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Richard Zeits  

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  • U.S. Oil Shales: Still Growing Fast
    Sun, Jan. 11 OIH, OIL, USO 53 Comments

    Summary

    • How long would it take for the U.S. oil production to go in decline?
    • Why have shale operators waited for six months since the beginning of the oil price correction to reduce drilling?
    • What are breakeven oil prices for U.S. shale plays?
    • What are the implications for the price of oil?
  • Sanchez Energy: Improving Well Results Imperative For Success
       • Sat, Jan. 10 SN 22 Comments

    Summary

    • Sanchez’s revised its 2015 capex sharply down, targeting ~$400-$450 million run rate, compared to $1.15 billion planned initially.
    • Mandatory drilling in Catarina and high-return development program in Palmetto survive as the primary spending categories.
    • Sanchez expects that its reduced capex, combined with lower costs, should be enough to keep production flat.
    • While well cost reduction targets are impressive, the new guidance highlights the need for stronger well results to stay competitive in a low commodity price environment.
  • Oil & Gas Stocks: Have You Noticed A Performance Improvement? May Be Worth Paying Attention
    Thu, Jan. 8 CLR, CVX, LINE 51 Comments

    Summary

    • The majority of oil-focused stock groups (excluding the MLPs and international Oil Majors) posted gains since my last update in mid-December.
    • During the same period, the price of oil declined by ~18%.
    • The “on sale” menu continues to be extensive, with a vast number of stocks priced at less than one-third of their peak prices achieved last summer.
    • The deterioration of the natural gas fundamentals appears to have caught the market by surprise, which may explain the under-performance by the gas-focused groups.
    • The article provides "correction scorecards" by stock and by group versus commodities.
  • Halcón Resources: November Eagle Ford Production Inches Higher
       • Thu, Jan. 8 HK 34 Comments

    Summary

    • Based on the aggregation analysis, Halcón’s Eagle Ford production held steady in November at ~24% above the Q3 2014 average.
    • Latest well results are in line with the company’s average well performance in the area.
    • Even though at $50 per WTI barrel El Halcón cannot compete for capital, a 2-rig drilling program is likely to be sustained due to lease retention requirements.
  • U.S., Russia, Saudi Arabia: Who Is Going To Win In The Oil Price Stand-Off?
    Editors' Pick • Wed, Jan. 7 USO 250 Comments

    Summary

    • Among the largest producers, the U.S., Canada, Saudi Arabia and Iraq were among the largest market share gainers in the past five years.
    • North American unconventionals have proven their top competitiveness against other supply sources.
    • While the market share trend is likely to continue, potential return of supply from Iran, Iraq and Libya may completely re-define oil market environment and depress oil prices.
  • Crude Oil: 3 Graphs That May Hold The Key To The Price Collapse
    Tue, Jan. 6 USO 44 Comments

    Summary

    • Can the negative supply/demand fundamentals be detected in worldwide industry statistics?
    • Why is the current decline so much deeper than several previous ones?
    • Where is the bottom?
  • Southwestern Energy: Big Opportunity Brings Along Big Challenges
       • Tue, Jan. 6 SWN 10 Comments

    Summary

    • Southwestern expects to raise $2.5-$3.0 billion via new equity issuance and asset sales in the first half of 2015, a tall order in the current market environment.
    • In South Marcellus, finding takeaway solutions and demonstrating strong well performance on the acquired acreage are high on the agenda.
    • 2015 promises to be difficult for natural gas producers and may challenge the economics of Southwestern’s drilling programs.
  • Linn Energy: A Half-Step In The Right Direction
    Editors' Pick • Mon, Jan. 5 LINE, LNCO 47 Comments

    Summary

    • Linn Energy’s 2015 budget balances expected cash flow, capex and distributions.
    • However, no room seems to be left for debt reductions.
    • Linn Energy remains vulnerable to a prolonged commodity price slump.
    • Cost reduction (particularly G&A) appears to be an untapped reserve.
  • Breitburn Energy Partners: One Cut Would Be Better Than Two Half-Cuts
       • Mon, Jan. 5 BBEP 18 Comments

