dan?
Re: dan?
Try not to get worked up over one day moves in any stock, especially those in high beta sectors like upstream oil & gas. I think this is just some investors overreacting to reported losses. Anyone that knows the business has to know that Q1 results would be crappy. WTI oil price is up $15/bbl since end of Q1, so Q2 will be better.
Here is how I look at upstream companies. Their assets are worth future revenues less future cash lifting costs. I told one of our members yesterday that if you believe oil prices are going to stay low forever then you should sell all your oil stocks. I personally believe that this oil price cycle is like all of the others before it.
This is a very capital intensive business. Oil prices must return to a level that will attract the capital necessary to find and develop the supply of oil this world will need in the future. $60/bbl is not even close. $65 is maybe break-even to justify new drilling, but capital providers want a risk adjusted return on their investments, so I think we need to get oil back to $80/bbl before drilling activity picks up again. The active rig count is expected to keep falling. My guess is that it bottoms at 600 onshore rigs running in the U.S. That will result in a BIG DROP in U.S. production. If the rig count stays that low, my SWAG is that U.S. production goes from 9.2 million barrels per day in Q1, 2015 to under 8.0 million by next summer.
Yesterday, I went to the EIA website to look at the last six months of "actual" data for oil production. At this point I think February is still a preliminary number but here is what it showed (these are crude oil only, not including NGLS):
Sept: 8,909,000 BOPD
Oct : 9,063,000 BOPD < Oil rig count peaked at 1,609 in early October, so well completions peaked 60-90 days later
Nov : 9,029,000 BOPD
Dec : 9,228,000 BOPD
Jan : 9,214,000 BOPD
Feb : 9,238,000 BOPD
EIA forecasts oil is now falling in 3 of 4 largest oil producing regions.
IEA forecasts increased demand for refined products from ~93 million bbls per day in Q2 to ~95 million bbls per day in Q4.
What happens to any commodity's price when supply falls and demand goes up?
WTI closed over $60 today. It is actually way ahead of where I thought it would be at the beginning of April. My forecast models were assuming $50/bbl for Q2, $60/bbl for Q3 and $70/bbl for Q4. < Each model makes adjustments for individual company hedges and regional price differentials.
A 5% pullback in the dollar and increasing supply risk due to violence in the Middle East and North Africa explains some of the recent upward movement for oil. Supply / Demand in the global market is going to tighten over the next few months. That is what will drive prices a lot higher.
On the cost side, completed well costs have dropped like a rock. If oil goes back to $70/bbl by year-end the economics for development drilling in the shale plays will be close to where they were a year ago when oil was $100. EOG has made a lot of progress on the cost side. BTW costs were coming down before oil prices dropped. Movement to multi-well pad development drilling was bringing costs down.
As I tried to point out in the newsletter, natural gas prices may give revenues a nice boost for a lot of these companies. EOG, NFX and XEC produce a lot of gas.
I've started putting a box on my forecast models that shows First Call's estimated operating cash flows per share for each company. Take a look at how fast and high analysts think EOG CFPS will be in the future.
I rambled on a bit, but the real answer is that the fundamentals are improving so don't get too worked up over one day or one weeks reaction to reported earnings.
Here is how I look at upstream companies. Their assets are worth future revenues less future cash lifting costs. I told one of our members yesterday that if you believe oil prices are going to stay low forever then you should sell all your oil stocks. I personally believe that this oil price cycle is like all of the others before it.
This is a very capital intensive business. Oil prices must return to a level that will attract the capital necessary to find and develop the supply of oil this world will need in the future. $60/bbl is not even close. $65 is maybe break-even to justify new drilling, but capital providers want a risk adjusted return on their investments, so I think we need to get oil back to $80/bbl before drilling activity picks up again. The active rig count is expected to keep falling. My guess is that it bottoms at 600 onshore rigs running in the U.S. That will result in a BIG DROP in U.S. production. If the rig count stays that low, my SWAG is that U.S. production goes from 9.2 million barrels per day in Q1, 2015 to under 8.0 million by next summer.
