Lionel Yeo

Contrarian, investment advisor, oil & gas, energy
Lionel Yeo
Contrarian, investment advisor, oil & gas, energy
Contributor since: 2012
Company: Wesvault
Most in the oil patch has been crushed. Been slowly nibbling at more oil stuff.
At these prices, even the saudis are in trouble. Have to wait for the opec cut.
As an oil and gas analyst, I can say the data is showing that supply is starting to drop outside OPEC.
I'm convinced OPEC does not want to destroy the market, but is seeking an expanded agreement with producers to cut, not just going it alone.
Who's overproducing from 5 years ago.
1) US +4.5M barrels.
2) Iraq + 2.5M
3) Canada + 1.5M
4) Brazil +1M
We know that canada, brazil and iraq produce at quite high prices. +$65.
I think they need to probably look at cutting 250k bbls.
permain is the main sticky one. The author is correct that it's conventional layed with shale. A decline of 10% is what is to be expected from a reduced capex. I would not expect production to fall off a cliff just yet. Capex really only started to drop in Feb and there were still rigs being added during the $60 bump we had in Apr. I think we'll see production really drop next year in Feb.
Gents. Ackman is not running for President so let's not waste time.
Nobody is putting a gun to your head to ask you to drink coke or eat an oreo period.
Took a 5 month break and had a nice holiday doing other stuff like a dot.com company. The point is, Mr. Market is going to be irrational and it might take a while.
Oil's been a cycle and goes boom bust. So buying in a bust when everyone is negative is correct. You could buy at the middle or at the bottom or the real bottom. But no matter it's correct.
I'm liking the production figures a bit more since April. The problem here is whether to buy or be late. As seen from the 37 to 46 bounce this thing can move very quickly like a coiled spring.
The strategy is probably to follow what Michael says and buy a spread over a period of time.
I've been taking a vacation as there's no point arguing against the down market. There's an oversupply and it will last for a few quarters.
First, the fall in oil prices is a commodity wide sell off. You name it, if it's a commodity it's down.
Second, there's no doubt, oil does not work at $45. I've argued it works only at WTI $70. We're talking about medium term sustainable all in pricing. Not cash costs.
Third, I do not agree with the Shanghai market indicating demand weakness in the general economy. Participation rates with the Shanghai Stock Exchange are very low 4% and will not affect general growth rates. The Chinese government has already made their intention known that growth will be 0.5% lower. But this should not affect consumption.
Finally, car sales around the world are very strong YoY. Ignore the China sales numbers as they had a blowout Feb and Mar due to incentives and the number are coming down MoM.
I'm interested to see what the Canadian companies will be producing. Most seem to show a 10% drop in production with some capital spending.
I agree with buying a wide coverage of O&G stocks that focus on onshore, lower cost production.
As I stated, I continue to load up on PWE and a few more oil companies. It was cheap around $6.50 when I started buying and now it's going for a song. I'm really buying with both hands now.
At $65 wti PWE will generate $650M in FOF. I'm purchasing it for $1B and $2.2B in debt. If pay out all their cashflow, I'll get my money back in 5 years.
PWE has a sensitivity to oil price of 1USD = $20M. so $80 oil = $950M. Now we are all professionals here , let's keep the trolling to a minimal. If you and Dar are so adverse to a position, why not write your own articles and prove your points. If you're making money shorting my long position that kudos, but no need to troll on the comment section.
Hi Doug,
Thanks for linking to my article. I'll just like to point out that the article on XOM cost per barrel at $34 is a little low because they exclude historical sunk costs for some of the long life assets. They also do not include a reasonable margin factoring US income tax. Certainly nobody will produce oil at $34 just to break even. That being said, XOM benefits from massive economics of scale and almost 0 financing costs.
It's probably a little late in the game to switch from XOM to CLR as the latter has dropped significantly. I suggest BP
We won't see much demand destruction because gasoline margins are high, so refined product demand is moving up slower than crude demand. Refiners in the US have protected feedstock market due to lack of export. If crude prices rise, margins will get compressed that's all.
