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  • 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
  • The Main Bearish Thesis On Crude [View article]
    Most of us here are supporters of US shale and we get the upside potential. In fact I sense that many are a little biased towards the upside. So that ultimately we may make better investment decisions, it's very important that we do look at the bear case.

    However, if this is "the main bearish thesis on crude", where is the narrative on the several new supply projects coming online in the GOM this summer, where is the narrative on the strong growth in low-cost Iraqi production some of which we've already seen recently with more happening during 2015 and thereafter, where is the narrative on low-cost Iran coming back into the fold, where is the narrative on middle-east countries cutting budgets as indeed many will thus negating some of their needs for higher oil revenue, and where is the narrative on many other multi-year long-term projects which were costly but have low cash costs at the operation level and so on.

    Would appreciate some or more big picture arguments to support the titled article "the main bearish thesis on crude", thanks.
    Jan 21, 2015. 04:15 AM | 2 Likes Like |Link to Comment
  • Saudi Arabia: Cutting Off The Hand To Save A Finger [View article]
    I don't wish to be their defender, but why blame the Saudis, they've actually done nothing at all. Zero. Nada. It's the shale drillers and other high cost producers that should be slapped around - they pumped more and more and more and more oil out in a completely mindless fashion as if $100 oil was going to last forever. Supply and demand always matters.
    Jan 15, 2015. 01:14 PM | 10 Likes Like |Link to Comment
  • EOG Resources, Other Shale Stars, Vulnerable To Reserve Disappointments [View article]
    A very important sub-topic not addressed here is the impact that negative reserve revisions will have on drillers borrowing bases with their banks. Granted bank borrowing are mainly related to PDs. However, considering the dramatic slowdown in capex and thereby in new wells being drilled in 2015, plus the fact that 2015 production from existing wells will reduce PD reserves, it stands to reason that PDs going forward during 2015 will fall significantly. This has huge importance for drillers who are, or will soon be, heavily reliant on bank revolvers for liquidity. Clearly, diminishing PDs lead to reduced borrowing ability. In an ongoing low oil price environment I really cannot underestimate the importance of this last point especially for companies with already high borrowings and weak balance sheets. For sure some drillers will suffer enormously as 2015 unfolds and as hedges are burned off. Many investors seems to think that this harsh reality may not apply to their company, time will tell, there is real pain ahead.

    Separately, could I ask you to please insert a visual color code (not words as all the colors seems pastel to me) to the first 2 schematics as it isn't clear to me what it what.
    Jan 14, 2015. 01:40 AM | Likes Like |Link to Comment
  • Sanchez Energy: Exploring The Capex Cut [View article]
    "The good news is that Sanchez has hedged about 65% of 2015 revenue at $90 oil..."

    This is incorrect.

    The hedge program incorporates a large amount of contracts that Sanchez calls 'enhanced swaps'. Under these hedges, Sanchez is hedged at about $91-$93 at the upper side but with a floor of $75. This means that these contracts do not provide protection below $75. As with most companies, beware of taking all their presentations at face value, some creative wording is included.
    Jan 13, 2015. 10:10 AM | 3 Likes Like |Link to Comment
  • Is The Oil Super Cycle Over? [View article]
    I would argue that the oil super-cycle is over, at least for now. I cannot see the oil price going back towards $100 any time soon (except for the briefest of spikes) and I'd say about $70 will be the ceiling for the next few years.

    A major issue is that shale oil has become a victim of its own success.

    Because of advances in the fracking drilling and production process, the shale drillers are in a position to produce, annually, an extra 1 million barrels per day with oil at $80/bbl. Also consider improvements in deep sea drilling processes and with oil sands, production ramp-ups in the GOM and from Middle-East countries that have been off-line, it's hard to justify higher prices in a continuing low growth global environment with cheaper oil coming from multiple sources.

    Looking purely at the Saudis, the traditional Opec balancer: If Saudi Arabia cuts its oil production in order to temporarily shore up oil prices what it is effectively doing is giving away production of that same 1 million barrels/day to other producers such as shale etc. That's all very well for one year. But after 2-3 years this process of attempting to maintain high prices becomes insane for Saudi Arabia, especially when you consider that it now exports a significantly smaller percentage of their production than they did in the 1980's when production volumes were similar but when internal oil consumption was much smaller (population growth etc). All they'd effectively be doing is, year after year, creating a price platform for other producers such as shale to take away another 1 million bpd of market share. It just doesn't make sense, they've got to fight for market share.

