Papa Roach

Papa Roach
Contributor since: 2010
I would counter the idea that the Saudi strategy has worked/is working, and actually think it has backfired on them tremendously.
The will to survive is inherent in business as in life; we are seeing it in US E&P companies. The part that is going to leave a mark on the Saudi plan is the hyper-gained efficiencies and cost cutting we have experienced over the last year; those will not go away anytime soon. Now the players in the US have the ability to produce by dialing into the sections of their holdings that are the lowest breakeven costs, which turns out are the prolific areas and higher production. Forcing a business to adapt to hostile conditions is what has happened, and the knowledge gained will move forward.
Why a country like Saudi Arabia actually thought it a great idea to spend tens-of-billions of dollars of reserve assets to bankrupt high cost players is beyond illogical. Do they not realize the asset always remains; a bankruptcy only changes the players running it?
I think this will be a case study in economic/finance courses for decades under "WTF were they thinking?"
I have a solution for the entire E&P space 2016 CAPEX budget; better than drilling and growing into certain bankruptcy- http://bit.ly/1GvxTBx
@donal695 You could build 100 pipelines for them; these companies are vastly over-producing and continuing growth into an already over-supplied market. COG will NOT be at $70 in 24 months, unless the industry as a whole forms a 'gas cartel' arrangement similar to OPEC. Landowners should be furious that their commodity in-ground is being given away at such low value; it only produces one time.
Nothing like chasing "growth" for shareholders; in this oversupplied market, these guys will all grow their way into bankruptcy. They seem to care less about reserve valuations and legacy production; they are all in for finding ways to add production at lower levels, utilizing the very best part of their holdings. The commodity in-ground, only produces one time.
"Growth" should be scathingly frowned upon from the E&P sector; and heavily penalized.
Recent actions by Saudi Arabia may not make all that much sense on the surface, but if you drill down deeper in the 'why' department, the picture becomes a little less opaque.
Not only do the obliteration of the entire hydrocarbon chain price curve (oil, NGL's, gas) put tremendous pressure on the levered companies that became too drill happy, it drastically changes the financing game too. Lenders have been all too happy throwing cheap money at any and all E&P's as long as prices of at least 2/3rds of the chain remained strong. The price collapse is now punishing that behavior as well, and it will take awhile for this market to easily recover.
I do believe we will soon be in an environment of buyouts and consolidations, likely to mark the price cycle lows, which is why I am looking at Chesapeake. I am of the opinion that this company has been cleaned up well enough from the off-balance-sheet/sell... McClendon days, (they dodged a potentially fatal blow when they did that, barely). It is hard to pick the timing of a potential bid for the company, but I could easily see a Japanese bank or the likes, from a country with a real need for LNG, going to the source commodity as a long-term hedge. The price is right; we don't touch a calendar year strip of $4 until 2022. I feel this company will see a buyout bid of roughly $30/share by year-end, that is roughly 3x EBITDA, and right at current enterprise value.
"...Ask ECA, currently moving back into the Haynesville. They think that they are making money. Are you saying that you are smarter than they are? lol..."
Nobody said you cannot make a return in in any specific play, the basic idea is looking at the play on average. ECA or anyone else that holds some sweet spot sections can go in and drill a few more wells at a profit, but generally speaking the returns at the current price are low if there is a return at all. If this was wrong we would have more activity than we do.
Fact- Haynesville shale is in decline and has been for awhile now. There are currently 2,266 HS wells producing as of 10/3/13 just on the Louisiana side of the play (LA DNR). Bentek estimates decline will continue until 2015 before leveling out and starting to ascend again. So as I have stated before, there is now a regional tightening taking place, (declining supply and growing demand), in and around the basins that physically supply the Henry Hub/(NYMEX). Until the traditional long haul "T-pipes" buildout bi-directional capabilities via metering, looping and compression, Marcellus will only grow production as incremental new capacity comes on.
For the first time in years, there is fundamental reason to be bullish Producing Region gas, which includes Henry Hub and therefor NYMEX. The poor Marcellus producers that think they have "hedged" their supply by selling futures and/or are collared in may indeed get a double whacking as NE Marcellus/Utica pricing stays in the dumps and NYMEX rises. OOOOPPS! There is next to nothing in the way of basis hedges in the quarterly statements I have poured through, and that is going to sting.
This bull is going to be one that will catch many off guard, barring a blow-torch winter of course.
GamCap, Totally agree on Bentek's supply growth forecast being a Spongebob Squarepants fantasy at the forward strip pricing. Marcellus/Utica will not be the lone supply basin for the required growth to meet demand, and many of the PR basins that will need to be drilled will need a price adjustment.
