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  • ConocoPhillips: Another Company To Suffer Due To The Funding Gap? [View article]
    The funding gap of COP is much worse than suggested by the author. Read my take of the general funancial state of the industry:

    Basically, a large chunk of capital funding is provided by revenue from the portion of business in conventional oil and gas, the part that is cash positive and profitable. However the profitable portion of COP's business does NOT receive the continued funding it deserves, thus the profitable portion of business is shrinking. Rather, the capital is diverted to fund the UNPROFITABLE part of its business: the expensive shale well developments.

    COP really don't have a real profit. It spend about $4B per quarter in capital spending, but amortize less than half of that spending. In light of so little production growth, the bulk of capital spending is merely spent to maintain production level, not for growth. Thus the bulk of capital spending should be amortized right away.
    Jan 9, 2013. 10:31 AM | 1 Like Like |Link to Comment
  • Chesapeake Continues To Correct Its Ways [View article]
    McClendon is doing the right thing. But it is too little, a drop in the bucket. This company spend 4 billion dollars per quarter and they reported just one billion loss while the product revenue is only a fraction of the capital spending? The true loss is much bigger.

    When you are already deep in the hole of debts. The important thing is do NOT dig deeper. They should stop all drillings immediately. That will stop the money flowing away. After they have completely stopped capital spending, and boosted NG prices by cutting production, they can then talk about selling enough assets (at appreciated prices, too) to bring their debts down.

    I don't think they will do the right thing. The entire US NG sector is now a collosseum where most of the gladiators MUST DIE, leaving a few strongest to stand till the last. The field has too many players. The market has got to eliminate most players one way or another.

    I don't know what's the chance of CHK survival. But needless to say, the more debts you have, the more vulnerable you are.
    Jan 9, 2013. 06:57 AM | 3 Likes Like |Link to Comment
  • Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil [View article]

    Your calculations were wrong. I have just written a compelling piece for a case study of the specific well listed in your article, No. 16637 Bakken well:

    I think I have made a compelling case why the producers projected the production wrong. Why the EUR will likely be only 500 MBOE for that well, not 842.4 MBOE as you suggested.

    This time, we are not talking about different modeling. I am using the exact same formula as the producer uses. Excelt that I am using the parameters that best fit the data, while producers pushed for the extreme parameters that does not match at all, but will give them a much higher EUR estimate.

    More over, this well is NOT a typical or average Bakken well. The average is much worse in EUR.
    Jan 9, 2013. 06:52 AM | 1 Like Like |Link to Comment
  • Danger Zone: Cabot Oil & Gas [View article]

    Thanks for a very inlightening article. Interesting few concepts you mentioned: GAAP earnings vs economic earnings, NOPAT vs stock valuation, top 10 hidden management failures. I learned something.

    Although I agree with your take of COG. It will be too premature and too dangerous to short it now. Natural gas price is going to in up in short term. People who see rising gas prices will perceive COG or any NG producers as good buys. Only when gas price is significantly higher,and the problem ofthe whole shale gas industry is further exposed, will there then be good entry opportunity to short. In the imtermediate term, I am riding coal stocks up.

    But your short article failed to elaborate on specifics. I hope to supplement on that and show some specifics. COG's main problem is NOT asset write down. Such write downs occur when commodity price is lower, and they can be write up again when the gas commodity price goes up again. That is not the issue.

    The big issue, like any other shale players, is that COG makes lots of capital spendings but fails to adequately account for the cost in fair amortization. They only amortize and fraction of how much they SHOULD have amortized. If they do fair amortization, they would report a deep loss in Q3 instead of a net income.

    Let me explain. Capital spending is meant to an investment to grow future production and bring in future revenue. The money spend on capital spending does not need to be counted as immediate cost of revenue. They can be amortized as future costs as future revenue comes in.

    However, if the bulk of capital spending is NOT spend to grow future production, but merely spend to MAINTAIN current production. Then thatportion of spending need to be amortized immediately, as that money does NOT bring in future revenue, since they do not bring in production growth.

