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  • The U.S. Shale Oil Miracle Disappears [View article]
    I worked for a company that was involved in the Monterey during the '80s. A huge resource (the oil is there) with extreme technical, financial & political challenges. During that time, the technical challenges were deemed to daunting and the project was dropped.

    Fast forward a few decades and the industry has made huge advances in discovering and producing commercial quantities of shale gas, to the point that gas price dropped dramatically and North America is awash in gas. The investment bankers, private equity firms and other large investors loved the "manufactured" and assumed low risk aspects of the shale gas plays. When "oil shale" plays (they aren't really shales, they are often silts, but that's splitting technical hairs) were discovered, the "manufacturing template" and investment thesis used for shale gas was well established.

    The investors loved that template and the industry, eager for investment dollars, happily sold the same story. One thing investors like is repeatability - same play type, same management team with a history of success equals a guaranteed and very large check for the oil companies. There is one small technical issue with this - and I greatly oversimplify again - but here it is: Oil molecules are orders of magnitude larger than gas molecules. Oil molecules don't fit through the holes in the rock as easily as gas molecules. One could draw many conclusions from this, but a couple might be: 1) It will be more expensive to get the oil out of the rock, and 2) relative to gas shales, there might be less oil shale rock that will be commercial.

    Another interesting and related piece of news that I read this week was regarding the half-cycle cost of getting oil out of the Bakken and Three Forks oil shales in North Dakota. The half-cycle costs exclude previously spent dollars (land, exploration drilling, seismic, etc) and only include go-forward costs. The number was $72 per barrel of oil. Ouch. Let's just say that I would not be investing my personal dollars in that project.

    In the industry, we have a saying regarding "bent picks" - it's more of a mining rather than oil analogy, but the meaning is the same. "They really bent their picks on that play". The meaning is pretty clear - a company failed while exploring for commercial oil in a new play. The Monterey landscape is littered with mountains of bent picks.

    In order to move forward in the Monterey, the industry will need three new, bright, shiny (and very tough) picks: a technical pick, a financial pick and a political pick. I predict it will be some time before we see the convergence of those three picks.
    May 25 12:16 PM | 7 Likes Like |Link to Comment
  • Look No Further: Chinook Energy Is The Real Deal From The International Energy Patch [View article]
    All I have to say is: You first. This company has been augering in for the last 10 years, even before they went public. Maybe you want to talk the some of the investors that got in at $5, $4, or $3 before you put your money in this company. Production has been shrinking, and the management team has been selling off assets for years. They do not have a proven record of growing production. Unloved companies don't turn around overnight, so you better be committed if you put your money in Chinook.
    Dec 8 10:29 AM | 6 Likes Like |Link to Comment
  • Simple Is Better [View article]
    I for one prefer companies that stick to their core business. Metals and hydrocarbons have a common beginning, but beyond that the businesses are wildly different. If I want to own oil and gas, I will stick to companies that specialize in that area. Ditto for mining.
    Dec 8 12:08 PM | 1 Like Like |Link to Comment
  • Before You Buy Kodiak Oil And Gas, Take A Look North Of The Border [View article]
    The flavor of the day for small companies in Calgary is to convert to a dividend paying company. A good strategy _IF_ the company has the assets to support a dividend. Unfortunately, most of them don't. Pinecrest falls into this category; their assets are high decline, high cost. They cannot support paying a dividend. This merger/conversion to dividend-payer is pretty much an act of desperation. If you want a small company with a decent chance of supporting a dividend, buy Twin Butte. On the larger side, Baytex.
    Dec 1 06:44 PM | 1 Like Like |Link to Comment
  • Turning Hatred Into Profits [View article]
    Au contraire, medicin acs! I am quite happy with you. And I was joking about the work, it wasn't that difficult.
    Nov 1 08:16 PM | Likes Like |Link to Comment
  • Turning Hatred Into Profits [View article]
    Awwright, thought I would give this a try. In spite of the fact that work was involved. Grunt. Grind. Oof. This work is hard! I went through about a dozen stocks with weekly options that were reporting earnings at the end of this week. Rejected that one, delete this one (does this Acs guy know what he's doing!?#?), nope that won't work......Hey! LNKD looks interesting! A bit of a high flyer (fundamentally it's a bit scary, actually); relatively well-liked; history, albeit short, of exceeding expectations; big swings at earnings report time; nice rises in IV at earnings.

    Wednesday it was trading in the 104-108 range, so late in the day I did a buy/write, selling the NOV02 95 call. Picked up the stock at $106.85, sold the calls for $13.10, basis was $93.75.

    Earnings announced today (Thurs) AMC, stock is trading at $115 and change after hours. Assuming it maintains this trajectory 'til end of day Friday, my stock will get called away and I'll pocket $1.25 for a two day trade. 1.3% ROI using the 93.75 basis.

