Throwing money at uneconomic activities can seem to act as 'stimulus' but all it does is divert capital from economic activities that should take place instead.
Another dose of horseshit from Arthur Berman's sock puppet.
And another ID 10 T who has nothing, knows virtually nothing so goes into ad hominem personal attack mode, and thereby proving his ID 10 T status - again.
I guess the energy experts at Merrill Lynch didn't bother to read any of the 10-Ks and didn't listen in on any of the conference calls before writing their report on the benefits of energy to the U.S. economy?
its not enough...with capacity utilization at 78.9% and 27.5 million of us who arent working at the level they want to, it's clear our country's economy continues to run well below it's potential...
I guess the energy experts at Merrill Lynch didn't bother to read any of the 10-Ks and didn't listen in on any of the conference calls before writing their report on the benefits of energy to the U.S. economy?
That is your problem Mark, you are GUESSING. I did not ask for anything very difficult. When you were hyping shale gas because the 'experts' liked it and said it would make investors a lot of money I pointed out that the CEOs of the very companies that you were hyping had stated that they needed much higher prices to make money if all of the costs were taken into account. Since I am always on the lookout for a good investment I asked for examples of companies that were making a real profit in the sector. What I got back from you and the other optimists was nothing but the, 'if it wasn't any good the experts would not like it,' argument. It seems as if there is a bout of amnesia here because it wasn't that long ago that the 'experts' were telling us that house prices could go down, that we should buy the home builders because they were cheap, and that Pets.com was a good idea.
I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids. But even there you are still resorting to the same trick of referencing government estimates and analyst reports without ever looking into the accuracy of such estimates and reports.
I am sorry to be so skeptical of Wall Street promoters and government bureaucrats but I prefer to think for myself and to look at the actual data. And when I do look at the data I do not like what I see. I see companies that have to keep borrowing because their operations are not self financing even though the depletion rates mean that the assumed EURs would yield a very early payback. I wonder what happens if we have another financial crisis that cuts off credit and drives down prices for a while. How can companies that have yet to show positive cash flows at high prices and with low credit costs stay in business long enough to ride out even the normal market volatility. Are we to 'hope' for a war in the Middle East that causes a spike in prices and helps us get out with a profit? Or some 'new' technology to come along and increase porosity cheaply? I have been around long enough to realize that hope is not a good foundation of proper investing activity.
When I listen to the conference calls I do not like all of the references to asset sales, new financing, equity issuance, and FUNDING GAPS. While I could accept those for brand new companies first starting out it is hard to see how such massive borrowing would be necessary for companies that have such high EURs and steep depletion curves.
From what I see you have a few decent tight oil plays in the Bakken that could make a very nice return to a disciplined company that sticks to drilling them. But that having been said, the industry, which is drilling all of the areas, cannot yield a positive return because most of the formations do not have enough recoverable oil to justify drilling such expensive wells.
Winston Churchill said: "A fanatic is one who can't change his mind and won't change the subject."
The issue raised by Professor Perry and Merrill Lynch has nothing to do with the return on equity of companies drilling oil wells, nor anything to do with their financial health. All it talks about is the downstream economic bonanza to companies and individuals who are reducing their costs by paying much less for natural gas.
To Hydra: I visited Williston, North Dakota and drove through a good chunk of the oil patch. The streets in North Dakota, in the oil patch, are MUCH better than the streets in Minnesota. The water and air are also cleaner. The truth is North Dakota is a large state (70,000 square miles) and even with this additional oil patch development, it's still plenty of nothing, and a nothing that I've always enjoyed and loved as a Native North Dakotan.
"I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids." -- Vag
This is just nonsense. It has been pointed out on many previous occasions that the production of natural gas liquids and oil contributed to the economics of these plays. Here's just one instance from comments posted in December 2011: LINK
The paradox of your argument (actually, Arthur Berman's argument which you parrot here) is that depletion rates are high, new wells in "non-core" areas will not be productive and that natural gas prices will remain at their historic lows. Explain how all of those things can be true.
Vange>>>When I listen to the conference calls I do not like all of the references to asset sales, new financing, equity issuance, and FUNDING GAPS.<<<
Would you mind sharing your data and research with us comparing,say, Asset Sales between energy companies that are involved in the shale oil and gas areas and companies that are not involved in such areas? Also, it would be interesting to see such data over time to see how much higher such Asset Sales for relevant companies are now compared to historical norms in the energy industry. I would obviously also like to see your research and data for the other categories you mention-ie-"new financing, equity issuance, and FUNDING GAPS."
The issue raised by Professor Perry and Merrill Lynch has nothing to do with the return on equity of companies drilling oil wells, nor anything to do with their financial health. All it talks about is the downstream economic bonanza to companies and individuals who are reducing their costs by paying much less for natural gas.
But if you were rational you would know that spending on something that does not offer a positive return is not sustainable. I began my comments by stating, "Throwing money at uneconomic activities can seem to act as 'stimulus' but all it does is divert capital from economic activities that should take place instead."
If this is too subtle for you, what I am saying is that the diversion of capital into uneconomic activities leads to malinvestment that will eventually require a market liquidation that will do a great deal of harm. (See the aftermath of the tech and housing bubbles for examples.)
"I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids." -- Vag
This is just nonsense. It has been pointed out on many previous occasions that the production of natural gas liquids and oil contributed to the economics of these plays. Here's just one instance from comments posted in December 2011: LINK
The commentary ends with Mark writing:
Welcome to the shale gas revolution, where thanks to modern, advanced drilling technologies, we've become the "Saudi Arabia of Natural Gas," which translates into lower prices for U.S consumers.
This is not acknowledgment that the natural gas companies destroyed capital by selling their product at a fraction of their total cost. And Mark has not just been hyping the Bakken but plenty of other areas that have turned out to be disasters.
You also quoted a Chesapeake statement in which it was claimed that a price of $5.00-$6.00 per Mcf will eventually prevail. The problem is that the company's wells were depleting in months, not years and that it was forced to keep adding massive amounts of debt to stay in operation. It seems that the board has been paying more attention to the skeptics and critics because Chesapeake has subsequently dumped directors and its CEO and is now trying to sell itself as a shale liquids play.
I guess that you will wait to admit that you were too optimistic until after the massive write-offs as companies finally admit that the EURs were way too optimistic and write down assets that have a fraction of the value that is claimed on their balance sheets.
A fanatic is one who can't change his mind and won't change the subject. -- Winston Churchill
This is hilarious, you are such a fanatic and you can't even see it!
In housing the stimulus cost trillions and the "savings" were non-existent. In natural gas and oil, the savings are hundreds of billions to trillions of dollars for the economy.
And your wrong about bad investments: drilling and oil exploration have always been capital-intensive. The real issue is return on equity: if these companies get a high ROE, then they will ultimately be good investments.
I'm sorry, but I starting to think your "smart investor" facade (and it is a facade) is an attempt to hide the fact that you are an extreme environmentalist who is simply against tracking and oil and gas development.
Would you mind sharing your data and research with us comparing,say, Asset Sales between energy companies that are involved in the shale oil and gas areas and companies that are not involved in such areas? Also, it would be interesting to see such data over time to see how much higher such Asset Sales for relevant companies are now compared to historical norms in the energy industry.
I would obviously also like to see your research and data for the other categories you mention-ie-"new financing, equity issuance, and FUNDING GAPS."
I have already done this on previous threads. I would be given the name of some 'great' shale company only to find that it could not generate positive cash flows or keep its debt levels stable. I would try to clarify the situation by listening in on a conference call and hear a lot of positives but hear many qualified statements throughout. The CEO would tell us how great things are only to talk about a funding gap that will be filled by asset sales or more borrowing.
And I have made it very clear that if I were the CEO of a large conventional producer with reserve decline issues I would look at blowing a few billion on the acquisition of shale gas plays because I could apply the 6:1 boe ratio conversion to the assumed reserves. That would give the company a few years of cover before the reserves would have to be written down. That time could be used to use the company paper to take out smaller conventional players with better reserve prospects. By the time that the market recognised the shale problem the write-off of global reserves would cause prices to go up and that would make up for having to write down our own reserves.
In housing the stimulus cost trillions and the "savings" were non-existent. In natural gas and oil, the savings are hundreds of billions to trillions of dollars for the economy.
We have had the bankers and investors subsidize natural gas users for quite some time. The 'savings' have done little for the economy because it is still on the edge of collapse. But the 'savings' imposed a cost on the people who paid the subsidies. Those people will find that they own worthless shares of companies engaged on capital destroying activities. Even an optimist like Mark has to figure out eventually that such subsidies cannot last for very long if the companies continue to lose money.
And what about all these factories and power generation facilities built because of the expectation of very low prices? Once the subsidies end many of those may turn out to be uneconomic and abandoned by their original owners.
And your wrong about bad investments: drilling and oil exploration have always been capital-intensive. The real issue is return on equity: if these companies get a high ROE, then they will ultimately be good investments.
But they lost money on shale gas for years. That is my point. Mark thinks that the losses can continue forever. I am pointing out that it cannot.
I'm sorry, but I starting to think your "smart investor" facade (and it is a facade) is an attempt to hide the fact that you are an extreme environmentalist who is simply against tracking and oil and gas development.
I am an environmentalist but not in the lefty EPA/Obama way. I think that most people who work for NGOs should be put in jail for the damage that they have done to people. What I find ironic is that the idiot lefties are right about shale for the wrong reason. Fracking is not the problem. The economics are the problem. It is unfortunate that people like Mark refuse to see the bubble that is obviously in front of them.
> We have had the bankers and investors subsidize > natural gas users for quite some time.
Huh!? My family's wells in the Bakken spew off massive amounts of natural gas WITHOUT SUBSIDIES! And massive checks to royalty owners. And the company that drilled our well was acquired by the Norwegian State oil company for $4 billions dollars. And Harold Hamm is a billionaire and your not.
YOU DON"T KNOW WHAT YOU ARE TALKING ABOUT.
People with guts and gumption in the ND Bakken are taking risks and making millions/billions of dollars and you are simply envious.
>The 'savings' have done little for the economy > because it is still on the edge of collapse.
Because of Obama's tax and spend + massive regulatory regime + the EU's idiocy in keeping a single monetary zone for separate countries. The only thing keeping the US out of a depression is the oil and gas industry. Professor Perry is right on the mark here, and you are, quite frankly, on another planet.
> But the 'savings' imposed a cost on the people who > paid the subsidies. Those people will find that they > own worthless shares of companies engaged on > > capital destroying activities. Even an optimist like > Mark has to figure out eventually that such > subsidies cannot last for very long if the companies > continue to lose money.
YOU ARE DELUSIONAL.
I pay less for gas at the pump. I pay less for heating my house. Massively less, hundreds of dollars less except in the subsidized environmental nut case economy you worship.
> And what about all these factories and power > generation facilities built because of the >expectation of very low prices? Once the subsidies > end many of those may turn out to be uneconomic > and abandoned by their original owners.
There aren't any subsidies. You absolutely do not know what you are talking about. The subsidies are in power and wind for Obama's political cronies.
I say it again: reveal yourself! You are an environmental nut case who has absolutely no grasp of economics. There are no subsidies for natural gas. You absolutely do not know what you are talking about. Take your meds and slow down and take it easy, that is my advice.
To Test 1234-Are you familiar with the "Million Dollar Way" blog site? Just google it. Awesome site for what is happening in the Bakken.
One of his main themes is that the Bakken/3 Forks is essentially a giant oil industry lab and that practices learned and developed there will be applied to shale plays around the world. He had a post a few days ago about Statoil and one of the reasons they wanted Brigham and the Bakken was/is to develop the expertise to eventually go after the huge Russian shale plays.
Huh!? My family's wells in the Bakken spew off massive amounts of natural gas WITHOUT SUBSIDIES! And massive checks to royalty owners. And the company that drilled our well was acquired by the Norwegian State oil company for $4 billions dollars. And Harold Hamm is a billionaire and your not.
If your experience is common then it would show up in 10-K filings with the SEC for public companies. The fact that they do not seems to indicate that your experience is not common.
People with guts and gumption in the ND Bakken are taking risks and making millions/billions of dollars and you are simply envious.
I can't speak for others but I am not. I actually own shares in companies that do a bit of drilling in the Bakken. And I certainly have no problem with risking capital because that is how I make my money.
Because of Obama's tax and spend + massive regulatory regime + the EU's idiocy in keeping a single monetary zone for separate countries. The only thing keeping the US out of a depression is the oil and gas industry. Professor Perry is right on the mark here, and you are, quite frankly, on another planet.
Obama just did what Bush started. He bailed out companies and banks that should have failed and threw money at projects that made no economic sense. Both parties failed to defend fiscal conservative values. And as I said, it is easy for you and Perry to prove me wrong. Go to the fillings and show me the cash flows. Prove that companies are self financing, reducing debt, and paying dividends.
I pay less for gas at the pump. I pay less for heating my house. Massively less, hundreds of dollars less except in the subsidized environmental nut case economy you worship.
It is true that you pay a little less to heat your house and that the utilities saved money on their inputs. But it is also true that the lower prices came from capital destruction. I am suggesting that the results for the economy would have been better without the bailouts and malinvestments. You are buying the Keynesian argument that spending is a good thing regardless of how wise it is.
There aren't any subsidies. You absolutely do not know what you are talking about. The subsidies are in power and wind for Obama's political cronies.
Sure there are subsidies. They just come from investors, hedge funds, and finance companies, not government. If shale gas companies sell their product for less than its cost for five years you have to bet that someone is losing in a big way.
I say it again: reveal yourself! You are an environmental nut case who has absolutely no grasp of economics. There are no subsidies for natural gas.
