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Laura Starks
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Starks has worked for well-known energy companies in marketing, planning, and engineering. She brings this experience, along with extensive research and investing, to profiling energy companies by investing segment in her monthly newsletter.
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  • Volatility Ahead For Independence Contract Drilling?

    Independence Contract Drilling (NYSE:ICD) is a Houston-based shale drilling company operating primarily in the Permian Basin. It offers the potential of marked growth from a relatively small base: its market capitalization is about $150 million and its enterprise value is about $210 million. Thus, Independence has less market heft than its larger competitors should oil and gas prices decline. Nonetheless, the company's eleven rigs are mostly drilling in the highly active Permian Basin of West Texas. Its strong customer base includes Apache, Anadarko, Concho, Newfield, Laredo, and other well-regarded producers.

    Although formed in 2011, Independence was taken public in August 2014 by lead underwriters Morgan Stanley, RBC Capital Markets, and Tudor Pickering Holt, with ten million shares at $11 per share, or $110 million. Earlier fund-raising goals were said to be up to $150-$175 million. In particular, note that its lock-up expiration is February 4, 2015, so volatility in its stock price can be expected at that time if insiders sell.

    Operations

    Independence employs 240 people full-time. The company owns eleven up-to-date onshore drilling rigs, nine of which have more-efficient multi-directional walking systems. The rigs are 1500-horsepower and bi-fuel (diesel or natural gas-diesel mix). Announced plans for the IPO proceeds were to buy up to seven more rigs.

    Competitors

    Competitors are Precision Drilling, Nabors Industries, Patterson-UTI, and Helmerich & Payne. All are longer-established and have much larger market capitalizations, ranging from $3 billion for Precision Drilling to nearly $11 billion for Helmerich & Payne.

    Financials

    Demand for Independence's rigs will depend on oil prices, particularly those realized in the Permian Basin. However, the Permian Basin is one of the lowest-cost places in the U.S. to drill for oil. The benchmark West Texas Intermediate oil price closed at $94.50/barrel, near the bottom of its one-year range of $91-$108 per barrel.

    Independence does not pay a dividend. Its most recent earnings per share was -$0.15 and its expected next earnings per share is nearly the same at -$0.17.

    While institutional and mutual fund holders are not listed, top holders are Sprott Resource at 32% of shares outstanding, Alumbrera Trust at 13%. and Lime Rock Partners III at less than 5% (4.5%). Note that its chief executive officer, Byron Dunn, a fellow Boothie (University of Chicago business school) has deep experience but has been dinged for taking a salary of $3.6 million in 2012 when the firm had a net loss of $4.9 million.

    The stock is followed by seven analysts: six give it buy ratings and one gives it a strong buy rating.

    Overall

    Results for Independence Contract Drilling will depend on continued strong oil prices, good performance by the firm, and revenue maintenance in competition with larger drilling contractors. It is operating in a highly-active basin whose producers show considerable demand for its drilling capabilities.

    Disclosure: The author is long ICD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: ICD, long-ideas
    Oct 01 2:55 AM | Link | Comment!
  • Apache's (APA) Compelling Permian Basin Plans

    The growth of oil production from the Permian Basin has been a stealth contributor to the overall growth of US oil production. Permian producers benefit from existing infrastructure and long experience. Moreover, the Permian has what is music to any producer's ears: stacked pay. This means that underground, there are typically several oil-productive zones, rather than just one. Combined with horizontal drilling, this opens thousands of prospects.

    With the usual caveats about oil price-dependent stocks-that high oil prices are subject to continued quantitative financial easing, and oil that is produced must ultimately have transport to a refinery buyer-Apache is a company with strong operations in the Permian.

    Apache's (NYSE:APA) 9/12/2012 closing price of $90.51/share puts it at 81% of its one-year high of $112.09/share. Its one-year low has been $73.04/share. Its dividend of $0.68/share represents 0.8% of its share price. Per Yahoo! Finance Apache's estimated earnings per share (NYSEARCA:EPS) is $10.05/share; its most recent EPS was $8.30/share, giving it a price-earnings ratio of 11. Its liability-to-asset ratio is 46%.

    One place Apache shines is its Permian (West Texas) oil operations. It owns 1.8 million net acres in the Permian, second only to Occidental (NYSE:OXY). Steve Farris, Apache's Chairman and CEO, spoke at Barclay's CEO Energy Power Conference. According to Farris, Apache has a total of 67,000 locations to drill. Its Permian operation has grown by 200%, its rig position from 6 rigs at the beginning of 2010 to 36 rigs now, and its Permian production is about 105,000 barrels of oil equivalent per day (BOE/D). Apache has identified 35,000 potential drilling locations in the Permian.

    Its Permian operations, said Farris, has three parts: a vertical program in the Midland Basin, a Cline Shale program, and a Wolfcamp Shale program. Sample results from seven horizontal Wolfcamp wells are positive: with laterals ranging from 6400-9300 feet, 19-32 frac stages, initial production was 588-1260 BOE/D. Farris also identified Apache potential in MidContinent liquids plays, Mississippian Lime, Williston Basin, Cook Inlet in Alaska, offshore UK, and Vaca Muerta oil.