    Likewise, if half of the capex is spend to maintain current production, half is spend to bring in production growth. Then the half spending to maintain production need to be amortized immediately and the half that brings net growth can be amortized in the future. I think such a principle is fair. Now let's look at numbers:

    1. COG spend $257.871M in Q3 (92 days), averaging $2.8M per day. They completed 38 new wells, averaging 0.4 per day.The direct and indirect capital cost per well is $7M ($2.8M/0.44) per well.

    2. Gas production grew from 59.2 BCF in Q2 (91 days) to 62.7 BCF in Q3 (92) days. That's going from 650MMCF/day to 681MMCF/day in 92 days, or net production gain of 31 MMCF/day in 92 days. That's a production gain of 0.337 MMCF/day per day.

    3. The median production level during the period is 665 MMCF/day. Without new well addition, the existing wells will decline at roughly -0.2%/day, or losing 0.2% * 665 MMCF/day = 1.33 MMCF/day a day.

    4. So new well addition of 0.4 wells per day turn a -1.33MMCF/day production loss into a new production gain of 0.337 MMCF/day. So each 0.4 well brings in 1.330+0.337 = 1.667 MMCF/day of IP (initial productionrate). That figures into per well IP of 4.17MMCF/day.

    5. Thus average per well EUR is estimated to be EUR = IP/D = 4.17 MMCF / 0.02% = 2.08 BCF/well. Since the total capital cost per well is $7M, the capital cost per mmBtu of gas (MCF of gas) is $7M/2.08 BCF = $3.36/mmBtu. Note this is ONLY the capital cost portion of the cost.

    6. As calculated above, out of each 1.667 MMCF/day new production rate, 1.330 MMCF/day is lost to well decline, and 0.337MMCF is the net production gain. Thus the percentages are 80% of capital is spent on maintaing production, and 20% is spent on growing production.

    7. Thus the fair amortization cost for Q3 should be 80%* 257.831M = $206M. But COG only recorded $111.40M amortization cost. So they were able to report a net income of $36.6M. If they are honest and report a $206M amortization costs, it will bring downtheir bottom line by $206M - $111M = $95M. So instead of $36.6M profit, they would have reported $58M in LOSS instead.

    See how the shale gas players like COG cheated by funny accounting tricks of under-reporting amortization? Any way you put it, in light of so little net production gain for so much capital spending, the bulk of the money should be amortized immediately instead wait till the future.

    Please discuss.
    Jan 9, 2013. 05:19 AM | Likes Like |Link to Comment
  • Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil [View article]

    The numbers I listed above are not model numbers, but actual production number aken from ND DMR's web site. The cumulation comes to 355 MBOE by October 2012.

    Any model needs to fit the actual production curve of that well of 5 years of history. I did my analysis and the chart shows clearly who fit and who does not. Read here:

    I made the mistake of initially construing your 1800 days IP as meaning production rate atthe end of 1800 days. That will be way off. My appology. You actual mean the AVERAGE of the first 1800 days. The numebr is still off, but much closer to the correct value. However that bring in another issue that the change rate of such IP value does NOT reflect the actual well decline.

    In any event,I project that specific well, No 16637, of having an EUR of 500 MBOE, muchlower than your estimate. Go read my instablog. The chart shows clearly that my projection is the one that matches the actual data.
    Jan 9, 2013. 05:17 AM | 1 Like Like |Link to Comment
  • Top 10 Hidden Management Failures [View article]

    That is a very enlightening article. I should have read it when it was first published. But it is never too late to read, as the basic principle you discussed is always trueeither today or 50 years from now.

    Your title said top 10 hidden management failures. What about the other 9 failures?
    Jan 9, 2013. 05:16 AM | Likes Like |Link to Comment
  • Don't Forget About King Coal [View article]

    You don't know nothing about Three Gorge. The project was largely done years ago. They did commission the last of the 24 turbine sets on July 2, 2012. But the bulk of the other 23 were commissioned long before that. It makes little difference with or without that last turbine. Finally, Three Gorge only generates 1/7 of all China's hydroelectricity.

