels of proved reserves and, once that Q1 cut is out of the way, the horizon will be clearer for buyers to enter the sector; both acquisition buyers and retail investors in the shale sector.

    cirriusgator; Me an oil perma bull, I think not. I warned of impending lower oil prices in Nov '13;
    and again in late April 2014 when I sold 100% of my oil holdings;

    Q: If April 2014 was a good time to sell, what will be a good time to buy?
    A: I think the Q1 results, with the combination of reserves write-offs and oil inventory concerns, may lead to April being the low point for oil stocks and I think that should be a good time to buy for the long term.

    In anticipation of this, I've been doing some diligence work on the sector. I only bought into Whiting on Friday March 6 because the market was off heavily that day and it seemed from Whiting's stock performance that something was up, hence I bought, and ok got lucky in a sense. Longer term I strongly prefer that Whiting not get acquired because the upside for the stock over the next year or two is much greater than any acquisition premium in this market.

    Other people's comments about increased borrowings going forward;
    Over time borrowings go up in absolute terms, that's why I refer to the relative borrowings being stable to turning down for Whiting over time via the Debt/Equity ratio etc. To stress test Whiting's balance sheet I already used bigger capex figures for 2016 and 2017 than is likely to occur. There are swings and roundabouts, overall Whiting's liquidity is fixable and manageable. As usual, the scare talk is overdone.

    Again, thanks all for your comments. Appreciated.
    Mar 11, 2015. 09:45 AM | Likes Like |Link to Comment
  • U.S. Crude Oil Storage Capacity: There's More Available Than You Might Think [View article]
    Michael, as you point out, there is more available storage than some commentators would lead us to believe. However, we still have a problem.

    1. Physically and practically we cannot use all the boilerplate capacity. The absolute crunch, if there is such a thing, may arrive in about 12-15 weeks.

    2. However, the situation isn't actually binary i.e. it won't be a case of "we're ok until we hit the max storage point". Not all storage is equally priced and pricing matters.

    Reuters reported a few days ago that Gulf Coast lease rates are now rising to $1.20 to $1.25 per barrel per month. For the storage play to work properly the current contango would need to grow deeper. Recently, the contango between front month and 1-year has been running at about $10. It needs to grow wider either by the spot price falling or by the forward price rising.

    As more storage is taken up week after week Gulf Coast lease rates will continue to rise and put more pressure on contango. Unless the forward oil prices rise then the spot rates will face pressure to the downside. The size of the oversupply (too much for slightly higher demand to mop up) plus the fact that no domestic producers are doing or even talking about cutbacks implies the risk is to the downside.

    A change of the export laws would help but political solutions don't typically arrive until we reach or pass an emergency point. We're not there yet.

    Whichever way you slice it, we face a difficult period ahead.
    Mar 6, 2015. 07:18 AM | 4 Likes Like |Link to Comment
  • Bonanza Creek Energy: How Does 2015 Look? [View article]
    BCEI says it has hedged 60% of 2015 oil production equating to a hedged average of 10,000 B/day. This implies 16,667 bpd production - for oil only - for the full year.

    Some of the hedges are straight swaps, which is good, but the greater part of their hedging is via 3-way collars. The problem with 3-way collars is that the "short floor" segment causes the company to be unhedged below that short floor. For example, in Q1 2015 BCEI hedged 6,500 b/day with a 3-way collar incorporating a floor of $84.32 and a sub-floor of $68.08 (refer to the hedging schedule in the article above). Assuming an average WTI price during Q1 of $50, this means that under this specific 3-way contract BCEI would receive $50 WTI pricing (less say $12 differential) plus $16.24 from the 3-way swap ($84.32 less $68.08) i.e. $66.24 less say $12 differential, or about $54/bbl net.

    I've run some quick calcs, incorporating all of BCEI's swaps as well as all the 3-way collars so as to get an idea of BCEI's oil pricing for the full year 2015. If you assume, for simplicity, that production will be flat at 16,667 b/day and that WTI will average $50/bbl for the year and that differentials will average $12/bbl, then, on a full year 2015 basis, BCEI will receive approximately $56.60 per barrel.

    Under similar $50 WTI pricing for 2016 the picture would be worse because, whilst BCEI does have some fixed price swap hedges for 2015 (with pricing in $93 to $95 range), it has none for 2016.

    I'd guess that under flat $50 WTI pricing for 2016 that may equate to net pricing in the low $40s for BCEI.

    However, in reality I think it fair to expect WTI pricing to be higher than $50 in 2016 even if not by much.
    Jan 23, 2015. 10:33 AM | 3 Likes Like |Link to Comment
  • Synergy Resources: E&P With A Premium Valuation That Could Decline 80% [View article]
    In the present weak oil pricing environment, the (startling) $13 Wattenberg differential will hurt players such as SYRG, PDCE and BCEI. All told, reserves will be written down, drilling inventory will surely be reduced, liquidity will dry up and so on. The upcoming earnings season will be very interesting with particular interest in Q&As on conference calls.

    Whilst acceptable funding criteria has dramatically tightened in recent weeks, and banks are stress-testing client borrowing proposals using their own, very conservative, oil pricing assumptions, I still think that most drillers including SYRG should be ok in 2015 from an overall liquidity perspective. But the picture for 2016 looks a lot more daunting because drillers are overly reliant upon a decent rebound in oil pricing by 2016 and, in a continuing weak price environment, banks will never give you the desired umbrella when it's still raining.

    Whilst I wouldn't short SYRG because there's always acquisition risk for small companies, I'd certainly agree it should be given a wide berth for now.
    Jan 22, 2015. 07:11 AM | 2 Likes Like |Link to Comment