Tuesday, August 07, 2012

Natural Gas Production Sets New Records in May as Marcellus Shale Becomes Country's Top Producer

Updated EIA data on monthly natural gas production in the U.S. through May is displayed above, and shows that both "gross withdrawals" and "marketed production" of natural gas set new monthly all-time records on a 12-month moving average basis (to smooth out monthly variations).  Other highlights include:

1. Gross withdrawals of natural gas in May set a new record for the month of May, and were 4.4% above last year and 7.2% above last year for the January-May period. 

2. Marketed production of natural gas in May was 4.3% above last year, and it was also the highest-ever production level for the month of May, and 7.1% above last year for the January-May period.  

3. Over the last four years, both measures of natural gas production have increased by almost 20%.  

Where are the significant increases in natural gas production taking place? A lot of the increase is coming from the Marcellus Shale region, which is about to become the most productive natural gas field in the U.S., according to this new Associated Press report:
Though serious drilling began only five years ago, the sheer volume of Marcellus production suggests that in some ways there's no going back, even as New York debates whether to allow drilling in its portion of the shale, which also lies under large parts of Pennsylvania, West Virginia, and Ohio.

In 2008, Marcellus production barely registered on national energy reports. In July, the combined output from Pennsylvania and West Virginia wells was about 7.4 billion cubic feet per day, according to Kyle Martinez, an analyst at Bentek Energy. That's more than double the 3.6 billion cubic feet from April, and represents more than 25 percent of national shale gas production.

That's neck and neck with production from the Haynesville region in Arkansas and Texas, but new drilling permits there have declined sharply.

The Powell Shale Digest, an industry newsletter based in Fort Worth, Texas, concluded that a recent report from the U.S. Energy Information Agency means "it is reasonable to assume" the Marcellus has or will soon pass Haynesville as the top producer. The Marcellus Shale is a gas-rich formation of rock thousands of feet below ground. Advances in drilling technology made the shale accessible, which led to a boom in production, jobs, and profits, and a drop in natural gas prices for consumers.
MP: At the same time that natural gas production continues to increase, spot prices are also rising, and natural gas is now selling at $3.20 per million BTUs, the highest level since November 2011.  The higher prices are likely reflecting higher demand from electric utilities and industrial customers, and will naturally support ongoing increases in natural gas production. 

48 Comments:

At 8/07/2012 8:50 AM, Blogger Jon Murphy said...

[N]atural gas is now selling at $3.20 per million BTUs, the highest level since November 2011.

This is definitely a good sign here. $3.20 is close to the low range of an acceptable price level. At the risk of sounding callous, this hot summer is just what natural gas producers needed to help work our way through some of this oversupply. Hopefully, we can get this a little higher (maybe $4-$5 range), but it will be tough with natural gas coming to the market, not just from NatGas wells, but from oil wells as well.

 
At 8/07/2012 9:07 AM, Blogger Rufus II said...

According to EIA numbers, we're producing about 500,000,000 Cuft/day Less than we were in January.

With the drilling rigs pulling out, and heading for the oil patch, this trend can only accelerate.

EIA Data

 
At 8/07/2012 11:38 AM, Blogger Buddy R Pacifico said...

The Marcellus Shale is the Saudi Arabia... of the Saudi Arabia... of natural gas.

Marcellus and Utica Shales are proximate to the biggest U.S. markets. Despite this, abudancy seems likely to lead to bundled liquified natural gas exports, to even bigger and hungrier energy mnarkets.

Frack, baby, frack.

 
At 8/07/2012 1:34 PM, Blogger VangelV said...

That's neck and neck with production from the Haynesville region in Arkansas and Texas, but new drilling permits there have declined sharply.


If shale gas were the game changer that the promoters are claiming why would that happen? Why are gas rig counts dropping and how can producers make money at $3.20 when their total cost if more than $6 and averages at more than $7.50 if you go beyond the non-core areas?

Marcellus and Utica Shales are proximate to the biggest U.S. markets. Despite this, abudancy seems likely to lead to bundled liquified natural gas exports, to even bigger and hungrier energy mnarkets.

This smacks of peak idiocy. Yes, there is a lot of gas around the word. But the profitable gas is found in conventional deposits near oil rich areas in which there was never much exploration for gas because it would be stranded. It sure isn't in tight formations like the shales that are being sold as game changers even though the production is not self financing.

 
At 8/07/2012 1:34 PM, Blogger VangelV said...

