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Richard Zeits

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  • 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
  • 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
  • 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
  • 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
  • WPX Energy Trades Below Tangible Book Value, Smart Investors Are Buying [View article]
    Thank you for highlighting the WPX story. The company indeed has an evniable set of assets, particularly in the Piceance.

    Could you please help me understand some of the numbers you have presented in the valuation analysis.

    - The NAV table states that the company has 4.1 Tcf of proved gas reserves. When I look at the latest 10-K (page 135), I only see 3,459 Bcf of proved gas reserves, of which only 2,228 is developed and the rest is PUDs. Further, your NAV attributes a "price" of $1.25 to proved gas reserves. While I can see how one can value flowing dry gas reserves in the Piceance at $1.25 per developed Mcf (although that would probably require $4.25/MMBtu Nymex assumption), I do not see how one would value undeveloped reserves at such a high multiple.

    I also have difficulty matching the NGL number from your NAV table to the 10K.

    Should not the NAV valuation reflect working capital deficit ($71 million at 3/31/13) and non-E&P assets and liabilities? Are those numbers rounded?

    Most importantly, the company had $287 million in G&A costs. If you NPV that, it would be a big number (for illustration, if one were to use a 8x multiple, this comes out well over $2 billion). So unless you are expecting the company to be sold soon - in which case I would question the 10% discount rate for any asset that is not already on production - should not your NAV reflect that fairly material overburden?

    I am not suggesting that the conclusion in the article is right or wrong. I am just having some difficulties understanding the numbers in your NAV section.
    Jun 14 09:38 AM | 6 Likes Like |Link to Comment
  • Bakken: The Downspacing Bounty And Birth Of 'Array Fracking' [View article]

    That's a great point. In fact a great deal of technical information trading does take place. Some of pilot projects have significant non-op interests. Companies also often cross-participate in assessment wells with other operators (have you noticed CLR's interest in COP's Sunline TF2 test?). Moreover, frac companies often help customers in adopting best practices. I am sure there will be a great deal of information dissemination across the play.
    Mar 5 04:00 PM | 6 Likes Like |Link to Comment
  • Marcellus Shale: Giant Well Parade In Susquehanna County [View article]

    Thank you for posting the two articles.

    Just to make sure my article above does not get misinterpreted: when writing on natural gas fundamentals, I explicitly avoid providing any opinion on stocks, positive or negative, since the scope of analysis is different. I do provide stock analysis but solely in research reports that specifically focus on valuation, catalysts, operating momentum, and many other pertinent factors.

    Just a few thoughts with regard to the articles you posted. Mark does a significant amount of numeric analysis, and I respect his hard work. I am afraid in this specific case I have to disagree with some elements of his math and, more importantly, with the well sample I believe Mark is using. If one were to focus on the "recent vintage" wells only (and those, in my opinion, better represent the development mode economics), IP rates are much higher than what Mark is factoring into his assumptions. Please take a look at the 2012 data in my note above. Cabot's average well placed in line in 2012 will very likely deliver over 3 Bcf of production in the very first year (based on Zeits Energy Analytics decline curve), - pretty much a full payout at $3.50 gas. A significant portion of the production beyond that point represents profit. So even if EURs are overstated (which in fact may ultimately prove to be the opposite), the operation should still be profitable simply based on very measurable early production rates.

    The second article, which is entitled "The Danger Zone: Cabot Oil & Gas," sort of surprised me. In fact, the article itself (if anyone even remotely thought of taking it seriously) would be a bit of a danger zone. The author does not seem to fully understand the mechanics of deferred tax liability in Oil & Gas, or the recent dynamics of asset write downs in the sector. The statements: "economic earnings are negative and declining" and "the valuation is sky high" are not substantiated by anything. In general, I was looking for some analysis to explain the title, but I could not find any. The article did time stamp the stock price: $50/share. Again, I do not agree or disagree with the view on the stock price, but I may not be alone feeling short-changed when a recommendation is provided without any substantiation.
    Feb 25 01:02 PM | 6 Likes Like |Link to Comment
  • Does The Marcellus Success Condemn Natural Gas Prices? [View article]

    No doubt, only a relatively small percentage of the Marcellus acreage will end up solidly economic ("sweet spots"). One can also dispute the EURs - not enough history of production - but those wells that produce more than 1.5 Bcf in their first year will likely end up very profitable. And there are many of those.

    The primary reason for the decline in the Marcellus rig count is the inability by the infrastructure to keep up with the upstream deliverability. What's the point to in punching incremental holes while the off-teke has been all spoken for? Rig productivity is also a factor: anecdotal evidence suggests that the same rig count produces 20% more lateral footage than a year ago. Some rigs have migrated to delineate the Marcellus in West Virginia or Utica and other zones in Ohio - often get omitted from the rig count.
    Dec 20 11:20 AM | 6 Likes Like |Link to Comment
  • Halcón Resources: Solid Second Quarter Driven By The Bakken [View article]

    It has been indeed. A highly technical play. However, this has been the case with the many new big plays. We may forget but it was several years before operators cracked the code of the Middle Bakken.
    Jul 31 02:35 PM | 5 Likes Like |Link to Comment
  • Halcón Resources: Solid Second Quarter Driven By The Bakken [View article]

    Good observation re: the entire sector is being hit.

    I must admit that the rally that started earlier this year was so enthusiastic that E&P stocks might have run a bit ahead of themselves. A correction was almost inevitable, unfortunately.
    Jul 31 02:11 PM | 5 Likes Like |Link to Comment