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Richard Zeits  

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  • SandRidge Permian Trust: Oil Volumes, Price Realizations Disappoint
       • Mon, Feb. 2 PER 10 Comments

    Summary

    • The Trust's Q4 2014 oil production declined 7% sequentially, despite ~49 new development wells brought on production during the period.
    • The $0.66 per unit distribution was supported by a strong (above-production) oil hedge and the subordination mechanism.
    • The distribution may decline to as low as $0.25 per unit already in Q2 2015, assuming $50 per barrel WTI.
    • As SandRidge's drilling obligation has been met, the subordination mechanism will expire at the end of 2015.
  • SandRidge Mississippian Trust I: A Production Beat Driven By Workovers
       • Sat, Jan. 31 SDT 14 Comments

    Summary

    • The units’ risk/reward profile improved, in my opinion, driven by gains on hedges and the positive operating quarter reported.
    • Some performance “upside” may exist from well maintenance activity.
    • The hedge portfolio is a powerful asset that provides stability to the Trust’s intrinsic value in the depressed commodity price environment.
    • Production decline trajectory remains difficult to predict.
  • Oil & Gas Stocks: Is The Sell-Off A Reaction To Old News?
    Thu, Jan. 29 OIL, USO 16 Comments

    Summary

    • The latest U.S. petroleum inventory data shows “mustard seeds” of improvement (even though a trend confirmation from the next few reports is needed).
    • The current crude oil price can be interpreted as a “pain shock” signal needed to cause a supply response.
    • The period of extremely low prices is likely short-lived.
    • The article provides inventory data analysis on a normalized basis.
  • Are Exxon, Chevron And Shell Low Cost Oil Producers?
    Editors' Pick • Wed, Jan. 28 XOM 49 Comments

    Summary

    • The article compares the Oil Super-Majors’ operating and reserve development costs to those of U.S. shale oil Independents.
    • Several common misconceptions are addressed.
    • The article discusses key strategic factors that drive Oil Majors’ deteriorating cost position.
    • While U.S. Shale Oil is a significant, largely untapped opportunity for Oil Majors, it is neither the solution nor the primary cause of the strategic challenge the Majors have faced.
  • Crude Oil: Is The Widening Contango A Precursor To Even Lower Prices?
    Mon, Jan. 26 OIH, USO, XES 29 Comments

    Summary

    • Spare storage capacity in the U.S. is quickly shrinking and the short-term contango is widening.
    • The 12-month contango in WTI now stands at over $9 per barrel.
    • The current seasonally strong demand is masking the true magnitude of inventory build.
    • In the absence of significant supply cuts, the 2009 scenario - when the 12-month contango exceeded $20 per barrel - cannot be ruled out.
  • Oil Supply Accelerating - Saudi Arabia Delivering On Its Promise?
    Editors' Pick • Mon, Jan. 26 USO 182 Comments

    Summary

    • The supply/demand imbalance in the oil market deteriorated in the past seven weeks.
    • In the U.S. alone, the total oversupply increased by over 1.1 million barrels per day, judging by inventory data.
    • Spare storage capacity in the U.S. is quickly shrinking, and the short-term contango is widening.
    • Such dynamics would hardly be possible without proactive supply increases by key global exporters.
    • At the current pace, a true "oil glut" may arrive in just a few months.
  • Bonanza Creek Energy: How Does 2015 Look?
       • Fri, Jan. 23 BCEI 2 Comments

    Summary

    • Bonanza Creek operating outlook highlights the severity of the current commodity price environment for shale oil producers.
    • Despite the ~37% capex cut, strong hedges and productive assets, Bonanza Creek will need to borrow to keep its production flat throughout 2015, assuming current strip prices.
    • The Wattenberg asset appears to require ~$70 WTI/$4 Henry Hub to be truly competitive, using current operating metrics.
    • Drilling economics may show some improvement as well as costs decline: $65 WTI/$3.50 Henry Hub may work towards the end of the year, in my estimate.
    • Overall, Bonanza Creek is well positioned to weather commodity price weakness throughout 2015.
  • Southwestern Energy: The Benefit Of Preserving A Strong Balance Sheet
    Thu, Jan. 22 SWN 16 Comments

    Summary

    • Southwestern receives excellent pricing in its $2.2 billion bond offerings.
    • Apparently, the bond market can be highly receptive to issuers in the oil and gas sector, for the right credits.
    • The outcome of the announced asset sales, the final component of the acquisition funding, is uncertain but not critical.
  • Exxon Mobil: Slow But Steady, Value Erosion Is Underway
       • Wed, Jan. 21 XOM 111 Comments

    Summary

    • Despite $100 oil and much higher capital spending, Exxon's oil production has continued to decline at a high rate.
    • When measured on a free cash flow basis, after adjusting for production declines, financial returns over the past five years were poor and the outlook remains bleak.
    • Even assuming the company will stabilize its liquids volumes, the stock appears dependent on $100+ oil to yield minimally acceptable free cash flow returns.
    • In a weaker price environment, Exxon may have to borrow to sustain dividends and share buybacks at the current level.
    • Exxon needs a radical Upstream strategy re-evaluation and deep cost reductions to restore competitiveness.
  • Southwestern Energy: Acquisition Financing Successful, But The Price Is High
       • Fri, Jan. 16 SWN 9 Comments

    Summary

    • Raises $2.3 billion in net proceeds from the equity and mandatorily convertible offerings, assuming green shoes are exercised.
    • Investment grade rating preserved, with a one-notch downgrade from Standard & Poor’s.
    • The stage is set for a successful bond offering that will likely follow. The company should have ample liquidity to fund its 2015 operating plan.
    • The current share price appears to discount an expectation of a substantial improvement in the natural gas price environment.
  • U.S. Shale Oil: What Doesn't Kill Me Makes Me Stronger
    Editors' Pick • Tue, Jan. 13 CVX, OIH, OIL 120 Comments

    Summary

    • 2014 economic metrics for shale oil are a "rear view mirror": the industry’s cost structure and average well productivity will look very different a year from now.
    • An oil price of $60 per barrel may prove sufficient for the aggregate U.S. shale oil production to be sustained at current levels or even grow.
    • The shale oil industry will likely emerge from the current turmoil somewhat smaller and slower, but leaner and more competitive.
    • Due to its flexibility, shale oil has greater resiliency to oil price swings in terms of returns than conventional oil mega-projects.
    • Lack of sufficient correction in the “Super-Majors” stock prices, particularly for Exxon, raises a concern regarding ultimate under-performance.
  • Richard Zeits Positions For 2015: A Bull Case For North American Natural Gas
    Editors' Pick • Tue, Jan. 13 UNG, AR, CHK 38 Comments

    Summary

    • The supply acceleration in December leaves little room for optimism with regard to natural gas pricing in 2015.
    • With production still running 7 Bcf/d higher year-on-year, one cannot rule out further price decline to levels consistent with production curtailments.
    • In the medium term, however, strong demand growth may require supply contribution from sources that are currently sub-economic.
    • In which case, a step change in the price of natural gas is likely to occur.
    • The time frame for demand acceleration is beyond 2016.
  • 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 48 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.