According to EIA numbers, we're producing about 500,000,000 Cuft/day Less than we were in January.

With the drilling rigs pulling out, and heading for the oil patch, this trend can only accelerate.


Shhhh!!! Don't spoil a nice story.

 
At 8/07/2012 1:44 PM, Blogger hancke said...

I can't speak to the profitability of the exploration and production companies, but can you imagine what kind of slump our country would be in without the fracking boom?

 
At 8/07/2012 1:52 PM, Blogger Jon Murphy said...

With the drilling rigs pulling out, and heading for the oil patch, this trend can only accelerate.

Well...yeah. This is May data. At this time, Natural Gas was down around $2.42. Hell, we just broke the three dollar mark last month. You can't make money less than $3. Raise your hand if you find the decrease during this period surprising.

That being said, Production numbers are still overtly positive. On a monthly basis Production rose 4.4% from May 2011. Quarterly Production is up 4.2%. This year's seasonal decline is just about normal. It deviates some from the past several years in that it is actually declining, but it is not historically unusual (in fact, the past several years have been historically unusual in that there has been no seasonal decline whatsoever).

There is no doubt that the rate of growth in annual production will slow. The 7.9% clip averaged over the past year is completely unsustainable. However, there is no signs of a popping bubble here. Nothing to suggest production is collapsing.

 
At 8/07/2012 1:54 PM, Blogger Jon Murphy said...

I can't speak to the profitability of the exploration and production companies...

Some are certainly doing better than others. Chesapeake is in a bind, but most of the small guys are turning a profit, and the big guys like Exxon and Chevron can use higher oil prices to fund their exploration of natural gas. Hopefully, these higher prices will ease some burden.

but can you imagine what kind of slump our country would be in without the fracking boom?

Inflation would be a problem, that's for sure.

 
At 8/07/2012 2:20 PM, Blogger VangelV said...

I can't speak to the profitability of the exploration and production companies, but can you imagine what kind of slump our country would be in without the fracking boom?

The problem with that view is that it gives credence that debt financed capital destruction is somehow good for the economy. It isn't.

 
At 8/07/2012 2:23 PM, Blogger VangelV said...

Well...yeah. This is May data. At this time, Natural Gas was down around $2.42. Hell, we just broke the three dollar mark last month. You can't make money less than $3. Raise your hand if you find the decrease during this period surprising.

Not long ago I provided links in which shale patch CEOs were saying that TOTAL costs of production was more than $6 per mcf. For shale gas to be profitable you need over $8 gas and for an increased demand for drilling not to put upward pressure on service costs. I don't see that happening.

 
At 8/07/2012 2:26 PM, Blogger VangelV said...

That being said, Production numbers are still overtly positive. On a monthly basis Production rose 4.4% from May 2011. Quarterly Production is up 4.2%. This year's seasonal decline is just about normal. It deviates some from the past several years in that it is actually declining, but it is not historically unusual (in fact, the past several years have been historically unusual in that there has been no seasonal decline whatsoever).

When you drill thousands of new wells that cost $10 million a pop and only get a 4% increase there is a huge problem that you are not seeing. As I pointed out both BHP and Encana have began the process of writing off shale assets. Look for more asset sales, write downs, and lower cash flows right until the sector goes over the cliff.

 
At 8/07/2012 2:28 PM, Blogger VangelV said...

Some are certainly doing better than others. Chesapeake is in a bind, but most of the small guys are turning a profit, and the big guys like Exxon and Chevron can use higher oil prices to fund their exploration of natural gas. Hopefully, these higher prices will ease some burden.

Making a profit? Sure, if you use a EUR that is half of what the production data is pointing to you can report a profit. But if you look at the balance sheet and cash flow statements you see new debt being added and a lot more borrowing and share issues diluting existing equity holders.

 
At 8/07/2012 2:30 PM, Blogger Jon Murphy said...

When you drill thousands of new wells that cost $10 million a pop and only get a 4% increase there is a huge problem that you are not seeing.

Historically, the growth rate averages 1.0% year-over-year.

 
At 8/07/2012 2:33 PM, Blogger Jon Murphy said...

The 7.9% annual growth rate averaged over the past 12 months was the fastest rate of growth on record.

 
At 8/07/2012 2:34 PM, Blogger Jon Murphy said...

So, they are investing and rather than seeing gains of 1%, they are seeing gains of 4%.

Likewise, on a 12MMA basis, you were seeing the fastest growth rates on record.