According to Bentek, Haynesville will continue it's decline until 2015 before it bottoms and then starts a slow rise again. Considering how little activity there is now makes a long term bull like me happy. With nearly 2,300 producing wells just on the LA side of the play and the high decline rates experienced, it is going to take more than a few mom & pop producers to go drill some holes to reverse decline and start adding growth. Price will dictate that activity at a higher level than what is offered on the curve currently.
Scott,
On your thought-
" I for the life of me can not see how gas rises much above $4.50 anytime soon, but it was not so long ago that I thought it could never fall below $4 either. I would, however say that I follow the Marcellus pretty closely, and from your comments I suggest you might want to take a closer look at the economics in the best part of the play (susquehanna, bradford, lycoming, sullivan, wyoming counties) which is starting to look large enough to produce a whole lot of low cost gas for a pretty long time. Bentek's 2018 estimates (which are largely driven by Marcellus production) do not seem all that fantastical to me."
There are a few things to think about here relative to how price indeed climbs. First, looking at all the supply basins outside of the Marcellus/Utica region, they have either halted their ascension and are flat at best, or have already rolled over and are experiencing declines such as Haynesville. The production growth of the NE is obviously limited by capacity, which will be the main arresting factor of unimpeded growth from here forward. The new capacity projects being constructed will only add incremental new additions in steps.
Looking at the actual source of NYMEX pricing- Henry Hub, in south Louisana, (which I know you are aware of but mention the point for the other readers), the source basins for those physical molecules are the exact areas that are in decline, including offshore. Basis and daily spot markets are going to be what tempers the NE supply growth IMO, alongside the capacity. I am sure you have already seen the massive flips in paper that used to trade hefty premiums to growing discounts and some horrible daily cash prints.
For us to grow to an 80 BCF/day, we will have to either entice quite a bit of pad drilling to not only arrest decline but start to increase output in the producing region, or buildout about 15+Bcf/day of new pipe capacity up north between now and 2018/2019. The other question is what comes first from here forward, the supply additions or the demand additions? Since the vast majority of new demand additions are in and around the Gulf Coast region, we will need to increase output from the producing region basins, soon. Price.
So while looking at everything in a homogenous aspect, it would appear difficult to foresee what creates enough imbalance in a shorter term to lift prices. If you dissect the regions/basins however, you can easily see where Henry Hub (NYMEX) prices could rally to $5 to entice drilling, and at the same time have Marcellus regional pricing stay at $4 or even cheaper. Drill down the supply, the demand and the capacity and I think you can see the case of how we price higher from here.
Thoughts??
Sorry, I didn't mean all coal is going away, I was referring to many retirements and lack of any new coal fired generation being built. We will lose 13-15 GW of coal gen over the next 24 months, and counting....
Bentek energy put out the info on the 120 projects a month or two ago. It is an expensive service but one of the better ones publicly available. Also look into RBN Energy, he was a founder of Bentek and has his own analytics firm now, he puts out daily blogs on many subjects. Many demand projects are being built in the gulf coast region due to the already in place infrastructure and product delivery systems (barges, pipelines, ports, etc). New power gen is coming in many places, especially in areas where scheduled coal retirements are taking place. Capacity is definitely an issue for gas, and is easily seen in the weakening basis for marcellus area gas.
Because there is no takeaway capacity, things are getting maxed out. New projects are taking a lot of time and there are not that many more to keep up with the drilling pace.
And just what pipelines is this new NE production going to flow on? Capacity is the already the limiting factor. The other thing that you did not touch on is the fact that Marcellus area prices are well below the NYMEX prices the average investor see's, the NE basis markets have been getting weaker and weaker. Some points have had cash trading well under $2.50. Also, the traditionally high basis priced pipelines like TETCO M3 are now deeply discounted, so the prices are actually well under what you see. Dominion south is about 40 cents cheaper than nymex for all of 2014, and many other areas are trading a healthy discount as well.
Renewables generally are replacing coal, not displacing gas and are for power generation. RESCOM heating is still the big bad end-use of this commodity each year, and is why we must store supplies to meet those needs in the winter. Renewables don't offset heating loads. The industrial sector is almost at the point where it is the leading end-user and will likely be there in 12-24 months. There are roughly 120 new projects being completed between November 1 and March 31 that will add a nice chunk of new industrial baseload demand, and much more coming.
I think the renewable story has taken away some gas demand but as coal is getting phased out gas will make up the lionshare of those losses going forward. Last check I saw nearly 11 more GW of coal retiring in 2015.
