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Richard Zeits  

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  • Exxon Mobil: Slow But Steady, Value Erosion Is Underway [View article]
    Retired Aviator,

    "I've read that Exxon's actual lifting/transporting costs per barrel are low compared to most oil producers... Obviously it is much lower than the shale producers..."

    One would think,right?

    Let's have a look at the actual numbers. Let's take a typical large shale oil producer, Continental Resources for example, and compare its operating costs to Exxon's (let me use 2013 data, the last full year reported).

    Average price realization: XOM = $69.66/boe; CLR = $72.71/boe.

    Average operating cost (Production expensed + Taxes other than income + SG&A): XOM = $28.78; CLR = $15.29.

    In this calculation, I allocated 70% of XOM's SG&A expense to the Upstream. I excluded cash income taxes that are much higher for XOM (virtually all deferred for CLR).

    The bottom line: price realizations are comparable, XOM's operating expenses are two times (!) higher than CLR's.

    I could post a broader set of cost comparisons and discussion in a separate note (please vote with "like" under this comment if such analysis would be of interest).
    Jan 20, 2015. 11:51 PM | 51 Likes Like |Link to Comment
  • Oil & Gas Stocks: How Far Are We In This Correction? [View article]

    The correction appears to be disproportionately deep, relative to the move by other stocks, in the European Majors and smaller independents categories. That's where I would look for "unfairly penalized" situations. However, this article was not meant to provide specific recommendation with regard to each stock, but rather to give a convenient scorecard to track stock moves in the chaos and pain of the correction.
    Oct 8, 2014. 08:58 AM | 28 Likes Like |Link to Comment
  • Oil & Gas Stocks: Pain, Then More Pain... When Is The Gain? [View article]

    I agree, there is some redundancy. But when I have 300+ Oil & Gas stocks on my screen, with many of them jumping up and down 10%-20% per day, I personally find it useful to have a simple tracking tool that would tell me where we stand. Helps me to sort through the chaos.

    I thought if this is useful to me, it might be useful to someone else. So I posted it.
    Dec 15, 2014. 12:14 AM | 23 Likes Like |Link to Comment
  • Is This The End Of The 'Shale Oil Bubble?' Or The Beginning? [View article]

    It might be interesting to turn to the example of the previous "extreme" correction of 2008-2009. There were certainly some companies that faced challenges (I recall Kodiak trading at $0.20 per share). But I do not recall many bankruptcies or debt restructurings.

    I believe that overall the industry is actually in a very healthy condition at the moment, you may not see bankruptcies for some time.
    Dec 12, 2014. 08:54 AM | 22 Likes Like |Link to Comment
  • The Oil Price Crisis: What Is The Economic Cost To The U.S.? [View article]

    I think you are using a somewhat "intuitive" definition for GDP that may lead to wrong conclusions. In econometrics:

    GDP = Consumption + Government Expenditures + Investment + Exports - Imports

    You seem to focus mostly on just one component, the oil-related consumption. There are other components that are directly connected to it. You mention imports - that category would be a direct offset due to its one-for-one decline. I would agree with you that consumption dollars that free up due to cheaper fuels and oils will be spent elsewhere (which, generally speaking, should be stimulative to the economy) but I am not sure I understand the multiplier effect. So based on the above, the GDP impact is positive, not negative, in my opinion.

    I would also argue that the downstream sector's contribution to the GDP is mostly invariant with regard to the price of oil, I don't think your presumption is correct.

    I also believe you miss the most important component: new investment in oil will decrease significantly (although that capital will be available for investments elsewhere).

    Summing up, the GDP impact of lower oil prices will likely be slightly negative in the short term, but mostly for reasons different than what you discuss in the article (contraction in investments is key). In the long run, it would be obviously very positive.

    My 2 cents, or whatever it's worth.
    Dec 27, 2014. 02:30 PM | 18 Likes Like |Link to Comment
  • To Understand The Oil Price Drop, One May Wish To Look At The Term Structure [View article]

    Just to make sure, I don't think I use "technical analysis." Graphs in my notes are not "technical analysis" graphs. I really look at the industry from a fundamental and structural perspective. Backwardation and contango are not terms of "technical analysis."
    Nov 15, 2014. 07:35 AM | 17 Likes Like |Link to Comment
  • Oil & Gas Correction Scorecard: Have We Seen The 'Capitulation' Yet? [View article]

    Bankruptcies are not uncommon, but I would not hurry to interpret stock price declines as a signal of approaching bankruptcies. Let's not forget, one interesting attribute of oil and gas companies, they can drop their capex to zero and their free cash flow available to service debt skyrockets. It things get really bad. And if drilling rigs go idle, production with be almost certain to decline in the U.S., helping to balance the market.
    Oct 13, 2014. 05:22 PM | 17 Likes Like |Link to Comment
  • Oil & Gas Stocks: Pain, Then More Pain... When Is The Gain? [View article]

    I am afraid you are missing two factors. First, the oil & gas industry is coming off a very strong upcycle. A lot of equity has been accumulated to support debt. Second, before the operator faces liquidity issues, it often has the option to eliminate capex which leads to very strong free cash flow in the immediate term, typically more than sufficient to service debt... And then the upcycle may arrive to rescue.
    Dec 14, 2014. 07:14 PM | 16 Likes Like |Link to Comment
  • Oil & Gas Stocks: How Far Are We In This Correction? [View article]