You are a fool who is so biased by faulty political views and greed that he cannot see reality as it is. I was called a short seller or outright idiot by those who thought that my comments on the overvalued tech sector were far out and as a Bush hater when I pointed out his lack of courage when it came to controlling Fannie and Freddie. When I attack Reagan for not doing much about spending the GOP lapdogs get all mad and call me a liberal. When I point out that Clinton did not run real surpluses and doctored the economic data I am called a right wing nutcase by the Democratic lapdogs who call me a Nazi. When I point out that they are two wings on the same bird of prey they attack me as a nutcase who is not perceptive enough to figure out the differences between a president who would run deficits for 19 years and one who would run them for 17 years.
The problem for the critics is that I simply stick to the data. As I said, to prove me wrong is easy. Show me the financials that can prove to me that pets.com can be profitable. Show me the methodology that would blend low quality mortgages to create an AAA rated security. Show me that the shale companies are self financing and can show positive cash flows and stable debt within a reasonable period of time.
You absolutely do not know what you are talking about. Take your meds and slow down and take it easy, that is my advice.
But I do know what I am talking about. I look at the numbers and come to conclusions, not what some 'experts' are telling me to think. You and Mark sound a lot like those AGW fanatics who are telling me that I have to accept global warming as reality even though the actual data is not supporting those claims.
I was called a short seller or outright idiot by those who thought that my comments on the overvalued tech sector were far out and as a Bush hater when I pointed out his lack of courage when it came to controlling Fannie and Freddie. When I attack Reagan for not doing much about spending the GOP lapdogs get all mad and call me a liberal. When I point out that Clinton did not run real surpluses and doctored the economic data I am called a right wing nutcase by the Democratic lapdogs who call me a Nazi. When I point out that they are two wings on the same bird of prey they attack me as a nutcase who is not perceptive enough to figure out the differences between a president who would run deficits for 19 years and one who would run them for 17 years.
The problem for the critics is that I simply stick to the data. As I said, to prove me wrong is easy. Show me the financials that can prove to me that pets.com can be profitable. Show me the methodology that would blend low quality mortgages to create an AAA rated security. Show me that the shale companies are self financing and can show positive cash flows and stable debt within a reasonable period of time.
There is a slight difference. You can be positive in the face of lousy fundamentals because as someone who is a trader you may not care about the longer term for a while. From my side of the game I have no such luxury. That means that I have to tell people to stay away even though the bubble has plenty of time to run or to buy even though the consolidation period may have months or more to run. Those bubbles or consolidation periods tend to 'confirm' the bias of the clueless and they think that the rising market makes them some kind of genius and you a fool. And when they lose most of their paper 'gains' and more they forget that the critics were on the money and move on to the next batch of charlatans that tell them to be positive and that there is a lot of profit to be made in the next overvalued bull market.
To make money using my methodology requires looking at the raw data, understanding proper economic theory, and being very patient. It is very simple but not easy because most people lack the discipline to do the research that would allow them to stay with their convictions or the courage to stand against the herd.
So your method (don't invest in companies that are in a growth phase and require investment capital) is fine, it's conservative, it works, good for you.
I'm in technology. Using your method, you will never invest in tech startups and again, thats fine. Not your cup of tea, not what you do. But almost every successful tech startup I know (Google, Apple, Amazon, Cisco, Brocade, Compellent, etc.) goes through an initial seed phase and then rapid growth where additional capital is required. Not all companies: Microsoft grew organically (but much more slowly than Apple or Google). If everyone was as conservative as you, none of these companies would have been started, they never would have made it off the ground. Its VERY GOOD that some people had higher risk tolerance and were willing to consider "subsidizing" (to use your phrase) Google, Apple, and Cisco.
I don't know the math on the other shale "plays" that are strictly natural gas. You might be right that that will never work, I don't know. And I only know a very tiny amount about the Bakken. But the math is so trivial in the Bakken that even I can do it. The average well makes 100,000 barrels in the first few years, which yields about $8 million in revenue to pay back the cost of the well. After that, its maintenance, plus taxes and royalties, on 100 barrels a day (36,500 barrels a year). Call it 25% in taxes and royalties. Then just do a little math:
@ $50/barrel --> 36.5K*$50 == $1.825 million
@ $100/barrel --> 36.5K*$100 == $$3.65 million
@ $200/barrel --> 36.5K*$200 == $7.3 million
for the next 30 years. Except the per well numbers will keep increasing, and the network of pipelines to gather everything will add more efficiencies, etc. You may as well have a printing press to print the money as be an oil company in this situation.
The natural gas is captured and sold, albeit at very low prices nowadays. But that could change and go higher, and probably will (and at that point the other gas-oriented shale plays might get into positive ROE territory). That's just frosting on the cake.
The ROE (return on equity) has a oil price floor where it goes negative, which depends on the producer. At current prices everyone is making money. At higher prices they'll be making A LOT of money. The floor is apparently around $40 to $50 dollars a barrel. The bet is things won't get that low again, and they probably won't.
North Dakota will probably clear 1 million barrels a day in less than one year. With 2,000 new wells per year going in for the next 15 years, that's probably an additional investment of 3000*$10 million = $30 billion. 30,000 wells will produce on average 30,000*36,500 ~= 1 billion barrels a year, or about $75 billion at current oil prices. So a $30 billion investment gets you back a stream of $75 billion per year... no subsidies here.
Fair enough and at least partly true, Although I still am a trader, since late 2008 or so I've been doing less trading. I hit my long term net worth goal.
I still do trade, but since the gold temporary peak around $1900 and silver around $50, most of my trades have been hedges on my existing physical and core items.
My comment was more referring to yours about "called a ... outright idiot" and "they think that the rising market makes them some kind of genius and you a fool" and "they attack me as a nutcase".
Perhaps self serving, but if the critics and loud mouths knew either of our actual full track records and percentage of correct macro calls, they'd STFU almost instantly.
Both of us are far from perfect and have made mistakes, but where we have always 99.99% agreed is on risk control/management and having real facts on our side... and yes, it sure isn't easy ferreting out the facts, given all the noise and false info and PR, etc. But it is doable, as we and many others have proven.
So your method (don't invest in companies that are in a growth phase and require investment capital) is fine, it's conservative, it works, good for you.
That is not what I said. I have no trouble with investing in early stages that require capital and borrowing. In fact, about half my stocks are in very risky ventures that are expected to have a 90% failure rate. My problem is with investing in the hope that I find a greater fool because the economics and business plan does not work. That is the problem with shale gas and oil.
I'm in technology. Using your method, you will never invest in tech startups and again, thats fine. Not your cup of tea, not what you do. But almost every successful tech startup I know (Google, Apple, Amazon, Cisco, Brocade, Compellent, etc.) goes through an initial seed phase and then rapid growth where additional capital is required. Not all companies: Microsoft grew organically (but much more slowly than Apple or Google). If everyone was as conservative as you, none of these companies would have been started, they never would have made it off the ground. Its VERY GOOD that some people had higher risk tolerance and were willing to consider "subsidizing" (to use your phrase) Google, Apple, and Cisco.
As I said, I invest in early stage companies. But in your example I will point out that you have a survivorship bias problem. For every Apple and Cisco there are many pets.com, space.com, or grocer.com type failures. The fact that I could have predicted that automobiles would do great in the 1920s would not have helped me if I held any of the 300+ companies that failed.
I don't know the math on the other shale "plays" that are strictly natural gas. You might be right that that will never work, I don't know. And I only know a very tiny amount about the Bakken. But the math is so trivial in the Bakken that even I can do it. The average well makes 100,000 barrels in the first few years, which yields about $8 million in revenue to pay back the cost of the well. After that, its maintenance, plus taxes and royalties, on 100 barrels a day (36,500 barrels a year). Call it 25% in taxes and royalties. Then just do a little math:
@ $50/barrel --> 36.5K*$50 == $1.825 million
@ $100/barrel --> 36.5K*$100 == $$3.65 million
@ $200/barrel --> 36.5K*$200 == $7.3 million
for the next 30 years. Except the per well numbers will keep increasing, and the network of pipelines to gather everything will add more efficiencies, etc. You may as well have a printing press to print the money as be an oil company in this situation.
You do not describe the Bakken. The average well in the core areas starts out with an IP of less than 100 bpd and has a decline rate of more than 65%. This means that you get most of the money in the first two years. And that is why self-financing of operations is critical. If the estimates are right you get your payback early in the game and don't have the massive negative cash flows five years after you started drilling. And as you get outside of the core areas your IP drops and decline rates go up. Things get a lot worse very quickly.
This is where the problem lies. You are assuming that the EURs are valid and that the depletion rates are a lot lower than they really are. I am pointing out that the actual data is not confirming those assumption.
> But in your example I will point out > that you have a survivorship bias problem. > For every Apple and Cisco > there are many > pets.com, space.com, or grocer.com > type failures. The fact that I could > have predicted that automobiles > would do great in the 1920s would > not have helped me if I held any of the 300+ > companies that failed.
Which begs the question why you invest in these kinds of companies? Answer: you think you know better than the other investors, which is a perfectly good reason to do so.
Name some companies that you personally invest in that are early stage, i.e., negative cash flow and negative ROE. I'm skeptical you would actually do this.
> You do not describe the Bakken. > The average well in the core areas > starts out with an IP of less than 100 > bpd and has a decline rate of more than 65%. > This means that you get most of the money in the > first two years. > And that is why self-financing of > operations is critical.
Sorry, I'm not following your winnie-the-pooh logic (or lack thereof) here. If I get most of my money right away, then I can self-finance, or I can find someone else to give me cheap money because it's a boom and that's how billionaires like Howard Hamm and the Brigham guys are made.
And *you* don't know the Bakken. I checked the Parshall field production: it averages more than 100 barrels per day per well, and this is assuming 100% production every day, its probably less. From the State of ND data, I'd say the Parshall field is running at 137 barrels per day, based on an average of 25 days of production per well.
As an another example, the Robinson Lake field production averages 211 barrels per day assuming perfect 30 days per month operation. Assuming 25 days per month per well yields 253 per day per well.
Sanish field production is 188 barrels per well per day assuming 30 days of production, or 225 barrels assuming 25 barrels per day.
Your numbers are off by a factor of 2 for the "better Bakken."
The State of ND numbers are averaging 92 barrels per day against all wells in the state, or about 34,000 barrels per year, or about $3.4 million at $100/barrel per day per well.
President Obama proclaimed that the US has 100 years of natural gas (UNG) supply.
Do we really have 100 years of natural gas (NG) supply? Why did Chris Nelder claim that we have only 11 years or less NG supply left? The Potential Gas Committee, the EIA and the USGS gave different estimates of US NG resources. People may interpret the numbers wrong. They may not understand the differences between resource, reserve, and economical reserve.
The PGC claimed we have 2192 TCF of discovered and undiscovered potential NG resources. Marketed NG production was 22 BCF in 2010. So 2192 TCF divided by 22 BCF/year is about 100 years of supply. I will show that it is naive to jump to a conclusion based on that. The Difference Between Resource and Reserve In the oil & gas industry, resource means the amount of gas or oil that remains underground, and reserve means what could be produced from the resource. Only a portion of the resources could be recovered technically. Only a portion of the technically recoverable resources could be produced economically. Only a portion of the economically producible resources could be produced into supply. That is called reserve. This graph explains what are non-discovered and speculative resources, and what are discovered and proven reserves:
Please read Chris Nelder for details. We extracted 28.6 TCF of gas in 2011. So 273 TCF of proven gas reserve only lasts for ten years. How do NG industry experts and geologists estimate the resources and reserves? I found that these two groups calculate things differently. Investors should know why they calculate the estimates differently.
The Marcellus Shale counts for about half of US shale gas reserves. Recently USGS slashed reserve estimate of Marcellus from 410 TCF to 84 TCF. In response EIA also revised their number to 141 TCF. Let me do a case study on Marcellus Shale. The Top-Down Reserve Estimate of Marcellus This is the preferred approach of NG producers:
Drill some demonstration wells to get some production data. Use the Arps formula to fit a few months' production data. Extrapolate the type curve to 40-50 years of well lifespan to calculate an EUR (Estimated Ultimate Recovery). Extrapolate the results of the demo wells to the whole area. Calculate number of wells that could be drilled based on well spacing and area of the play. Multiplied it by the average EUR, then multiply it by an effective recovery percentage.
This EIA document explains how the estimates were obtained:
Here is how EIA came up with 410 TCF for Marcellus (page 21):
The area of the Marcellus play is 94893 square miles. At 8 wells per square mile, 759144 wells can be drilled. The average EUR/well is 1.18 BCF. So total is 896 TCF. Discount it by an effective recovery factor of 45.8%. The result is 410 TCF technically recoverable gas.
I think this approach is flawed:
Fitting the Arps Type Curve based on merely the first few months of production data and extrapolating to 500 months of production is wrong. It leads to overestimated EURs. The Arps formula diverges to infinity with B>1 as I explained. Producers drill demo wells with more laterals of longer length. The laterals could extend up to 9000 feet away. So they are draining gas from beneath 4 or 5 well sites away. In doing so, they can show higher production rates per well. But the data does not represent the production potential for the area fairly. When they drill the next well on the next 80 acres patch, they may discover that the gas was already drained.
Following the USGS revision, EIA slashed the Marcellus reserve from 410 TCF to 141 TCF. That invalidated the previous calculation. The USGS geologists have a more scientific approach. The Bottom-Up Reserve Estimate of Marcellus A geologist would estimate the reserve as below:
Calculate the Gas-in-Place (GIP) based on the geology: The thickness of the shale layer and the gas content per volume or per ton of the shale rocks. Calculate percentage of recoverable GIP.
This is reasonable to me. I checked this overview with a chart on page 8 giving parameters of the Marcellus Shale:
Total area of Marcellus is 95000 square miles The thickness of the shale layer is 50 to 200 feet. The gas content is 60-100 CF per ton of material. Geologists calculated the GIP to be 1500 TCF.
