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Richard Zeits

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  • 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 08:58 AM | 28 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 05:22 PM | 17 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 09:41 AM | 16 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 02:28 PM | 15 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 04:01 PM | 13 Likes Like |Link to Comment
  • Ultra Petroleum Could Double Within 3 Years [View article]

    Thank you for highlighting UPL, they are indeed an interesting company.

    Could you please substantiate your investment thesis a bit further.

    You have singled out UPL among many gas-focused stocks. Wouldn't many stocks double, triple, quadruple if gas prices went to $6? I would also note that many gas companies have been able to increase their production through the recent downcycle (COG, RRC, EQT, SWN, just to provide some names), their stocks have done well. During the same period, UPL has seen its production and stock price decline. Does it indicate that UPL has marginal assets and will continue to underperform in what is an extremely competitive industry with essentially unconstrained supply?

    It appears your thesis is hinged on natural gas price going up to $5 or $6. What will drive it so much higher? Supply and demand appear to have been balanced very nicely for the past six months or so, yet nat gas has been trading between $3.25 and $4.50. There is a view point that there is no shortage of drilling opportunities in natural gas to satisfy even a strong growth in demand. Cost of supply has also been drifting lower, not higher. In a competitive industry, operating margins should be defind by cost of marginal supply, not by demand. What am I missing here?

    What will happen to UPL if nat gas prices stayed where they are (sub $4)?

    Could you please explain your statement: "Ultra Petroleum is one of the low-cost producing natural gas drillers with all-in costs of $3.00 per MCF in 2012?" Are you using a correct/relevant metric? Why did UPL have to cut their production? What nat gas price would it take for UPL to break-even on its cost of capital at the field level and corporate level? Are they really a "low cost" producer?

    I am not arguing for or against your conclusions, I am just trying to understand your thesis.
    Jun 21 09:54 AM | 10 Likes Like |Link to Comment
  • Natural Gas: Marcellus Pipeline Boom Sets Stage For A 30 Bcf A Day Tsunami [View article]

    Again, I've never heard of Mr. Powers, but a forecast of 50 Tcf of total future production from the Marcellus sounds very surprising to hear. This is either a mis-quote or you may wish to have a closer look at what is driving that conclusion. 50 Tcf is what Range alone may be able to produce from their lands. And then there are a dozen of other producers of comparable size and many smaller ones.
    Oct 11 08:54 AM | 9 Likes Like |Link to Comment
  • SandRidge Energy: What Are The Assets Worth? [View article]
    JRF77 and Mjtroll1,

    Sorry for the acronyms.

    EUR per well = Estimated Ultimate Recovery per well (a key metric that characterizes expected reserves associated with a well and drives the rate of return on investment)

    HBP = Held By Production (acreage that the E&P operator controls beyond the initial lease term by way of drilling a producing well)

    NGL = Natural Gas Liquids

    PUD = Proved Undeveloped (in conjunction with reserves or drilling locations)

    And indeed, this is article is not meant to be an investment recommendation - just thoughts that I hope will be helpful to readers in developing their own, a lot more comprehensive analysis.
    Mar 4 11:49 AM | 8 Likes Like |Link to Comment
  • Natural Gas: Marcellus Pipeline Boom Sets Stage For A 30 Bcf A Day Tsunami [View article]

    Bill Powers must be a distinguished researcher, but I just have not come across his work or heard his name, so it is difficult for me to comment.

    However, the Marcellus is already producing 15 Bcf/d and E&P operators are contracting for new capacity with remarkable confidence, as I wrote above. The proof of the pudding...
    Oct 11 12:26 AM | 7 Likes Like |Link to Comment
  • Linn Energy: Value Gap Suggests Risk Of Underperformance [View article]
    There a several comments suggesting that the comparison is of the "apples to oranges" nature. I am not sure I agree it is. If E&P stocks are "apples," it makes Berry an apple, it makes the recently acquired Devon's assets a piece of an apple, it makes the recently swapped XOM assets a little part of a big apple, etc. So once we piece together apples and apple pieces, how does this become an orange?

    The point I was hoping to get across in the article, Linn still operates an oil & gas business, whether we like it or not. There are costs, margins, estimate uncertainties, commodity price volatility - in other words, multiple risks of a real business. Just because the business is "mature" it does not mean it is a complete no-brainer to operate and produce profits from.

    Cash distributions do not come from thin air. They come from future cash flows generated by specific assets (or from asset sales). Is there enough of such assets in the portfolio relative to what the market is expecting to receive?
    Jul 11 12:31 PM | 7 Likes Like |Link to Comment
  • SandRidge Energy: Mississippian Well Results Update [View article]

    I agree, 50% IRR would be very attractive, wouldn't it?

    To validate drilling economics estimates one needs to have a very good read on production performance history by individual well. SD has a huge number of producing wells - compiling a reliable production history database is an expensive undertaking. I hope to have an answer soon on that front.

    Another issue is the way the return is calculated. Judging by SandRidge's budget, the play appears to be very capital intensive beyond the drill&complete cost per well. Those "overburdens" must be factored in carefully.

    I am waiting for the analyst day to hear the company's thoughts with regard to potential impact of open hole completions. May help a bit.
    Feb 18 12:15 PM | 7 Likes Like |Link to Comment
  • SandRidge Energy: Does The Announced Stock Repurchase Contradict The 'Grow Into Debt' Plan? [View article]
    Adrian Theriault,

    "What has SD got to lose by announcing a buyback?"

    Credibility is a difficult-to-replace asset.
    Sep 5 02:48 PM | 6 Likes Like |Link to Comment
  • Halcón Resources: The Second TMS Well Comes In Strong [View article]

    Radio silence? I thought HK was pretty vocal on the TMS couple of days ago in Denver, but I am delighted I could bring the news. :)
    Aug 22 11:51 AM | 6 Likes Like |Link to Comment
  • Tuscaloosa Marine Shale - It Works! [View article]

    Thank you for your comment. While I do not share some of your conclusions and interpretations, I think it is beneficial to hear a different point of view.

    I should also add that there is one area where I would totally agree with you - exploration in a new, technically complex play is risky and not inexpensive. The TMS is still in the second inning and is yet to be proven commercial, in my opinion. I would also add, there was a time when the Bakken was not a commercial play and typical EUR per well in the Marcellus was one-third of what it is currently.
    Aug 13 12:42 PM | 6 Likes Like |Link to Comment
  • Halcón Resources: Latest Eagle Ford Well Results (Through January 2014) [View article]

    This means an average reader can know as much as a manger at a resource-rich hedge fund (who can hire a consultant, often for a lot of money, to source this same analysis).

    One month of data does not make a difference (there were no surprises in January), but I hope this note helps monitor the evolution of the play in real time. More updates to come.
    Mar 5 11:09 AM | 6 Likes Like |Link to Comment