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Elliott Gue

 
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  • Overcapacity In The Oil Services Industry? What You Need To Know [View article]
    I'll try. I've written about the major US unconventional oil and gas fields on a few occasions for Seeking Alpha. To summarize, unconventional fields popularly known as "shale" fields are the hottest oil and gas-producing plays onshore in the US right now. To be produced economically, companies use a combination of horizontal drilling and fracturing (pressure pumping) techniques.

    The first of those technologies is self-explanatory. Fracturing involves pumping a liquid into the reservoir to literally crack the reservoir rock that contains the oil or gas. This aids the flow of oil and gas through the reservoir and into the well.

    Not all of the US shale plays are the same. The Haynesville Shale in Louisiana is a "dry gas" play meaning that what's produced from wells in this field is primarily methane (natural gas). In contrast, the Bakken Shale of North Dakota is mainly an oil play as these wells produce crude oil mixed with a bit of natural gas and significant quantities of so-called natural gas liquids (ethane, propane and butane are the most common NGLs).

    The Eagleford of South Texas produces mainly oil in the northern window, wet gas in the middle part (methane plus lots of NGLs) and mainly dry gas in the lower reaches of the field.

    Crude oil prices are quite elevated right now with brent trading well over $100/bbl and West Texas Intermediate in the upper $90's per barrel. At those prices, as you might expect, producing oil from unconventional onshore fields is tremendously profitable so producers have been drilling like there's no tomorrow in fields lie the Bakken.

    Meanwhile, natural gas prices are depressed and have been averaging in the $3.50 to $4.50 per million BTU range for some time. At those prices, it's not profitable to produce gas from many of the dry gas fields in the US. So, activity in places like the Haynesville Shale is moderating.

    Meanwhile, a barrel of natural gas liquids (NGLs) tends to follow the trend in oil prices more so than the price of natural gas. So, NGLs prices have been robust this year. That means if you have a wet gas field--gas with NGLs--you can produce wells profitably because the value of the NGLS found in the raw gas stream is high.

    I am often asked why producers keep drilling "gas" shale fields with gas prices so weak. NGLs are one of the major factors driving this seemingly paradoxical behavior.

    My quote above is referring to the fact that if a service company is performing work in a region known for oil or NGLs production (ie the Bakken Shale or parts of the Eagleford) they're still raising prices to perform services. That's because activity is still strong in these plays.

    In contrast, as activity in gassy plays slows down, services companies are losing their pricing power for services performed in regions like the Haynesville.

    I hope that helps.
    Nov 18 02:35 PM | 6 Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for the comment. I am somewhat puzzled by all the IBM haters that have emerged over the past few days. Warren may be a bit late to the proverbial party but it's one of the best-performing large-cap stocks this year and corporate spending on IT has been a bright spot in this recovery. Corporates that IBM sells to also have cash and borrowing power unlike governments or consumers -- it's nice to have solvent customers.

    Long IBM
    Nov 15 05:24 PM | Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for the comment but why does everything have to be taken to the extremes? I am not saying that everything is fine and dandy or that we're on the verge of a 1982 to 2000 style bull market. Nor am I saying that Europe will become a competitive single economy by the weekend.

    In fact, I have written on this site, in two books and in my newsletters that I see a prolonged period of sub-par growth and deleveraging headwinds.

    As for gold, didn't even mention that in the article but I certainly wouldn't want anyone to think I'm bearish there either. In my 2005 book I called for gold to hit $4,000 per ounce before topping out.

    What I am saying is that the mood out there is pretty bearish even as the odds of recession in the US diminish rapidly and the odds of a Chinese hard landing are receding. I am calling for some market upside, not a new secular bull market.

    Long GLD
    Nov 15 05:18 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    Thanks for commenting.

    In my view Europe will sort of muddle through and the ECB will ultimately step up as lender of last resort. It's definitely the weakest link though.

    As for the US economy, there has been a clear improvement in the data. Retail sales were strong and the Q3 inventory headwinds should abate so I think GDP can print above 3% in the fourth quarter. The odds of a US recession are declining versus where they were in midsummer in my view.