The density of shale rocks is 2.5 tons/M3 or 0.0708 tons/CF. So Average gas content is 5.664 times the shale volume. Using 100 feet average thickness, GIP = 5.664*95000*640*43560*100 = 1500.08 TCF. My math is good! Halliburton (HAL) disclosed that only 10% of GIP could be recovered. Various sources put the recovery factor at 5% to 10% or less. But somehow Chesapeake (CHK) got a 30% recovery factor magically. Assuming a 9.4% recovery factor, the 1500 TCF of GIP in Marcellus would produce 141 BCF technically recoverable gas. That's the new EIA estimate. Chesapeake's mileage may vary.
Calculating the EUR Per Well Let's calculate the EUR per well, using the upper bound numbers: 100 cubic feet of gas per ton of rocks, and 200 feet shale layer. GIP = 100CF/ton*0.0708ton/CF*80Acres*43560SQF/Acre*200FT The result is GIP = 4.93 BCF per well. Assuming 10% recovery, the EUR would be 0.5 BCF per well. Even CHK's optimistic 30% recovery factor gives EUR of 1.5 BCF. That is way below the 3.75 BCF in CHK's type curve. In Barnett Shale, the GIP was estimated to be 327 TCF. The NG industry projected an EUR of 1.42 BCF and recoverable reserve of 44 TCF. So far, they drilled 16000 wells and developed 66% of the 3000 square miles core area. The cumulative production is only 10.8 TCF. That's 3.3% GIP recovery factor and 0.675 BCF per well. The GIP of the thickest core of Barnett is 52 BCF per well, BTW. How could producers ever make a profit at that kind of EUR? They quietly retreated from Barnett and switched to other shale plays, without admitting defeat. The gas content in Barnett averaged 320 CF/ton. That is four times better than Marcellus, and the highest of all US shales. That must be the reason Barnett was developed first. Do they expect success in Marcellus with 1/4 the gas content? How could they place wells only 2000 feet apart, when the wells were drilled with 9000 feet or longer laterals? If the well spacing was increased, then fewer wells could be drilled. Thus the resource assets of producers would value less. Likewise, with a lower EUR, the asset values must be written down. It is much worse! A low EUR means a shale play might not even be profitable at reasonable NG prices. When an asset could not bring in profits, should its value not be marked down to zero?!
Implications to Investors Investors check balance sheets and quarterly operation reports to determine a company value. Knowing the real reserve estimates and the realistic EURs, what do you see when you look at the balance sheets of major NG producers? What happens to the equity values when the assets on the books must be marked down by half or more, or reduced to near zero? I see grave danger in the US NG industry. They told us the shale gas boom story for years. It is time for the investors and the NG industry to wake up to the reality. The industry has survived so far by keep begging banks for more money to keep drilling. For example, CHK earned $1.068B in gas and oil revenue in Q1 of 2012 while spent $4.4B in capital expenditures. This is unsustainable! I foresee a looming collapse of the US NG sector. In my follow-up articles I will discuss in details. I urge people to scrutinize the financials of these names:
Chesapeake Energy [CHK] Anadarko (APC) Devon Energy (DVN) EnCana (ECA) ConocoPhillips (COP) Southwestern Energy (SWN) Chevron (CVX) WPX Energy (WPX) EOG Resources (EOG) Occidental (OXY) Apache Corp. (APA) Ultra Petroleum (UPL) QEP Resources (QEP) Cabot Oil & Gas (COG) EQT Resources (EQT) Exco Resources (XCO) Range Resources (RRC) Newfield Exploration (NFX) Noble Energy (NBL) Pioneer Natural (PXD) Marathon (MRO) Quicksilver Resources (KWK) Forest Oil (FST) Linn Energy (LINE) Energen Resources Corp. (EGN) SandRidge Energy (SD)
Invest in Coal, Not Natural Gas Mean while, deeply discounted US coal producers are poised for a strong rebound. There is a myth that natural gas is now dirt cheap and abundant, and coal is dirty and expensive and abandoned. Some thought the entire coal sector is doomed, and that the NG sector will thrive. Nothing is further from the truth. Coal is not going away. The shale gas boom will turn to bust. Amid surging electricity demand, reversal of the coal-to-gas fuel switch and rapid growth of exports, US coal producers continue to curtail productions, which is bullish:
China's coal imports in the first half of 2012 reached 140M tons, up 65.9% Y-o-Y. That's bad news to Chinese coal producers but good news to the oversea producers. I predicted that the Chinese coal industry faced peak coal, peak water and peak labor. Recent data suggests that other than the top three producing provinces, productions in other provinces are collapsing. I will discuss the black lung in Chinese coal miners and more in my future articles. I call to short certain NG players after the NG prices recovery, but not now. After the Patriot Coal (PCX) bankruptcy, I increased my positions in James River Coal (JRCC), Arch Coal Inc. (ACI), Alpha Natural Resource (ANR) and Peabody Energy (BTU). I encourage readers to consider other US coal producers as well:
Cloud Peak Energy (CLD) Consol Energy (CNX) Black Hills Corp. (BKH) Walter Energy (WLT) Westmoreland Coal (WLB) Nacco Industries (NC) Alliance Resource Partners LP (ARLP) Market Vectors Coal ETF (KOL)
Which begs the question why you invest in these kinds of companies? Answer: you think you know better than the other investors, which is a perfectly good reason to do so.
Name some companies that you personally invest in that are early stage, i.e., negative cash flow and negative ROE. I'm skeptical you would actually do this.
I invest in Canadian junior mining companies that keep going to the market and issuing shares because they need the money to drill. Among my holdings are Golden Goliath, Eurasian, Lydian, Barker Minerals, BlackPeral Resources, Chesapeake Gold, Renaissance Gold, Commerce Resources, Ivernia, Sona Resources, Tanzanian Royalty, and many many more.
In the current environment I prefer physical gold and silver, conventional energy companies with strong cash flows and little debt, coal companies, and PM mining shares and royalty plays.
Sorry, I'm not following your winnie-the-pooh logic (or lack thereof) here. If I get most of my money right away, then I can self-finance, or I can find someone else to give me cheap money because it's a boom and that's how billionaires like Howard Hamm and the Brigham guys are made.
But that is the problem. You get most of the money early but that is far short of the cost of drilling and operating the well. This makes the average well a loser, which is why you can't show positive cash flows even after five or six years of operations. Don't you remember that the same song and dance were given to us about shale gas?
And *you* don't know the Bakken. I checked the Parshall field production: it averages more than 100 barrels per day per well, and this is assuming 100% production every day, its probably less. From the State of ND data, I'd say the Parshall field is running at 137 barrels per day, based on an average of 25 days of production per well.
Of course they would average more than 100 bpd. You have mostly new $10 million wells that have been drilled over the past few years while many of the older wells and dry wells are abandoned and not counted in the average. The point is that the average well for the average company is not profitable. IF THE COMPANIES WERE CAPABLE OF SELF FINANCING AND RUNNING POSITIVE CASH FLOWS MARK WOULD BE ABLE TO POINT TO THEM. The fact that he does not and has no good analysis based on the 10-K filings to point to shows us that this is little more than promotion.
Vange>>>The average well in the core areas starts out with an IP of less than 100 bpd<<<
I never knew just how full of it you were until this comment. In the REAL North Dakota world versus theoretical peak oil websites there is well after well after well with IPs in the 400-500 barrel range and in some cases far more.
Good points about high well production numbers in the Bakken. I think VangelV keeps hoping his stock in ShortTheBakken.com will finally take off, but it's not happening. So Sad.
To your earlier point about the MillionDollarWay blog, he has a list of MONSTER wells in the Bakken, see:
Some of these wells are incredible! Check these out:
16059, 729, Petro-Hunt, USA 2D-3-1H, Charlson field, s6/06; cum 1.24 million 2/12; still producing 9,000 bbls/month
17092, Behr 11-34H, s4/08; produced 500,725 bbls in 591 days; as of 11/11 -- 769K
17227, Austin 21-28H, s5/08, produced 504,554 bbls in 517 days; as of 11/11 --767K
17222, Austin 18-21H, s6/08, produced 514,353 bbls in 522 days; as of 11/11 --715K
This is a small sample.
But sad to say, we won't be able to pull VangelV away from his Tanzanian Royalty stock, because I'm sure that is much better than the Bakken. That's why were hearing so much about it.
As an another example, the Robinson Lake field production averages 211 barrels per day assuming perfect 30 days per month operation. Assuming 25 days per month per well yields 253 per day per well.
The last time someone was touting Robinson Lake to me the data included a lot of gas production that was converted to barrels of oil equivalent at a 6:1 ratio. I wonder how clean your aggregate numbers are, how old the wells that are counted are, and how many abandoned wells are not counted. Do you even know the answers? And if you don't shouldn't you have a better idea of what is going on?
Sanish field production is 188 barrels per well per day assuming 30 days of production, or 225 barrels assuming 25 barrels per day.
Your numbers are off by a factor of 2 for the "better Bakken."
I have no evidence of that. Clearly the numbers that you cite are not very clean and do not include sufficient information to make a determination. As I said, new wells have high IPs but production falls off quickly. When I see a company like Continental, which has been in the Bakken for nine years, raise nearly a billion dollars from debt and equity dilution I have trouble buying the profitability story that Mark is selling.
The State of ND numbers are averaging 92 barrels per day against all wells in the state, or about 34,000 barrels per year, or about $3.4 million at $100/barrel per day per well.
No wonder the Bakken is exploding.
It is not enough to finance $10 million wells and other costs. Below is the commentary about the Maugeri report that Mark was hyping a while ago. I have excerpted the Bakken section below.
Some of these wells are incredible! Check these out:
16059, 729, Petro-Hunt, USA 2D-3-1H, Charlson field, s6/06; cum 1.24 million 2/12; still producing 9,000 bbls/month
17092, Behr 11-34H, s4/08; produced 500,725 bbls in 591 days; as of 11/11 -- 769K
17227, Austin 21-28H, s5/08, produced 504,554 bbls in 517 days; as of 11/11 --767K
17222, Austin 18-21H, s6/08, produced 514,353 bbls in 522 days; as of 11/11 --715K
This is a small sample.
But sad to say, we won't be able to pull VangelV away from his Tanzanian Royalty stock, because I'm sure that is much better than the Bakken. That's why were hearing so much about it.
Some of these wells? The problem is that the AVERAGE well does not produce very much oil at all and the arguments are based on the aggregate production and total cost that is required for that production. On that front the companies fail.
And I would not be so harsh on Tanzanian Royalty. My average cost in 2002 was around C$1.20 which comes out to US$0.76 if the BoC converter is right. I sold most of my shares in January 2006 for C$8.31 or US$7.13. I still hold a few thousand shares that are valued at C$4.24 today. While not a stellar performer the company has helped offset the inevitable losses in the sector.
Vangel said: The problem is that the AVERAGE well does not produce very much oil at all and the arguments are based on the aggregate production and total cost that is required for that production.
Nothing like how they're doing cherry picking, eh?
And think of (assuming the average really actually is 92 bbls/day, from a source with a large vested interest in being optimistic about production) how many wells are only producing 5-10 bbls/day, or less.
> Some of these wells? The problem > is that the AVERAGE well does not > produce very much oil at all.
Overall EUR's for the Bakken wells are about 500,000 over their lifetime, and because of better technology they are rising towards 650,000, and may go higher than that. You can keep hiding behind the depletion rate dodge but it only shows you and bart DO NOT know what you are talking about. But I repeat myself...
Also, your the unsourced article saying Maguire is wrong about the potential for the Bakken is wrong in every way. If I printed that out and used it to line my cat's litter box, my cat would refuse to do his business there.
Yes, OMG, all drilling will stop and everything will end when oil hits $70!!! The sky is falling, oh no!!!! Except, ND producers already get less than $70 and there are still hundreds of rigs going full throttle 24 hours per day drilling for oil and making money.
The prediction of 50,000 wells to reach 2 million barrels per day is off by about 30,000, given the 100 barrels per day average in the Bakken -- as reported by the State of North Dakota (people who don't believe these numbers probably also don't believe we landed on the moon and that fluoride is a government conspiracy to increase autism rates).
The most hilarious of the chicken little statements in that article is that if you have to have more wells, they will start to bump against communities and developed areas. Has this person ever been to North Dakota? It's miles and miles of nothing. ESPECIALLY northwest North Dakota -- I know, my family homesteaded there over 110 years ago. You can see for 10's of miles, and you might see 1 farm, if you're lucky. The wells are placed every square mile or so, multiple wells per pad (especially in the hottest areas like Sanish, Parshall, or Robinson Lake). In some cases their are oil wells right in the middle of town. People in North Dakota have had to struggle to survive against the elements: the dryness and lack of rain, bitter cold and blizzards in the winter, hail and locusts in the summer. They aren't like Californians, who have forgotten what it took to build their state, and now just live off what previous generations built (kind of like Europeans). North Dakotan's celebrate the land and what it produces, they don't tolerate environmentalist fringe nut case religious zealots telling them what to do, because they know what they are doing, and they are going to get it done, and in the process replace all the 2 million barrels per day we import from the Persian Gulf.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of. Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data, just put your money in short-term US treasury bonds, at least they won't go down like your ShortTheBakken.com position. Any other approach will likely put your money at great risk.
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of. Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data...
It's very illuminating that you apparently feel that your position is so weak that you must go into personal attacks, and even assert PR type lies, as in Vangel or I are short the Bakken or natural gas.
As far as obscure stocks, most never heard of MSFT in 1985 either. In other words, not only can I play the illogical or absurd or fallacy type word games, it does absolutely nothing to advance overall understanding or the total factual picture.