    I stand corrected that China was blessed with higher than usually precipitation and worse than usual food during 2012, as a result hydroelectricity was 30% higher than a normal year. The Yangzi River experiences the worst flood in several decades. All those are widely reported on global news media. Once again it is one time weather event, unlikely to repeat.
    Jan 9, 2013. 02:13 AM | 2 Likes Like |Link to Comment
  • U.S. Natural Gas: 3-to-6 Month Forecast [View article]
    You are wrong:

    1. The total working space of US natural gas storage is only 4 TCF, that compare to 26 TCF annual supply.demand, is only 15%.

    2. The bulk of working storage space, about 2400 BCF, is already used to buffer seasonal variation of natural gas demand. That leaves only 1600 BCF room of flexibility. Then you take away 500 BCF wigging room, there is really only 1100 BCF of storage space which is available to absorb any supply demand imbalance.

    3. That buffer space of 1100 BCF is only 4% of annual supply/demand, or worth only half a month of supply/demand.

    No wonder when the storage level is 1000 BCF above or below the normal level, the market freaks out. In comparative term, 1000 BCF is not a lot compare with 26000 BCF annual supply/demand, but it is enough to drive the price crazy in either direction.

    I do not think the supply side is able to maintain such a dedicated balance. What happens is the penduleum swings to one extreme and then it will swing to the opposite side of extreme. I project a severe natural gas shortage by the middle of 2013.
    Jan 9, 2013. 01:50 AM | 3 Likes Like |Link to Comment
  • U.S. Natural Gas: 3-to-6 Month Forecast [View article]

    It does not matter how exactly well completion is carried out. We as investors care only onething: how many wells they complete and bring into production in a particular month or quarter. It remains a fact that well completion is a task that involved enormous resources, including MAN POWER. Most of the completion crews are working on oil/liquid rich plays thus there is not enough completion crew to complete Marcellus wells fast enough to keep production growing.

    Talisman, the No. 2 driller in Marcellus, already reported a 9% drop in Marcellus production in Q3 versus Q2. If I check other producers I may find similar drops. Likewise, QEP reported a 11% drop in Haynesville production. Also, CHK, No.1 in Marcellus, projects a Q4 Marcellus production fall from Q3.
    Jan 9, 2013. 01:40 AM | 2 Likes Like |Link to Comment
  • Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil [View article]

    Here is the complete set of monthly production of well No. 16637, according to the ND DMR web site:

    Month Oil_Prod(Barrels) Gas_Prod(MCF) Days BOE/Day
    10/1/2007 14323 4407 12 1256.90
    11/1/2007 23803 7287 30 835.31
    12/1/2007 9250 3061 15 651.85
    1/1/2008 17010 5692 31 580.37
    2/1/2008 11311 3812 29 412.70
    3/1/2008 6780 2251 19 377.27
    4/1/2008 12410 4165 30 437.60
    5/1/2008 12003 4132 31 410.17
    6/1/2008 11471 3888 30 404.71
    7/1/2008 11079 3810 31 378.58
    8/1/2008 10631 3666 31 363.32
    9/1/2008 9553 2664 30 333.74
    10/1/2008 9360 2649 31 316.67
    11/1/2008 7810 2313 30 273.63
    12/1/2008 7745 2286 31 262.55
    1/1/2009 7109 1966 31 240.26
    2/1/2009 5927 1721 28 222.28
    3/1/2009 2174 704 10 229.54
    4/1/2009 7223 1932 29 260.56
    5/1/2009 5396 1542 31 182.64
    6/1/2009 4777 1328 30 166.87
    7/1/2009 1046 195 10 107.96
    8/1/2009 5632 1740 31 191.35
    9/1/2009 4853 1547 30 170.66
    10/1/2009 4522 1414 31 153.74
    11/1/2009 4031 1422 30 142.54
    12/1/2009 4750 2982 31 169.81
    1/1/2010 4282 2256 31 150.68
    2/1/2010 3139 1110 23 144.80
    3/1/2010 4849 1670 31 165.71
    4/1/2010 4645 1629 30 164.20
    5/1/2010 4335 1614 31 148.82
    6/1/2010 4010 1194 30 140.53
    7/1/2010 3996 1280 31 136.02
    8/1/2010 3816 1195 31 129.74
    9/1/2010 3625 957 30 126.33
    10/1/2010 3574 1264 30 126.40
    11/1/2010 3110 1225 30 110.71
    12/1/2010 3051 1169 31 104.92
    1/1/2011 3097 1179 30 110.01
    2/1/2011 2885 1080 28 109.69
    3/1/2011 2977 1165 31 102.51
    4/1/2011 3160 1096 29 115.48
    5/1/2011 3051 1045 31 104.23
    6/1/2011 2877 990 30 101.59
    7/1/2011 2874 1005 31 98.30
    8/1/2011 2900 919 31 98.66
    9/1/2011 2679 966 30 94.85
    10/1/2011 2686 1048 31 92.47
    11/1/2011 2570 958 30 91.17
    12/1/2011 2598 910 31 88.87
    1/1/2012 2495 876 31 85.36
    2/1/2012 2306 811 29 84.34
    3/1/2012 2379 857 31 81.51
    4/1/2012 2293 785 30 80.94
    5/1/2012 2369 810 31 80.92
    6/1/2012 1679 627 23 77.70
    7/1/2012 2745 1061 29 100.96
    8/1/2012 2360 902 31 81.15
    9/1/2012 2248 915 30 80.19
    10/1/2012 2305 1006 31 79.95