    As for China, the recent decline in inflation suggests an end to their inflation fighting campaign. China has significant policy bullets unlike its developed world peers. So, that reduces the odds of a hard landing in my view.

    I'm not saying the news is stellar but it's a lot "less bad" than it was. I think this will drive a rally in the broader market. But, as the old saying goes differences of opinion are what make a market.
    Nov 15 05:08 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    I had to laugh when a couple of pundits on business TV spent a good 10 minutes coming up with wild theories why volume was so low last Friday. Typically is on Veteran's Day when the bond market is closed.
    Nov 15 05:01 PM | Likes Like |Link to Comment
  • Assessing Market Risk [View article]
    European credit markets may have "yawned" but the high-yield debt market in the US has revived in a big way.

    Not only did prices rally but so far this month US corporates have issued nearly $20 billion ion junk bonds and about $145 billion in total debt (junk and investment grade corporates). In the entire third quarter, junk bond issuance averaged about $10 billion per month and in September it was just $7 billion or so.

    My point is that we aren't seeing the global credit contagion that we saw post-Lehman back in 2008. US companies are still able to borrow money.
    Nov 15 05:00 PM | 1 Like Like |Link to Comment
  • Assessing Market Risk [View article]
    It may or may not be successful though one thing is clear, it won't happen immediately. The market clearly has took some cheer in the idea though as it rallied impressively through the month of October as the details of the plan emerged.

    But, the more important point in my view is that the Europeans are beginning to panic a bit. Remember it was less than two months ago they were saying that leveraging EFSF was a "stupid" idea. Then, they ended up doing exactly what the market demanded.

    Then, the market basically demanded the resignation of Berlusconi and Papandreou last week. Both initially resisted and then acceded to the what markets wanted.

    Next up is the ECB. Mario Draghi has said the ECB isn't the lender of last resort for Italy and Spain even though the recent spike in yields is the bond market trying to force the ECB to be more aggressive. Eventually, I suspect they'll cave in to those demands as well.
    Nov 15 04:49 PM | 1 Like Like |Link to Comment
  • Should You Worry About The Volatility In Schlumberger's Stock Price? [View article]
    Thanks for the comment. Yes, international pricing has been a concern and the "turn" in pricing has been delayed a bit partly due to the fact that the big services companies are still seeing big start-up costs related to new contracts they're starting. But, I think you're right that by mid-2012 we'll see real upside in international margins. In fact, SLB indicated that they're already pushing pricing a bit on smaller contracts so that's an incremental positive.

    Long SLB
    Nov 10 11:43 AM | Likes Like |Link to Comment
  • Natural Gas: It Pays To Stay Liquid [View article]
    I'm not familiar with Poseidon but will take a closer look. Generally speaking, however, I am starting to get worried about pricing for North American pressure pumping services mainly as a result of the huge wave of capacity entering that industry. Schlumberger (SLB) said in their conference call that they're seeing a flattening out in pricing in pressure pumping and actually lower pricing for this service in gas-focused basins.

    North American services have been growing faster than international and prices have been rising. I think that over the next 2 to 4 quarters, North American may disappoint a bit while international picks up.

    Not necessarily a problem for Poseidon (I'll have to look at it more carefully) but a trend to watch.

    Long: SLB
    Nov 8 12:11 PM | 1 Like Like |Link to Comment
  • Natural Gas: It Pays To Stay Liquid [View article]
    I don't cover PEIX in my newsletter though I do cover the biofuels/ethanol industry. Generally speaking I like to play this theme through stocks leveraged to agriculture like the fertilizer stocks, seed companies, agribusiness names and companies involved in the actual production of agricultural commodities.

    Demand for biofuels is one driver of higher prices. The other is that consumers in emerging markets are eating more meat and raising livestock requires massive amounts of grain. Agriculture is one of my favourite long-term investing themes -- I'll try to post an article in future with more details.
    Nov 7 05:58 PM | 1 Like Like |Link to Comment
  • Natural Gas: It Pays To Stay Liquid [View article]
    Thanks for the comment.

