A Natural Gas Disconnect

[SharperDingaan]

The flag that should go up is whether they lose people faster than their day rate increases. The patch is busy, & principals are going to be making offers to all the good people that this company can find. For the next 3-6 months are they more a headhunter, or a driller ? Break-up may benefit them for March-April but it doesn't last forever.

 

SD

 

[VAL9000]

The flag that should go up is whether they lose people faster than their day rate increases. The patch is busy, & principals are going to be making offers to all the good people that this company can find. For the next 3-6 months are they more a headhunter, or a driller ? Break-up may benefit them for March-April but it doesn't last forever.

This is my whole problem with professional services-type businesses.  The competitive advantage comes from the people doing the work.  Once they become skilled, they become marketable.  Marketable people can do the same job for another business in exchange for a better salary.  Or they can renegotiate with their current employers based on new offers.  The cost structure works against the business and it doesn't scale well.  You can only keep your profit margins by constantly retraining unskilled/low-cost labour, or by pushing the prices up on your customers which is hard to do because there are so many competitors.  This looks like Michael Porter's "bargaining power of suppliers" (labour) ruining the economics of the industry.

 

There are some things that PHX is doing that does give a retention advantage, such as remote access directional drilling, but I doubt it's enough to justify a P/E of 16 in the long term.

 

[SharperDingaan]

This is really telling you that PHX is a 2nd Tier player. Suppliers to the 1st Tier drillers.

 

PHX is still one of the names, but at the 2nd Tier level all players experience magnified volatility. You might want to look at where the near term gain probabilities are, & an option strategy to match. 

[JEast]

GasLog (GLOG) went public but came up a little short of the initial $18 IPO price.

 

As a side note, Wilbur Ross is looking into LNG tankers.  Wonder if this may be a part of the FFH JV??

 

http://www.tradewindsnews.com/finance/665933/gaslog-comes-up-short

 

 

Cheers

JEast

[gordoffh]

following article paints about as gloomy a picture for gas that there can be - i am and will continue to build a postiion - i might be early to the play but never good at picking bottom - buying ECA and taking dividends while i wait

 

http://www.reuters.com/article/2012/03/2...

[VAL9000]

http://www.reuters.com/article/2012/03/2...

Can you fix this link?  Thanks.

[gordoffh]

try this  my apologies

 

following article paints about as gloomy a picture for gas that there can be - i am and will continue to build a postiion - i might be early to the play but never good at picking bottom - buying ECA and taking dividends while i wait

 

http://www.reuters.com/article/2012/03/28/usa-natgas-storage-idUSL2E8ESYVQ20120328

[lessthaniv]

So when it comes to natural gas I very uneducated on the issues but trying hard to catch myself up....

Can someone more knowledgeable provide me with the cliff notes or direct me to a resource that I read online?

 

From everything that I've read it would seem the cost of producing 1000btu;

 

From solar is $15 - $20

From nuclear is $8-$10

From fracking NG is about $4

 

On the shorter term the massive oversupply has caused prices to fall significantly but overseas prices are higher. If exports of LNG accelerate,  domestic supply will be impacted moving gas prices up but not enough to make nuclear/solar competitive for some time.  Possible regulation changes in regards to fracking may increase the cost per 1000btu but not significantly. Maybe $1-$2.

 

It that about right?

[SharperDingaan]

NA gas is cheap because of shale production (high supply) & nowhere for the gas to go (low demand). Fundamentals that will materially continue untill new west coast LNG facilities are built (i.e. 5 yrs plus). Shale production will continue so long as wet gas can be produced & the distillates sold off as bi-product (i.e. only a moderate reduction in new gas supply over time).

 

To government, the real costs of solar & nuclear are roughly the same. Nuclear in the private sector only looks cheap because government absorbs the nuclear liability risk (i.e a Fukushima). Median to long term solar is materially cheaper - primarily because of industrial policy generating new industry/jobs, & reducing unit cost through higher production & next generation technology (i.e. common IT experience).

 

Nuclear is here to stay, but the mining through production and waste disposal technology needs updating - no different to the technology difference in todays IC engine versus its 1930's counterpart (i.e. years away)   

 

All kinds of literature available, but spun.

[gordoffh]

This makes so sense . Although there is so much to the negative re gas major power users can make a big dent into storage supplies and we have less production. Our winters won,t all be like  the one we just had.

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/market-lab/warm-winter-hides-rising-appetite-for-natural-gas/article2387859/

[biaggio]

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/low-natural-gas-price-casts-doubt-on-proven-reserves/article2388590/

 

"Low natural gas price casts doubt on ‘proven’ reserves"

 

I am looking at buying at discount to P+P 10. What do folks think here?