    The oil price is obviously an 800 lbs gorilla in the room. The trick is that the US/Canada shales are not price setters (at least not yet). The price is defined elsewhere. I will try to post a more detail note soon.
    Oct 8, 2014. 09:41 AM | 16 Likes Like |Link to Comment
  • U.S. Oil Export Ban: Are There Reasons Not To Repeal? [View article]
    David de los Angeles,

    One can make a mile-long list of things that the U.S. consumes much more than it produces domestically (including t-shirts, sneakers, toys, PCs, and you can continue the list). But very few of those are subject to export ban. Logic?
    Mar 22, 2015. 09:23 PM | 15 Likes Like |Link to Comment
  • How Long Does A 'Typical' Oil Downcycle Last? [View article]

    How do you define "doing fine?" The right question to ask is why is the currency in a free fall first place. And the answer is probably very simple - the market is anticipating a huge budget deficit and a huge new supply of money to be printed by the central bank to cover the gap. The outcome - a deep recession coupled with a galloping inflation, which in turn leads to an even greater decline of the internal revenue. By the way, the worst thing one can do in this situation is to hike the interest rate. And that is what their central bank did today, in my understanding. This "doing fine" is actually a risk factor for the S&P 500, the same way it was back in 1998 with LTCM.
    Dec 15, 2014. 11:21 PM | 15 Likes Like |Link to Comment
  • The Debate Over Shale Oil Reserve Estimates Suggests EOG Resources Might Be A Good Short [View article]
    Dear Michael,

    I read your note with interest. While I do not agree or disagree with you main point that EOG is a good short, I am a bit surprised by the rationales that you are using to support this and other recommendations.

    "Most oil and gas investors have never heard of Jan Arps or seen his commonly-used formula for calculating Estimated Ultimate Recovery..."

    First, even if your assertion were true on its surface, I don't think it is valid in its substance. Well performance, production declines and EURs are typically analyzed and estimated by reserve engineers. It is a large and well established discipline. Suggesting that all estimates are overstated needs some substantiation. Investors do benefit from the knowledge and established practices and analytic standards developed and enforced by the industry. So, in substance, investors not only have "heard" of Arps math, but are routinely using a vastly more elaborate set of methods and practices (even if they do not know about it) when they listen to investor presentations or read 10-Ks.

    It is true, some investors would not be able to perform this type of analysis like professional reserve engineers can (equally, few investors are good forensic accountants). Many investors do not have same access to raw well performance data. However, based on my experience, the majority of energy-focused institutional investors and analysts can understand what stands behind the estimates and can think of these estimates critically. Reading your note, I almost get an impression that steep initial declines from fracked wells is a recent news and that the concept of a decline curve was first discovered in the article in Businessweek from last week that you refer to.

    "My personal view is that the Arps formula produces unreliable results for fracking, and investors should approach the area with caution."

    I wholeheartedly agree that investors should approach any area in investments with caution and avoid judgement based on superficial understanding. However, I do not agree with how you depict the process of estimating reserves (and drilling economics). In practice, this process is not (or, at least, should not be) a simple mechanical application of some mathematical formula - this would be a very simplistic and inadequate view of how the estimation is done by the industry.

    "My approach is buy oil & gas companies with diversified resource bases at prices of 5 to 7 times cash flows and reasonable balance sheets."

    I am surprised you are advocating to pay that high of a multiple. Every situation is different of course, but aren't there many well-established energy companies with diversified resource bases that are trading well below 5 to 7 times cash flows? 7x multiple, in my experience, is a sign of a high growth expectation.

    Just my to cents.


    Apr 6, 2014. 02:28 PM | 15 Likes Like |Link to Comment
  • Oil & Gas Stocks: Pain, Then More Pain... When Is The Gain? [View article]

    I would distinguish the breakeven price for existing production and for new projects.

    In a place like the Eagle Ford, existing wells could break even at $10-$20 WTI on a cash basis (variable LOE and production taxes are low and everything else is often sunk cost in the immediate term).

    The breakeven cost for new production is substantially higher. EOG, for example, has stated that it can generate 10%+ returns in the Eagle Ford at $40 per barrel and current cost structure (which reflects $100 per barrel oil). Can an operator survive on a 10% return? Certainly not in a long term, in my opinion.

    All these questions are somewhat irrelevant, however. First, operators will begin shutting in production well before cash breakeven costs are reached. Second, what matters most is the price at which the industry as a whole would be able to attract capital sufficient to grow production at an annual rate of at least 1 million barrels per day a year. Given natural declines, this takes a tremendous amount of capital.

    Capital availability may not be sufficient to feed that minimal growth if oil stayed at $60, in my opinion. Something would have to give - either costs or the price.
    Dec 14, 2014. 05:29 PM | 14 Likes Like |Link to Comment
  • Is This The End Of The 'Shale Oil Bubble?' Or The Beginning? [View article]

    The presumption is that the producer is essentially fully hedged. This rarely is the case however.

    However, I totally agree with your concept - if the price of oil is too low, it seems to make a lot of sense to cut capex by all means possible and monetize hedges at the same time.
    Dec 12, 2014. 10:11 AM | 13 Likes Like |Link to Comment
  • Oil & Gas Correction Scorecard: Have We Seen The 'Capitulation' Yet? [View article]
    By way of update, today proved to be another very painful day for Oil & Gas stocks (the article was submitted in the morning, with all stock price data based on last Friday's close). Many small-capitalization stocks suffered further large declines. Some are trading in what I would consider "irrational" territory that does not reflect asset quality or financial leverage.

    In another worrisome development, some other economically sensitive sectors - such as Airlines - showed weakness.
    Oct 13, 2014. 04:01 PM | 13 Likes Like |Link to Comment