    Summary

    • Breitburn’s 2015 budget leaves little room for debt reductions, using the company’s $60 per barrel and $3.50 per MMBtu price assumptions.
    • The partnership continues to prioritize distribution maximization over balance sheet health.
    • This effectively “cut once there is a problem” approach may not be the best strategy in light of the daunting macro uncertainties.
    • With leverage unaddressed, capex and distributions remain vulnerable to additional cuts in the near future.
  • U.S. Natural Gas Economics: $4 Works; $3 Is Too Low
    Editors' Pick • Sat, Jan. 3 UNG 164 Comments

    Summary

    • With Nymex natural gas averaging $2.93 per MMBtu for the next six months, the commodity’s economics need to be re-assessed.
    • While the current negative price signal can be rationalized, sub-$3 gas price is not sustainable in the longer term.
    • However, the re-balancing of supply and demand may take several months.
  • A Giant Gas Well Confirms Deep Utica Potential
    Editors' Pick • Dec. 31, 2014 RRC 56 Comments

    Summary

    • Range Resources reported a record IP in deep dry gas Utica test.
    • The well extends the play's proven frontier almost 2,000 feet downdip and far to the east from the majority of existing wells.
    • However, the high well cost sets well performance bar high.
    • The note summarizes the play's evaluation results to-date.
  • At What Oil Price Do U.S. Shales No Longer 'Work?'
    Dec. 31, 2014 SM, WLL, CLR 63 Comments

    Summary

    • Notwithstanding the decline in oil prices, U.S. oil production from shales will likely post solid sequential growth in the first half of 2015.
    • In the second half, significant volume contraction is unlikely, unless oil price stays below $50 for at least several months.
    • Beyond 2015, the North American shale oil industry is likely to see sustainable expansion, as long as average oil price remains above $60 per barrel.
    • Many shale operators have significant drilling inventories that will yield returns above 20% even at $60 per barrel WTI.
    • Oil shales are not the highest-cost sources of supply and should not be counted on to provide quick relief for the oversupplied market.
  • Is The Oil Super Cycle Over?
    Dec. 28, 2014 OIH, OIL, USO 131 Comments

    Summary

    • For almost a decade, oil has traded in disconnect from the underlying cost to produce it. What has made it possible?
    • Was the recent move in oil price driven by speculation or by economics?
    • Is the Super Cycle over?
  • Is Saudi Arabia Targeting U.S. Shales?
    Editors' Pick • Dec. 26, 2014 XOM, CVX, BP 316 Comments

    Summary

    • Strategically, North American shale oil will be one of the biggest beneficiaries of the current industry downcycle.
    • The most damaging impact will be on long lead-time mega-projects, particularly in high political risk areas.
    • It may sound counter-intuitive, but U.S. shale operators' economic interest at the moment effectively coincides with Saudi Arabia's.
    • Consumers are the ultimate winners, as supply is becoming more competitive and its marginal cost - which supports the long-term price - is effectively being reduced.
  • Continental Resources: Budget Cut In Half, Production Still Growing
    Dec. 24, 2014 CLR 11 Comments

    Summary

    • At $2.7 billion, Continental’s budget appears to be fully funded under a $60 per barrel WTI and $3.50 per MMBtu Henry Hub scenario.
    • Under the new operating plan, I anticipate the company’s production to grow at a significant rate during the first half of 2015, flattening thereafter.
    • In the event commodity prices decline further, Continental would face difficult decisions, as drilling economics would be severely challenged.
  • Encana: Unhedged But Undeterred
       • Dec. 22, 2014 ECA 10 Comments