 

Would that be a valid metric?

 

Also interesting that KKR purchasing nat gas investment

 

"KKR Natural Resources Acquires Barnett Shale and Arkoma Basin Properties From WPX Energy for $306 Million

 

Read more: http://www.benzinga.com/news/12/04/2463678/kkr-natural-resources-acquires-barnett-shale-and-arkoma-basin-properties-from-wpx#ixzz1qv49xwlw

 

http://www.benzinga.com/news/12/04/2463678/kkr-natural-resources-acquires-barnett-shale-and-arkoma-basin-properties-from-wpx

 

 

[SharperDingaan]

If proven reserve is 100, the banker is lending up to .5 D/E, & they are 35 in debt - they look good. Cut the proven reserve to 60 (i.e. uneconomic gas prices) & the bank is suddenly forcing you to sell 5 of your depressed reserve. If you borrow to drill the banker will force you to sell > 5 of proven reserve.

 

KKR is there because it will become cheaper to buy versus drill in the shale fields once banks start selling collateral, & they hope to be selling entire coy's for > the reserve value. If you must own gas wait untill the banks start selling.

[biaggio]

If proven reserve is 100, the banker is lending up to .5 D/E, & they are 35 in debt - they look good. Cut the proven reserve to 60 (i.e. uneconomic gas prices) & the bank is suddenly forcing you to sell 5 of your depressed reserve. If you borrow to drill the banker will force you to sell > 5 of proven reserve.

 

KKR is there because it will become cheaper to buy versus drill in the shale fields once banks start selling collateral, & they hope to be selling entire coy's for > the reserve value. If you must own gas wait untill the banks start selling.

 

Sharper is that valid even if their cash flow is decent i.e they are earning their interest payments?

 

How about if they have relatively little debt? I don t know if there is such an animal out there.

[biaggio]

Anyone here real familiar with these reserve estimates + how these 3rd part engineering firms come out with the estimate. When do they start using current low prices? Do they actually try to project what the price of nat gas will be in the future?

 

I would be interested in buying reserves estimated with today's low prices at a discount.

[SharperDingaan]

The proven reserve estimate is essentially an independent engineering appraisal of what the firm has in the ground, that is commercially viable at a price of X. Same kind of thing as the 3 yr actuarial appraisal of a P&C firm.

 

Importance is because proven reserve x the prices used equals the collateral, against which the bank may lend up to 50-60%. If you can still service the debt, but no longer have the collateral the bank will not call in the loan - but it will be very nervous. It IS an ol'boys club, so expect forced sales on the newer, vs established, operators to reduce the banks total exposure. Ya dance with the ones that brung ya. 

 

Lot of physical/technical factors. The majors are formation characteristics, flow rate, presence of distillates (wet/dry gas, etc), age & type/efficiency of well (i.e: fracked with newer technology, & when). Most wells produce mixed flows - water, gas/distillates, oil, etc. in different quantities, & are sensitive to pressure. The less pressure the less flow & higher the heavier (& less valuable) distillate mix.

 

For a porous formation, at high pressure (& heat), & high commodity prices (financing tertiary extraction) you may retrieve 75% of all the pay zone within a 50-150' radius of the well. Horizontal drilling in the formation increase the pay zone. Fracking increases porosity & the extraction radius.

 

Low commodity prices knee-cap the ability to extact the oil/gas commercially, & effectively reduce both the extraction radius & the recovery potential (from 75% to maybe 55%). You get hit twice - & the less porous (shale) the formation, the more vulnerable you are. Proven reserves collapse, & banks start selling assets.

 

Buying a shale field is really a long term play. You buy cheaply today, but recognize that the oil/gas is still in the formation. When prices improve later (West Coast LNG terminals), the higher prices increase proven reserves (through tertiary production) & hopefully more than offset the interim depletion - with NO additional drilling required. Buying the field, versus individual producers, also alows you to maximize formation pressure & extract as efficiently as possible.  Drilling still takes place but it largely changes to infill water/gas injection to drive up formation pressure. The risk changes to timing the selling of the oil/gas, versus finding it in the first place.

 

Studied to be a petroleum engineer in a previous life  ;)

 

 

 

 

 

   

 

[twacowfca]

The proven reserve estimate is essentially an independent engineering appraisal of what the firm has in the ground, that is commercially viable at a price of X. Same kind of thing as the 3 yr actuarial appraisal of a P&C firm.

