How Many Board Members Have Been Investing in Nat Gas Companies?

[mountboney]

This latest leg down (say 4 to 2.50) surprised a lot of experts.  What has become apparent is that the gravitation to liquids plays by so many producers does not reduce gas production very much.  These liquids plays still produce a ton of gas as the liquids are largely natural gas liquids.  For at least the next year or two I think you can toss the marginal cost numbers that have floated around and think of marginal cost in terms of gas being a by-product like it was in the 50-70's.  It won't last forever but I suspect that several debt laden dry gas producers will go bust with $1-2 dollar gas before the reversal starts. 

[txlaw]

This latest leg down (say 4 to 2.50) surprised a lot of experts.  What has become apparent is that the gravitation to liquids plays by so many producers does not reduce gas production very much.  These liquids plays still produce a ton of gas as the liquids are largely natural gas liquids.  For at least the next year or two I think you can toss the marginal cost numbers that have floated around and think of marginal cost in terms of gas being a by-product like it was in the 50-70's.  It won't last forever but I suspect that several debt laden dry gas producers will go bust with $1-2 dollar gas before the reversal starts.

 

I expect there will be a number of companies, perhaps public but certainly private, in distress due to low nat gas prices and their capital structure.  Hopefully, properties can be bought at very attractive (and even fire sale) prices from these companies by the savvier deal makers who have cash to work with.

 

In other words, I don't want to invest based solely on the value of proved reserves.  I'm essentially buying up a fund that will snap up nat gas and oil properties at very attractive prices.  No need to be a high net worth individual and put my money with a PE outfit when I can simply invest in a public company that will do the same thing.

[claphands22]

Last year I was somewhat interested in Spindletop Oil & Gas(SPND). It's small 14M market cap (pink sheet). It has 8M in cash, another million in long term investments, real estate, and some pipelines. To be honest, I haven't kept up on it since I didn't think it was cheap enough and I wasn't confident with valuing their oil/gas properties. 

 

The company has all these related party transactions with another oil company the CEO owns and has all these different arrangements. 

 

http://finance.yahoo.com/q?s=SPND.PK%2C+&ql=1

 

SEC Files

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000867038&owner=exclude&count=40

 

(shrug) maybe someone will find it more interesting than I did

[zarley]

I expect there will be a number of companies, perhaps public but certainly private, in distress due to low nat gas prices and their capital structure.  Hopefully, properties can be bought at very attractive (and even fire sale) prices from these companies by the savvier deal makers who have cash to work with.

 

I believe the guys at Loews (L) mentioned expecting a similar process to unfold.  If they don't feel too stung by their previous purchases, they will probably see some good opportunities to get more assets cheaply.

[petec]

bmichaud - the shale technologies have dramatically lowered the marginal cost because production growth at the low end of the demand curve shoves the whole curve to the right, making the high cost stuff unnecessary at the same level of demand.

 

I'd be very interested to know what your friend thinks will link the North American market with the global one.  Currently the North American natgas market can't export much and very little demand can switch from oil to gas, so I don't see how global pricing is relevant until one of those things changes.  And that's way further out than 2013/4.  I don't see gas much above $4-5 in 2014 unless production declines are severe, and I doubt they will be.

 

Does anyone have any data on how much associated gas is being produced by 'liquids' wells?  Because there seem to be differing opinions on this point.

[Eric50]

Corridor Resources (CDH) is very cheap. Incredible potential upside with strong downside protection.

 

Can you elaborate on the downside protection for CDH. Trapeze has made this argument, but they've made the wrong call on this one before. Cash position is only $7m, how long can they keep the lights on? What's the likelihood of potential upside working out in your view?

 

Their producing asset, McCully is worth alone more than $2 per share. More than twice current price. You get free options on Frederick Brook (potential 60 tr cft of NG), Anticosti Island shale oil (real estate there worth $100m or more than $1 per share) and Old Harry (potential 2b barrels of conventional oil). Could be a 10 bagger or more. Don't know the odds of that happening. It's a tail I don't lose much / face I have a huge upside story.

 

It's a simple thesis. Do your homework and make up your mind on your own.

 

Eric

 

[bmichaud]

bmichaud - the shale technologies have dramatically lowered the marginal cost because production growth at the low end of the demand curve shoves the whole curve to the right, making the high cost stuff unnecessary at the same level of demand.

