Why $100 Brent Will Not Last Through 2013 [View article]
Saw a comment in Mauldine's "Yield Shark" that the price of crude would have to drop to less than $30/barrel to approximate the fall in natural gas prices. While not likely to happen tomorrow, at some point (maybe when the total capacity of all LNG tankers has grown to equal the total capacity of all crude oil tankers), economic equilibrium should set in. That is, assuming speculation in the paper crude market is ever affected by reality.
SandRidge Energy (SD) is striking back against TPG-Axon’s push to replace the company’s board and amend its bylaws, urging shareholders to reject the proposal and describing the hedge fund as an “opportunistic investor with short-term interests” whose slate of nominees is not familiar with SD’s operations or the oil and gas sector. TPG says it's just looking out for the shareholders. [View news story]
Not sure it would be a step in the right direction to accept the recommendations of a former Goldman Sachs Partner (TPG-Axon CEO) given Goldman's sterling record of looking out for their clients during the past decade or two. Guess the plan is to come in and cook SD's books like Goldman did for Greece and palm the Company off to some trusting buyer like the EU.
Midstream Assets Sales Reason To Buy Chesapeake [View article]
I subscribe to Mark's analysis if permitted one small exception: It isn't that shale wells are necessarily unprofitable, it is just that an operator has to exercise a modicum of cost control. Cost control isn't in CHK's policies and procedures manual. And taking nothing away from the new Chairman, I believe he is too far removed from the nitty gritty of melding hard headed field people into cost conscious managers than for it to ever happen.
Linn Energy For 7.9% Yield And 22% Upside [View article]
An unconfirmed rumor around the oil patch is that Linn will pay as much for proved reserves as their present value at a 6% discount factor. That is pretty rich, but there have been hidden values in Linn's acquisitions. Moreover, Linn's philosophy appears to be distributions first, as contrasted with most oil companies philosophy of putting all cash flow and as much as you can borrow on the drill bit and forget about dividends. Always good to remember, though, that MLP distributions are partly yield and partly a return of capital. If the spread between annual distributions and taxable income before IDC exhibits an ever widening margin, it could be a caution flag that the asset base is declining faster than other factors might indicate.
Continental Resources Recent Asset Sales Suggest The Company Is Not Undervalued [View article]
Way, way back in time, when all of the trade was in physical barrels and the posted price for WTI was about two-bits less than $3/bbl, independents were selling out for around $10,000/barrel of daily production. We never figured out why back then, and too many of my brain cells have retired to undertake such a daunting task now. There is, of course, a relationship between daily production and proved reserves. For example, assume for the moment that $100,000 buys 30 years of production that starts at one barrel per day and ends at zero 30 years out. Cumulative production after 30 years would be about 5,000 barrels, or $20/barrel.
If pressed, I would probably throw in with Devon Shire on their conclusion that CLR is fully priced. Some would argue that the difference in Devon Shires' number and market price is going concern value. That is a legitimate consideration, but it should checked against what can be called "Market Sentiment Indicator (MSI)." MSI is the SEC value of proved reserves minus Enterprise Value (Enterprise Value being Market Cap plus Debt). Of course, by the time the value of proved reserves becomes available, a company like CLR has moved much further down the road, but it is still useful to keep an eye on MSI. For example, when CHK's stock price was at $40/share, the Company' Enterprise Value was almost $20/share more than the value of their proved reserves. Or, to say it another way, 50% of CHK's stock price represented going concern value.
I haven't calculated any of this for CLR and I don't know what the right number is for going concern value for any company, but the market can easily push the price of a popular stock past its going concern value into the realm of irrational exuberance.
Disgruntled investment firm TPG-Axon and its affiliates boost their stakes in SandRidge Energy (SD) to 6.2% of outstanding shares, according to a new SEC filing, after owning ~4.5% last week when TPG-Axon criticized the performance of SD stock and accused management of "poor strategic planning and reckless spending." [View news story]
.....AXON must know something or their analysts are just plain stupid.
Buy Chesapeake: A Turnaround Energy Stock [View article]
Falling demand per IEA. Probably a short term trend. But here I go again on a tiresome tale from yesteryear. Late 1950's American households began to become two car families. Humble Oil (now Exxon) market analysis projected significant growth in gasoline demand as a result, so we jacked up our E & P budget accordingly. Demand actually dropped and we had to retrench. Post drop analysis showed there was less driving in two car families because it was no longer necessary to take hubby to work and pick him up that evening. (For what it is worth, I have as much confidence in market analyses as I do in the daily explanation of why the DOW went up or down.)
Buy Chesapeake: A Turnaround Energy Stock [View article]
Lot of potential for domestic energy and domestic energy companies, but keep your eye on a couple of worrisome trends:
(1) Unprecedented (at least in recent history) increase in worldwide oil production and capacity.