    Thanks for the idea, Mr. Acs.
    Nov 1 07:43 PM | Likes Like |Link to Comment
  • What's More Frightening Than A Fiscal Cliff? [View article]
    Thanks for the article. I'm feeling an unnatural urge (or maybe it's natural?) to better understand this "PEE Principle". Perhaps you can help, given your medical and financial background. I've looked at a few of these candidates, and don't see a lot of "liquidity" in the deep ITM calls, which concerns me a bit. Does this hinder ones ability to "PEE" properly?
    Oct 29 12:23 PM | Likes Like |Link to Comment
  • Natural Gas: The Tricky Craft Of Counting Drilling Rigs - Part I [View article]
    Thanks to the author for a thought provoking article, and for pointing out some of the inconsistencies with rig count data in the oil patch. And my apologies in advance for a long and potentially boring comment.

    As the author has pointed out, there has recently been significant lack of correlation between rig count and natural gas production. Given the changes in the industry associated with shale gas and tight oil development, this is not a surprise. First I will discuss why this is not a surprise, then I will point out some of the weaknesses in our ability to track and predict production accurately.

    In the life cycle of a well, there are multiple significant events. Planning comes first. Second, the well must be drilled. Third, it must be completed; in the "old days" completions were simple, low cost and often occurred immediately after drilling. Not anymore; more on this later. Fourth, it must be pipelined so that raw production can be sent to a processing facility and then to sales. Fifth, production must be managed to maximize profits; this may mean that the wells are not produced at peak capacity. The corollary to this last item is that rather than starting high and dropping rapidly, production may be relatively flat.

    A delay or change in any of these five processes will obviously impact production rates. Not to offend the drillers, but the actual drilling of the well is becoming less and less important, other than the fact that it needs to occur. Horizontal well drilling technology has progressed rapidly and is usually very efficient. However, drilling, in and of itself, does not result in production. It results in an expensive hole in the ground, with the producing zone in a state referred to as "behind pipe". Obviously, no production is forthcoming at this point. Hence, no direct correlation between drilling and production.

    The completion of the well is now the primary challenge, highest cost and driver of production rate and timing. Multi-frac completions are complex from a technical and logistical standpoint. Significant equipment, supplies, and manpower are required to execute a multi-frac operation in a horizontal well. For example, one or two frac pumpers may be needed for a conventional well frac, while a shale gas well frac might require up to 15 pumpers. Sand, water and chemical requirements are significantly higher, and often the amount needed for a shale gas frac will not fit on the well location and must be transported to the site while the frac is in progress, or stockpiled on an adjacent site.

    Given that the completion is now the highest cost and most complex operation, and also that it opens the producing zone to flow, it is now the key factor that should be correlated to production rate. It is also an operation that has huge impact on company performance, both from a cost and rate standpoint. It is no wonder that gas producers are working hard to manage the completion process as best they can to maximize profits. As a result of this management process, completions are often delayed, sometimes more than a year after drilling. They are also bundled in order to maximize efficiency and save costs. Again, none of this is related to drilling, other than completions require the presence of drilled wells.

    Obviously a better way to track and predict gas rates is to track completions. Unfortunately, neither the industry nor regulatory groups have a system to track completion operations, or if they do, it is not publicly available in a consistent format.

    So why does the financial world continue to attempt to use drilling data to predict rates? One, it's traditional, and on the surface, it seems logical. Two, it's simple, and everyone wants simple answers. If it's not a sound bite, it gets ignored in today's media. Three, lack of anything else.

    Hope this helps explain this issue a bit.
    Oct 27 10:16 PM | 3 Likes Like |Link to Comment
  • Turning Hatred Into Profits [View article]
    Hate is a strong word that I don't often like to use; but if it fits anywhere in my vocabulary it would be in regard to financial losses.

    I do have an intense dislike for negative numbers on my monthly statements. When an ITM call is used, I see a positive number from the calls, and a negative number on the stock. I must admit that this intense dislike of negative numbers probably pushes me toward more OTM call trades, even tho I know ITM calls have a valid and profitable place in my portfolio. I concede this is not necessarily logical behavior, but then I'm not of Vulcan descent.

    Thanks for this article, George; perhaps it will influence my future investing behavior for the better.
    Oct 27 04:51 PM | Likes Like |Link to Comment
  • A Reason To Smile [View article]
    Score one for you, George, on the inclusion of the pic of Biden in the article. The political comments have carried the discussion without a doubt. I was wondering if I was reading a political forum rather than a financial one for a moment.

    I don't want to break up the party, but do have a question regarding the inclusion of LXK in the momentum group. The recent downtrend in the stock is getting long in the tooth and closing in on a month. Can you discuss your criteria for inclusion in the momentum group? Just wondering if I missed something, or if you anticipate the uptrend to resume.

    Thanks for the thought-provoking article, as always.
    Oct 14 01:11 PM | Likes Like |Link to Comment
  • Let The Party Begin [View article]
    >"and had time to frequent one of their fine London hospitals, subsequent to a very unexpected heart attack"

    Best wishes for a speedy recovery and return home.
    Oct 3 09:46 AM | Likes Like |Link to Comment
  • It's Lonely And Cold In The Crowd [View article]
    Happy to oblige. The strikes on the Sept puts were 58, 55 & 52; premiums were roughly $2.70 for all of them, as they were sold at different times. Generated some decent cash on the initial sales.