    I like both Shell and Chevron (CVX) and recommend Chevron in my newsletter.

    That said, EOG is an exploration and production company focused almost exclusively on US unconventional plays. Chevron and Shell are major integrated oil companies -- basically a combination of global exploration and production (E&P) with refining and chemicals. Thus, these firms really just aren't comparable nor are they plays on the same trends.

    One of the problems with the Big Oils (like Chevron, Shell, Exxon, etc.) is that they're having trouble growing their production. It's tough to come up with major new projects that can offset natural declines from existing maturing fields. CVX is one that will probably be able to generate some output growth in coming years though some of that will be gas, not oil.

    EOG is a fast-growing increasingly oil-focused producer. I'd say the company's growth merits a higher valuation.

    Disclosure: Long CVX and EOG
    Nov 7 12:47 PM | 2 Likes Like |Link to Comment
  • Natural Gas: It Pays To Stay Liquid [View article]
    Thanks for the comment. I actually don't think that supply will respond all that quickly.

    Shale outside North America is in its infancy and we're still a few years away from even having a good idea how large, expensive to produce or productive these international plays. I'd recommend reading Schlumberger's (SLB) last few conference calls where management discusses the shale opportunity. They give you a good idea just how early-stage most of these plays are right now.

    Investors have a tendency to overestimate the speed at which oil and gas plays can be produced. I remember a few years back when there were some pundits arguing that Iraq would be the world's largest producer by 2013 to 2015. I think we can see how that one turned out.

    As for the US exporting LNG, it will happen but the first exports aren't likely until 2015 at the earliest and then the quantities will be too small to move the proverbial needle on global supply. Until LNG exports happen, there's no way for America's massive shale production to impact global supplies either.

    Disclosure: Long SLB
    Nov 7 12:41 PM | 3 Likes Like |Link to Comment
  • Natural Gas: It Pays To Stay Liquid [View article]
    They are a little tough to believe....Mea culpa, those capacities were supposed to read bcf per year.
    Nov 7 12:35 PM | 3 Likes Like |Link to Comment
  • Finding Yield In U.S. Royalty Trusts: SandRidge Mississippian Trust I [View article]
    Thanks for the comment. I actually did cover that as the distributions will stop when the trust is dissolved in 2030 and the proceeds distributed.
    Nov 6 02:18 PM | Likes Like |Link to Comment
  • Favorable Valuations For The Master Limited Partnership Sector [View article]
    Thanks for all the comments. I tend to prefer picking individual names like Targa (NGLS) within the MLP industry rather than buying the ETFs or closed-end funds. I have written several other articles here on SA with some of my favourites in the group.

    The reason I wrote about the sector as a whole in this issue is to refute the idea that all MLPs are overvalued. I definitely agree you can do much better by picking individual names.

    On that note, one of the biggest mistakes I see investors make is to gravitate towards the names with the highest yields. Some of these are good plays in my view but some are just ripe for a distribution cut. Broadly speaking, one must keep an eye on quantitative measures like the payout ratio (using distributable cash flow, not irrelevant earnings). But, it's also important to evaluate how much commodity price sensitivity an MLP has. For example, how are its processing contracts structured? Are the revenues fee-based or based on the value of natural gas liquids (NGLs) produced.

    The final point I would make is that several readers were quite correct to point out the dislocations in the sector back in 2008 due to forced hedge-fund selling. I would point out that you don't even have to go back 3 years to find examples of these dislocations -- there have been several mini flash crashes in the group over the past few years. Look at the chart of Linn Energy (http://bit.ly/u2RFAM) as an example -- the stock has experienced a number of quick sell-offs that weren't driven by any fundamental newsflow. Those moves were quickly reversed but offered the nimble investor an opportunity to buy LINE at deeply discounted prices and lock in well above-average yields.

    Disclosure: I am long LINE
    Nov 6 02:14 PM | Likes Like |Link to Comment
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