Oil, wow, WTF happened to all of the oil bugs on this site?

[muscleman]

http://www.energyintel.com/pages/worldopinionarticle.aspx?DocID=898759

 

"The only new element that I see this time around that wasn't there in the previous cycle is the availability of financing. The low cost of money, large amounts of private equity money is easily raised because it doesn't cost anything at these low interest rates."

 

And this:

http://www.wsj.com/articles/private-equity-firms-plunge-back-into-the-oil-patch-1441326003

"Private-equity firms are doubling down on energy, despite heavy damage from their last adventure in the oil patch."

 

It is always possible to find one last fool to raise financing. :)

[rb]

I will disagree with you there muscle man. From what I can remember from cycles past there was never any shortage of people and institutions willing to write stupid loans or any other kind of paper.

[meiroy]

 

Cardboard,

 

Also Druckenmiller, the greatest [macro] investor that has ever lived went into the likes of HAl and FCX. Then again he invested big into WFC, C, JPM,...

[Gamecock-YT]

 

 

Andrew Hall is another one who was bearish, made a ton of money and who is now bullish. He also called it right in 2008. He is also calling the current IEA 3 million barrels a day surplus estimate bogus.

 

Cardboard

 

He's also got taken to the woodshed this year, in full disclosure. Down 16.6% in July alone.

[wisdom]

http://www.bloomberg.com/news/articles/2015-09-08/buffett-says-he-sold-exxon-bought-refiner-phillips-on-oil-fears?cmpid=yhoo

 

Buffett on oil.

[Cardboard]

http://www.marketwatch.com/story/opec-monthly-oil-output-falls-in-august-2015-09-08

 

Cardboard

[finetrader]

When analysing oil producer, I always come back to this same question? Is amortization and depreciation a good proxy for maintenance capex (i.e. Capex required to maintain production rate in the long run)?

 

[rb]

When analysing oil producer, I always come back to this same question? Is amortization and depreciation a good proxy for maintenance capex (i.e. Capex required to maintain production rate in the long run)?

There are probably people on here more qualified than me to answer that. But my view is that it isn't. Since oil is getting progressively harder to get out of the ground you need more capex to get replace a barrel of production, plus there's the inflation thing.

[shhughes1116]

When analysing oil producer, I always come back to this same question? Is amortization and depreciation a good proxy for maintenance capex (i.e. Capex required to maintain production rate in the long run)?

There are probably people on here more qualified than me to answer that. But my view is that it isn't. Since oil is getting progressively harder to get out of the ground you need more capex to get replace a barrel of production, plus there's the inflation thing.

 

I think it is a little more nuanced.  I attempted to research a similar question and came upon the following information:

"Companies involved in the exploration and development of crude oil and natural gas have the option of choosing between two accounting approaches: the "successful efforts" (SE) method and the "full cost" (FC) method. These differ in the treatment of specific operating expenses relating to the exploration of new oil and natural gas reserves.

 

The successful efforts (SE) method allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful (or "dry hole") results, the associated operating costs are immediately charged against revenues for that period.

 

The alternative approach, known as the full cost (FC) method, allows all operating expenses relating to locating new oil and gas reserves - regardless of the outcome - to be capitalized.

 

[Accounting For Differences In Oil And Gas Accounting http://www.investopedia.com/articles/fundamental-analysis/08/oil-gas.asp#ixzz3lIdiR6Jf]

 

Depending upon the accounting method, the unsuccessful exploration costs may not be captured under D&A, and thus D&A may understate the true cost of finding and replacing each barrel.  Of course you then need to also incorporate your own views about whether it will be more expensive in the future to replace each barrel of oil or oil-equivalent, as noted in the previous post.   

[Cardboard]

"For unsuccessful (or "dry hole") results, the associated operating costs are immediately charged against revenues for that period."

 

The thing is that dry holes are disappearing, so this is becoming less of an issue. With 3D seismic and other advances, many if not most producing companies are now reporting 100% success rate with new drilled and completed wells. And a successful well is not only one that produces but, economical.

 

So dry wells now seem to only apply to exploration wells which makes it a much smaller portion of an E&P company as it used to.