Play it the way you must, but please don't waste your time worrying about either of our financial positions. Both of our records of correct calls and successful investing for the last decade are hugely above average.
As just one of many examples, both of us called for the housing crash years before it happened, and although I don't recall if Vangel called the top within a few months, I did.
Thanks for your "genius call" but it's not true. I make mistakes too.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
Believe what you will, as in everything is perfect.
One comment at a time we take a look at the facts and logic.
Overall EUR's for the Bakken wells are about 500,000 over their lifetime, and because of better technology they are rising towards 650,000, and may go higher than that.
You do understand that the E in EUR stands for estimate, don't you? And you do understand that you don't have enough data in the Bakken to make such an estimate at this time? After all, the Bakken is not just one homogeneous formation. It is three formations of which one is quite good but very uneven. We will take this up below when we deal with your depletion comment.
You can keep hiding behind the depletion rate dodge but it only shows you and bart DO NOT know what you are talking about. But I repeat myself...
There is no depletion dodge. The depletion rate is very high. This means that if you are going to get 500K barrels out of a well you will get more than 300K of them in the first two years. This means that your $10 million well is paid off and that you are self financing. But the SEC filings do not show that. They show companies that have to keep borrowing and issue new shares nearly a decade after entering the Bakken.
Also, your the unsourced article saying Maguire is wrong about the potential for the Bakken is wrong in every way. If I printed that out and used it to line my cat's litter box, my cat would refuse to do his business there.
Unsourced? I guess you are not referring to the article in the Financial Times.
Yes, OMG, all drilling will stop and everything will end when oil hits $70!!! The sky is falling, oh no!!!! Except, ND producers already get less than $70 and there are still hundreds of rigs going full throttle 24 hours per day drilling for oil and making money.
But ND producers are showing negative cash flows. Have the WTI price go less than $70 and I doubt that the financing that they need will raise the money that is required to finance operations. Let me repeat this. After nearly a decade many of the 'better' operators still can't self finance operations. They need to issue more equity or borrow more in order to keep drilling. If prices decline again you will find that there will be less financing and lower share prices. This means production will decline as the pace of drilling has to fall.
The prediction of 50,000 wells to reach 2 million barrels per day is off by about 30,000, given the 100 barrels per day average in the Bakken -- as reported by the State of North Dakota (people who don't believe these numbers probably also don't believe we landed on the moon and that fluoride is a government conspiracy to increase autism rates).
You are missing a very important point. First there are dry wells in the region that are ignored by the optimists because they yield a tiny amount of gas or oil before they are abandoned. These do not make it into the denominator. Then there are those wells that can no longer produce enough to justify the operations costs. They are also cemented and abandoned. And they also come out of the denominator. Then we have the falloff of production and the increase in depletion rates as you move out of the core areas. To get to the total production level being touted the producers have to move to the lower and upper Bakken. That means many more dry and early abandoned wells.
Note that the state of ND is not very good at providing timely data on how many dry and abandoned wells there are every year. Such data would be easy to get but it isn't publicised because it makes the story look ordinary and discourages investment.
The most hilarious of the chicken little statements in that article is that if you have to have more wells, they will start to bump against communities and developed areas. Has this person ever been to North Dakota? It's miles and miles of nothing. ESPECIALLY northwest North Dakota -- I know, my family homesteaded there over 110 years ago. You can see for 10's of miles, and you might see 1 farm, if you're lucky. The wells are placed every square mile or so, multiple wells per pad (especially in the hottest areas like Sanish, Parshall, or Robinson Lake). In some cases their are oil wells right in the middle of town. People in North Dakota have had to struggle to survive against the elements: the dryness and lack of rain, bitter cold and blizzards in the winter, hail and locusts in the summer. They aren't like Californians, who have forgotten what it took to build their state, and now just live off what previous generations built (kind of like Europeans). North Dakotan's celebrate the land and what it produces, they don't tolerate environmentalist fringe nut case religious zealots telling them what to do, because they know what they are doing, and they are going to get it done, and in the process replace all the 2 million barrels per day we import from the Persian Gulf.
I agree with your bumping against communities critique. It is stupid and not credible as far as I am concerned. That is why I provided you the FT analysis, which you seem to have ignored.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
Very true. But CO2 is not a pollutant yet he we are. The EPA is using make believe science to shut down coal plants and environmental groups are preventing or delaying the construction of pipelines that would get a better price for the Bakken oil.
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of.
I don't short. And I already have plenty of positions in the sector although around a third of my original positions have been taken out by producers. Bart does not like the juniors because the liquidity is too low for the type of trading that he favours and the opportunity for manipulation is great.
Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data, just put your money in short-term US treasury bonds, at least they won't go down like your ShortTheBakken.com position. Any other approach will likely put your money at great risk.
How about you stop with the narrative and provide the 10-Ks that support your view of the Bakken. Surely it can't be that hard if the picture is as good as you claim that it is. I know that I have asked Mark for such information but after more than a year he has yet to provide anything of use.
You guys sound a lot like those AGW fanatics who argue that we should believe because some government agency tells us that the issue is settled. Just like them, you fail to deal with the actual data and look at the objective evidence. And just like them you are losing credibility as more and more people start to pay attention.
Have you seen this report from the State of North Dakota on expected oil and gas production in ND:
http://tinyurl.com/bwx5h9n
From the article:
"North Dakota’s oil production could be more than 2 million barrels a day by 2025 — about three times the current rate — according to a state-funded study released Wednesday.
Bentek Energy LLC, an analysis firm based in Evergreen, Colo., also predicts in its study that natural gas production could quintuple to some 3 billion cubic feet by 2025 in the Williston Basin, which includes the Dakotas and Montana."
Also, apparently Bentek thinks natural gas production in old wells in the Bakken will actually increase, not decrease:
"North Dakota produced a record 650.8 million cubic feet of natural gas in April. Montana produced 85 million cubic feet for the month, and South Dakota’s production was pegged at 42.1 million cubic feet.
Natural gas production from traditional wells typically mirrors crude production and drops off as oil pumped from the well declines.
The Bentek study predicts gas production could actually increase or decrease at a slower rate in the Bakken and Three Forks wells as oil production declines. The study based its findings on older Bakken wells in Montana."
I can't wait for to hear from Bart and VangelV about their take on this data from within the prism of their "reality distortion field". Their ramblings get more and more bizarre as this thread progresses.
The record as noted in that super long post about Marcellus (especially the *very* poor forecasts), and the others about vested interests continue to sail right over their heads.
Very similar to the ostriches at the height of the dot com frenzy.
I can't wait for to hear from Bart and VangelV about their take on this data from within the prism of their "reality distortion field". Their ramblings get more and more bizarre as this thread progresses.
There is no chance that natural gas production will go up as predicted because the energy return from the marginal formations is negative and there is no way to deal with the depletion. We have already seen the shale gas industry chew through capital on uneconomic drilling and see no way to see a replay unless prices are substantially higher and costs are below the sale price.
The study is funded by the state and it looks as if the state got the puff piece it needs to try to draw more activity. But you have to love the comment, "The Bentek study predicts gas production could actually increase or decrease at a slower rate in the Bakken and Three Forks wells as oil production declines. The study based its findings on older Bakken wells in Montana."
For the record, the wells that are most like those being drilled today are those in the Elm Coulee field. If one looks at the record it is easy to see that the Elm Coulee increased Montana's oil production for a few years before it topped out and began to decline. From the bottom to the peak only took six years. That is not exactly a long term solution to the problems that the US faces no matter what the study says.
Now if you want to convince me show me the money. Where are the companies that have positive cash flows and are not adding debt or diluting shareholders to keep operations going? If you can't produce them none of your speculations and promotion pieces are worth anything.
Now if you want to convince me show me the money. Where are the companies that have positive cash flows and are not adding debt or diluting shareholders to keep operations going? If you can't produce them none of your speculations and promotion pieces are worth anything.
I've only been reading the comments here a few months, but I have as yet to see *anything* from any of the believers.
Maybe they think that cash flow doesn't matter and that ND or the Feds will bail them out, no matter what?
Fracking is safe and incredibly effective at generating massive amounts of gas and oil. Keep up the good work in pointing this out, in spite of fanatical cranks like bart and VangelV, who remain impervious to logic, data, and truth.
Fracking is safe and incredibly effective at generating massive amounts of gas and oil. Keep up the good work in pointing this out, in spite of fanatical cranks like bart and VangelV, who remain impervious to logic, data, and truth.
I am still waiting for that data. Which companies are generating positive cash flows from their Bakken operations and paying back investors with healthy dividends? Let us note that neither you, Mark, or any of the other cheerleaders has been able to come up with SEC filings to support the claims that are being made.
And where is your data on the abandoned and dry wells that do not go into the denominator when average output is calculated? You would think that such data is easy to find and can be used to support your claims. The fact that you keep refusing to provide any evidence shows that all you have are the puff pieces that are put out by the promoters who benefit from the capital destruction in the shale industry.
While previously in the thread he said>>>The average well in the core areas starts out with an IP of less than 100 bpd<<
So which is it?-I can tell you right now that you are Orders of Magnitude wrong on the less than 100 BPD.
It is a typo. That should have read less than 1000 bpd, a figure that I have cited many times. The IP is less than a thousand bpd and the average well is less than 100 bpd. Those are horrible numbers for the case that you are trying to make.
I am still waiting for that data. Which companies are generating positive cash flows from their Bakken operations and paying back investors with healthy dividends? Let us note that neither you, Mark, or any of the other cheerleaders has been able to come up with SEC filings to support the claims that are being made.
Ah yes, the inconvenient truth and facts that they keep avoiding. Don't they know that housing prices always go up or that it's a new paradigm? *sigh*
And where is your data on the abandoned and dry wells that do not go into the denominator when average output is calculated? You would think that such data is easy to find and can be used to support your claims. The fact that you keep refusing to provide any evidence shows that all you have are the puff pieces that are put out by the promoters who benefit from the capital destruction in the shale industry.
Another big OOPS, and continuing evidence and raw facts about how the "PR mavens" can affect so many who won't even look.
Nowhere in that ND state paper is there anything about the recently abandoned and dry wells = strong evidence of vested interests, and just one example.
Throwing money at uneconomic activities can seem to act as 'stimulus' but all it does is divert capital from economic activities that should take place instead.
ReplyDelete"Throwing money at uneconomic activities can seem to act as 'stimulus' ... blah, blah, blah" -- Vag
ReplyDeleteAnother dose of horseshit from Arthur Berman's sock puppet.
Another dose of horseshit from Arthur Berman's sock puppet.
ReplyDeleteAnd another ID 10 T who has nothing, knows virtually nothing so goes into ad hominem personal attack mode, and thereby proving his ID 10 T status - again.
Any others?
ReplyDeleteIs that net of externalized costs?
DeleteI guess the energy experts at Merrill Lynch didn't bother to read any of the 10-Ks and didn't listen in on any of the conference calls before writing their report on the benefits of energy to the U.S. economy?
ReplyDeleteits not enough...with capacity utilization at 78.9% and 27.5 million of us who arent working at the level they want to, it's clear our country's economy continues to run well below it's potential...
ReplyDeleteThis comment has been removed by the author.
ReplyDelete[W]ith capacity utilization at 78.9%...our country's economy continues to run well below it's potential
ReplyDeleteThat 78.9% is 2.2 percentage points above the 10-year average.
I guess the energy experts at Merrill Lynch didn't bother to read any of the 10-Ks and didn't listen in on any of the conference calls before writing their report on the benefits of energy to the U.S. economy?
ReplyDeleteThat is your problem Mark, you are GUESSING. I did not ask for anything very difficult. When you were hyping shale gas because the 'experts' liked it and said it would make investors a lot of money I pointed out that the CEOs of the very companies that you were hyping had stated that they needed much higher prices to make money if all of the costs were taken into account. Since I am always on the lookout for a good investment I asked for examples of companies that were making a real profit in the sector. What I got back from you and the other optimists was nothing but the, 'if it wasn't any good the experts would not like it,' argument. It seems as if there is a bout of amnesia here because it wasn't that long ago that the 'experts' were telling us that house prices could go down, that we should buy the home builders because they were cheap, and that Pets.com was a good idea.
I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids. But even there you are still resorting to the same trick of referencing government estimates and analyst reports without ever looking into the accuracy of such estimates and reports.
I am sorry to be so skeptical of Wall Street promoters and government bureaucrats but I prefer to think for myself and to look at the actual data. And when I do look at the data I do not like what I see. I see companies that have to keep borrowing because their operations are not self financing even though the depletion rates mean that the assumed EURs would yield a very early payback. I wonder what happens if we have another financial crisis that cuts off credit and drives down prices for a while. How can companies that have yet to show positive cash flows at high prices and with low credit costs stay in business long enough to ride out even the normal market volatility. Are we to 'hope' for a war in the Middle East that causes a spike in prices and helps us get out with a profit? Or some 'new' technology to come along and increase porosity cheaply? I have been around long enough to realize that hope is not a good foundation of proper investing activity.
When I listen to the conference calls I do not like all of the references to asset sales, new financing, equity issuance, and FUNDING GAPS. While I could accept those for brand new companies first starting out it is hard to see how such massive borrowing would be necessary for companies that have such high EURs and steep depletion curves.
From what I see you have a few decent tight oil plays in the Bakken that could make a very nice return to a disciplined company that sticks to drilling them. But that having been said, the industry, which is drilling all of the areas, cannot yield a positive return because most of the formations do not have enough recoverable oil to justify drilling such expensive wells.
VangelV:
ReplyDeleteWinston Churchill said: "A fanatic is one who can't change his mind and won't change the subject."
The issue raised by Professor Perry and Merrill Lynch has nothing to do with the return on equity of companies drilling oil wells, nor anything to do with their financial health. All it talks about is the downstream economic bonanza to companies and individuals who are reducing their costs by paying much less for natural gas.
