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  • 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
  • Can Continental Grow At 25% With Oil At $65? [View article]
    Given the ongoing negative Bakken differentials of about $10/bbl doesn't this mean that WTI would need to average $75/bbl for CLR to hit the $65/bbl oil price mentioned. I suspect we'll not see WTI averaging $75 for some time because that price would be an open invitation to the shale drillers to take market share away from producers such as Saudi Arabia and, considering the lines being drawn, I don't see that happening anytime soon.

    Hamm's move to cash out the hedges around $80/bbl doesn't look like one of his best decisions.
    Dec 8, 2014. 01:08 PM | 3 Likes Like |Link to Comment
  • A Look At Anadarko Petroleum [View article]
    APC is a fine company but, with WTI likely to break below $60 in the next few months and possibly spike much lower, the risk-reward says it's wiser to wait until early 2015 before considering buying.
    Nov 28, 2014. 08:16 AM | Likes Like |Link to Comment
  • Oil & Gas Stocks: Does This Correction Have Logic To It? [View article]
    US shale has added ~4.5 Mbo/d to the global picture during a very short time frame. Against this backdrop, the fact that global oil prices didn't soften during 2012 and 2013 was an aberration. During this time frame, significant price support occurred because of the amount of outages by large global suppliers such as Libya, Iraq, Iran and Nigeria. With production by Libya and Iraq having been reinstated in 2014 it became inevitable - and entirely logical in my view - that we would get some significant downward pressure on oil prices during 2014. I wrote about this in April:
    http://bit.ly/1GoXWGQ

    Unfortunately, the situation is exacerbated by slowing economies, by even further efficiently improvements achieved by the shale drillers, by continuing plans by the shale drillers to increase production during 2015 (E.g. Whiting guides 20% production increase in 2015 even with flat Capex) and the picture is also worsened by some speculative flows out of the space.

    I have no doubt that things will improve.

    However, first I feel it necessary for the shale drillers to collectively show negligible production growth for 2015 or, better, to show flat production.

    Alas, much as I like all things shale, we're not there yet in my opinion.
    Nov 5, 2014. 07:50 AM | 8 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Does The End Of QE Mean To The Individual Investor? [View article]
    - When QE1 ended in 2010 the Federal Deficit was running at $1,290 billion.
    - When QE2 ended in 2011 the Federal Deficit was running at $1,300 billion.
    - Currently the Federal Deficit is running at $483 billion.
    - That's a Federal Deficit funding improvement of over $800 billion.
    - Meanwhile QE Infinity added (only) $25 billion monthly towards the end of the program.

    Some people are over-reading the effect of the Federal Reserve bringing QE Infinity to an end because of how markets reacted after QE1 and QE 2 were concluded. Against a Federal Deficit funding improvement of over $800 billion, the end of QE is largely a non-event.
    Nov 2, 2014. 04:12 AM | 7 Likes Like |Link to Comment
  • Buy The Dip Or Sell The Rally [View article]
    People are over-reading the effect of the Federal Reserve bringing QE to an end. The QE program is now adding only $25 billion of liquidity to the system.

    - When QE1 ended in 2010 the Federal Deficit was running at $1,290 billion.
    - When QE2 ended in 2011 the Federal Deficit was running at $1,300 billion.
    - Currently the Federal Deficit is running at $483 billion.

    We now have a Federal Deficit funding improvement of over $800 billion compared to 2010 and 2011.

    Given this $800 billion improvement in Federal funding needs, it's silly to expect the removal of a comparatively miniscule $25 billion of QE liquidity to cause markets to tank.

    The end of QE isn't a good thing or a bad thing, it's just a non-event.
    Oct 27, 2014. 06:24 AM | 1 Like Like |Link to Comment
  • Looking For A Bounce In Oil Stocks? Let Hedging Guide You [View article]
    Without doubt the long-term picture for oil is positive. The problem lies in the short-term.