 

Personally, I like to look at what they are spending in capex each year and how it impacts production volumes over time. Unfortunately, it becomes pretty hard with companies that are growing quickly and when you combine it with decline curves that are untested (with unconventional wells), it admittedly involves a lot of guessing.

 

Cardboard

 

[rb]

I think it is a little more nuanced.  I attempted to research a similar question and came upon the following information:

"Companies involved in the exploration and development of crude oil and natural gas have the option of choosing between two accounting approaches: the "successful efforts" (SE) method and the "full cost" (FC) method. These differ in the treatment of specific operating expenses relating to the exploration of new oil and natural gas reserves.

 

The successful efforts (SE) method allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful (or "dry hole") results, the associated operating costs are immediately charged against revenues for that period.

 

The alternative approach, known as the full cost (FC) method, allows all operating expenses relating to locating new oil and gas reserves - regardless of the outcome - to be capitalized.

 

[Accounting For Differences In Oil And Gas Accounting http://www.investopedia.com/articles/fundamental-analysis/08/oil-gas.asp#ixzz3lIdiR6Jf]

 

Depending upon the accounting method, the unsuccessful exploration costs may not be captured under D&A, and thus D&A may understate the true cost of finding and replacing each barrel.  Of course you then need to also incorporate your own views about whether it will be more expensive in the future to replace each barrel of oil or oil-equivalent, as noted in the previous post. 

I'm sorry but I don't really see your point here. What matters to an investor is the economic cost of replacing a barrel of oil.

 

Fiddling around with accounting may lower the reported numbers but doesn't really change the capital cost of developing reserves.

 

That being said I would be really interested to hear an argument about how the nominal cost of developing reserves is lower today than 10 or 20 years ago.

[Patmo]

When analysing oil producer, I always come back to this same question? Is amortization and depreciation a good proxy for maintenance capex (i.e. Capex required to maintain production rate in the long run)?

Yes it's a good proxy, but it's only a proxy. Still, chances are really high that d+a will be closer to true maintenance capex than what management might tell you or what you can conjure up with homemade gimmicks...

[SharperDingaan]

As owner, we want to see SE accounting as it is more conservative.

To capitalize the cost you have to find the oil, & be able to deliver it in today’s market, profitably. Once capitalized, the costs are then subject to annual impairment testing based on reservoir and forecast economics. SE earnings & impairments are lower than they would be under FC accounting, but of much higher quality.

 

True maintenance CAPEX is depreciation + amortization + impairment. The problem is that 1) the impairment is many years of depreciation + amortization charged at once, and that 2) historic depreciation + amortization was understated. Most folk would average the depreciation + amortization over the last 10 years, & add the 10 year average impairment/10. As long as the period covers 2-3 cycles it should be reasonable.

 

Reserves can be bought at fire sale prices. The driller could also luck out and hit a big field near an existing collection facility.

Firms lower costs by either buying cheap or using scale.

 

Long term owners prefer SE accounting & a strong BS, so as to capitalize on the periodic fire sales. Short term investors prefer the higher earnings of FC accounting & a weaker BS, as it produces a higher share price & greater trading volatility. Opposite sides of the same coin.

 

To a value investor thinking like an owner, today’s market is a screaming buy. To the short-term investment orientated media it’s a dog.

 

SD

 

[finetrader]

To a value investor thinking like an owner, today’s market is a screaming buy. To the short-term investment orientated media it’s a dog.

 

Well, that is what I'm trying to assess.

 

I looked at many canadian pure oil producer( no gas and gas liquid) and I cannot find any one that is a bargain if you take a 75$/barrel of oil as an average price for the next ten years.

 

Add production + royalty + administrative + inerest + D&A costs, and no one is breaking even below 60$.

 

Take (75-60) 15 * boe/day production * 365 = X

 

Put a P/E ratio of 15 on this, (X*15= IV),  and you will soon find that the market cap of a given oil company is 3 times higher than the IV

 

 

 

 

 

[aws]

To a value investor thinking like an owner, today’s market is a screaming buy. To the short-term investment orientated media it’s a dog.