To Hydra: I visited Williston, North Dakota and drove through a good chunk of the oil patch. The streets in North Dakota, in the oil patch, are MUCH better than the streets in Minnesota. The water and air are also cleaner. The truth is North Dakota is a large state (70,000 square miles) and even with this additional oil patch development, it's still plenty of nothing, and a nothing that I've always enjoyed and loved as a Native North Dakotan.
"I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids." -- Vag
ReplyDeleteThis is just nonsense. It has been pointed out on many previous occasions that the production of natural gas liquids and oil contributed to the economics of these plays. Here's just one instance from comments posted in December 2011: LINK
The paradox of your argument (actually, Arthur Berman's argument which you parrot here) is that depletion rates are high, new wells in "non-core" areas will not be productive and that natural gas prices will remain at their historic lows. Explain how all of those things can be true.
Vange>>>When I listen to the conference calls I do not like all of the references to asset sales, new financing, equity issuance, and FUNDING GAPS.<<<
ReplyDeleteWould you mind sharing your data and research with us comparing,say, Asset Sales between energy companies that are involved in the shale oil and gas areas and companies that are not involved in such areas? Also, it would be interesting to see such data over time to see how much higher such Asset Sales for relevant companies are now compared to historical norms in the energy industry.
I would obviously also like to see your research and data for the other categories you mention-ie-"new financing, equity issuance, and FUNDING GAPS."
The issue raised by Professor Perry and Merrill Lynch has nothing to do with the return on equity of companies drilling oil wells, nor anything to do with their financial health. All it talks about is the downstream economic bonanza to companies and individuals who are reducing their costs by paying much less for natural gas.
ReplyDeleteBut if you were rational you would know that spending on something that does not offer a positive return is not sustainable. I began my comments by stating, "Throwing money at uneconomic activities can seem to act as 'stimulus' but all it does is divert capital from economic activities that should take place instead."
If this is too subtle for you, what I am saying is that the diversion of capital into uneconomic activities leads to malinvestment that will eventually require a market liquidation that will do a great deal of harm. (See the aftermath of the tech and housing bubbles for examples.)
"I have noted that the hype about shale gas has been toned down without acknowledgment of the massive losses that some of us predicted and that you have now moved on to shale liquids." -- Vag
ReplyDeleteThis is just nonsense. It has been pointed out on many previous occasions that the production of natural gas liquids and oil contributed to the economics of these plays. Here's just one instance from comments posted in December 2011: LINK
The commentary ends with Mark writing:
Welcome to the shale gas revolution, where thanks to modern, advanced drilling technologies, we've become the "Saudi Arabia of Natural Gas," which translates into lower prices for U.S consumers.
This is not acknowledgment that the natural gas companies destroyed capital by selling their product at a fraction of their total cost. And Mark has not just been hyping the Bakken but plenty of other areas that have turned out to be disasters.
You also quoted a Chesapeake statement in which it was claimed that a price of $5.00-$6.00 per Mcf will eventually prevail. The problem is that the company's wells were depleting in months, not years and that it was forced to keep adding massive amounts of debt to stay in operation. It seems that the board has been paying more attention to the skeptics and critics because Chesapeake has subsequently dumped directors and its CEO and is now trying to sell itself as a shale liquids play.
I guess that you will wait to admit that you were too optimistic until after the massive write-offs as companies finally admit that the EURs were way too optimistic and write down assets that have a fraction of the value that is claimed on their balance sheets.
VangelV:
ReplyDeleteA fanatic is one who can't change his mind and won't change the subject. -- Winston Churchill
This is hilarious, you are such a fanatic and you can't even see it!
In housing the stimulus cost trillions and the "savings" were non-existent. In natural gas and oil, the savings are hundreds of billions to trillions of dollars for the economy.
And your wrong about bad investments: drilling and oil exploration have always been capital-intensive. The real issue is return on equity: if these companies get a high ROE, then they will ultimately be good investments.
I'm sorry, but I starting to think your "smart investor" facade (and it is a facade) is an attempt to hide the fact that you are an extreme environmentalist who is simply against tracking and oil and gas development.
Would you mind sharing your data and research with us comparing,say, Asset Sales between energy companies that are involved in the shale oil and gas areas and companies that are not involved in such areas? Also, it would be interesting to see such data over time to see how much higher such Asset Sales for relevant companies are now compared to historical norms in the energy industry.
ReplyDeleteI would obviously also like to see your research and data for the other categories you mention-ie-"new financing, equity issuance, and FUNDING GAPS."
I have already done this on previous threads. I would be given the name of some 'great' shale company only to find that it could not generate positive cash flows or keep its debt levels stable. I would try to clarify the situation by listening in on a conference call and hear a lot of positives but hear many qualified statements throughout. The CEO would tell us how great things are only to talk about a funding gap that will be filled by asset sales or more borrowing.
And I have made it very clear that if I were the CEO of a large conventional producer with reserve decline issues I would look at blowing a few billion on the acquisition of shale gas plays because I could apply the 6:1 boe ratio conversion to the assumed reserves. That would give the company a few years of cover before the reserves would have to be written down. That time could be used to use the company paper to take out smaller conventional players with better reserve prospects. By the time that the market recognised the shale problem the write-off of global reserves would cause prices to go up and that would make up for having to write down our own reserves.
In housing the stimulus cost trillions and the "savings" were non-existent. In natural gas and oil, the savings are hundreds of billions to trillions of dollars for the economy.
ReplyDeleteWe have had the bankers and investors subsidize natural gas users for quite some time. The 'savings' have done little for the economy because it is still on the edge of collapse. But the 'savings' imposed a cost on the people who paid the subsidies. Those people will find that they own worthless shares of companies engaged on capital destroying activities. Even an optimist like Mark has to figure out eventually that such subsidies cannot last for very long if the companies continue to lose money.
And what about all these factories and power generation facilities built because of the expectation of very low prices? Once the subsidies end many of those may turn out to be uneconomic and abandoned by their original owners.
And your wrong about bad investments: drilling and oil exploration have always been capital-intensive. The real issue is return on equity: if these companies get a high ROE, then they will ultimately be good investments.
But they lost money on shale gas for years. That is my point. Mark thinks that the losses can continue forever. I am pointing out that it cannot.
I'm sorry, but I starting to think your "smart investor" facade (and it is a facade) is an attempt to hide the fact that you are an extreme environmentalist who is simply against tracking and oil and gas development.
I am an environmentalist but not in the lefty EPA/Obama way. I think that most people who work for NGOs should be put in jail for the damage that they have done to people. What I find ironic is that the idiot lefties are right about shale for the wrong reason. Fracking is not the problem. The economics are the problem. It is unfortunate that people like Mark refuse to see the bubble that is obviously in front of them.
> Fanatic Said:
ReplyDelete> We have had the bankers and investors subsidize
> natural gas users for quite some time.
Huh!? My family's wells in the Bakken spew off massive amounts of natural gas WITHOUT SUBSIDIES!
And massive checks to royalty owners. And the company that drilled our well was acquired by the Norwegian State oil company for $4 billions dollars. And Harold Hamm is a billionaire and your not.
YOU DON"T KNOW WHAT YOU ARE TALKING ABOUT.
People with guts and gumption in the ND Bakken are taking risks and making millions/billions of dollars and you are simply envious.
>The 'savings' have done little for the economy
> because it is still on the edge of collapse.
Because of Obama's tax and spend + massive regulatory regime + the EU's idiocy in keeping a single monetary zone for separate countries. The only thing keeping the US out of a depression is the oil and gas industry. Professor Perry is right on the mark here, and you are, quite frankly, on another planet.
> But the 'savings' imposed a cost on the people who > paid the subsidies. Those people will find that they > own worthless shares of companies engaged on > > capital destroying activities. Even an optimist like > Mark has to figure out eventually that such
> subsidies cannot last for very long if the companies > continue to lose money.
YOU ARE DELUSIONAL.
I pay less for gas at the pump. I pay less for heating my house. Massively less, hundreds of dollars less except in the subsidized environmental nut case economy you worship.
> And what about all these factories and power
> generation facilities built because of the >expectation of very low prices? Once the subsidies > end many of those may turn out to be uneconomic > and abandoned by their original owners.
There aren't any subsidies. You absolutely do not know what you are talking about. The subsidies are in power and wind for Obama's political cronies.
I say it again: reveal yourself! You are an environmental nut case who has absolutely no grasp of economics. There are no subsidies for natural gas.
You absolutely do not know what you are talking about. Take your meds and slow down and take it easy, that is my advice.
To Test 1234-Are you familiar with the "Million Dollar Way" blog site? Just google it. Awesome site for what is happening in the Bakken.
ReplyDeleteOne of his main themes is that the Bakken/3 Forks is essentially a giant oil industry lab and that practices learned and developed there will be applied to shale plays around the world.
He had a post a few days ago about Statoil and one of the reasons they wanted Brigham and the Bakken was/is to develop the expertise to eventually go after the huge Russian shale plays.
Huh!? My family's wells in the Bakken spew off massive amounts of natural gas WITHOUT SUBSIDIES!
ReplyDeleteAnd massive checks to royalty owners. And the company that drilled our well was acquired by the Norwegian State oil company for $4 billions dollars. And Harold Hamm is a billionaire and your not.
If your experience is common then it would show up in 10-K filings with the SEC for public companies. The fact that they do not seems to indicate that your experience is not common.
People with guts and gumption in the ND Bakken are taking risks and making millions/billions of dollars and you are simply envious.
I can't speak for others but I am not. I actually own shares in companies that do a bit of drilling in the Bakken. And I certainly have no problem with risking capital because that is how I make my money.
Because of Obama's tax and spend + massive regulatory regime + the EU's idiocy in keeping a single monetary zone for separate countries. The only thing keeping the US out of a depression is the oil and gas industry. Professor Perry is right on the mark here, and you are, quite frankly, on another planet.
Obama just did what Bush started. He bailed out companies and banks that should have failed and threw money at projects that made no economic sense. Both parties failed to defend fiscal conservative values. And as I said, it is easy for you and Perry to prove me wrong. Go to the fillings and show me the cash flows. Prove that companies are self financing, reducing debt, and paying dividends.
YOU ARE DELUSIONAL.
ReplyDeleteI pay less for gas at the pump. I pay less for heating my house. Massively less, hundreds of dollars less except in the subsidized environmental nut case economy you worship.
It is true that you pay a little less to heat your house and that the utilities saved money on their inputs. But it is also true that the lower prices came from capital destruction. I am suggesting that the results for the economy would have been better without the bailouts and malinvestments. You are buying the Keynesian argument that spending is a good thing regardless of how wise it is.
There aren't any subsidies. You absolutely do not know what you are talking about. The subsidies are in power and wind for Obama's political cronies.
Sure there are subsidies. They just come from investors, hedge funds, and finance companies, not government. If shale gas companies sell their product for less than its cost for five years you have to bet that someone is losing in a big way.
I say it again: reveal yourself! You are an environmental nut case who has absolutely no grasp of economics. There are no subsidies for natural gas.
You are a fool who is so biased by faulty political views and greed that he cannot see reality as it is. I was called a short seller or outright idiot by those who thought that my comments on the overvalued tech sector were far out and as a Bush hater when I pointed out his lack of courage when it came to controlling Fannie and Freddie. When I attack Reagan for not doing much about spending the GOP lapdogs get all mad and call me a liberal. When I point out that Clinton did not run real surpluses and doctored the economic data I am called a right wing nutcase by the Democratic lapdogs who call me a Nazi. When I point out that they are two wings on the same bird of prey they attack me as a nutcase who is not perceptive enough to figure out the differences between a president who would run deficits for 19 years and one who would run them for 17 years.
The problem for the critics is that I simply stick to the data. As I said, to prove me wrong is easy. Show me the financials that can prove to me that pets.com can be profitable. Show me the methodology that would blend low quality mortgages to create an AAA rated security. Show me that the shale companies are self financing and can show positive cash flows and stable debt within a reasonable period of time.
You absolutely do not know what you are talking about. Take your meds and slow down and take it easy, that is my advice.
But I do know what I am talking about. I look at the numbers and come to conclusions, not what some 'experts' are telling me to think. You and Mark sound a lot like those AGW fanatics who are telling me that I have to accept global warming as reality even though the actual data is not supporting those claims.
I was called a short seller or outright idiot by those who thought that my comments on the overvalued tech sector were far out and as a Bush hater when I pointed out his lack of courage when it came to controlling Fannie and Freddie. When I attack Reagan for not doing much about spending the GOP lapdogs get all mad and call me a liberal. When I point out that Clinton did not run real surpluses and doctored the economic data I am called a right wing nutcase by the Democratic lapdogs who call me a Nazi. When I point out that they are two wings on the same bird of prey they attack me as a nutcase who is not perceptive enough to figure out the differences between a president who would run deficits for 19 years and one who would run them for 17 years.
ReplyDeleteThe problem for the critics is that I simply stick to the data. As I said, to prove me wrong is easy. Show me the financials that can prove to me that pets.com can be profitable. Show me the methodology that would blend low quality mortgages to create an AAA rated security. Show me that the shale companies are self financing and can show positive cash flows and stable debt within a reasonable period of time.
+1
And I know how you feel.
And I know how you feel.
ReplyDeleteThere is a slight difference. You can be positive in the face of lousy fundamentals because as someone who is a trader you may not care about the longer term for a while. From my side of the game I have no such luxury. That means that I have to tell people to stay away even though the bubble has plenty of time to run or to buy even though the consolidation period may have months or more to run. Those bubbles or consolidation periods tend to 'confirm' the bias of the clueless and they think that the rising market makes them some kind of genius and you a fool. And when they lose most of their paper 'gains' and more they forget that the critics were on the money and move on to the next batch of charlatans that tell them to be positive and that there is a lot of profit to be made in the next overvalued bull market.