    Total 335944 112150 1751 202.90

    How do you reconcile the data with those listed in your data table.

    So far well No. 16637 produced 355 MBOE. Current production rate is 80 BOE/day, declining at -16% annual rate. At this rate, the well will likely produce another 163 MBOE. If we cut off at 10 MBOE, the well will produce another 143 MBOE. That will bring the total EUR to 355+143 = 498 MBOE. That's far below your 842.4 MBOE projection.

    The current cumulative production is 355 MBOE, still 487 MBOE away from your target. At current 80 BOE/day and declinging much faster than the 8% terminal decline rate, there is no way it will come any close to your number.
    Jan 8, 2013. 11:24 PM | Likes Like |Link to Comment
  • Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil [View article]

    OK, I take your explanation of what Michael means 1800 day IP. He probably means the AVERAGE production rate for the first 1800 days, NOT the production rate on the 1800th day.

    But still:

    1. The numbers are not correct. Oct 2012 would be five years since start of production in Oct, 2007. Cumulative production is 355.280 MBOE, divided by 5 years and then by 365 days, the average is 195 BOE/day, not 234 BOE/day as listed.

    2. More importantly, Michael uses the CHANGE of the accumulated average production rate and track how that value declines, and use that as indication of well decline. That is ABSURD. If you want to track well decline, you look at 1800 days and then you look at a month later at 1830 days, and see how much production rate has dropped. You do NOT use how the average to track decline.

    For example, if say the well abruptly stops production today, it drops by half each day to zero. The decline rate would be a very high number as production is halved each day. But using Michael's method:
    At (five year) 1825 days, the IP = 355.280 / 1825 = 194.674 BPD
    At 1825+30 days, the IP = 355.280/1855 = 191.526 BPD

    Thus IP dropped by 191.526/194.674 -100% = -1.62%/month

    That is certainly absurd. That method of calculation is wrong.

    3. Even more importantly. Michael's absurd method of calculation leads to an absurdly ridiculous high EUR. He concluded that the EUR of well No. 16637 will be 842.4 MBOE. There is NO WAY it can reach any where close to that EUR:

    Cumulative production so far is 355.280 MBOE. Current production rate is at 80 BOE/day, dropping 14% to 15% annually. How is the well going to produce 487,000 barrels more?
    Jan 8, 2013. 11:03 PM | 1 Like Like |Link to Comment
  • Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil [View article]

    The well production data you listed in your data table does NOT comply with actual monthly well production data I obtained from North Dakota DMR web sites, at links like this below:

    For example, for the well No. 16637 you listed, as of Oct 2012, 1800 days after initial production, the production rate dropped to 80 BOE/day. That's far below the 234 BOE/day you listed.