Yesterday, I went to the EIA website to look at the last six months of "actual" data for oil production. At this point I think February is still a preliminary number but here is what it showed (these are crude oil only, not including NGLS):
Sept: 8,909,000 BOPD
Oct : 9,063,000 BOPD < Oil rig count peaked at 1,609 in early October, so well completions peaked 60-90 days later
Nov : 9,029,000 BOPD
Dec : 9,228,000 BOPD
Jan : 9,214,000 BOPD
Feb : 9,238,000 BOPD
EIA forecasts oil is now falling in 3 of 4 largest oil producing regions.
IEA forecasts increased demand for refined products from ~93 million bbls per day in Q2 to ~95 million bbls per day in Q4.
What happens to any commodity's price when supply falls and demand goes up?
WTI closed over $60 today. It is actually way ahead of where I thought it would be at the beginning of April. My forecast models were assuming $50/bbl for Q2, $60/bbl for Q3 and $70/bbl for Q4. < Each model makes adjustments for individual company hedges and regional price differentials.
A 5% pullback in the dollar and increasing supply risk due to violence in the Middle East and North Africa explains some of the recent upward movement for oil. Supply / Demand in the global market is going to tighten over the next few months. That is what will drive prices a lot higher.
On the cost side, completed well costs have dropped like a rock. If oil goes back to $70/bbl by year-end the economics for development drilling in the shale plays will be close to where they were a year ago when oil was $100. EOG has made a lot of progress on the cost side. BTW costs were coming down before oil prices dropped. Movement to multi-well pad development drilling was bringing costs down.
As I tried to point out in the newsletter, natural gas prices may give revenues a nice boost for a lot of these companies. EOG, NFX and XEC produce a lot of gas.
I've started putting a box on my forecast models that shows First Call's estimated operating cash flows per share for each company. Take a look at how fast and high analysts think EOG CFPS will be in the future.
I rambled on a bit, but the real answer is that the fundamentals are improving so don't get too worked up over one day or one weeks reaction to reported earnings.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: dan?
Gartman: Einhorn "terribly, terribly" wrong on oil
Dennis Gartman of "The Gartman Letter" says hedge fund titan David Einhorn is "terribly, terribly" wrong when it comes to oil.
Read more: http://www.cnbc.com/id/102650799
Dennis Gartman of "The Gartman Letter" says hedge fund titan David Einhorn is "terribly, terribly" wrong when it comes to oil.
Read more: http://www.cnbc.com/id/102650799
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: dan?
Dan, on this topic, do you subscribe to Oil & Energy Insider? Yesterday's email discussed Dan Dicker's take that shale suffers from an inherently flawed business model. Since I do not subscribe, I was wondering if anyone could expound on his point, and get a reaction from your point of view
Thanks
Thanks
Re: dan?
here is the link,
http://oilprice.com/newsletters/free/opintel08052015
http://oilprice.com/newsletters/free/opintel08052015
Re: dan?
The economic returns on horizontal wells in the Tier One acreage of the Eagle Ford and Permian Basin are very good at today's oil price. Drilling and completion costs have come down 20% to 30%, so let's say the typical Eagle Ford well that was $10 million, now costs $7.5 million to drill and complete. [BTW D&C costs were coming down before the drop in oil prices and they will stay down even after oil prices go back up.]
Here is a very simple (back of the envelop) computation for a good Eagle Ford well with an EUR of 800,000 Bbls of oil (ignoring the natural gas for now)*.
This well will produce about 40% of those reserves in the first year, 320,000 bbls. Let's say the oil is sold for $55/bbl.
$17,600,000 = First year gross oil revenues (320,000 X $55)
- 4,400,000 = Royalty owners 25%
- 1,122,000 = Production taxes to state at 8.5% of net after Royalties
- 1,600,000 = Lease operating expenses estimated at $5/bbl, which is high since this well is flowing and tied directly to a pipeline (see note below)
------------------
$10,478,000 = Net cash to the working interest before income taxes
=============
Does that look like a crappy first year return on a $7.5 million investment to you? Keep in mind that this well is going to produce positive cash flows for many years after it pays out in the first year.
*In the really good areas of the Eagle Ford, companies like EOG are estimating EURs of 1.5 million per well.
Note: LOE + Production taxes for the Sweet 16 are around $10/bbl. You can download any of the forecast models and check this for yourself.