I'd say they are getting some bang for their buck.

 
At 8/07/2012 2:35 PM, Blogger Jon Murphy said...

And it's not like these growth rates are coming off some deep recessionary lows. This is record-high level of production we are talking about here.

 
At 8/07/2012 2:52 PM, Blogger Jon Murphy said...

For the record, I am not saying that production is not headed for a cliff. I am just saying, as of the May 2012 data, it is not plummeting off the cliff yet.

 
At 8/07/2012 4:07 PM, Blogger Che is dead said...

We found the Woodford, Fayetteville, Haynesville and Marcellus Shales had respective breakeven points of $6.45 per Mcf, $5.39 per Mcf, $3.62 per Mcf and $3.42 per Mcf based on the data collected in 2008 ... The advent and application of new seismic, drilling and completion technologies gives the operator in these gas-rich resource plays an opportunity to generate acceptable rates of return on invested capital. Case in point is how E&P companies operating in the Woodford, Fayetteville, Haynesville and Marcellus regions have shrunk the disparity between the 2008 numbers above and today's breakeven points of $3.93 per Mcf, $4.19 per Mcf, $3.51 per Mcf, and $2.88 per Mcf, respectively. ...

Capital Efficiency is the measurement of cash flow generated for every dollar of investment and is calculated as (trailing twelve month EBITDA / trailing twelve month production) / 3-Year F&D cost per Mcfe. For the period ended December 31, 2012, RRC, COG and EQT's Capital Efficiency ratios were: 417%, 267% and 453%, respectively. Said another way, each company generates $4.17, $2.67 and $4.53, respectively, for every $1.00 of investment. Bear in mind that this ratio measures the entire company's cash generation capability not just a single basin.

Asset Intensity is an indicator of how much of a company's annual cash flows that are needed to be reinvested to keep production flat. It is also an indicator of a company's future growth potential. The metric is calculated as trailing twelve month production multiplied by 3-Year F&D cost all divided by trailing twelve month cash flow from operations. For Range (25%), Cabot (48%), and EQT (24%) each company needs to invest less than 50% of its annual cash flow to keep production flat. We note that these are not the only companies with favorable asset intensity metrics but we use these examples to make a point that natural gas prices can be dealt with in certain portions of the commodity cycle provided a company has the assets, cost structure, people, technologies, balance sheet and bull-headedness to make it work. -- Driving Down The Cost Of Production - Natural Gas Companies Can Still Make Money, Seeking Alpha

 
At 8/07/2012 4:10 PM, Blogger Che is dead said...

“Producers typically need $5 [per 1,000 cubic feet] to break even,” says David Greely, an energy analyst at Goldman Sachs ... Other analysts say $5 is too high and that the average gas producer can still make money with the price between $3 and $4, depending on the well because different types of wells have different cost structures. Newer, high-production wells can turn a profit even with prices below $2, while older wells that are just trickling out gas need much higher prices to make money. That’s probably why there’s been stronger demand for horizontal rigs that specialize in fracking. -- Businessweek

 
At 8/07/2012 4:20 PM, Blogger Che is dead said...

Shell Oil has tentatively chosen to put a new multibillion-dollar petrochemical plant in Pennsylvania to take advantage of an abundance of natural gas from the Marcellus shale. ...

On March 7, Dow Chemical said its board had approved the construction of a “world-scale” propylene plant in Texas to take advantage of shale gas resources there. -- Washington Post

Hmmm, why would Shell Oil and Dow Chemical be making multi-billion dollar investments associated with what "Vag" insists is a Ponzi scheme? Doesn't anyone at these companies get his newsletters? Are they completely unaware of the accelerated depletion rates? The fraudulent EURs?

 
At 8/07/2012 4:31 PM, Blogger Che is dead said...

"When you drill thousands of new wells that cost $10 million a pop ..." -- "Vag"

How Much Does it Cost to Drill a Single Marcellus Well? $7.6M, University of Pittsburgh

Well, you were only off by 24 percent this time. You're improving. Of course, that University of Pittsburgh study was in 2011, it has only gotten cheaper to drill since then.

 
At 8/07/2012 4:36 PM, Blogger Mark J. Perry said...

In a March 27 report, Merrill-Lynch listed 68 new major industrial investment projects totaling more than $200 billion that have been announced or started just since 2011 in a wide variety of manufacturing industries like petrochemicals, chemicals, steel, refining, autos, heavy equipment, aerospace, plastics and ethylene. Most of this $200 billion in new planned investment is being motivated by abundant, low cost natural gas. Guess they haven't realized yet that they're buying into a Ponzi scheme.