 

Well, that is what I'm trying to assess.

 

I looked at many canadian pure oil producer( no gas and gas liquid) and I cannot find any one that is a bargain if you take a 75$/barrel of oil as an average price for the next ten years.

 

Add production + royalty + administrative + inerest + D&A costs, and no one is breaking even below 60$.

 

Take (75-60) 15 * boe/day production * 365 = X

 

Put a P/E ratio of 15 on this, (X*15= IV),  and you will soon find that the market cap of a given oil company is 3 times higher than the IV

 

Do you have an example of company you have valued in this way?  It looks like your methodology is saying that the IV is $82,125 per boe (15 x 15 x 365).  If the current market cap is 3x this that's $246,375 per boe, which sounds very high. 

[finetrader]

Hey aws,

 

You are right, it is way too high.  I ran some numbers in my head last night while reading the income statements about Spartan Energy(SPE-t), and it doesn't make sense today. I must have been omitting something in my calculation.

 

[SharperDingaan]

Its better to look at annualized netback, & subtract the annualized last 2 quarters of cost = X

Multiply X by the multiple & divide by the sharecount = Y. Compare Y to todays share price.

Sell the high outliers & buy the low.

 

The reality is that you are using a rubber ruler on rigged numbers, and a precise guess is still just a guess.

You have enough resolution to roughly discern the best & worst case, but that is about it.

 

SD

 

Finetrader/Aws

 

SUBTRACT impairment to offset production & royalties on shut-in wells. The $60 number should be roughly equal to $45-50.

You also seem to be using USD numbers. Convert to CAD & its 30% higher.

IV should be (75-50)/(75-60) x 1.3 higher than you have calculated. ie: 2.17 to 2.60 x higher depending on your impairment number

Market cap is roughly equal to IV.

 

Logic test. When the market is balanced, you would expect industry IV to roughly equal industry market cap; & that is roughly what we are in fact seeing.

 

SD

 

 

[Cardboard]

http://finance.yahoo.com/news/week-energy-does-mean-opec-182953325.html

 

I have found two interesting points in this article:

 

1- U.S. production is down 500,000 barrels per day since its peak in April. That is actually a bit more than that or around 550,000 if you are to normalize the wild swings in Alaskan production over the last 2 weeks.

 

That is a drop of 5.2% in just 5 months or 12.5% annualized. I think this is a very important data point being overlooked by market participants. Why?

 

a) IMO, it means that the rig count and capex decline still impacts oil production very much despite the media barrage about new found efficiencies.

b) It also means that the decline curves that we are familiar with for shale oil are real.

c) Considering that with no drilling, the natural decline rates for oil wells around the world is 5 to 7% annually, you can start to get an appreciation at what rate unconventional oil production has declined in the U.S. after peaking at just over 5 million barrels a day out of a total of 9.6. It has to be around 8% or 20% annualized.

 

If there is any truth and logic in what I have posted above, it is clear that the U.S. will soon produce less than 9 million barrels a day (within a few weeks) and that it will never produce at this level again unless it ramps up capex and number of wells drilled. Moreover, after all the high grading that has been done, newer wells should be drilled over time in less prolific areas and likely be more costly: less infrastructure in place.

 

2- The Chinese are putting in place their own oil benchmark and it will be traded in Yuan. I think this is a very big development. How long will it take for oil vendors to start accepting the currency from their largest client in the world once they have the same mechanism in place as found in the West? Over time, this should put pressure on the USD.

 

Cardboard

 

   

[meiroy]

 

Cardboard,

 

What about the demand side of things?

[Cardboard]

Very strong demand growth and likely understated for 2016: up 1.7 million barrels/day in 2015 and 1.4 in 2016:

 

https://www.iea.org/newsroomandevents/news/2015/september/iea-releases-oil-market-report-for-september.html

 

This report was largely ignored on Friday following Mr. Courvalin, from dear Goldman Sachs, with his sensational bear case call for $20 oil.