    Now the roll, mind you, did generate cash but not much. I tried to move the strikes down a bit on the roll, but that put me in a slight debit position, so I left them the same. The premiums for buying back the Sept puts were roughly $12, $15, & $18. Selling the Oct puts put me in a credit position of $0.35, $0.40 & $0.45 on each strike, respectively.

    When I sold the Sept puts initially, I was of course expecting a correction in the price of silver. Since I was off on the timing, the roll buys me some time. Actually I was paid to increase the time, which is nice. Certainly better than accepting positions in ZSL in the $50s today.
    Sep 22 08:19 PM | Likes Like |Link to Comment
  • It's Lonely And Cold In The Crowd [View article]
    Thank you for the article. I also had the brilliant idea of selling ZSL puts in late August when silver was shooting up. Unfortunately, it continued to shoot up......which is why I rolled from Sept to Oct puts on Friday. Generated cash on the initial sale, cash on the roll, and with luck I'll come into some cash if/when silver corrects and I buy back the Oct puts. Gaining cash and time is never a bad idea, in my book.
    Sep 22 05:52 PM | Likes Like |Link to Comment
  • Natural Gas Production Could Be Curtailed By Drought [View article]
    The author has written a thought-provoking article with information that potentially impacts US natural gas rate and price predictions. This is interesting, as typical attempts usually focus solely on rig count. Rig count has worked well in the past as a predictive tool, but with today's unconventional development, it is woefully inadequate. Bringing a well on production not only requires drilling rigs, but also completion rigs, frac crews, pipelines and wellsite equipment. I have been a proponent of using frac crew activity as a predictive tool, but to my knowledge the data is not publicly available.

    Given the lack of data on frac crew activity, it is useful to track access to critical frac supplies such as sand, water and chemicals such as guar. In light of the current drought in the US, a focus on water seems appropriate.

    In regard to the volume of water utilized by fracs, millions of gallons certainly seems like a lot. But this must be put into perspective relative to other water usage. For example, the largest use of fresh water in the US is for irrigation, which accounts for approximately 150 billion gallons per day, or over 1/3 of all water use. By comparison, water for fracs is miniscule; in the order of 1% or so. From a supply/demand point of view, it does not seem that fracs are terribly demanding.

    But frac water is the new kid on the block, while irrigation is the established and traditional user. Support for farm and ranch use is much more politically acceptable, while on the other hand it is easy and in vogue to attack the big bad dirty oil companies. From this viewpoint, frac water users have an uphill battle. Farmers, ranchers, environmentalists, land owners and many politicians will not look kindly upon the increasing use of water for fracs, especially in a drought year.

    Once water permits are acquired, the logistics of getting it to the well site come into play. Drilling rigs and frac crews constantly move from well site to well site - they do not sit still in one place (although pad drilling has helped this issue somewhat). The water must follow the rigs and crews, which means either trucking or a mix of permanent and temporary pipelining must be utilized. Trucking is certainly the least desirable due to the large volume required, the expense and wear-and-tear on local roads. Trucking for drilling rig water is common, as the water volumes are usually much lower than for fraccing. For fraccing, it is usually more cost effective to use temporary pipelines, if proper pipeline permits can be acquired.

    In an environment of low gas price, cost of water handling is absolutely huge. It can make or break a shale gas project. Water access permits must be acquired, the water must be moved to location, pumped down the well, produced back when the well is turned on, processed to remove toxins, then recycled and stored or disposed of. Each step has a cost, and it is critical to keep these costs as low as possible. This has spawned a new sub-industry within the oil and gas business, and it is thriving.

    So......the casual observer might think that water for fraccing might not be an issue, but politically, logistically, and financially it is a huge issue for the industry to tackle.

    In regard to some other comments, one about using seawater; certainly a good idea, but the salinity of seawater approaches the limits for frac use. I know some work is being done in this area, hopefully progress will be made. But there is still the issue of getting it from the ocean to the well site. About using gas fracs, see my previous comment.
    Aug 2 01:04 PM | 3 Likes Like |Link to Comment
  • Happily, Triple Digits Are Out Of Hand Again [View article] seems there is no free lunch. Thanks to all of you that were watching, but were discreet enough to not point out my misfortune. I plucked that low hanging fruit, reaping almost a $1 for the calls in one day, only to see the stock plunge $5 because, according to some silly and uncaring analysts, a poor earnings report came out. Time to make lemonade from lemons - I sold the Aug 45 puts for $1.07 early this morning. It somewhat lessened the pain, but the resulting lemonade is still a bit tart. If the stock is put to me, my basis will be near $47, and I have $2 cash in the account from the sale of calls & puts.
    Jul 27 10:50 PM | Likes Like |Link to Comment