This is a DANGEROUSLY misleading article. First off, the author is using total EUR (expected ultimate recovery of the life of the well) as an up-front number to be produced in one year, when the reality is these numbers are expectations over a 30-40 year period. It is also fantasy that we are not in decline in several key plays already, including the mentioned Haynesville shale, that coincidentally has 25-30 rigs drilling yet cannot keep up with high decline. Take a look at the latest EIA 914 report- http://1.usa.gov/y7PLBv
There is also a continuing push to HBP large areas of lease still in the NE (Marcellus), which is one reason for the continuing drilling pace and subsequent backlog. The first year decline of shale is conservatively averaging 65-70% over 12-months, meaning with US dry gas production of roughly 65 BCF/day being made up of over a third from shale, we must produce a new +/- 15 BCF/day each year just to hold steady.
Demand is coming in a larger way than many think, and prices will have to have a level adjustment to entice drilling in declining area's outside of the NE. Most shale plays do not have a return at current prices outside of the 'sweet spot' areas, meaning just the average to fringes of the plays are uneconomical. I know from a dry gas perspective that Eagle Ford is disappointing many players which is also why Texas production has remained rather flat for the last 12 months (as evidenced from the above EIA 914 link).
Higher prices will be needed soon to entice the drilling required to meet new demand.
Sure wish these whipper snapper analysts would ask more about the natural gas story of this company.... The majority of these questions are recycled again and again.
Since this article was written, to the timestamp of this comment, IBM is sitting on a tremendous gain of 3.5%, way to go naysayers!
For everyone else that heeded good valuation advice, a simple investment for the like period in the SPY yielded a respectable 13.5%.
Yes, that is me.......and why supply has held steady through some shut-ins and rig counts falling off a cliff to 13 year lows. I mean who would have thought that only six months ago when that was written, we would see rigs fall as fast as they did? Oh wait, I did mention prices would have to fall far enough to incite a response, which they did and did..........$1.90 Henry created fuel switching, shut-ins and mass rig migrations. Price did it's job and as my article was targeting, CHK lost more valuation........alot more.
Frac, instead of constantly providing criticism, why not step out and do some meaningful prognostication of your own? 451 comments (and counting), zero articles.
Don't get me wrong, I do now think dry gas rigs have fallen low enough to incite net supply declines really soon. But recall
This article is so wrong.............written by someone stuck in bearish positions.
If you liked Enron at $80, you'll LOVE it at $40......
One thing bottom pickers on falling rig counts must not ignore is the opposite rig count in 'oil rigs drilling'. The trajectory of oil rigs looks like a chart of apple in a parabolic rise now since 2009, sitting on record highs of all-time. What this translates into natural gas is the associated gas volumes that are produced from oil wells, and that source of gas supply is growing as fast as the rig count chart, offsetting the falling 'gas rig' counts. Since associated gas is really a secondary product to oil, the commodity costs of gas is not a factor in producing it and that will continue to increase gas supply from that source.
What do you mean that "500-700 wells were not completed'? Of course they were, that was a logistical backlog. Completing a well takes time for several reasons; you must first have a gathering system to tie into, then you need a frac crew and equipment (a very large undertaking), if you are doing a direct tie-in that takes quite a bit of time as well.
Wells were being drilled in the play at a pace much faster than they could complete them, causing a back log. They have since brought that down a few hundred wells since the peak and continue to do so.
As of 2/23/12, there are still 61 rigs drilling new wells in Haynesville, and 294 awaiting completion- http://bit.ly/xXo0a0
I am starting to think you lack knowledge of E&P operational logistics.
I tend to disagree about associated gas. If you are in the production side of this business as your name 'Fracjob' suggests, then you are aware that there is a large lag time between when a well is finished drilling and it is actually completed (sometimes many many months). Take a look at this information on the Haynesville shale as a perfect example- http://bit.ly/zUKQHH
Notice the data columns under the chart and pay attention to the 'Waiting on Completion/Fracturing/... Operations'. Those are wells that have been drilled but are waiting for various operations to bring on production. At the high point on a monthly basis there were 689 in backlog, and this is in just one shale play.
With so much rig activity in the US currently in many different plays, there is an enormous amount of wells waiting on completion on top of the record amount of drilling taking place. In other words, if every single drilling rig was laid down and the rig count was zero, we would still be bringing on new supply for well over the next year just working through the backlog. But we are indeed at record rigs for oil/liquids and there is still a very large increase of associated gas coming online. It will grow at a pace faster than the natural decline from the dry gas wells.
Here is the rig count chart if you missed the link above- http://bit.ly/wURDcY
Look at the oil rig activity and just ponder for a moment how many holes we are poking in the ground let alone how many we already have, and then ponder the amount of wells awaiting completion.
Again, we will have a gas production decline this summer, but it will be anything from natural; it will be forced upon the market via a much lower price. Storage physically cannot handle the supply this year, the market will drop low enough to get much more shut ins to balance. Many other companies that are still hedged (unlike CHK), are getting far higher prices for their production and are not as enticed yet to stop supply.
I think you need to reassess your idea of associated gas. Over 100% growth of volume in the last 12 months alone and looking at that oil rig count in the same time points to increasing gains in an increasing pace.