    Please explain your data source and explain how they can be reconciled with the official data from ND DMR web site.
    Jan 8, 2013. 04:25 PM | Likes Like |Link to Comment
  • Fracking, Climate Change And What Gets Lost In The Shuffle [View article]
    Let's put the global warming debate to an end, OK. Here is the argument:

    There is a miniscule physical effect that higher CO2 concentration in the atmosphere increases average earth surface temperature ever so slightly by maybe 0.2 °C degrees, or maybe 0.5 °C, or maybe 1.0 °C.

    It does not matter as the temperature raise is so small. The earth's season regulary varies 50 °C or more, especially in the polar area.

    The polar ice do seasonablly melt and then freeze over again, seasonally. Satellite photos prove it. However, it is FACTUAL that no one reported any city in the world be seasonally submerged and then re-emerged due to sea level rise due to the seasonal polar ice melting. That is a FACT.

    If 50°C temperature variation of the polar region does not cause sea level to rise and fall seasonally, what are we to worry that a mere 0.2°C temperature rise will cause so much sea level rise that cities could be submerged? It's a pure falacy!

    Global Warming is the biggest science hoax in history, period.

    Now let me explain why the seasonal polar ice melt does not cause sea level to rise. This is because of a physics priciple that Archimedes discovered more than 2000 years ago. Any object (polar ice in this case) submeged and floating on water will expell the exact volume of water that equals to the object in weight. So when a piece of floating ice melts, it neither causes the water to rise nor cause it to fall.

    It is possible, that if land based polar ice is to melt and flow into the sea, the sea level will rise. But we are not any where close to the point that polar ice on the antarctic continent melts. The seasonal polar ice melting so far reaches only the floating ice, not the continent.
    Jan 8, 2013. 04:25 PM | 3 Likes Like |Link to Comment
  • Don't Forget About King Coal [View article]
    I agree with the author's bullish take on the US coal sector. I have been one of the most outspoken advocator for coal on SA.

    The author mentioned China's November coal import of 29M tons was a rise of 6.5% over the same month last year. That was putting things lightly as last Nov. was a very high month to start with. You have to look at the bigger picture. China's coal import in 2011 was 182.4M tons. This year it's projected to be 265M tons, which is up 45% year-over-year. That's not the meager 6.5%.

    China's coal import this year could have been much higher had it not been for the abundance hydroelectricity in 2012 due to the excessive flooding, a one time weather event.

    China generated 0.7 trillion KWH of hydroelectricity in 2012, up roughly 1/3. The 0.7 trillion KWH of hydroelectricity was equivalent to 385M tons of coal. So China saved 1/4 of 385M = 96M tons of coal in 2012 year because of excessive hydroelectricity. If the hydroelectricity in 2013 falls back to normal level, all things equal, China would need to import 96M extra tons of coal just keep flat.

    Likewise, US lost 100M tons of coal demand in early 2012 merely due to a one time weather event of a warm winter. This winter is unlikely to be another exceptionally warm one. Actually right at this moment China experiences the coldest winter in 28 years.

    The outlook of coal can not be better. I see a much bigger coal rally than the 2007-2008 one coming.
    Jan 8, 2013. 04:25 PM | Likes Like |Link to Comment
  • U.S. Natural Gas: 3-to-6 Month Forecast [View article]
    Further, Check QEP's Haynesville production. They have last added wells in Haynesville in April or May, and have not added any QEP operated wells since. They do have added wells operated by others but that they have shared interests. Their Haynesville production is down 11% from Q2 to Q3.

    That's pretty much the figure for all shale plays. Yet the EIA production report, which is a MODELED estimate, not actual data, still shows straight line growth for Marcellus and flat line for others.

    Take the EIA data with a grain of salt. They do their modeling based on data package from private organizations, first from HPDI and now from DI (Drill Info). These private organizations get their data from state agents. State agents like Pennsylvania in turn only publishes data once in 6 months. PA thus far only published data up to first half of 2012. What happened in the second half of 2012? There is no state datainput thus EIA has no input either in their data modeling. They don't have the ability to track real month by month changes. They are merely modeling by extrapolation.

    The real natural gas production is already dropping pretty steeply.
    Jan 8, 2013. 10:06 AM | 3 Likes Like |Link to Comment