I don't think they meant shut in. They probably meant 10,000 prospects which have yet to be fracked or maybe even not drilled.
I'm not convinced poor vertical wells are superior horizontals. Could be just a higher initial production that waters out quickly. Permain had marginal performances that's why it was the last play. The only reason why PXD did so well previously was that they were sitting on historic leases with little production but kept the lease terms. So when things started going horizontal they produced on leases they already owned not paid $20,000 an acre. But the economics are still poor.
If oil is $40, it will be ugly. But xom or cvx have the cash to last many years. Furthermore, their projects are long life with sunk capital, so its all cash.
The frackers will have to go back to drill as their production wells decline rapidly. If you spend $1 to make 80 cents, you'll be out of cash soon.
That's the point Einhorn was making that PXD spent and didn't make anything at $100.
Penn West is correlated with oil... duh!
What a surprise! I'm not sure anyone here doesn't know that by now.
The accounting scandal is down and dusted. Adjustments were already made and the results were not very big.
Agree with Hendrick on this point. What weakness? that 0.3% is surprise... due to drop in oil prices. What about dropping costs due to lowering prices? What about export growth.
no cash. PWE works on a credit line and spends of flow of funds. The analyst should know this. Debt to cash flow ration increasing. Yes, we already know that.
Disposals not making a difference. How about saving interest in 300M? How about not spending anything on those 300M worth of assets?
The US is a net importers of oil. So a price war is actually beneficial for the US as a whole. There is no reason for Washington to get involve.
There is some price differential from US sweet vs heavy refinery capacity in the gulf coasts, but this is not significant. I do not expect lifting the export ban to have a lot of difference.
There are also powerful political interest (from the refiners) who like having the ban in place so that they enjoy lower feed prices and get to export good margin products.
Answer, no
Limiting imports would be politically bad for Obama. This would give too much power to US producers. (more 1%). Suppose oil in US was $75 while the rest of the world was $65.
Oil and Gas consultant here.
1) His model assumes that divestment's are reinvested as capital investment.
2) I agree that his method of counting reserves is crude (punt!). There's no 3Ps included or hidden reserves.
3) The short bet is pretty safe. I wrote a cross section break even of prices, stating that we need $75 for a reasonable rate of return. At $60 without hedges Pioneer is under pressure.
As an oil and gas consultant, this over production theory is false.
The Canadians are cutting production already and I'm seeing cuts in everywhere except for Permain. As everyone knows Shale decrease 65% in first 18 months, so just reduced capex is enough to show declines.
I'm with David Einhorn on the US frackers are overpriced. They weren't making money at $95 and they surely aren't making money at $60.
good points.
1: Very interesting that OPEC is actually trying to crash the market and squeeze out the US.
2: They said they are maintaining the quota but they are actually increasing production.
3. I don't think they'll officially announce an increase. Too much push back from non-opec players. It's not just the US that low prices will hurt. Think about Norway or Malaysia. They'll just maintain their market share.
It's up to US producers to cut supply. I think they'll throw in the towel. The 500 pound gorilla is just going to smash EOR or PXD.
The market will find its own balance.
The real price is about $85, but we'll take some time for the price war to end.
good point. No idea why PGH got hit so bad. Oil is $58 plus and they have a lot of hedges in place. it should at least be $3.50.
I'll nibble on some here and there.
I've taken this opportunity to continue to load up on energy stocks.
Valuations are very good and cheap. The price of oil is around 75 CAD. Basically just load up and wait it out.
For example PWE will probably pull $650M in FOF, using $450 for capex and $100 for dividend while paying back $150 in debt.
Not too bag in the long haul.
Thanks for the insights.
Some are calling the end of the rig drop due to Canada picking up, but you've explained it away.
fairly expensive purchase. But still good news for oils. I'd like to see more merges.
A picasso just went for $180M. Christies had its first $1B transaction auction.