To make money using my methodology requires looking at the raw data, understanding proper economic theory, and being very patient. It is very simple but not easy because most people lack the discipline to do the research that would allow them to stay with their convictions or the courage to stand against the herd.
VangelV;
ReplyDeleteOK you are conservative, good.
So your method (don't invest in companies that are in a growth phase and require investment capital) is fine, it's conservative, it works, good for you.
I'm in technology. Using your method, you will never invest in tech startups and again, thats fine. Not your cup of tea, not what you do. But almost every successful tech startup I know (Google, Apple, Amazon, Cisco, Brocade, Compellent, etc.) goes through an initial seed phase and then rapid growth where additional capital is required. Not all companies: Microsoft grew organically (but much more slowly than Apple or Google). If everyone was as conservative as you, none of these companies would have been started, they never would have made it off the ground. Its VERY GOOD that some people had higher risk tolerance and were willing to consider "subsidizing" (to use your phrase) Google, Apple, and Cisco.
I don't know the math on the other shale "plays" that are strictly natural gas. You might be right that that will never work, I don't know. And I only know a very tiny amount about the Bakken. But the math is so trivial in the Bakken that even I can do it. The average well makes 100,000 barrels in the first few years, which yields about $8 million in revenue to pay back the cost of the well. After that, its maintenance, plus taxes and royalties, on 100 barrels a day (36,500 barrels a year). Call it 25% in taxes and royalties. Then just do a little math:
@ $50/barrel --> 36.5K*$50 == $1.825 million
@ $100/barrel --> 36.5K*$100 == $$3.65 million
@ $200/barrel --> 36.5K*$200 == $7.3 million
for the next 30 years. Except the per well numbers will keep increasing, and the network of pipelines to gather everything will add more efficiencies, etc. You may as well have a printing press to print the money as be an oil company in this situation.
The natural gas is captured and sold, albeit at very low prices nowadays. But that could change and go higher, and probably will (and at that point the other gas-oriented shale plays might get into positive ROE territory). That's just frosting on the cake.
The ROE (return on equity) has a oil price floor where it goes negative, which depends on the producer. At current prices everyone is making money. At higher prices they'll be making A LOT of money. The floor is apparently around $40 to $50 dollars a barrel. The bet is things won't get that low again, and they probably won't.
North Dakota will probably clear 1 million barrels a day in less than one year. With 2,000 new wells per year going in for the next 15 years, that's probably an additional investment of 3000*$10 million = $30 billion. 30,000 wells will produce on average 30,000*36,500 ~= 1 billion barrels a year, or about $75 billion at current oil prices. So a $30 billion investment gets you back a stream of $75 billion per year... no subsidies here.
VangelV said...
ReplyDeleteThere is a slight difference.
Fair enough and at least partly true, Although I still am a trader, since late 2008 or so I've been doing less trading. I hit my long term net worth goal.
I still do trade, but since the gold temporary peak around $1900 and silver around $50, most of my trades have been hedges on my existing physical and core items.
My comment was more referring to yours about "called a ... outright idiot" and "they think that the rising market makes them some kind of genius and you a fool" and "they attack me as a nutcase".
Perhaps self serving, but if the critics and loud mouths knew either of our actual full track records and percentage of correct macro calls, they'd STFU almost instantly.
Both of us are far from perfect and have made mistakes, but where we have always 99.99% agreed is on risk control/management and having real facts on our side... and yes, it sure isn't easy ferreting out the facts, given all the noise and false info and PR, etc. But it is doable, as we and many others have proven.
So your method (don't invest in companies that are in a growth phase and require investment capital) is fine, it's conservative, it works, good for you.
ReplyDeleteThat is not what I said. I have no trouble with investing in early stages that require capital and borrowing. In fact, about half my stocks are in very risky ventures that are expected to have a 90% failure rate. My problem is with investing in the hope that I find a greater fool because the economics and business plan does not work. That is the problem with shale gas and oil.
I'm in technology. Using your method, you will never invest in tech startups and again, thats fine. Not your cup of tea, not what you do. But almost every successful tech startup I know (Google, Apple, Amazon, Cisco, Brocade, Compellent, etc.) goes through an initial seed phase and then rapid growth where additional capital is required. Not all companies: Microsoft grew organically (but much more slowly than Apple or Google). If everyone was as conservative as you, none of these companies would have been started, they never would have made it off the ground. Its VERY GOOD that some people had higher risk tolerance and were willing to consider "subsidizing" (to use your phrase) Google, Apple, and Cisco.
As I said, I invest in early stage companies. But in your example I will point out that you have a survivorship bias problem. For every Apple and Cisco there are many pets.com, space.com, or grocer.com type failures. The fact that I could have predicted that automobiles would do great in the 1920s would not have helped me if I held any of the 300+ companies that failed.
I don't know the math on the other shale "plays" that are strictly natural gas. You might be right that that will never work, I don't know. And I only know a very tiny amount about the Bakken. But the math is so trivial in the Bakken that even I can do it. The average well makes 100,000 barrels in the first few years, which yields about $8 million in revenue to pay back the cost of the well. After that, its maintenance, plus taxes and royalties, on 100 barrels a day (36,500 barrels a year). Call it 25% in taxes and royalties. Then just do a little math:
@ $50/barrel --> 36.5K*$50 == $1.825 million
@ $100/barrel --> 36.5K*$100 == $$3.65 million
@ $200/barrel --> 36.5K*$200 == $7.3 million
for the next 30 years. Except the per well numbers will keep increasing, and the network of pipelines to gather everything will add more efficiencies, etc. You may as well have a printing press to print the money as be an oil company in this situation.
You do not describe the Bakken. The average well in the core areas starts out with an IP of less than 100 bpd and has a decline rate of more than 65%. This means that you get most of the money in the first two years. And that is why self-financing of operations is critical. If the estimates are right you get your payback early in the game and don't have the massive negative cash flows five years after you started drilling. And as you get outside of the core areas your IP drops and decline rates go up. Things get a lot worse very quickly.
This is where the problem lies. You are assuming that the EURs are valid and that the depletion rates are a lot lower than they really are. I am pointing out that the actual data is not confirming those assumption.
To understand my position better you might look at this article from today's FT.
> But in your example I will point out
ReplyDelete> that you have a survivorship bias problem.
> For every Apple and Cisco > there are many > pets.com, space.com, or grocer.com
> type failures. The fact that I could
> have predicted that automobiles
> would do great in the 1920s would
> not have helped me if I held any of the 300+
> companies that failed.
Which begs the question why you invest in these kinds of companies? Answer: you think you know
better than the other investors, which is a perfectly
good reason to do so.
Name some companies that you personally invest in that are early stage, i.e., negative cash flow and negative ROE. I'm skeptical you would actually do this.
> You do not describe the Bakken.
> The average well in the core areas
> starts out with an IP of less than 100
> bpd and has a decline rate of more than 65%.
> This means that you get most of the money in the > first two years.
> And that is why self-financing of
> operations is critical.
Sorry, I'm not following your winnie-the-pooh logic (or lack thereof) here. If I get most of my money right away, then I can self-finance, or I can find someone else to give me cheap money because it's a boom and that's how billionaires like Howard Hamm and the Brigham guys are made.
And *you* don't know the Bakken. I checked the Parshall field production: it averages more than 100 barrels per day per well, and this is assuming 100% production every day, its probably less. From the State of ND data, I'd say the Parshall field is running at 137 barrels per day, based on an average of 25 days of production per well.
As an another example, the Robinson Lake field production averages 211 barrels per day assuming perfect 30 days per month operation. Assuming 25 days per month per well yields 253 per day per well.
Sanish field production is 188 barrels per well per day assuming 30 days of production, or 225 barrels assuming 25 barrels per day.
Your numbers are off by a factor of 2 for the "better Bakken."
The State of ND numbers are averaging 92 barrels per day against all wells in the state, or about 34,000 barrels per year, or about $3.4 million at $100/barrel per day per well.
No wonder the Bakken is exploding.
President Obama proclaimed that the US has 100 years of natural gas (UNG) supply.
ReplyDeleteDo we really have 100 years of natural gas (NG) supply? Why did Chris Nelder claim that we have only 11 years or less NG supply left? The Potential Gas Committee, the EIA and the USGS gave different estimates of US NG resources. People may interpret the numbers wrong. They may not understand the differences between resource, reserve, and economical reserve.
The PGC claimed we have 2192 TCF of discovered and undiscovered potential NG resources. Marketed NG production was 22 BCF in 2010. So 2192 TCF divided by 22 BCF/year is about 100 years of supply.
I will show that it is naive to jump to a conclusion based on that.
The Difference Between Resource and Reserve
In the oil & gas industry, resource means the amount of gas or oil that remains underground, and reserve means what could be produced from the resource.
Only a portion of the resources could be recovered technically.
Only a portion of the technically recoverable resources could be produced economically.
Only a portion of the economically producible resources could be produced into supply. That is called reserve.
This graph explains what are non-discovered and speculative resources, and what are discovered and proven reserves:
http://www.nowandfutures.com/download/d4/future_natural_gas_estimates.png
Please read Chris Nelder for details. We extracted 28.6 TCF of gas in 2011. So 273 TCF of proven gas reserve only lasts for ten years. How do NG industry experts and geologists estimate the resources and reserves? I found that these two groups calculate things differently. Investors should know why they calculate the estimates differently.
http://www.nowandfutures.com/download/d4/shale_gas_oil_us(eia).png
The Marcellus Shale counts for about half of US shale gas reserves. Recently USGS slashed reserve estimate of Marcellus from 410 TCF to 84 TCF. In response EIA also revised their number to 141 TCF.
Let me do a case study on Marcellus Shale.
The Top-Down Reserve Estimate of Marcellus
This is the preferred approach of NG producers:
Drill some demonstration wells to get some production data.
Use the Arps formula to fit a few months' production data.
Extrapolate the type curve to 40-50 years of well lifespan to calculate an EUR (Estimated Ultimate Recovery).
Extrapolate the results of the demo wells to the whole area.
Calculate number of wells that could be drilled based on well spacing and area of the play. Multiplied it by the average EUR, then multiply it by an effective recovery percentage.
This EIA document explains how the estimates were obtained:
http://www.nowandfutures.com/download/d4/how_natural_gas_estimates_were_made(eia).png
The typical well spacing is 2000 feet apart, or 80 acres per well. The unit conversions are:
1 mile = 5280 feet
1 square mile = 640 acres
1 acre = 43560 square feet
80 acres spacing = 8 wells/SQM
Here is how EIA came up with 410 TCF for Marcellus (page 21):
The area of the Marcellus play is 94893 square miles.
At 8 wells per square mile, 759144 wells can be drilled.
The average EUR/well is 1.18 BCF. So total is 896 TCF.
Discount it by an effective recovery factor of 45.8%.
The result is 410 TCF technically recoverable gas.
I think this approach is flawed:
Fitting the Arps Type Curve based on merely the first few months of production data and extrapolating to 500 months of production is wrong. It leads to overestimated EURs. The Arps formula diverges to infinity with B>1 as I explained.
Producers drill demo wells with more laterals of longer length. The laterals could extend up to 9000 feet away. So they are draining gas from beneath 4 or 5 well sites away. In doing so, they can show higher production rates per well. But the data does not represent the production potential for the area fairly. When they drill the next well on the next 80 acres patch, they may discover that the gas was already drained.
(continued)
ReplyDeleteFollowing the USGS revision, EIA slashed the Marcellus reserve from 410 TCF to 141 TCF. That invalidated the previous calculation. The USGS geologists have a more scientific approach.
The Bottom-Up Reserve Estimate of Marcellus
A geologist would estimate the reserve as below:
Calculate the Gas-in-Place (GIP) based on the geology: The thickness of the shale layer and the gas content per volume or per ton of the shale rocks.
Calculate percentage of recoverable GIP.
This is reasonable to me. I checked this overview with a chart on page 8 giving parameters of the Marcellus Shale:
Total area of Marcellus is 95000 square miles
The thickness of the shale layer is 50 to 200 feet.
The gas content is 60-100 CF per ton of material.
Geologists calculated the GIP to be 1500 TCF.
The density of shale rocks is 2.5 tons/M3 or 0.0708 tons/CF. So Average gas content is 5.664 times the shale volume. Using 100 feet average thickness, GIP = 5.664*95000*640*43560*100 = 1500.08 TCF. My math is good!
Halliburton (HAL) disclosed that only 10% of GIP could be recovered. Various sources put the recovery factor at 5% to 10% or less. But somehow Chesapeake (CHK) got a 30% recovery factor magically.
Assuming a 9.4% recovery factor, the 1500 TCF of GIP in Marcellus would produce 141 BCF technically recoverable gas. That's the new EIA estimate. Chesapeake's mileage may vary.
Calculating the EUR Per Well
Let's calculate the EUR per well, using the upper bound numbers: 100 cubic feet of gas per ton of rocks, and 200 feet shale layer.
GIP = 100CF/ton*0.0708ton/CF*80Acres*43560SQF/Acre*200FT
The result is GIP = 4.93 BCF per well. Assuming 10% recovery, the EUR would be 0.5 BCF per well.
Even CHK's optimistic 30% recovery factor gives EUR of 1.5 BCF. That is way below the 3.75 BCF in CHK's type curve.
In Barnett Shale, the GIP was estimated to be 327 TCF. The NG industry projected an EUR of 1.42 BCF and recoverable reserve of 44 TCF. So far, they drilled 16000 wells and developed 66% of the 3000 square miles core area. The cumulative production is only 10.8 TCF. That's 3.3% GIP recovery factor and 0.675 BCF per well. The GIP of the thickest core of Barnett is 52 BCF per well, BTW.