 

And to tell you the truth Meiroy, the IEA has almost always over-estimated production and under-estimated demand. Think about this. Since 2013 or when I unfortunately got more involved with oil stocks (it was very good for a while  :'(), the estimated excess of production over demand has always been in the 1 million barrels a day range. And recently they have mentioned that we were running 3 million barrels a day surplus! That is like 1 billion barrels that should have been added to inventories since early 2013... Where are they?

 

Then they say this: "OECD oil inventories swelled by a further 18 mb in July to a record 2 923 mb."

 

Now, if I count right that is like 580,000 barrels a day that were added to inventory in July. We are a long way from 3 million barrels a day unless non-OECD countries are accumulating reserves like crazy and having farm tanks and tankers that according to knowledgeable sources do not exist.

 

By the way, 2,923 million barrels looks like an enormous pile but, this would be depleted in less than 60 days. It also represents even fewer days of consumption by refineries if you were to remove 695 million of this inventory or 23.8% stocked in the U.S. Strategic Petroleum Reserve that is not available unless an emergency order is declared by the President.

 

IMO, with tanks not at all full yet and with refineries having mostly paid for this storage capacity, it must be within their comfort level as to how much crude oil they require in inventory to run their business.

 

The IEA is also saying this:  "...expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades..."

 

FYI, the non-OPEC supply bucket is around 65 million barrels a day. And now we are supposed to believe that this will be cut by only 500,000 barrels a day in 2016 when every country is cutting capex by billions, offshore drilling is nearly at a halt and that U.S. production alone was cut by that amount in just the last 5 months!!!

 

Cardboard

[Wilson-TPC]

The IEA's estimate of non-OPEC production is so wrong, I don't even know where to start.

 

The methodology that they use are all estimates using historical data. Excel data extrapolating like how an amateur investor would look at 5 years of company data and then calculate an average, then drag that out. Looking at current capex budget and STRIP pricing, non-OPEC should fall more in the tune of 2-3 million bbl/d as opposed to the 500k bbl/d.

 

The way you would calculate this is look at the required capex to sustain current productions, compare this data over the last 3-4 years and calculate the capital efficiency. This gives you a rough idea of where non-OPEC productions are headed next year. Not to mention, there's the natural decline rate attached, which is around 5-6%. 

 

IEA and EIA both have had to increase the production decline estimates month over month. Let's just see how flat out wrong they are going into next year.

 

Note: variables that would significantly affect these production estimates would need rig counts to rise, and rig productivity to rise significantly. Both of which aren't showing any real signs to offset production declines.

[SharperDingaan]

Attached is a simplified production profile for a shale field. Play with the assumptions, or the well addition, to fit to a specific field.

 

Full year production decline from April 2015, when drilling really started slowing, would be around 20%. Roughly 12.5% if annualized to Dec 2015 - so what we are seeing is actually very real.

 

More notable is that for Apr 2016 through Apr 2017, the decline would be around 35% - from fewer wells, & shorter lives from high-grading.

THE major reason why 2016 prices are forecast to be higher.

 

The demand side is largely a wash.

The additional volume wanted from lower prices largely offsetting the lower volume wanted from reduced Chinese demand.

 

And all this without somebody tossing a lit match …

 

SD

Production_Profile.xlsx

[rkbabang]

I just paid $1.99/gal for gas, the lowest I've seen in a long time.    I found this article interesting, I've never heard of "oil intensity" before.

 

The Real Price of Oil - You have to account not just for inflation but for what economists call “oil intensity”

 

http://spectrum.ieee.org/img/numb-don-lie-oct15-1442523801491.jpg

[TwoCitiesCapital]

http://www.reuters.com/article/2015/09/22/us-climatechange-energy-divestment-idUSKCN0RM2PZ20150922

 

Sounds like oil companies might be structurally cheap in the future if this catches on. Not bad for long-term investors who are looking for their "Phillip-Morris" stock to be the long-term, best performer in an index, but also not good for those expecting a quick turnaround and high capital gains.

[Cardboard]

http://johngaltfla.com/wordpress/2015/09/27/how-russia-and-iran-plan-to-push-oil-prices-back-above-100/

 

Sounds like a crazy conspiration theory but, there seems to be some truth to it the way it is lining up.

 

Cardboard