 
At 8/07/2012 4:37 PM, Blogger Che is dead said...

Chimera Energy develops fracking technique that uses no water, Gizmag

 
At 8/07/2012 5:03 PM, Blogger Unknown said...

Then of course there is Super Fracking which, when adopted on a large scale, will bring down the costs of these wells substantially.

 
At 8/07/2012 7:14 PM, Blogger VangelV said...

Historically, the growth rate averages 1.0% year-over-year.

Historically, wells don't deplete at more than 75% per year. Tight formations like shale are a serious problem that require massive investment in drilling just to keep production from falling. The fact that companies can borrow so that they can sell their product at a loss is not a positive because all those companies will have a balance sheet problem that will require massive asset sales and equity dilution just to stay alive. The problem is that the amount of asset selling is limited to what is on the balance sheet and the only way to get a decent price is to sell off the better quality assets while keeping the crappy ones on your books. That is not a formula for success.

As I said, to prove me wrong is very easy. All you have to do is show that the natural gas operations are self financing and that companies make real profits by showing healthy dividends or a reduced debt load. (Of course, I would not expect this for new players in the sector that just began operations. But I certainly would for the players that have been around for more than three or four years and have already drilled many wells that should have paid off early in the game.(That has to happen given the EURs and the high depletion rates.))

 
At 8/07/2012 7:21 PM, Blogger VangelV said...

How Much Does it Cost to Drill a Single Marcellus Well? $7.6M, University of Pittsburgh

Well, you were only off by 24 percent this time. You're improving. Of course, that University of Pittsburgh study was in 2011, it has only gotten cheaper to drill since then.


The numbers given by the companies are typically in the range of $7-$10 million depending on the depth and the length of the horizontal segment. And why would it be cheaper to drill when you are having problems in the oil services sector thanks to increased demand from many regions that want to cash in on the shale hype? You have newer rigs with less experienced crews. If prices are falling it means that land acquisition prices are falling. But that would be reflective of falling economics, not better efficiency.

Again I point out the obvious way to prove me wrong. Show me that shale gas is self financing by providing me with cash flow statements showing positive cash flows and balance sheets showing that debt levels are stable or being reduced. Dividends would also help prove the claims. Until you guys can do that, and please don't pull the trick of showing us the integrated players or conventional players who also have shale operations, there is not much to support your case that is credible. All you have is narrative.

 
At 8/07/2012 7:24 PM, Blogger VangelV said...

So, they are investing and rather than seeing gains of 1%, they are seeing gains of 4%.

Likewise, on a 12MMA basis, you were seeing the fastest growth rates on record.

I'd say they are getting some bang for their buck.


You would say that. But the 10-Ks are not saying that. And neither are the CEOs on the conference calls. The ones that I have listened to keep talking about negative cash flows from shale gas operations and funding gaps that need to be filled by asset sales or more debt. If you borrow enough you can produce more gas. But if you sell more gas at a greater loss you will eventually go out of business.

 
At 8/07/2012 7:30 PM, Blogger Jon Murphy said...

Vangel-

Your conclusion is illogical.

Any investment requires debt. These companies have done cash flow analysis, have done projections, have done studies, and have found these projects to be worthwhile. Maybe not now. Over the course of 10 years. A little while ago, a post was done saying the average shale well will make about $20 million over the course of its life. You spend $7 million, you make $20. Seems like a good deal. And to counter all this, all you say is "well, they are not making money now." it took Amazon 10 years to turn a profit. Facebook is in the red. Investments do not immediately turn profits. They take time. You are looking at a short term issue and declaring a 20-year project to be false. These companies have done the analysis and come to the conclusion that the projects are worthwhile.

The fact of the matter is this: we will not know one way or the other for years to come. Maybe these wells will be a bad investment, but one cannot possibly tell that now. To say this is a failure simply because the companies are in debt is illogical and flies in the face of entrepreneurship.

I will turn your challenge around on you: show me a cash flow analysis proving that this project will make no money over 20 years.

 
At 8/07/2012 7:33 PM, Blogger Jon Murphy said...

Since you have listened to these conference calls, then what do they say about these projects going forward? This isn't some government project where they have unlimited resources. They have to spend their own. What are the cash flow analyses they discuss? the IRR? The Payback period? The NPVs? Surely you have access to this information if you declare these long-term projects doomed to fail.