 

I'd be very interested to know what your friend thinks will link the North American market with the global one.  Currently the North American natgas market can't export much and very little demand can switch from oil to gas, so I don't see how global pricing is relevant until one of those things changes.  And that's way further out than 2013/4.  I don't see gas much above $4-5 in 2014 unless production declines are severe, and I doubt they will be.

 

Petec,

 

I followed up this discussion with my energy friend, and this was his response in regards to what will drive US gas prices toward global prices:

 

Not sure if you listened to Exxon's mtg last week - I think they go big on export once they are done buying.  D LNG & SRE want to too - Public policy isn't expected to be supportive until post elections.  Near term - gas is ugly - longer term very attractive, as I have been saying (my opinion).

 

XOM's exports aspirations were noted in the article Parsad just posted as well: http://www.bloomberg.com/news/2012-03-12/chesapeake-ceo-courts-asians-for-100-billion-resource-energy.html

 

 

[petec]

Thanks.  I think he's dead right but just maybe not on a 2013/4 timeframe.  It takes years to build LNG export infrastructure and lots of it will have to be built to overcome the current localised supply/demand imbalance.  Plus, a $9 global price does not translate into a $9 local one once infrastructure and operating costs are taken into account.  Will be interesting to see how it plays out!

[muscleman]

I've been buying two nat gas-related stocks.

 

XCO

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By far my largest nat gas-related position.  Reasonable people can disagree on the NAV here, particularly given one's outlook on nat gas prices in the future, but I think the downside is minimal and the upside could be stupendous given the ratio of proved reserves to probable and possible reserves.  The operators are rationale, unlike some other nat gas firms, will shut down production if its uneconomic, and have articulated a hurdle rate for returns. 

 

More importantly, I have been looking for companies that can be used as platforms to acquire resources at dirt cheap prices.  I think Exco fits the bill very nicely.  Doug Miller and Co are excellent deal makers.  They have a nice strategic alliance with BG that could prove very fruitful in the future (think LNG export) and where the potential negatives (e.g., over-reliance on and contractual obligations to BG that cause liquidity crunch) won't happen.  They already have folks lined up to do JVs, including current shareholders, and they were even turned down on a rather large deal where they already had all the money raised.  Current shareholders include Wl Ross & Co, Oaktree, and Ares Capital.  And on the board, you have Boone Pickens and Wilbur Ross (just recently named).  Debt is not an issue, as they can likely sell off midstream assets or do other deals that would allow them to entirely pay off their debt in the next 3 to 6 months (according to Miller).  And based on the recent bid for TGGT (midstream asset) I do think the equity investments are carried on the balance sheet at haircuts to IV.

 

There is even the possibility that there will once again be a going private bid for the company, but I wouldn't count on it.  I highly recommend reading the Exco CCs.

 

NRG

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We've discussed NRG on the board, so I won't rehash the analysis.  Suffice it to say, I think the sucker is cheap and that it is cheap because the price of the stock is levered to nat gas prices.

 

As with XCO, I think of NRG as an investment vehicle rather than as a purely operating company.  They focus on ROIC and I like they way they think.  The recent deal with MidAm shows you that they know what they're doing. 

 

I own the 2014 LEAPs.

 

txlaw, I quite like the idea of XCO being an investment vehicle. However, if they don't get any deals, according to their 10-k, their current net acres is around 500,000. This is much smaller than SD's Missisipian Lime alone. (1,750,000). SD's market cap is around $2.65 Bn and XCO is around 1.5bn, and SD has 44% oil production in it, so I am not sure if XCO is really that undervalued?

[CorpRaider]

Noob here:  I've been thinking of focusing in on the transport/pipeline companies.  The thesis is that their position becomes stronger over time as more energy and industrial production switches to gas and after the price rises enough to ramp up production and we got to an equilibrium.  I am unaware of the ability to switch modes of transport as easliy as can apparently be done with oil.  Looking at like KMI and some regulated nat gas cos.  E.g. PNY.  I've also been thinking about buying some SD on the next market correction and maybe some CHK, but I keep coming around to the idea Txlaw expressed earlier in the thread of focusing on the strong hands that are buying assets that CHK and SD and some of the other distressed hands have been forced to sell at what is likely the bottom.  Does that lead me to CVX?  Seems like they got the lion's share of the CHK assets...