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Bill Francis
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I run a small oil and gas company and keep tabs on the student loan market.
  • Three Decisions That Will Keep the Independent Producer Afloat 0 comments
    Apr 13, 2010 11:39 PM | about stocks: DVN, CHK, RRC, XCO, APC, ATLS, PVA, TLM, HK, EOG, SD, ECA
    If you’re a Public Independent Natural Gas producer in 2010 it seems as if you need to hop on the train and do three things to make sure you can keep that stock price up. The reoccurring theme for all of these appears to be the depressed price of Natural Gas and how most companies had not plugged $4 gas into their shale growth strategies. The first move CEO's are making is to divest their assets that will not supply the most of your growth over the coming years or divest in a way that will pay for some of your growth.  It is evident that the sell offs are following two trends. If it’s a non-core asset they are willing to part with 100% interest, yet if it involves a core asset (shale play) they seem to always find a major who is willing to buy into minority stake of a deal and post up front drilling costs.  Divestures for these companies are fortunately coming at a time that all majors are chomping at the bit for acquisitions into the bridge fuel of the future. The deals look to be a good fit for both since the majors are not leveraged to the teeth with debt coming due, and are willing to take the risk of $4 gas for the time being. Here are a couple of the big deals in the spotlight over the past months:
    Devon (DVN) who has sold out of high cost deep water properties in the Gulf of Mexico, Brazil and some exotic international plays among others to Apache and BP,
    Range Resources (RRC) has completed two deals in West Texas and Ohio for around 500 million
    Chesapeake Energy (CHK) pretty much invented the Shale JV with deals covering all the major shale basins with three of the largest five integrated oil companies in Europe BP, Total, Statoil.
    Exco Resources (EXCO) sold off ½ it’s Hayneville action to BG.
    Anadarko (APC) completed the first Asian Shale deal while getting in bed with a Japanese Conglomerate Mitsui and giving up a 1/3 of its stake in the Marcellus
    Atlas Energy (ALTS) went into a JV with Reliance Energy in the Marcellus for a 40% stake structured along the same lines as the APC and CHK deals
    Talisman (TLM) had a two billion dollar deal to get rid of some Canadian natural gas fields in order to focus more on the US unconventional plays
    Petrohawk (HK) sells off midstream and producing properties in northern Louisiana and some Oklahoma properties so they can really ramp up on the Eagle Ford and Haynesville.
    EOG Resources (EOG) has publicly stated its intentions on Divesting non core natural gas properties during late 2010
    Penn Virginia (PVA) recently closed on a deal to offload some Gulf Coast assets to focus on the Haynesville.
    As these companies struggle to realize that low gas prices are around to stay the second move they seem to be making takes them out of their comfort zone and into a more liquid environment.  Companies that have solely relied on natural gas over the past year have been getting picked on by their big brother, oil. One can’t see this more clearly than in the case of Encana (ECA). When they announced their company’s split into a natural gas company and an oil company back in November one should have been able to easily predict what was going to happen.  Now 6 months later one is up 40% while the little brother has been knocked down 10%.  Meanwhile the S&P seems to be roaring and indicating the market is pro oil and not as bullish as once thought on natty gas. CHK has come out publicly and stated that they are looking to move their oil portfolio to 20% of the company’s reserves, up from 8%. Sand Ridge (SD) who has close ties to CHK, being that it’s founder was also a founder in CHK just completed a deal with Arena to make sure they still had significant oil exposure. EOG has also publicly come out to claim it is exploiting new crude discoveries while shedding some natural gas properties. All of this can be explained by the Eagle Ford shale and how it is now at the center of the shale leasing bonanza. One would think a big reason behind this is the fact that companies are able to produce liquids as well as natural gas from their horizontal wells, as opposed to the Haynesville which is producing solely dry gas.
    The third and final move is even more across the board than the previous two. With prices so much lower than when these companies bought their leases the one clearest position to take is lower your costs and lower the supply of your product. Obviously the way to do this is to cut Capital Expenditures which is slang for don’t drill as many wells as you were planning on. I won’t even go into examples of this bc you can throw a dart at a wall of E&Pers and almost certainly hit one that’s lowered their Cap Ex recently. The reason is clear, as a whole the industry has realized they found too much of this stuff too quickly and they need to quit drilling themselves out of a job. 
     
    Here is the big catch 22 though, how do companies stop drilling and in turn raise nat gas prices so they can stay solvent, when all of their leases will run out if they don’t continue to drill creating a solvency problem. I believe the companies who have embraced the ideas from above have figured out an answer to this difficult question. They sell out to large companies that can give them cash and get hit with losses in the near future, bc the buyers are sheltered by high oil prices. Then the indy’s pick up some oil for themselves with some of the newfound cash and free drilling given to them by their new partners.  The third part of the puzzle and the one that should make or break these companies is to cut their Cap Ex/drilling in order to reduce supply and drive up prices in the short term.  By doing this prices should surge to $7-8. They’ll be able to draw upon the cash they got from the integrated companies and leverage their oil properties to ramp up their drilling schedule 2-3 years down the line to retain all of the acreage that’s just about to expire. 
    These companies all leveraged their future on buying up massive amounts of land with borrowed cash in hopes of easy money at $8 dollar gas. Now that that fantasy is gone they implemented this complex but smart strategy to still make money for their shareholders.


    Disclosure: Long CHK
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