    Majors active in the Permian Basin include Shell (RDS), which just bought 618,000 acres from Chesapeake (NYSE:CHK), Chevron (NYSE:CVX), which bought 246,000 acres from Chesapeake , as well as Occidental , ExxonMobil (NYSE:XOM), and ConocoPhillips (NYSE:COP). Some of the independents active in the Permian Basin include Approach Resources (NASDAQ:AREX), Concho (NYSE:CXO), Devon (NYSE:DVN), EOG Resources, Pioneer (NYSE:PXD), and SandRidge (NYSE:SD).

    Per Bloomberg, today's prices for oil were about $98/barrel for West Texas Intermediate (NYSE:WTI) spot at Cushing and over $116/barrel for dated Brent spot. The current price for natural gas is about $3.00/MMBTU for Henry Hub spot.

    Starks is long COP and SD. She has not transacted in any of the stocks mentioned here in the last three trading days and has no plans to transact in them during the next three trading days.

    Disclosure: I am long COP, SD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: APA, commodities
    Sep 13 2:17 PM | Link | Comment!
  • Unconventional wisdom: Case for buying BP

    Since the Macondo disaster--the explosion and sinking of the Deepwater Horizon drilling rig in offshore Mississippi Canyon block 252 and subsequent oil spill--BP has been everyone's bete noire. Yet, like Exxon after the Valdez, there appears to be strong potential BP has changed its operating procedures and may be returning to a more 'boots-on-the-ground' culture. The US government is allowing BP to again bid on leases and to act as operator in the offshore Gulf of Mexico. Last week, Anadarko settled its portion of Macondo claims with BP for $4 billion. Mitsui, its other partner on Macondo, settled earlier.

    http://www.bp.com/bodycopyarticle.do?categoryId=1&contentId=7052055

    In particular, despite--or even perhaps because of--the many mistakes that led to the Macondo disaster, BP is one of the few companies with the experience and size to operate in ultradeepwater offshore. Ultradeepwater offshore GOM will continue to be an important domestic oil producing province for many years.

    At a time when Brent costs $110/barrel, oil producer BP has a price/earnings ratio of 6.74, based on the 10/21/2011 close of $42.35/share. (The DJIA closed at 11,808 on 10/21/2011.) Reflecting the uncertainty of the liability associated with the spill, BP's common stock price in the last year has ranged between $33.62 and $49.50/share. Prior to the spill, BP's share price topped $60/share at a time when the DJIA was 11,000. BP's consensus one-year target price is $52/share.

    Let's be crystal-clear about Macondo. BP, as operator and by contract, had fairly complete responsibility for all decisions made on the Deepwater Horizon drilling rig. Those decisions included not fully circulating the drilling mud, running a single long string of casing instead of multiple individual strings, using 6 centralizers instead of 21 called for by the drilling plan, not running a cement bond log, incorrectly interpreting the negative pressure test, and replacing the drilling mud with seawater at what appears to have been a premature point. There is also uncertainly about whether there was a gas zone several hundred feet above the bottom of the well. If there was, cementing was incomplete.

    11 people were killled and 17 were injured in the explosion. The well, which turned out indeed to have been productive, flowed three months before it was capped. It spilled an estimated 4.9 million barrels of oil, making it the largest accidental marine spill ever.

    The trial, which is estimated to require several months and will take place in three phases, starts in late February 2012. Findings could include gross negligence or criminal charges, both major negative uncertainties.

    BP has set aside $20 billion for damages. Its market cap is $133.7 billion at Friday's close. Despite stumbles, BP continues to be a major player in Russia as well as the US.

    While I am a fan of US oil shale production, it is worth noting that 30% of 2010's oil production came from the US Gulf of Mexico (NYSE:GOM). The GOM has 3500 platforms and companies have made 65 discoveries in over 5000 feet of water. BP's Thunder Horse in the GOM, which came on 3 years late due to damage from Hurricane Dennis when a check valve installed backward caused the plaform to flood, nonetheless produces 260,000 BPD of oil and 220 MMCF/Day of gas from seven wells, the most production from an individual platform in the Gulf. Moreover, BP is an experienced operator; for example, in 2006-2007 it had six of the twenty largest-volume platforms producing in the GOM.

    BP pays a $1.68/share dividend, about 4%. One out of every seven pounds of dividends in the FTSE 100 is paid by BP. 18 million people in the UK either own shares or pay into pension funds that own shares in BP. 39% of its shares are held in the US including holdings by Fidelity, Vanguard, State Street, Invesco, Bill and Melinda Gates Foundation, Barrow Hanley Mewhinney & Strauss, and Franklin. As of 12/31/2010, BP's liabilities were $177 billion and its assets were $272 billion, a liability/asset ratio of 65%. BP's estimated 2011 production is 3.4 million barrels of oil equivalent; its reserves are 18 billion barrels of oil equivalent. BP also has substantial refining (2.4 MM BPD), chemicals, and other businesses.

    BP's assumption of responsibility in the Macondo spill, genuine effort to remediate the damage, and change in procedures suggest a change in the operating culture that make it an interesting candidate for investment. Significant uncertainty remains, to be played out over the next 12-18 months.

    Disclosure: Author does not plan to transact in BP securities in the next 72 hours.
    Oct 23 5:16 PM | Link | Comment!
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