    Summary

    • Assuming average Nymex prices of $70 per barrel for oil and $4 per MMBtu for gas next year, Encana’s shares are trading at ~3.3x 2015 estimated pre-hedge cash flow.
    • The company has sufficient resources to execute its 2015 business plans without major curtailments even under a $55 oil/$3.50 gas scenario.
    • However, Encana still has a lot to prove with regard to the economic viability of its asset base in a low-price commodity environment.
    • At its current price, the stock represents an intriguing bet on a cyclical recovery in oil.
    • It would be natural to expect that Encana eventually streamlines its portfolio to the four most strategic assets, with divestitures providing funds for accelerated development.
  • First Crude Oil, Now Natural Gas... How Low Can It Go?
    Dec. 22, 2014 UNG 21 Comments

    Summary

    • Is natural gas headed for a 2012 scenario?
    • What is the level of structural support for the price?
    • Is the Marcellus still economic?
  • Linn Energy: Something's Got To Give
    Editors' Pick • Dec. 18, 2014 LINE 270 Comments

    Summary

    • Bloomberg’s report that Linn Energy is putting its capital spending on hold requires confirmation.
    • The probability of a major capex reduction is indeed very high and may be announced in January or February.
    • The probability of a distribution cut is also high.
    • The units’ current price appears to discount a strong cyclical recovery scenario in oil.
  • Is The 'Oil Glut' A Myth?
    Editors' Pick • Dec. 18, 2014 OIH, OIL, USO 208 Comments

    Summary

    • The severity of the oil price drop appears to be in disconnect from some “supply glut” indicators that remain at moderate levels.
    • The price decline does not appear to be caused by an inventory pile up throughout the delivery and storage chain but rather by the lack of supply or demand elasticity.
    • The current imbalance between supply and demand appears to be much “softer” than in the 2008-2009 correction and may be easier to address.
  • How Long Does A 'Typical' Oil Downcycle Last?
    Editors' Pick • Dec. 15, 2014 XLE, USO, OIL 308 Comments

    Summary

    • Oil price patterns observed during some of the previous “mega-corrections” imply that this time a decline to a $45-$55 per barrel range cannot be ruled out.
    • It is difficult to expect a rapid recovery. At least three previous mega-corrections took almost two years to run their full course.
    • The current correction’s structural logic does not imply that there is a fundamental change to the industry’s capacity or cost base, which are the key drivers of the long-term price.
  • Chesapeake Granite Wash Trust: Stress-Testing At $50 Per Barrel
       • Dec. 15, 2014 CHKR 24 Comments

    Summary

    • Oil over-hedging enhances distributions through Q3 2015. Subordination mechanism may remain in place through Q2 2017.
    • The Trust’s current $5.75 per unit price reflects ~$70 per barrel WTI and $4/MMBtu Henry Hub (based on Illustrative Scenario outlined in this note).
    • Uncertainty with regard to production decline in Granite Wash is significant.
    • At the current price, units offer a neutral risk-reward trade-off, in my opinion.
  • Oil & Gas Stocks: Pain, Then More Pain... When Is The Gain?
    Editors' Pick • Dec. 14, 2014 CLR, COP, CVX 129 Comments

    Summary

    • Small- and mid-capitalization stocks, both E&P and Oil Service, are trading ~60% below their recent peaks, on average.
    • A growing number of stocks are priced at less than one-quarter of their peak prices achieved less than six months ago.
    • Is this a transitory downcycle or a fundamental change in the Oil & Gas business?
    • The article provides "correction scorecards" by stock and by group versus commodities.
  • Is This The End Of The 'Shale Oil Bubble?' Or The Beginning?
    Editors' Pick • Dec. 12, 2014 USO, XLE, OIH 201 Comments

    Summary

    • Can oil price decline any lower? What would be the structural support level?
    • How long will the downcycle last?
    • Are market mechanisms OPEC’s new best friend?
  • Triangle Petroleum: What Are The Assets Worth?
       • Dec. 11, 2014 TPLM 30 Comments