(2) Saudi drumbeat that oil prices are too high to permit worldwide economic recovery. (Perhaps a counterpunch to their Shia enemies in Iraq and Iran ?)
(3) Falling demand for oil, which may be exacerbated by continuing trend of deflation in other commodity prices.
(4) Loss of $40/barrel premium for Middle East turmoil should the region quiet down (not much of a possibility, it would seem).
Chesapeake (CHK -8.5%) hits lows of the day after admitting its target to reduce debt to $9.5B or less by year's end may be pushed into 2013 (conference call). Argus oil analyst Phil Weiss says CHK has promised a lot but has yet to deliver much: "They still say they are going to lower debt and they still need to complete asset sales. They just admitted they are having trouble."[View news story]
Just goes to show that "Full Cost Accounting" and a CEO's Letter To Stockholders can't hide the truth forever.
Why You Should Buy Chesapeake Energy Now [View article]
Auto 44:
"Buying natural gas when nobody wants it is how fortunes are made."
True enough, but over what time frame ? I told our investors the same thing for a couple of decades in the 20th Century, and it did happen for a few months from time to time. It depended a whole lot on what was going on in Washington back then (and maybe still does). I was throwing out some old files the other day and found a copy of a letter that Jimmy Carter wrote to several governors when he was running for President. His pitch was that we should be conserving out limited natural gas supplies by burning coal in our power plants. It has been long forgotten, but during his administration there was an actual a ban on firing generating plants with natural gas. Electrical utilities in Oklahoma had to switch some of their plants to coal back then and only recently retired those plants in order to meet current EPA standards. Fortunately, the Good Fairy picked up the tab for all this, sparing consumers higher utility bills.
But, of course, the wonks in Washington have learned a lot since then and we shouldn't let their lack of success in the past cause us to be skeptical of their ability to make our decisions for us now.
However you slice it, the Bakken is good news for North Dakota and will be ultimately for drivers in the other 49 States. A handful of bold explorers (maybe just one, followed by those not so bold) have done what a 30 billion dollar a year Department of Energy hasn't been able to do in the 40-plus years since its creation.
Betting On The Biggest Producer In The Bakken [View article]
Sure. Sandridge gives their play in the Mississippi Lime 90,000 BOE. At $100/barrel that's $9,000,000. An average well costs $3.2 million (some considerably more; very few materially less), plus it is necessary to drill one SW disposal well for every four producers. A PI of a little more than 3 to 1. When the dust settled in 1982, after the short lived boom that resulted from the 73 embargo and the 79 hostage crisis, oil bounced around $10 to $20 a barrel for the next 15 years; gas from $1.50 to $3.00 per Mcf. Average well cost dropped almost every year as drilling companies slashed bids in a race to see who could go out of business first. Average well costs probably started the era around $400,000, but dropped to about $300,000 by the early 90's. So, for a well that was about 50% gas and 50% oil, at $300,000 with upper end prices, the PI was 3 to 1. At $400,000, with prices dropping to the lower end of the spectrum, the PI was 1.5 to 1.
Then there is the huge difference in the acquisition cost of leases. Mississippi lime leases command signing bonuses that are about 30 times greater than those of 80's and 90's, which probably brings the PI for the new stuff down even further. Add to that the higher operating cost for wells that make 90% saltwater and an ultimate PI of 2 to 1 isn't out of the question. And all of those numbers are before royalty payments. Moreover, they reflect the oil operator's position, so the PI of an investor in a so-called royalty trust could be far lower than anticipated.
Obviously, these are broad brush numbers. The point is, investors should keep,in mind the following:
1. Although it looks like there will be exceptions in some of the shale plays, the history of unconventional reservoirs is one of wide variances in results from well to well, making exploitation of such hydrocarbon deposits a game of averages.
2. It is easy for an oil producer to get stars in his eyes when he hits a sweet spot, when he believes oil prices will never again be lower than those at present, when he thinks he is going where no oilman has gone before, when he honestly believes that the futures market won't bushwhack him at some point, etc, etc. Investors who share these illusions will put their capital in harms way.
Incidentally, the depth of the Mississippi in some of the new play is as shallow as 5,000 feet; however, the old play was from about 7,000 to 8,500 feet. And proration (i.e. - government restrictions on the amount of oil one could produce) evaporated with the 1973 oil embargo.