    There is an oft cited argument that says the Saudis need to boost revenues in order to fund their social budget. This argument is invalid. Their social budget is awash with subsidies and appeasement payments aimed at keeping segments of the population in check. Essentially, that's what always occurs when a country's budget revenues are aplenty. However, significantly lower oil prices give the Saudi government ample excuse for dramatically cutting back on overly generous subsidies and thereby then can re-set their budgets to a lower level that can then be managed prudently for several years thus maintaining social and fiscal harmony. It's what they did in the 1980's and there's every reason to anticipate it to occur again now.

    In essence the Saudis have no option but to fight for their market share by maintaining production for the next few years. The natural supply-demand outcome is the end of the super-cycle with oil prices capping out at a lower price ceiling that we're all become used to in recent years.

    Besides, if you look at the longer-term history of oil prices they have always been followed by periods of lower oil prices and I don't think this time should be materially different.
    Dec 28, 2014. 02:08 PM | 8 Likes Like |Link to Comment
  • Whiting Petroleum: Sold-Off, Unloved, And A Deeply Undervalued Value Play [View article]
    Hi Michael, good article and agree WLL stock should have long-term potential when the dust settles. I had hoped WLL would have pulled the KOG acquisition deal because ultimately they could acquire far better assets at significantly lower prices after the oil price plunge, but we are where we are.

    Personally, having cashed out all my shale oil stocks in April/May 2014, I think it is still too soon to buy WLL for the long term and I prefer to wait until WTI breaks below $50 before looking to buy any shale stocks again except for the occasional quick trades. Most probably there will be a typical stock market pull-back in H1 2015 that coincides with WTI being well under $50 that will throw up a really good buying opportunity.

    On my back of envelope calcs, I come up with different market cap and EV numbers for WLL than you are using in this article. Unless I'm mistaken, the market cap should be 119m shares plus 48m shares to KOG shareholders (not yet shown on sites such as Yahoo because the acquisition closed after the qtr 3 10Q report date) x $34 per share = about $5.7 billion.

    And add the WLL debt of about $2.76bn and the KOG debt of about $2.25 billion, total $5 billion to the $5.7 billion market cap (above) to get a total EV of about $10.7 billion.

    We have an interesting year ahead for the stock market with interest rate hikes and for shale and oil stocks in general. A lot of money can be made, and lost. Good luck.
    Dec 28, 2014. 09:32 AM | 5 Likes Like |Link to Comment
  • Continental Cashed In Its Hedges. Now What? [View article]
    The picture is actually significantly worse than implied in this article. For example, you say that in the Bakken Continental would achieve IRRs of 30% when "oil" is $70/bbl but then you correctly lament that WTI pricing is currently below $70.

    However, Continental does not receive WTI pricing for its oil sales, it receives WTI less the regional differentials. In the case of the Bakken, the differentials are currently $16/bbl. That means that, based on a WTI price of $56, Continental now only receives $40 a barrel. This is miles away from the $70/bbl 30% IRR price cited by Continental.

    Pouring cash into drilling new wells in the current pricing environment Continental is questionable. It is understandable that they are now cutting back their 2015 capex programs. I believe we will see a lot more capex cutbacks across the industry during the months ahead.

    Continental's decision to liquidate their entire hedge program was clearly a very poor decision. It's actually hard to understand why any shale company, not just Continental, would run such a reckless risk given leveraged balance sheets and exposure to lower-cost producers in the Middle East.
    Dec 23, 2014. 07:27 AM | 4 Likes Like |Link to Comment
  • What Is Keeping Oil Prices Down? [View article]
    The oil price weakness is primarily caused by the US shale producers dumping 5 million B/day onto the market. For the first few years, shale production had no material impact on price because of large Opec outages. But this year this equation changed when Libya and Iraq came back.

    Oil demand is highly inelastic and the current oversupply is having a disproportionate downward impact on the oil price.

    This downward spiral is set to continue into 2015 because shale wells and other production projects already funded and near completion will, when complete, pump more oil onto the fire.

    Look for oil to bottom in H1 2015 at prices much lower than today, probably below $40. Think 'cash costs' of production.

    A great investment opportunity will be available but only for those who wait. In the meantime a lot more hurt will occur. Play with caution.
    Dec 16, 2014. 04:19 AM | 3 Likes Like |Link to Comment
  • Northern Oil & Gas: Oil Price Move Overdone Relative To Oil's Impact On Cash Flow [View article]
    A base case of $85 for 2015 seems awfully high. It would be interesting to see the NOG estimates for 2016 using $60 WTI. By then, with less obfuscation by temporary hedge programs, we will get a better view of the underlying business. I'm not saying that WTI will be $60 in 2016, but I'd sure like to test the model before committing precious capital. In my view the high oil prices of the past couple of years were an aberration supported by high Opec outages and we won't see those prices again for quite some time now that shale production volumes swamp the Opec outages.
    Dec 9, 2014. 08:10 AM | 2 Likes Like |Link to Comment