    Summary

    • This article attempts to estimate the long-term oil price effectively discounted in Triangle’s current stock price.
    • Illustrative value sensitivities are presented for a wide range of oil price assumptions.
    • The oil price cycle needs to be taken into account when valuing the shares.
  • Can EOG Resources Grow At 25% With Oil At $65?
       • Dec. 10, 2014 EOG 42 Comments

    Summary

    • EOG is very strongly positioned to weather a most severe oil price trough.
    • If oil price remained at $65 per barrel level, EOG would still be able to post oil production growth in 2015, without increasing debt level.
    • Given weak hedge protection in 2015, the company’s financial results will be volatile quarter to quarter.
  • Can Continental Grow At 25% With Oil At $65?
       • Dec. 8, 2014 CLR 38 Comments

    Summary

    • Continental’s current 2015 budget implies 23%-29% year-on-year production growth.
    • The company has sufficient drilling inventory that remains economic even at $65 per barrel.
    • Assuming no change in the price of oil, credit considerations will likely cause spending reductions throughout the year.
    • However, even assuming significant budget cuts, the company’s production will still likely grow in 2015.
  • SandRidge Permian Trust: Stress-Testing At $50 Per Barrel
       • Dec. 6, 2014 PER 33 Comments

    Summary

    • Subordination mechanism provides distribution protection through the end of 2015. Hedge protection is adequate in the near term but runs out after Q1 2015.
    • The Trust’s current $7.56 per unit price appears to discount ~$75 per barrel WTI (based on Illustrative Scenario outlined in this note).
    • Uncertainty related to production decline is significant.
    • At the current price, units offer a neutral risk-reward trade-off in my opinion.
  • Halcón Resources: Eagle Ford Production Regains Production Momentum
       • Dec. 6, 2014 HK 31 Comments

    Summary

    • Halcón’s latest (through October 2014) well performance data in the Eagle Ford is analyzed.
    • El Halcón gross production increased ~21% in October month-on-month.
    • Latest well results show continued improvement in the average IP-30 rate.
    • In the event of a protracted oil price decline, El Halcón may be able to compete for capital above $60 per barrel of WTI, based on current well results.
  • SandRidge Mississippian Trust II: Stress-Testing At $50 Per Barrel
       • Dec. 5, 2014 SDR 1 Comment

    Summary

    • Strong hedge position on the oil side provides distribution protection through the end of 2015.
    • The Trust’s current $4.96 per unit price appears to discount ~$85 per barrel WTI and $4/MMBtu Henry Hub (based on Illustrative Scenario outlined in this note).
    • At the current price, units offer a neutral risk-reward trade-off, in my opinion.
    • I estimate the next distribution at $0.37 per unit, driven by hedges.
    • Distributions per unit will likely decline strongly (to ~$0.15 per unit, assuming $85 oil) by mid-2016.
  • Southwestern Energy: Robust Firm Transportation Portfolio For Marcellus North
    Dec. 5, 2014 SWN 6 Comments

    Summary

    • The $300 million WPX acquisition is notable for firm transportation on the Millennium Pipeline that it brings along.
    • The earlier than expected in-service date estimate for the Constitution Pipeline is another positive for Southwestern.
    • Results of two Northern Susquehanna test wells revealed. The results can be interpreted as encouraging.
  • Cabot Oil & Gas: Good News On The Constitution Pipeline
    Dec. 4, 2014 COG 8 Comments

    Summary

    • The Constitution Pipeline may see an earlier than currently expected in-service date.
    • Will add 0.5 Bcf/d to Cabot’s production.
    • Will provide access to strategically attractive markets.
  • I Wouldn't Get Used To $65 Oil
    Editors' Pick • Dec. 2, 2014 OIH, OIL, XLE 323 Comments

    Summary

    • A prominent oil company chairman suggests that crude oil can “spike down” to $30 per barrel.
    • A Bloomberg article mentions $40 per barrel as a possibility.
    • This note draws historical parallels that illustrate the market psychology.