Indeed that is the billion dollar question. I penned an article a year ago that estimated we would start seeing a gentle decline in production by the end of 2011, which didn't happen. What was not properly thrown into my mix was two things; how fast oil rigs would climb and keep climbing (associated gas growth), and how much more money would be spent buying leasehold (forcing continued production at low prices to meet debt servicing cash flow requirements).
If everything remained static, supply growth would very likely continue into next year. Since that is physically impossible at this time due to a limited capacity of storage space with the record carryout we will walk with this spring, price itself will be called upon to force a decline. Nobody will be shutting in oil production or slowing the drilling pace anytime soon, associated gas growth will continue. The burden of shutting-in to balance will be placed upon dry gas production.
So yes, I do expect a decline this year, but a forced one rather than natural. A natural decline possibly late 2012 or early 2013 although it is tricky with estimating associated gas.
here is the chart on gas/oil rig counts they somehow lost in publishing-
http://bit.ly/wURDcY
Starting to see the folly of recommending this trade now? The risk is realizing a multiple now, to get out of the 4.65 call you sold at .065, you have to pay .26. Even if you choose to hold it, it is creating margin calls that would hurt people running small accounts. In the end, you ***may wind up collecting the .065 if this falls back late month. Regardless, that is not something to be proud of, (going underwater a multiple).
While your trading method may work for you on the long haul thusfar, you should not lead regular Joe's into this type of set-up, especially being a CTA.
While I am not here to argue the underlying fundamentals of gas now, I do think the trade rec. is an absolute horrible one. You are shorting a call that is just over .20 out of the money and has an entire month of risk before settlement. The risk/reward is completely backwards here, at your price, you have unlimited theoretical risk for a max profit potential of .065, ($.0925 on todays settle, you're already down near -42% on liq. value). If you were bearish at this juncture, and as cheap as volatility is, you would be far better off just buying a put or put spread (create defined risk for reward of at least near 3:1).
One thing I will caution you on is the long term complacency of the bear trade here, while we may indeed head lower later this season, we currently are -235 BCF in storage deficit to last year this time and will likely not make any dent in this until late June with the heat in the current forecast. One year ago, the June contract settled at $4.155 and July as prompt ran up to the summer highs at $5.196 on June 16th, a dollar move in just over two-weeks. And once again, this was with 235 BCF more gas in the tank than we have now.
The bears may endure a painful rally that shakes the market up before weaker fundamentals may or may not take hold later this summer. Me? I am obviously looking for higher pricing in the very near future.
I went in enthusiastic for this read..........until global warming was mentioned a couple of times as fact, eyes immediately glossed over.
Global warming is the biggest schitt pie being sold to people, all in the name of creating a carbon market for fun and profit for a select few modern day snake oil salesmen.
Go research PDO cycles, we've had a warm one for a couple decades......when it was warming.........like it has done since the inception of time, it is now flipping to a cold phase and the next decade plus, "global warming" will be forced to change to "climate change" as the earths temperatures cool, which by the way are already happening.
Look at this- www.planetseed.com/fil...
Anyone notice a cycle?
While I am not looking for a serious bull to occur immediately, I do think the bear story has reached the bottom of the ninth inning. Things are changing and will continue to in the coming months that are rather supportive of natty, and this was happening even prior to the Japanese disaster.
Just touching on a few points that are going to be drivers in the background. Coal is pricing at a premium to last years summer peak (on the hottest summer on record); coal-to-gas will be rather robust. La Nina conditions continue to persist which is forecasted to have a dry and hot summer for the southern US and also be supportive of an active tropical season; (it only takes one in the right area). Industrial demand is gaining. Pemex supply is down creating higher US pipeline exports to Mexico. Oil sands production is rapidly increasing, leading to lower Canadian imports. Global LNG pricing is very high, meaning we will only get the minimum baseload quantities. Production has just about flat-lined, even if it is at the top; the ascension has left the building. Gas rigs are leaving for the higher reward in oil, and a small bump up in natty will not create a rush back with the price discrepency so wide; gas rigs are off -117 from the August peak while crude rigs are making new record highs each passing week. I know I am leaving out more, but this is a good start for this exercise.
Baker Hughes-
Gas rigs drop another 7 in the week, and oil made a new record adding 12 more.................and the curve is still being ignored/underappreciated!
As they say in Vegas, "Good luck gentlemen"
Baker Hughes weekly rig count-
Gas rigs dropped another 17 rigs in the week while oil rigs increased 26, the migration of gas to oil in motion.
Gas is now off -110 rigs from the peak in August (-11%).
This weeks 899 gas rigs count is the lowest since week ending 2/19/2010, (last year), and -93 from the high of 992 on 8/13/2010