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Elliott Gue  

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  • A Bull Market For Brazen Forecasts [View article]
    Gary H,

    Thank you for your very kind comments about our work and research.
    Oct 8, 2015. 09:31 AM | Likes Like |Link to Comment
  • A Bull Market For Brazen Forecasts [View article]
    Thanks for the comment. The refined product midstream MLPs definitely benefit from a low cost of capital relative the group as a whole.
    Oct 8, 2015. 09:30 AM | Likes Like |Link to Comment
  • A Bull Market For Brazen Forecasts [View article]
    Thanks for the comment.

    I have been bearish on the deepwater drillers like SDRL for a long time (see a lengthy series of articles on SA bearish about SDRL published in 2014). The basic problem is that even when oil was over $100/bbl in early 2014, the big integrated oil companies were struggling to earn an acceptable return on capital from deepwater developments.

    In this lower oil price environment, deepwater will be crowded out and companies will direct more of their CAPEX at onshore projects with better returns. Over time, the industry will figure out how to make returns on deepwater projects better (just as the economics of shale get better every year) but that will take years and in the meantime I'd avoid all of these offshore plays.

    I respectfully disagree with the idea that this is a temporary, artificial oil glut.

    There are essentially two flavors of cycle in the energy business, those driven by demand and those driven by supply. Demand-led downcycles such as 2008-09 can be resolved quickly as the global economy recovers and consumption of oil improves.

    Supply led cycles (see the 80's) take longer to resolve.
    Oct 8, 2015. 09:29 AM | Likes Like |Link to Comment
  • A Bull Market For Brazen Forecasts [View article]

    Consumers don't consume oil, they consume refined products like gasoline, heating oil and diesel fuel.

    Refiners consume oil. It's the key raw material used to manufacture refined products like gasoline.

    US law prohibits the export of crude oil but allows unlimited exports of refined products. Thus, the price of gasoline and diesel in the US (freely imported and exported every day) is leveraged to the cost of Brent (and other non - US oil benchmarks) not the the price of WTI.

    This is why refiners benefit from the crude oil export ban. They're able to purchase oil on the cheap in the US (because US oil can't be exported, it's essentially priced outside the global market) and sell refined products like gasoline and diesel at higher global prices.

    The same policy hurts producers who are forced to sell US-produced WTI at a significant discount to Brent because they don't have access to global markets.

    The US consumer is completely unaffected by all of this. Americans pump gasoline into their cars and gasoline prices are already leveraged to Brent oil prices, not the price of WTI. Ban or no Ban, the cost of refined products would not change.

    What would change is how profits are allocated within the energy industry. Ban in place, refiners eat more of the profits. Remove the ban, more profits flow upstream (to producers). No change for the consumer whatsoever.
    Oct 8, 2015. 09:22 AM | 1 Like Like |Link to Comment
  • A Bull Market For Brazen Forecasts [View article]
    Scooter-Pop: I assume you're referring to OPEC as the Cartel?

    The crude oil export ban is bad policy. A law put in place to make voters feel that the government was doing something to slow America's growing dependence on imported crude in the mid 1970s. Oil prices quadrupled in real terms in the early 1970s as OPEC began to flex its muscles.

    And, for about 35 years, it didn't really matter as the US wasn't in a position to export crude oil in meaningful quantities. But, over the past five years, the peak years of the shale boom, this policy has started to matter. As US production of light-sweet crude oil has grown, refiners have been forced to address a growing issue -- a glut of light sweet crude oil in the US and insufficient quantities of heavy, sour crudes.

    The obvious solution -- to export light-sweet crude and import more heavy sour -- is prohibited by US law.

    OPEC's control over global oil prices stems from one thing and one thing only -- Saudi Arabia's spare capacity. This represents essentially oil wells that are not being produced at the maximum rate possible. It's oil supply the Saudis could put on the world market but choose not to.

    All other OPEC nations and other major producers outside OPEC (including Russia) are price-takers. That means they will continue to pump at the maximum rate possible and accept the global price of oil. In fact, when oil prices fall and export revenues decline, history suggests the most financially shaky countries will actually become more committed to maximizing output (and less willing to adhere to production cuts imposed by OPEC) because they're desperate for the cash flows from oil exports.

    The Saudis, therefore, can control oil prices regardless of US policy on oil exports.