How could producers ever make a profit at that kind of EUR? They quietly retreated from Barnett and switched to other shale plays, without admitting defeat. The gas content in Barnett averaged 320 CF/ton. That is four times better than Marcellus, and the highest of all US shales. That must be the reason Barnett was developed first. Do they expect success in Marcellus with 1/4 the gas content?
How could they place wells only 2000 feet apart, when the wells were drilled with 9000 feet or longer laterals?
If the well spacing was increased, then fewer wells could be drilled. Thus the resource assets of producers would value less. Likewise, with a lower EUR, the asset values must be written down.
It is much worse! A low EUR means a shale play might not even be profitable at reasonable NG prices. When an asset could not bring in profits, should its value not be marked down to zero?!
(continued)
ReplyDeleteImplications to Investors
Investors check balance sheets and quarterly operation reports to determine a company value. Knowing the real reserve estimates and the realistic EURs, what do you see when you look at the balance sheets of major NG producers?
What happens to the equity values when the assets on the books must be marked down by half or more, or reduced to near zero?
I see grave danger in the US NG industry. They told us the shale gas boom story for years. It is time for the investors and the NG industry to wake up to the reality. The industry has survived so far by keep begging banks for more money to keep drilling. For example, CHK earned $1.068B in gas and oil revenue in Q1 of 2012 while spent $4.4B in capital expenditures.
This is unsustainable! I foresee a looming collapse of the US NG sector. In my follow-up articles I will discuss in details. I urge people to scrutinize the financials of these names:
Chesapeake Energy [CHK]
Anadarko (APC)
Devon Energy (DVN)
EnCana (ECA)
ConocoPhillips (COP)
Southwestern Energy (SWN)
Chevron (CVX)
WPX Energy (WPX)
EOG Resources (EOG)
Occidental (OXY)
Apache Corp. (APA)
Ultra Petroleum (UPL)
QEP Resources (QEP)
Cabot Oil & Gas (COG)
EQT Resources (EQT)
Exco Resources (XCO)
Range Resources (RRC)
Newfield Exploration (NFX)
Noble Energy (NBL)
Pioneer Natural (PXD)
Marathon (MRO)
Quicksilver Resources (KWK)
Forest Oil (FST)
Linn Energy (LINE)
Energen Resources Corp. (EGN)
SandRidge Energy (SD)
Invest in Coal, Not Natural Gas
Mean while, deeply discounted US coal producers are poised for a strong rebound. There is a myth that natural gas is now dirt cheap and abundant, and coal is dirty and expensive and abandoned. Some thought the entire coal sector is doomed, and that the NG sector will thrive.
Nothing is further from the truth. Coal is not going away. The shale gas boom will turn to bust. Amid surging electricity demand, reversal of the coal-to-gas fuel switch and rapid growth of exports, US coal producers continue to curtail productions, which is bullish:
http://www.nowandfutures.com/download/d4/coal_production_and_curtailments(eia).png
China's coal imports in the first half of 2012 reached 140M tons, up 65.9% Y-o-Y. That's bad news to Chinese coal producers but good news to the oversea producers. I predicted that the Chinese coal industry faced peak coal, peak water and peak labor. Recent data suggests that other than the top three producing provinces, productions in other provinces are collapsing. I will discuss the black lung in Chinese coal miners and more in my future articles.
I call to short certain NG players after the NG prices recovery, but not now. After the Patriot Coal (PCX) bankruptcy, I increased my positions in James River Coal (JRCC), Arch Coal Inc. (ACI), Alpha Natural Resource (ANR) and Peabody Energy (BTU). I encourage readers to consider other US coal producers as well:
Cloud Peak Energy (CLD)
Consol Energy (CNX)
Black Hills Corp. (BKH)
Walter Energy (WLT)
Westmoreland Coal (WLB)
Nacco Industries (NC)
Alliance Resource Partners LP (ARLP)
Market Vectors Coal ETF (KOL)
(HT Mark Anthony and ProdigyOfZen)
Which begs the question why you invest in these kinds of companies? Answer: you think you know better than the other investors, which is a perfectly good reason to do so.
ReplyDeleteName some companies that you personally invest in that are early stage, i.e., negative cash flow and negative ROE. I'm skeptical you would actually do this.
I invest in Canadian junior mining companies that keep going to the market and issuing shares because they need the money to drill. Among my holdings are Golden Goliath, Eurasian, Lydian, Barker Minerals, BlackPeral Resources, Chesapeake Gold, Renaissance Gold, Commerce Resources, Ivernia, Sona Resources, Tanzanian Royalty, and many many more.
In the current environment I prefer physical gold and silver, conventional energy companies with strong cash flows and little debt, coal companies, and PM mining shares and royalty plays.
Sorry, I'm not following your winnie-the-pooh logic (or lack thereof) here. If I get most of my money right away, then I can self-finance, or I can find someone else to give me cheap money because it's a boom and that's how billionaires like Howard Hamm and the Brigham guys are made.
But that is the problem. You get most of the money early but that is far short of the cost of drilling and operating the well. This makes the average well a loser, which is why you can't show positive cash flows even after five or six years of operations. Don't you remember that the same song and dance were given to us about shale gas?
And *you* don't know the Bakken. I checked the Parshall field production: it averages more than 100 barrels per day per well, and this is assuming 100% production every day, its probably less. From the State of ND data, I'd say the Parshall field is running at 137 barrels per day, based on an average of 25 days of production per well.
Of course they would average more than 100 bpd. You have mostly new $10 million wells that have been drilled over the past few years while many of the older wells and dry wells are abandoned and not counted in the average. The point is that the average well for the average company is not profitable. IF THE COMPANIES WERE CAPABLE OF SELF FINANCING AND RUNNING POSITIVE CASH FLOWS MARK WOULD BE ABLE TO POINT TO THEM. The fact that he does not and has no good analysis based on the 10-K filings to point to shows us that this is little more than promotion.
Vange>>>The average well in the core areas starts out with an IP of less than 100 bpd<<<
ReplyDeleteI never knew just how full of it you were until this comment. In the REAL North Dakota world versus theoretical peak oil websites there is well after well after well with IPs in the 400-500 barrel range and in some cases far more.
BreakerMorant:
ReplyDeleteGood points about high well production numbers in the Bakken. I think VangelV keeps hoping his stock in ShortTheBakken.com will finally take off, but it's not happening. So Sad.
To your earlier point about the MillionDollarWay blog, he has a list of MONSTER wells in the Bakken, see:
http://www.milliondollarwayblog.com/2009/11/monster-wells.html
Some of these wells are incredible! Check these out:
16059, 729, Petro-Hunt, USA 2D-3-1H, Charlson field, s6/06; cum 1.24 million 2/12; still producing 9,000 bbls/month
17092, Behr 11-34H, s4/08; produced 500,725 bbls in 591 days; as of 11/11 -- 769K
17227, Austin 21-28H, s5/08, produced 504,554 bbls in 517 days; as of 11/11 --767K
17222, Austin 18-21H, s6/08, produced 514,353 bbls in 522 days; as of 11/11 --715K
This is a small sample.
But sad to say, we won't be able to pull VangelV away from his Tanzanian Royalty stock, because I'm sure that is much better than the Bakken. That's why were hearing so much about it.
As an another example, the Robinson Lake field production averages 211 barrels per day assuming perfect 30 days per month operation. Assuming 25 days per month per well yields 253 per day per well.
ReplyDeleteThe last time someone was touting Robinson Lake to me the data included a lot of gas production that was converted to barrels of oil equivalent at a 6:1 ratio. I wonder how clean your aggregate numbers are, how old the wells that are counted are, and how many abandoned wells are not counted. Do you even know the answers? And if you don't shouldn't you have a better idea of what is going on?
Sanish field production is 188 barrels per well per day assuming 30 days of production, or 225 barrels assuming 25 barrels per day.
Your numbers are off by a factor of 2 for the "better Bakken."
I have no evidence of that. Clearly the numbers that you cite are not very clean and do not include sufficient information to make a determination. As I said, new wells have high IPs but production falls off quickly. When I see a company like Continental, which has been in the Bakken for nine years, raise nearly a billion dollars from debt and equity dilution I have trouble buying the profitability story that Mark is selling.
The State of ND numbers are averaging 92 barrels per day against all wells in the state, or about 34,000 barrels per year, or about $3.4 million at $100/barrel per day per well.
ReplyDeleteNo wonder the Bakken is exploding.
It is not enough to finance $10 million wells and other costs. Below is the commentary about the Maugeri report that Mark was hyping a while ago. I have excerpted the Bakken section below.
Bakken ballyhoo
Maugeri devotes the longest section of his report to the tight oil and shale gas “revolution” in the U.S., saying it “could be a paradigm-shifter for the oil world.” He extrapolates most of his forecast from the Bakken formation, a tight oil reservoir which underlies parts of North Dakota, Montana and Saskatchewan.
Unrestricted production from shale and tight oil could reach 6.6 mbpd by 2020 in his estimation, or as much as 4.2 mbpd after considering risk factors and depletion. The U.S. is currently producing about 0.9 mbpd from tight oil, so Maugeri’s forecast amounts to a more than four-fold increase in eight years, an extremely optimistic prospect. It is also far more than the EIA expects, having recently forecasted that U.S. tight oil would reach only 1.2 mbpd by 2035. For additional perspective, total U.S. production of crude oil and condensate today is 6.1 mbpd.
He does not mention that, on the basis of Bakken well productivity, it might take 50,000 new successful tight oil wells or more to achieve his forecast, plus many more unsuccessful ones as the productive areas of new fields are delineated. In the IEA’s recent forecast, another 500,000 new shale gas wells might be drilled by 2035, doubling the number of producing gas wells in America. Many of these new tight oil and shale gas wells would need to be drilled near where people live and work, rendering an “unrestricted” forecast for new development all but meaningless. Maugeri refers vaguely to this limitation, noting that “a revolution in environmental and curb-emissions technologies is required to sustain the development of most unconventional oils,” and that if the industry continues to fail to prevent environmental contamination from tight oil projects, “massive over-regulation” could result and new development could be delayed.
Maugeri assumes that oil will sell for at least $70 a barrel to achieve his tight oil production forecast. “Most of U.S. shale and tight oil are profitable at a price of oil (WTI) ranging from $50 to $65 per barrel,” he says, but an executive with an oil company producing oil in the Bakken, who was interviewed by Steve LeVine for Foreign Policy in February, said that if prices dropped to $70 per barrel, it could “create an extreme drop in drilling and field production really quickly” in the Bakken, and that “if oil drops to $70, a lot of people will lose money in the Bakken.”
Finally, Maugeri’s assumptions for the production profiles of Bakken wells appear to be far removed from reality. He uses a “combined average depletion rate for each producing well of 15 percent over the first five years, followed by a 7 percent depletion rate” for tight oil wells, while historical evidence shows that Bakken wells typically decline by 80 percent or more over the first five years.
Production profile of a typical Bakken well. Source: North Dakota Department of Mineral Resources
While tight oil production since 2005 has indeed been impressive, there is little basis for the Maugeri’s confidence that its growth trend will continue on its present trajectory through 2020, when real-world costs, siting issues, environmental concerns, and oil industry practices are taken into account.
Some of these wells are incredible! Check these out:
ReplyDelete16059, 729, Petro-Hunt, USA 2D-3-1H, Charlson field, s6/06; cum 1.24 million 2/12; still producing 9,000 bbls/month
17092, Behr 11-34H, s4/08; produced 500,725 bbls in 591 days; as of 11/11 -- 769K
17227, Austin 21-28H, s5/08, produced 504,554 bbls in 517 days; as of 11/11 --767K
17222, Austin 18-21H, s6/08, produced 514,353 bbls in 522 days; as of 11/11 --715K
This is a small sample.
But sad to say, we won't be able to pull VangelV away from his Tanzanian Royalty stock, because I'm sure that is much better than the Bakken. That's why were hearing so much about it.
Some of these wells? The problem is that the AVERAGE well does not produce very much oil at all and the arguments are based on the aggregate production and total cost that is required for that production. On that front the companies fail.
And I would not be so harsh on Tanzanian Royalty. My average cost in 2002 was around C$1.20 which comes out to US$0.76 if the BoC converter is right. I sold most of my shares in January 2006 for C$8.31 or US$7.13. I still hold a few thousand shares that are valued at C$4.24 today. While not a stellar performer the company has helped offset the inevitable losses in the sector.
Vangel said:
ReplyDeleteThe problem is that the AVERAGE well does not produce very much oil at all and the arguments are based on the aggregate production and total cost that is required for that production.
Nothing like how they're doing cherry picking, eh?
And think of (assuming the average really actually is 92 bbls/day, from a source with a large vested interest in being optimistic about production) how many wells are only producing 5-10 bbls/day, or less.
Some of my leveraged futures trades over the years had annualized rates of return of 3,000% or better too. -g-
ReplyDelete"Any sufficiently advanced technology is indistinguishable from magic."
-- Arthur C. Clarke
Bart:
ReplyDelete> Some of my leveraged futures trades
> over the years had annualized rates
> of return of 3,000% or better too. -g-
Clearly, you are a genius.
Don't get your hopes up about ShortTheBakken.com though...
VangelV Said:
ReplyDelete> Some of these wells? The problem
> is that the AVERAGE well does not
> produce very much oil at all.
Overall EUR's for the Bakken wells are about 500,000 over their lifetime, and because of better technology they are rising towards 650,000, and may go higher than that. You can keep hiding behind the depletion rate dodge
but it only shows you and bart DO NOT know what you are talking about. But I repeat myself...
Also, your the unsourced article saying Maguire is wrong about the potential for the Bakken is wrong in every way. If I printed that out and used it to line my cat's litter box, my cat would refuse to do his business there.