 

Importance is because proven reserve x the prices used equals the collateral, against which the bank may lend up to 50-60%. If you can still service the debt, but no longer have the collateral the bank will not call in the loan - but it will be very nervous. It IS an ol'boys club, so expect forced sales on the newer, vs established, operators to reduce the banks total exposure. Ya dance with the ones that brung ya. 

 

Lot of physical/technical factors. The majors are formation characteristics, flow rate, presence of distillates (wet/dry gas, etc), age & type/efficiency of well (i.e: fracked with newer technology, & when). Most wells produce mixed flows - water, gas/distillates, oil, etc. in different quantities, & are sensitive to pressure. The less pressure the less flow & higher the heavier (& less valuable) distillate mix.

 

For a porous formation, at high pressure (& heat), & high commodity prices (financing tertiary extraction) you may retrieve 75% of all the pay zone within a 50-150' radius of the well. Horizontal drilling in the formation increase the pay zone. Fracking increases porosity & the extraction radius.

 

Low commodity prices knee-cap the ability to extact the oil/gas commercially, & effectively reduce both the extraction radius & the recovery potential (from 75% to maybe 55%). You get hit twice - & the less porous (shale) the formation, the more vulnerable you are. Proven reserves collapse, & banks start selling assets.

 

Buying a shale field is really a long term play. You buy cheaply today, but recognize that the oil/gas is still in the formation. When prices improve later (West Coast LNG terminals), the higher prices increase proven reserves (through tertiary production) & hopefully more than offset the interim depletion - with NO additional drilling required. Buying the field, versus individual producers, also alows you to maximize formation pressure & extract as efficiently as possible.  Drilling still takes place but it largely changes to infill water/gas injection to drive up formation pressure. The risk changes to timing the selling of the oil/gas, versus finding it in the first place.

 

Studied to be a petroleum engineer in a previous life  ;)

 

 

 

 

 

 

[biaggio]

Sharper, thanks for the response-I think it will help.

[txlaw]

Anyone here real familiar with these reserve estimates + how these 3rd part engineering firms come out with the estimate. When do they start using current low prices? Do they actually try to project what the price of nat gas will be in the future?

 

I would be interested in buying reserves estimated with today's low prices at a discount.

 

You should read the 10-Ks of these nat gas companies and the reserve reports that they attach as exhibits.  See, e.g., the reports attached for CHK as Ex-99.1 through Ex-99.4.

[txlaw]

You can also get some pretty interesting color from CCs on how banks treat reserves when it comes to lending against them. 

[twacowfca]

The proven reserve estimate is essentially an independent engineering appraisal of what the firm has in the ground, that is commercially viable at a price of X. Same kind of thing as the 3 yr actuarial appraisal of a P&C firm.

 

Importance is because proven reserve x the prices used equals the collateral, against which the bank may lend up to 50-60%. If you can still service the debt, but no longer have the collateral the bank will not call in the loan - but it will be very nervous. It IS an ol'boys club, so expect forced sales on the newer, vs established, operators to reduce the banks total exposure. Ya dance with the ones that brung ya. 

 

Lot of physical/technical factors. The majors are formation characteristics, flow rate, presence of distillates (wet/dry gas, etc), age & type/efficiency of well (i.e: fracked with newer technology, & when). Most wells produce mixed flows - water, gas/distillates, oil, etc. in different quantities, & are sensitive to pressure. The less pressure the less flow & higher the heavier (& less valuable) distillate mix.

 

For a porous formation, at high pressure (& heat), & high commodity prices (financing tertiary extraction) you may retrieve 75% of all the pay zone within a 50-150' radius of the well. Horizontal drilling in the formation increase the pay zone. Fracking increases porosity & the extraction radius.

 

Low commodity prices knee-cap the ability to extact the oil/gas commercially, & effectively reduce both the extraction radius & the recovery potential (from 75% to maybe 55%). You get hit twice - & the less porous (shale) the formation, the more vulnerable you are. Proven reserves collapse, & banks start selling assets.

 

Buying a shale field is really a long term play. You buy cheaply today, but recognize that the oil/gas is still in the formation. When prices improve later (West Coast LNG terminals), the higher prices increase proven reserves (through tertiary production) & hopefully more than offset the interim depletion - with NO additional drilling required. Buying the field, versus individual producers, also alows you to maximize formation pressure & extract as efficiently as possible.  Drilling still takes place but it largely changes to infill water/gas injection to drive up formation pressure. The risk changes to timing the selling of the oil/gas, versus finding it in the first place.

 

Studied to be a petroleum engineer in a previous life  ;)

 

 

 

 

 

 

 

 

That's great, Sharper D.  Thanks for the Spark Notes about the economics of financing and developing reserves.  :)

[Liberty]

Apparently nat gas futures went undef two dollars today.