    That said, Saudi Arabia's control over pricing isn't unlimited. Supply and Demand forces in the global oil market are far more powerful than the Saudis, Putin, or any policies put in place (or not enacted) by the Obama Administration.

    The OPEC cartel's hold on pricing was broken in the early 1980s and its been broken again over the past year. The reason is prettty simple: when you manipulate supply to artificially boost prices, you can boost your revenues for a time (maybe several years) but there are ultimately consequences. Those consequences are that artificially high prices cause demand destruction and incentivize new supply from parts of the world not under the cartel's influence.

    In the early 1980's, Saudi Arabia chose to cut their own oil output by 70 percent to keep prices high. It worked to a degree but at great cost in the form of falling oil revenues (due to lower output). The other cost was that relatively high prices in the early 1980's encouraged all sorts of new non-OPEC oil supply including Alaska output in the US and the North Sea of the UK and Norway. In the end, Saudi Arabia decided to cede control of the oil market in late 1985 and it took 18 years for the market to rebalance.

    This time around, the Saudis have chosen not to repeat their mistakes of the early 1980's. They've actually stopped artificially manipulating prices so that oil prices would fall and slow non-OPEC supply growth (such as shale and deepwater).

    So, nothing needs to be done to overcome OPEC's grip in global prices. The market has broken OPEC in the past and is doing so right now.
    Oct 8, 2015. 09:15 AM | 2 Likes Like |Link to Comment
  • DCP Midstream Partners - A Solid Fourth Quarter, But Storm Clouds On The Horizon [View article]
    No mention of 2016.
    Jul 1, 2015. 03:21 PM | Likes Like |Link to Comment
  • DCP Midstream Partners - A Solid Fourth Quarter, But Storm Clouds On The Horizon [View article]
    No mention of 2016.
    Jul 1, 2015. 03:21 PM | Likes Like |Link to Comment
  • Lower For Longer: Why You Should Stand Aside On U.S. Oil Producers [View article]
    Think about what happens when their hedges expire...
    May 21, 2015. 08:35 AM | Likes Like |Link to Comment
  • Lower For Longer: Why You Should Stand Aside On U.S. Oil Producers [View article]
    Think about what happens when their hedges expire...
    May 21, 2015. 08:35 AM | 2 Likes Like |Link to Comment
  • Lower For Longer: Why You Should Stand Aside On U.S. Oil Producers [View article]
    Thank you for all the comments. Let me address a few issues generally:

    1) First, I'd like to address those that are asking where I was during last year's oil price collapse. Obviously, I don't always get every prediction or call right -- no one does and if they tell you they do, they're lying to you.

    However, if you have a quick look at my profile on Seeking Alpha, you'll find I wrote a series of articles on this site last year warning investors to get out of stocks like Seadrill (SDRL) and fracturing sand names like Hi-Crush Partners (HCLP).

    I also flagged a number of energy names in SA that did well including the refiners.

    2) Oil price outlook: My Outlook is for more of a W-shaped "Double-Dip" sort of scenario. I think we've seen the middle of that W and will see the second dip shortly (likely already starting now). Longer term, I see oil remaining in the $40 to $60 per barrel range.

    3) The US rig count reductions and declines in supply. As for the drastic reduction in the rig count, please remember that many of the rigs that have come off in the last few months are not in the core shale fields. Producers have mainly been taking rigs off marginal regions and refocusing on the core of the shale.

    There probably will be a dip in US oil output (see today's 112,000 bbl/day EIA reported production decline). However, this dip will be temporary as all I heard from the major shale producers this quarter was talk about ramping up their drilling activity in the second half.

    4) The "rally" in oil since March

    Remember, producers don't really care what the price of oil is right now because they don't sell all their production in a single month. Most of these producers really look at the 12-month calendar strip (average price of oil over the next 12 months) because they can hedge their production forward to lock in prices.

    In fact, looking at the spot price of crude is really misleading. Consider that while the spot price of WTI has rallied from a low of $43/bbl in March to a current $58 (35%), the futures curve has been far steadier. For example, on March 18, 2015 the front month oil futures price closed at about $44.66 and, on that same date, the December 2016 oil futures closed at $60.09. Today, the December 2016 futures trade for around $63.05.

    So, while everyone is talking about this massive rally in oil, December 2016 futures are up just around 5 percent since March 18th. What has really happened is that the market is less concerned about running out of oil storage this spring; therefore, the front of the futures curve has bounced.

    Recently, most producers have been able to hedge output in 2016 at prices around $60 to $65 and they've been hedging aggressively all through this rally.