    If Saudi Arabia and Kuwait wish to push back against the fracking train in order to maintain their overall market share, then, in the short term, there is nothing stopping them doing so. They can drive down the oil price to the point where they force a cut-back in shale drilling, they have the low-cost oil and the financial flexibility to do so.

    Given the efficiency improvements that are taking place in shale drilling, it will surely take a further significant fall in the oil price for drilling cut-backs to occur. And just as oil spikes overshoot on the upside we should certainly expect oil to overshoot on the downside i.e. don't expect the price slide to conveniently end at the first stop where rational logic would suggest. Markets, including the oil market, are irrational. When you put everything together there is potential for oil to down to levels that most of us here would consider alarming. Alas, I think this will occur.

    The good news is that when (not if, when) oil spikes a lot lower, and when the drillers consequently make substantial cuts to their 2015 capex programs, the oil price will stabilize and that should represent a tremendous buying opportunity. In the meantime we have to see more pain, unfortunately a lot more pain.

    Pay no attention to current broker estimates. Throw them out. They will be revised substantially to the downside over the next few months.

    My guess, and it is a guess, is that we will see the oil price hit bottom and turn north within a few months. But if the shale drillers ramp up production again later in 2015, as well as Iran coming in from the cold, don't be surprised to see another oil price wobble in late 2015.

    I expect we'll see many oil pricing peaks and troughs over the coming years.
    Oct 16, 2014. 08:50 AM | 4 Likes Like |Link to Comment
  • Petrobras: Why It Is Looking At A Potential 50% Upside Now [View article]
    Hard to see Petrobras gaining 50% when most pundits are forecasting lower oil prices ahead. Normally lower oil prices equate to lower stock prices for drillers, not higher.
    Oct 3, 2014. 11:10 AM | 7 Likes Like |Link to Comment
  • GT Advanced Technologies: Are We Closer To A Bottom? [View article]
    Honestly, there's zero chance of GTAT winning any I-phone business. It really is zero chance. Sapphire isn't even a contender because it failed not just one but multiple tests; too heavy, too big, crack/break, bad battery life, expensive, and it's got nothing to do with production yield or GTAT's business ramp-up.
    Sep 30, 2014. 04:33 AM | 2 Likes Like |Link to Comment
  • GT Advanced Technologies: Are We Closer To A Bottom? [View article]
    My concern is that there is still considerable i-phone hope premium in the stock price, it trades on a 2015 p/e of over 20 and, as you point out, the earnings estimates are still coming down. Stocks with hope premiums tend to disappoint on business update days.

    When I look at the reviews, it appears increasingly unlikely that GTAT will win any I-phone contracts in the foreseeable future; screens too heavy, too expensive, too thick, too brittle, use too much lighting energy etc. Yes i-watches, i-phones no.

    I have GTAT on my watch list for consideration only if we get a sizable market pullback, perhaps around the end of QE or later. Meantime, no reason to rush in.
    Sep 30, 2014. 02:00 AM | 2 Likes Like |Link to Comment
  • Why Is The Price Of Gold Falling? [View article]
    Gold wasn't just an inflation hedge following 2008/2009. It's also a go-to place in times of intense market fear, like, for example, when the market feared that the Euro would break up in mid 2011 with major negative consequences. Now, that intense fear factor is all-but gone.
    Sep 19, 2014. 04:33 AM | 1 Like Like |Link to Comment
  • Callon Petroleum Expands Permian Footprint With Core Midland Basin Acquisition; Stock Will Expand Too [View article]
    Mike, thanks for all the good work here, it is appreciated.

    One metric that I like to look at is EV/EBITDA on a forward basis. If I understand your figures the total market cap, inclusive of the current offering, is about $520 million, and total debt net of the offering and inclusive of the acquisition comes to about $270 million, giving total EV of $790 million. In 2015 EBITDA should come in at about $175 million. This puts CPE on a 2015 EV/EBITDA of 4.5. That's certainly attractive.