Wake up and smell the coffee people. Inflation is here. I don't know about you guys, but I'm owning things that people actually use. That you can't live without. The shale players were fools to overproduce and crash the market. Now I have a chance to own valuable strategic assets and reserves for the long haul.
Everything still runs on oil. i don't mind $68 at the end of the year. Would produce good numbers at PWE.
Don't bother about the storage. As with anything demand drives supply. The more demand for storage the more storage becomes available.
Nobody is going to bother to produce at $60 oil. Soon production will start dropping.
Grab the great oil sale before its over.
I agree with Einhorn. Shale isn't profitable. NG only works in certain areas in Marcellous.
A big problem is the high decline rates for shale. I think everything will come out in the wash. Could take some time of course. We need about $75 oil to make reasonable money.
The tax number looks a little too low.
Royalties are between 6 - 15% while other production shares taxes can be up to 15%.
Should also factor income taxes and insert a 10% margin to account for risks such as the bp oil spill.
Hi River,
It's a logistic and price issue. Refineries have a portfolio of suppliers to ensure consistent and regular pricing. There's also winter disruption and pipeline considerations.
Everyone's very focus on US storage. But I'm not too concerned as this is a great time to buy more oil. Great numbers coming out of SUV sales and rig numbers coming down.
Good drop in offshore, which is critical long term. Hopefully we put a dent to solar and new technology (sorry guys, but it's all about $$$). Just need to ride out this swing.
Good article. building on what we already know in the oil patch. Few pointers.
1) Decline curves do not go flat for 30 years in shale. There's no pressure so after 5 years they drop to 0 and need to be re stimulated.
2) Initial high production rates are due to longer laterals and more fracking columns. So it's difficult to compare 2010 to 2014. It cost more to go longer. Some of it is also better pinpoint where a play is discovered efficiently.
3) After 6 months production declines.
4) Old wells supporting new wells is the other way around. It's newer wells supporting new wells.
No change in news. Basics are that oil prices came down 60% and companies are cutting costs and dividends. PWE got infront and secured a relax of covenants.
I have no doubt that nobody is making money at $43 WTI prices and if prices drop to $30, there could indeed be lots of bankrupts.
But my bet remains. In an average price cycle of $70 USD. We're going to be siting on a company that produces 95,000 Barrels of oil and I'm only paying $6/bbl of 2P reserve.
That which was cheaper is now even cheaper.
There are going to be times when Mr. Market goes crazy. We've seen a few. 1998 Asian Financial Crisis. 2008 CDO crisis and housing market collapse. You could have picked up Las Vegas Sands at $2.00 before it hit $50. Ge at $7.00.
There will be some pain. But if you do your home work properly and pick up shares when other people are fire selling. You need not do anything for the next 5 years.
There are a lot of things I find different about PWE than the US players.
1) They are in CAD so costs are coming down along with CADs.
2) They had already begun restructuring before the crisis and had sold over $1B in assets.
3) They've streamlined their costs before the crisis.
4) Their assets are conventional and EOR type assets. Not shale. I'm never a big believer in Shale due to costs above $85/bbl.
lots and lots of facts and data but no conclusion. Basically, your guess is as good as mind and it could be hot or it could be cold.
the US is not the swing producer because it does not act as a single entity. Hence the title is incorrect.
Will oil swing be less violent? I doubt so. The real estate market is very fragmented but that doesn't stop boom bust cycles. This current oil shale boom has less to do with oil and more to do with financing. So I think you need to re-do your title.
I'm long term long gas. But I have to admit, the volume of production coming from Marcellus continues to baffle me. On how NG companies continue to produce with no sense of cash flow is really stumping me. How can anyone make money at $4mmbtu? no idea. $6.50 is in reality the right number to make a decent profit and cover finance costs.
The $2.00 handle is already priced in today. I don't expect it going much lower. Will have to wait and see if production slows.
If oil goes to $150, those rigs that are left open will simply come back on. I think we'll see a much more stable market going forward.