    They've even been building "fracklog" wells that they'll be putting into production by early 2016 or sooner.

    None of this suggests a major reduction in US oil production. In fact, the hedging suggests that the glut will persist longer than many expect.

    5) Saudi Arabia. When you artificially boost the price of a commodity (or anything really) you'll get too much supply and too little demand. To maintain high prices you need to either manipulate supply or demand.

    In the early 80's Saudi Arabia maintained high prices by cutting supply. This was not good for the country because they eventually had to cut their output by 70% to maintain prices. The problem is that using supply to manipulate prices creates a vicious, self-reinforcing cycle: you cut supply to maintain prices, encouraging new supply which requires further supply cuts, etc.

    This time they have said (quite clearly) they aren't going to repeat that mistake. That means market forces will need to rebalance the global oil market. That's exactly what's happening right now and financial history tells us it always takes time.

    6) Finally, some readers have commented that I'm just trying to "sell my products." As you can clearly see from my profile, I own a publishing firm that produces subscription-based research and analysis on energy markets. Therefore, obviously, one of the main reasons I publish articles on SA is to gain exposure for me and my business. I'm not trying to hide that -- it's right at the top of this page for all to see.

    That said, I'm not sure why anyone would find this to be a negative. If I were to publish rubbish, that would NOT be good for my reputation or business. So, I try to put up quality work that reflects my research.
    May 20, 2015. 08:07 PM | 10 Likes Like |Link to Comment
  • Lower For Longer: Why You Should Stand Aside On U.S. Oil Producers [View article]
    Occidental Petroleum (OXY) is definitely one of the better names and I like Chazen but I think we'll get an opportunity to buy most of these upstream names at much lower prices.
    May 20, 2015. 07:16 PM | 1 Like Like |Link to Comment
  • American Midstream Partners LP: Be Cautious, Yield Moths! [View article]
    We do expect more consolidation in the midstream space, in the near term focusing on the greatest pain points: gathering and processing and exploration and production companies looking to raise cash by monetizing their midstream assets.

    Comments from likely consolidators suggest better values will emerge once the market has a better understanding of the volumetric risk at play. Brookfield Infrastructure Partners (NYSE: BIP), which reported has raised about $8 billion to deploy in energy assets, asserted that the market has yet to price in the risk associated with gathering and processing names that have acreage dedications but lack firm, take-or-pay agreements.

    Williams Partners' management team highlighted the volumetric risk in basins that rely heavily on natural gas liquids to bolster rates of returns.

    As for DPM shining light on the health and direction of the midstream space, much of the attention will focus on the restructuring of its general partner, which holds assets that entail significant commodity risk. At least for now, less attention will be paid to DPM's hedge position, which declines dramatically in 2016.

    I don't make a habit of responding to questions on Seeking Alpha because I'm usually doing research or writing for my newsletters; I post excerpts from our content on this site to raise awareness of our products. You can draw your own conclusions based on what you see here.
    Feb 24, 2015. 08:31 AM | 4 Likes Like |Link to Comment
  • Linn Energy, LLC: Why There's More Downside To Come [View article]
    No, they aren't impacted. Linn hasn't even yet done its first deal using the Blackstone financing.
    Jan 17, 2015. 10:29 AM | Likes Like |Link to Comment
  • Linn Energy, LLC: Why There's More Downside To Come [View article]
    Linn has hedged 100% of its gas production for 2015 and 2016; however, this excludes some volumes of gas produced in Califonia that it does not hedge. This California gas isn't sold but is used internally by Linn to produce steam that is used in its heavy oil production in the Golden State (steam flooding).

    So, they're producing 650, hedging roughly 525 and using the difference for steam flooding.

    I hope that helps.
    Jan 17, 2015. 10:27 AM | 10 Likes Like |Link to Comment
  • Drilling Into Transocean Partners LLC And Seadrill Partners LLC [View article]
    Russia may wish to drill their Arctic acreage but it's going to be expensive and probably doesn't make sense at current oil prices.

    Also, keep in mind that most of the world's deepwater drilling activity (and hence demand for floating rigs) is focused on what's called the "Deepwater Golden Triangle," which includes offshore Brazil, the US GoM and offshore West Africa.

    I really don't see Russia bailing out the floater market over the next 2 to 3 years.
    Nov 13, 2014. 05:39 PM | Likes Like |Link to Comment