Why $100 Brent Will Not Last Through 2013 [View article]
SandRidge Energy (SD) is striking back against TPG-Axon’s push to replace the company’s board and amend its bylaws, urging shareholders to reject the proposal and describing the hedge fund as an “opportunistic investor with short-term interests” whose slate of nominees is not familiar with SD’s operations or the oil and gas sector. TPG says it's just looking out for the shareholders. [View news story]
Midstream Assets Sales Reason To Buy Chesapeake [View article]
Linn Energy For 7.9% Yield And 22% Upside [View article]
Chesapeake Energy: Converting To Oil Production At A Breathtaking Rate [View article]
Continental Resources Recent Asset Sales Suggest The Company Is Not Undervalued [View article]
If pressed, I would probably throw in with Devon Shire on their conclusion that CLR is fully priced. Some would argue that the difference in Devon Shires' number and market price is going concern value. That is a legitimate consideration, but it should checked against what can be called "Market Sentiment Indicator (MSI)." MSI is the SEC value of proved reserves minus Enterprise Value (Enterprise Value being Market Cap plus Debt). Of course, by the time the value of proved reserves becomes available, a company like CLR has moved much further down the road, but it is still useful to keep an eye on MSI. For example, when CHK's stock price was at $40/share, the Company' Enterprise Value was almost $20/share more than the value of their proved reserves. Or, to say it another way, 50% of CHK's stock price represented going concern value.
I haven't calculated any of this for CLR and I don't know what the right number is for going concern value for any company, but the market can easily push the price of a popular stock past its going concern value into the realm of irrational exuberance.
SandRidge Energy: Should Tom Ward Go? [View article]
Disgruntled investment firm TPG-Axon and its affiliates boost their stakes in SandRidge Energy (SD) to 6.2% of outstanding shares, according to a new SEC filing, after owning ~4.5% last week when TPG-Axon criticized the performance of SD stock and accused management of "poor strategic planning and reckless spending." [View news story]
Could be both.
Buy Chesapeake: A Turnaround Energy Stock [View article]
Buy Chesapeake: A Turnaround Energy Stock [View article]
(1) Unprecedented (at least in recent history) increase in worldwide oil production and capacity.
(2) Saudi drumbeat that oil prices are too high to permit worldwide economic recovery. (Perhaps a counterpunch to their Shia enemies in Iraq and Iran ?)
(3) Falling demand for oil, which may be exacerbated by continuing trend of deflation in other commodity prices.
(4) Loss of $40/barrel premium for Middle East turmoil should the region quiet down (not much of a possibility, it would seem).
Chesapeake (CHK -8.5%) hits lows of the day after admitting its target to reduce debt to $9.5B or less by year's end may be pushed into 2013 (conference call). Argus oil analyst Phil Weiss says CHK has promised a lot but has yet to deliver much: "They still say they are going to lower debt and they still need to complete asset sales. They just admitted they are having trouble." [View news story]
Why You Should Buy Chesapeake Energy Now [View article]
"Buying natural gas when nobody wants it is how fortunes are made."
True enough, but over what time frame ? I told our investors the same thing for a couple of decades in the 20th Century, and it did happen for a few months from time to time. It depended a whole lot on what was going on in Washington back then (and maybe still does). I was throwing out some old files the other day and found a copy of a letter that Jimmy Carter wrote to several governors when he was running for President. His pitch was that we should be conserving out limited natural gas supplies by burning coal in our power plants. It has been long forgotten, but during his administration there was an actual a ban on firing generating plants with natural gas. Electrical utilities in Oklahoma had to switch some of their plants to coal back then and only recently retired those plants in order to meet current EPA standards. Fortunately, the Good Fairy picked up the tab for all this, sparing consumers higher utility bills.
But, of course, the wonks in Washington have learned a lot since then and we shouldn't let their lack of success in the past cause us to be skeptical of their ability to make our decisions for us now.
Bakken: Getting Thicker And Denser [View article]
This Oil & Gas Stock Should Surprise You In 2013 [View article]
Betting On The Biggest Producer In The Bakken [View article]
Then there is the huge difference in the acquisition cost of leases. Mississippi lime leases command signing bonuses that are about 30 times greater than those of 80's and 90's, which probably brings the PI for the new stuff down even further. Add to that the higher operating cost for wells that make 90% saltwater and an ultimate PI of 2 to 1 isn't out of the question. And all of those numbers are before royalty payments. Moreover, they reflect the oil operator's position, so the PI of an investor in a so-called royalty trust could be far lower than anticipated.
Obviously, these are broad brush numbers. The point is, investors should keep,in mind the following:
1. Although it looks like there will be exceptions in some of the shale plays, the history of unconventional reservoirs is one of wide variances in results from well to well, making exploitation of such hydrocarbon deposits a game of averages.
2. It is easy for an oil producer to get stars in his eyes when he hits a sweet spot, when he believes oil prices will never again be lower than those at present, when he thinks he is going where no oilman has gone before, when he honestly believes that the futures market won't bushwhack him at some point, etc, etc. Investors who share these illusions will put their capital in harms way.
Incidentally, the depth of the Mississippi in some of the new play is as shallow as 5,000 feet; however, the old play was from about 7,000 to 8,500 feet. And proration (i.e. - government restrictions on the amount of oil one could produce) evaporated with the 1973 oil embargo.