Conclusion: Anyone that says the economic model in the shale plays is "flawed" does not know how to use a calculator or they are trying to mislead you. This is not rocket science. If you get your money back on each well within a year it is a darn good place to drill. When I was at Hess, we considered a 3-year payout on any project to be good.
Here is a very simple (back of the envelop) computation for a good Eagle Ford well with an EUR of 800,000 Bbls of oil (ignoring the natural gas for now)*.
This well will produce about 40% of those reserves in the first year, 320,000 bbls. Let's say the oil is sold for $55/bbl.
$17,600,000 = First year gross oil revenues (320,000 X $55)
- 4,400,000 = Royalty owners 25%
- 1,122,000 = Production taxes to state at 8.5% of net after Royalties
- 1,600,000 = Lease operating expenses estimated at $5/bbl, which is high since this well is flowing and tied directly to a pipeline (see note below)
------------------
$10,478,000 = Net cash to the working interest before income taxes
=============
Does that look like a crappy first year return on a $7.5 million investment to you? Keep in mind that this well is going to produce positive cash flows for many years after it pays out in the first year.
*In the really good areas of the Eagle Ford, companies like EOG are estimating EURs of 1.5 million per well.
Note: LOE + Production taxes for the Sweet 16 are around $10/bbl. You can download any of the forecast models and check this for yourself.
Conclusion: Anyone that says the economic model in the shale plays is "flawed" does not know how to use a calculator or they are trying to mislead you. This is not rocket science. If you get your money back on each well within a year it is a darn good place to drill. When I was at Hess, we considered a 3-year payout on any project to be good.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: dan?
Let me add that this 1.5 million bbl per day "glut" you keep hearing about will be gone in 90 days.
This world consumes over 93 million bbls of refined hydrocarbon based liquid fuels and feedstock per day. Demand is set to jump to 95 million bbls per day in the 3rd quarter (like it does every year). See https://www.iea.org/oilmarketreport/omrpublic/
At this same IEA website you can find a chart that shows they now say global oil supply (crude oil + NGLs + biofuels) declined in the first quarter. The United States is not the only country stacking drilling rigs. The charts are also in the slides I spoke from at our luncheon on Friday, which are on the EPG website. Go to the website and click on "Luncheon Presentations and Specials"
Demand for oil goes up AT LEAST 1.0 million bbls per day every year. That is what it has done for the last 30 years and all forecasts that I've seen predict that same increase in demand for the next 30 years. [In 2009, after oil prices dropped from $147/bbl in mid 2008 to $35 in January, 2009 the EIA and IEA grossly underestimated the impact on demand. From mid-2009 to mid-2010 demand for refined products increased by 3.3 million bbls per day. Lower fuel prices does increase global demand.
So, to say a brief period where supply exceeds demand by less than 2% is a "glut" is a bit of an exaggeration.
The United States, Canada and Brazil accounted for almost 100% of the global increase in oil supply over the last five years. They are now all on decline.
This world consumes over 93 million bbls of refined hydrocarbon based liquid fuels and feedstock per day. Demand is set to jump to 95 million bbls per day in the 3rd quarter (like it does every year). See https://www.iea.org/oilmarketreport/omrpublic/
At this same IEA website you can find a chart that shows they now say global oil supply (crude oil + NGLs + biofuels) declined in the first quarter. The United States is not the only country stacking drilling rigs. The charts are also in the slides I spoke from at our luncheon on Friday, which are on the EPG website. Go to the website and click on "Luncheon Presentations and Specials"
Demand for oil goes up AT LEAST 1.0 million bbls per day every year. That is what it has done for the last 30 years and all forecasts that I've seen predict that same increase in demand for the next 30 years. [In 2009, after oil prices dropped from $147/bbl in mid 2008 to $35 in January, 2009 the EIA and IEA grossly underestimated the impact on demand. From mid-2009 to mid-2010 demand for refined products increased by 3.3 million bbls per day. Lower fuel prices does increase global demand.
So, to say a brief period where supply exceeds demand by less than 2% is a "glut" is a bit of an exaggeration.
The United States, Canada and Brazil accounted for almost 100% of the global increase in oil supply over the last five years. They are now all on decline.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group