    On the downside, I note that the acquired land highlighted is "chessboard" and, until more deals are worked out, this would limit the horizontals to about 4,500 feet. This is shorter than those used in their IRR models and would normally lead to lower IRRs. Also, those IRR's in their presentations are based off $90 oil and drillers in the Midland Basin have pretty wide differentials from WTI. Some diffs are running at over $10/bbl although there is an expectation that these will narrow - but not disappear - when more pipeline comes online. Anyway, the combination of shorter laterals plus the real oil pricing being well below $90 would normally lead to IRR's that would be quite a bit lower than the IRRs used in the company presentations when some/most of the short-term hedges are burned off.

    Net-net, I find CPE fairly attractive at current levels. But with forecasters calling for somewhat lower WTI oil in 2015, and taking account of Midland differentials, I'd like to see some stability or visibility in the oil shale sector before getting in deeper. Meantime, I'm adding CPE to the watch list. Thanks for the heads up.
    Sep 10, 2014. 07:16 AM | 1 Like Like |Link to Comment
  • Fed Positioning To Normalize Policy [View article]
    I didn't think the Fed were planning on normalizing policy anytime soon because of the massive consumer debt overhang, but that they were proceeding towards neutral rates (Pimco's New Neutral), not normalized rates.

    Also, I though that a 25bp hike in March was largely in the bag at this point.
    Sep 2, 2014. 04:48 AM | Likes Like |Link to Comment
  • An Important Indicator Says Crude Oil Is Going Lower [View article]
    The oil price debate demands serious comment and, whilst it has merit, I think your article isn't sufficiently balanced or complete.

    "Lower growth equals lower demand for energies such as crude."
    This statement is materially incorrect. It might read "Lower growth equals lower demand growth...." The point being that, contrary to what is stated in the article, demand is not lower, demand is in fact higher, and growing.

    Trend is you friend? Doesn't it go "the trend is your friend until the bend at the end"? In which case you will be aware that the recent declining trend turned around noticeably in the past 10 days. According to some respected commodity strategists, the summer pullback is overdone because of the rush by commodity investors to exit positions in tandem with an increase in physical oil volumes hitting the market on top of a full 10 million barrels a day production by Saudi Arabia. They advise that the combination caused the overshoot. They also think the down move is done with the bottom at WTI $92-$93 / Brent $100 and they recommend clients now take new positions ahead of WTI and Brent moving to near $100 and $110 before year end.

    The Ukraine situation is a geopolitical event but it's got little to justify higher global oil prices. Indeed, rather than using it as rationale for higher oil prices, it probably was negative for oil because of the generally negative economic consequences associated with the sanctions on Russia.

    You may have noted that longer dated WTI is $10 higher today than where it was in 2013.

    Significantly lower oil prices, especially WTI, are unlikely because - aside from the fact that WTI futures are saying that the oil price outlook in coming years has improved by $10 versus a year ago - any significantly lower oil price would lead to a reduction in new shale oil wells being drilled and, given the steep production fall-off, the laws of supply and demand would quickly lead to higher WTI once the production fall off kicks in. Remember that shale oil production will soon hit 4 million barrels a day, a production cut back would be highly significant.

    "With the bulls washed out of the market and open interest at the lowest levels of the year perhaps it is time to wait for the shorts to come back in". The time to short is when prices are high after the bulls load up, not after the bulls have all rushed to the exit and have already driven the price down in the process.

    Btw, WTI is in backwardation but, more importantly, Brent is in contango into 2015.

    Frankly, I don't see any rationale to justify significantly lower oil prices ahead. On the other hand, nor do I see rationale to justify significantly stronger oil prices. If oil prices do spike down further, I'd overweight shale oil stocks. If oil prices do spike up I'd sell some into strength.
    Sep 2, 2014. 02:24 AM | 4 Likes Like |Link to Comment
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