Yes, OMG, all drilling will stop and everything will end when oil hits $70!!! The sky is falling, oh no!!!! Except, ND producers already get less than $70 and there are still hundreds of rigs going full throttle 24 hours per day drilling for oil and making money.
The prediction of 50,000 wells to reach 2 million barrels per day is off by about 30,000, given the 100 barrels per day average in the Bakken -- as reported by the State of North Dakota (people who don't believe these numbers probably also don't believe we landed on the moon and that fluoride is a government conspiracy to increase autism rates).
The most hilarious of the chicken little statements in that article is that if you have to have more wells, they will start to bump against communities and developed areas. Has this person ever been to North Dakota? It's miles and miles of nothing. ESPECIALLY northwest North Dakota -- I know, my family homesteaded there over 110 years ago. You can see for 10's of miles, and you might see 1 farm, if you're lucky. The wells are placed every square mile or so, multiple wells per pad (especially in the hottest areas like Sanish, Parshall, or Robinson Lake). In some cases their are oil wells right in the middle of town. People in North Dakota have had to struggle to survive against the elements: the dryness and lack of rain, bitter cold and blizzards in the winter, hail and locusts in the summer. They aren't like Californians, who have forgotten what it took to build their state, and now just live off what previous generations built (kind of like Europeans).
North Dakotan's celebrate the land and what it produces, they don't tolerate environmentalist fringe nut case religious zealots telling them what to do, because they know what they are doing, and they are going to get it done, and in the process replace all the 2 million barrels per day we import from the Persian Gulf.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of. Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data, just put your money in short-term US treasury bonds, at least they won't go down like your ShortTheBakken.com position. Any other approach will likely put your money at great risk.
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of. Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data...
ReplyDeleteIt's very illuminating that you apparently feel that your position is so weak that you must go into personal attacks, and even assert PR type lies, as in Vangel or I are short the Bakken or natural gas.
As far as obscure stocks, most never heard of MSFT in 1985 either. In other words, not only can I play the illogical or absurd or fallacy type word games, it does absolutely nothing to advance overall understanding or the total factual picture.
Play it the way you must, but please don't waste your time worrying about either of our financial positions. Both of our records of correct calls and successful investing for the last decade are hugely above average.
As just one of many examples, both of us called for the housing crash years before it happened, and although I don't recall if Vangel called the top within a few months, I did.
Thanks for your "genius call" but it's not true. I make mistakes too.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
ReplyDeleteBelieve what you will, as in everything is perfect.
Sorry, I'm not buying it.
One comment at a time we take a look at the facts and logic.
ReplyDeleteOverall EUR's for the Bakken wells are about 500,000 over their lifetime, and because of better technology they are rising towards 650,000, and may go higher than that.
You do understand that the E in EUR stands for estimate, don't you? And you do understand that you don't have enough data in the Bakken to make such an estimate at this time? After all, the Bakken is not just one homogeneous formation. It is three formations of which one is quite good but very uneven. We will take this up below when we deal with your depletion comment.
You can keep hiding behind the depletion rate dodge but it only shows you and bart DO NOT know what you are talking about. But I repeat myself...
There is no depletion dodge. The depletion rate is very high. This means that if you are going to get 500K barrels out of a well you will get more than 300K of them in the first two years. This means that your $10 million well is paid off and that you are self financing. But the SEC filings do not show that. They show companies that have to keep borrowing and issue new shares nearly a decade after entering the Bakken.
Also, your the unsourced article saying Maguire is wrong about the potential for the Bakken is wrong in every way. If I printed that out and used it to line my cat's litter box, my cat would refuse to do his business there.
Unsourced? I guess you are not referring to the article in the Financial Times.
Yes, OMG, all drilling will stop and everything will end when oil hits $70!!! The sky is falling, oh no!!!! Except, ND producers already get less than $70 and there are still hundreds of rigs going full throttle 24 hours per day drilling for oil and making money.
But ND producers are showing negative cash flows. Have the WTI price go less than $70 and I doubt that the financing that they need will raise the money that is required to finance operations. Let me repeat this. After nearly a decade many of the 'better' operators still can't self finance operations. They need to issue more equity or borrow more in order to keep drilling. If prices decline again you will find that there will be less financing and lower share prices. This means production will decline as the pace of drilling has to fall.
The prediction of 50,000 wells to reach 2 million barrels per day is off by about 30,000, given the 100 barrels per day average in the Bakken -- as reported by the State of North Dakota (people who don't believe these numbers probably also don't believe we landed on the moon and that fluoride is a government conspiracy to increase autism rates).
ReplyDeleteYou are missing a very important point. First there are dry wells in the region that are ignored by the optimists because they yield a tiny amount of gas or oil before they are abandoned. These do not make it into the denominator. Then there are those wells that can no longer produce enough to justify the operations costs. They are also cemented and abandoned. And they also come out of the denominator. Then we have the falloff of production and the increase in depletion rates as you move out of the core areas. To get to the total production level being touted the producers have to move to the lower and upper Bakken. That means many more dry and early abandoned wells.
Note that the state of ND is not very good at providing timely data on how many dry and abandoned wells there are every year. Such data would be easy to get but it isn't publicised because it makes the story look ordinary and discourages investment.
The most hilarious of the chicken little statements in that article is that if you have to have more wells, they will start to bump against communities and developed areas. Has this person ever been to North Dakota? It's miles and miles of nothing. ESPECIALLY northwest North Dakota -- I know, my family homesteaded there over 110 years ago. You can see for 10's of miles, and you might see 1 farm, if you're lucky. The wells are placed every square mile or so, multiple wells per pad (especially in the hottest areas like Sanish, Parshall, or Robinson Lake). In some cases their are oil wells right in the middle of town. People in North Dakota have had to struggle to survive against the elements: the dryness and lack of rain, bitter cold and blizzards in the winter, hail and locusts in the summer. They aren't like Californians, who have forgotten what it took to build their state, and now just live off what previous generations built (kind of like Europeans).
North Dakotan's celebrate the land and what it produces, they don't tolerate environmentalist fringe nut case religious zealots telling them what to do, because they know what they are doing, and they are going to get it done, and in the process replace all the 2 million barrels per day we import from the Persian Gulf.
I agree with your bumping against communities critique. It is stupid and not credible as far as I am concerned. That is why I provided you the FT analysis, which you seem to have ignored.
There isn't any environmental contamination in the Bakken, drilling and the resulting oil/gas production is a tightly regulated process and there have been no instances of ground water contamination by fracking-- NONE!
Very true. But CO2 is not a pollutant yet he we are. The EPA is using make believe science to shut down coal plants and environmental groups are preventing or delaying the construction of pipelines that would get a better price for the Bakken oil.
bart and VangelV: I strongly suggest you dump your ShortTheBakken.com position and use the proceeds to buy obscure mining stocks no one has ever heard of.
ReplyDeleteI don't short. And I already have plenty of positions in the sector although around a third of my original positions have been taken out by producers. Bart does not like the juniors because the liquidity is too low for the type of trading that he favours and the opportunity for manipulation is great.
Or better yet, since you can't do math, are impervious to logic, and want to ignore hard data, just put your money in short-term US treasury bonds, at least they won't go down like your ShortTheBakken.com position. Any other approach will likely put your money at great risk.
How about you stop with the narrative and provide the 10-Ks that support your view of the Bakken. Surely it can't be that hard if the picture is as good as you claim that it is. I know that I have asked Mark for such information but after more than a year he has yet to provide anything of use.
You guys sound a lot like those AGW fanatics who argue that we should believe because some government agency tells us that the issue is settled. Just like them, you fail to deal with the actual data and look at the objective evidence. And just like them you are losing credibility as more and more people start to pay attention.
VangelV said...
ReplyDeleteBart does not like the juniors because the liquidity is too low for the type of trading that he favours and the opportunity for manipulation is great.
Pretty much true, although I do own miners in a mutual fund, and have traded it since 2004.
Hi Mark Perry:
ReplyDeleteHave you seen this report from the State of North Dakota on expected oil and gas production in ND:
http://tinyurl.com/bwx5h9n
From the article:
"North Dakota’s oil production could be more than 2 million barrels a day by 2025 — about three times the current rate — according to a state-funded study released Wednesday.
Bentek Energy LLC, an analysis firm based in Evergreen, Colo., also predicts in its study that natural gas production could quintuple to some 3 billion cubic feet by 2025 in the Williston Basin, which includes the Dakotas and Montana."
Also, apparently Bentek thinks natural gas production in old wells in the Bakken will actually increase, not decrease:
"North Dakota produced a record 650.8 million cubic feet of natural gas in April. Montana produced 85 million cubic feet for the month, and South Dakota’s production was pegged at 42.1 million cubic feet.
Natural gas production from traditional wells typically mirrors crude production and drops off as oil pumped from the well declines.
The Bentek study predicts gas production could actually increase or decrease at a slower rate in the Bakken and Three Forks wells as oil production declines. The study based its findings on older Bakken wells in Montana."
I can't wait for to hear from Bart and VangelV about their take on this data from within the prism of their "reality distortion field". Their ramblings get more and more bizarre as this thread progresses.
Yep, I was correct Vangel.
ReplyDeleteThe record as noted in that super long post about Marcellus (especially the *very* poor forecasts), and the others about vested interests continue to sail right over their heads.
Very similar to the ostriches at the height of the dot com frenzy.
Yes, I recently posted that here.
ReplyDeleteThanks Mark, and thanks for your great blog, I find it very informative!
ReplyDeleteI can't wait for to hear from Bart and VangelV about their take on this data from within the prism of their "reality distortion field". Their ramblings get more and more bizarre as this thread progresses.
ReplyDeleteThere is no chance that natural gas production will go up as predicted because the energy return from the marginal formations is negative and there is no way to deal with the depletion. We have already seen the shale gas industry chew through capital on uneconomic drilling and see no way to see a replay unless prices are substantially higher and costs are below the sale price.
The study is funded by the state and it looks as if the state got the puff piece it needs to try to draw more activity. But you have to love the comment, "The Bentek study predicts gas production could actually increase or decrease at a slower rate in the Bakken and Three Forks wells as oil production declines. The study based its findings on older Bakken wells in Montana."
For the record, the wells that are most like those being drilled today are those in the Elm Coulee field. If one looks at the record it is easy to see that the Elm Coulee increased Montana's oil production for a few years before it topped out and began to decline. From the bottom to the peak only took six years. That is not exactly a long term solution to the problems that the US faces no matter what the study says.
Now if you want to convince me show me the money. Where are the companies that have positive cash flows and are not adding debt or diluting shareholders to keep operations going? If you can't produce them none of your speculations and promotion pieces are worth anything.
VangelV said:
ReplyDelete...
Now if you want to convince me show me the money. Where are the companies that have positive cash flows and are not adding debt or diluting shareholders to keep operations going? If you can't produce them none of your speculations and promotion pieces are worth anything.
I've only been reading the comments here a few months, but I have as yet to see *anything* from any of the believers.
Maybe they think that cash flow doesn't matter and that ND or the Feds will bail them out, no matter what?
Hi Mark Perry:
ReplyDeleteNote the following post in National Review:
http://www.nationalreview.com/corner/312445/fracking-fires-go-out-nash-keune
Fracking is safe and incredibly effective at generating massive amounts of gas and oil. Keep up the good work in pointing this out, in spite of fanatical cranks like bart and VangelV, who remain impervious to logic, data, and truth.
Fracking is safe and incredibly effective at generating massive amounts of gas and oil. Keep up the good work in pointing this out, in spite of fanatical cranks like bart and VangelV, who remain impervious to logic, data, and truth.
ReplyDeleteI am still waiting for that data. Which companies are generating positive cash flows from their Bakken operations and paying back investors with healthy dividends? Let us note that neither you, Mark, or any of the other cheerleaders has been able to come up with SEC filings to support the claims that are being made.
And where is your data on the abandoned and dry wells that do not go into the denominator when average output is calculated? You would think that such data is easy to find and can be used to support your claims. The fact that you keep refusing to provide any evidence shows that all you have are the puff pieces that are put out by the promoters who benefit from the capital destruction in the shale industry.
Vange at one point in this thread says>>>"As I said, new wells have high IPs"<<<<
ReplyDeleteWhile previously in the thread he said>>>The average well in the core areas starts out with an IP of less than 100 bpd<<
So which is it?-I can tell you right now that you are Orders of Magnitude wrong on the less than 100 BPD.
You do tend to talk in circles-So do wells get "high IP's" or do the core area wells get "less than 100"?
While previously in the thread he said>>>The average well in the core areas starts out with an IP of less than 100 bpd<<
ReplyDeleteSo which is it?-I can tell you right now that you are Orders of Magnitude wrong on the less than 100 BPD.
It is a typo. That should have read less than 1000 bpd, a figure that I have cited many times. The IP is less than a thousand bpd and the average well is less than 100 bpd. Those are horrible numbers for the case that you are trying to make.
I am still waiting for that data. Which companies are generating positive cash flows from their Bakken operations and paying back investors with healthy dividends? Let us note that neither you, Mark, or any of the other cheerleaders has been able to come up with SEC filings to support the claims that are being made.
ReplyDeleteAh yes, the inconvenient truth and facts that they keep avoiding. Don't they know that housing prices always go up or that it's a new paradigm?
*sigh*
And where is your data on the abandoned and dry wells that do not go into the denominator when average output is calculated? You would think that such data is easy to find and can be used to support your claims. The fact that you keep refusing to provide any evidence shows that all you have are the puff pieces that are put out by the promoters who benefit from the capital destruction in the shale industry.
Another big OOPS, and continuing evidence and raw facts about how the "PR mavens" can affect so many who won't even look.
Nowhere in that ND state paper is there anything about the recently abandoned and dry wells = strong evidence of vested interests, and just one example.
*sigh*