 
At 8/07/2012 7:47 PM, Blogger hancke said...

Finacially what is the difference between drilling a $10m well and building a $10m office building?

 
At 8/07/2012 7:58 PM, Blogger VangelV said...

We found the Woodford, Fayetteville, Haynesville and Marcellus Shales had respective breakeven points of $6.45 per Mcf, $5.39 per Mcf, $3.62 per Mcf and $3.42 per Mcf based on the data collected in 2008 ... The advent and application of new seismic, drilling and completion technologies gives the operator in these gas-rich resource plays an opportunity to generate acceptable rates of return on invested capital. Case in point is how E&P companies operating in the Woodford, Fayetteville, Haynesville and Marcellus regions have shrunk the disparity between the 2008 numbers above and today's breakeven points of $3.93 per Mcf, $4.19 per Mcf, $3.51 per Mcf, and $2.88 per Mcf, respectively. ...

You missed the important point. The companies can use better seismic data to find the sweet spots in the formation and get the cheap gas out. That means that the the ultimate recovery will be lower because the break even price for the rest of the formation goes up.

Note that I have never said that you can't make a buck from the core areas in the shale formations. I have pointed out that shale formations are not homogeneous and that the average property needs $7.50 gas or higher to break even. Aubrey was very clear on this. When gas was at $11 he said that his company can make money from its properties at $7.50 gas. But when prices fell below that price point the only profit that could be made was from a few very good wells in the best areas of the core areas. While Chesapeake should have restated its reserves based on the new economics it managed to coast past the SEC and stayed in business by adding massive amounts of debt.

But the party now seems over. As BHP and Encana wrote down shale properties from their balance sheets Chesapeake was selling $7 billion in assets as it tried to reduce its debt to $9.5 billion by the end of Q4. In the next fiscal year Chesapeake is planning another $5 billion in sales but it will still have too much debt on (and off) its books.

 
At 8/07/2012 8:02 PM, Blogger VangelV said...

Capital Efficiency is the measurement of cash flow generated for every dollar of investment and is calculated as (trailing twelve month EBITDA / trailing twelve month production) / 3-Year F&D cost per Mcfe. For the period ended December 31, 2012, RRC, COG and EQT's Capital Efficiency ratios were: 417%, 267% and 453%, respectively. Said another way, each company generates $4.17, $2.67 and $4.53, respectively, for every $1.00 of investment. Bear in mind that this ratio measures the entire company's cash generation capability not just a single basin.

Really? If this is the case why are the cash flows negative? Stop trying to convince by giving us narratives and show us 10-Ks that show positive cash flows and self funding shale gas operations. I have asked for this for more than a year and none of you guys have been able to provide me with actual evidence to support the claims that you were making. If shale gas were so profitable why is it that the biggest producer in the sector just blew its brains out and was adding huge quantities of debt that could only be reduced to still high levels by selling off billions in assets?

 
At 8/07/2012 8:19 PM, Blogger Che is dead said...

This comment has been removed by the author.

 
At 8/07/2012 8:26 PM, Blogger VangelV said...

“Producers typically need $5 [per 1,000 cubic feet] to break even,” says David Greely, an energy analyst at Goldman Sachs ... Other analysts say $5 is too high and that the average gas producer can still make money with the price between $3 and $4, depending on the well because different types of wells have different cost structures. Newer, high-production wells can turn a profit even with prices below $2, while older wells that are just trickling out gas need much higher prices to make money. That’s probably why there’s been stronger demand for horizontal rigs that specialize in fracking. - -- Businessweek

Is this the same Businessweek that was touting homebuilders in 2005 and never saw the bubble until it appeared in the rear view mirror? What next? A Time article? Or one from the Economist.

As I said, all you need to prove me wrong is a bunch of 10Ks showing that the companies that you are touting are generating positive cash flows from shale gas. And explain why it is that drill rig counts are falling if there were so much money to be made in the sector.

To give you a start I suggest that you look at RRC. If you check the cash flows from production activities you see not much of a change. The 2011 number was $631,637,000 the 2010 number was $513,322,000 and the 2009 number was $591,675,000. But capital expenditures exploded. In 2009 the $528,715,000 that the company spent produced a decline of $60,000,000 in production cash flow. In 2010 the $1 billion in capital expenditures only managed to increase the production cash flows by $118 million.

Let us note that RRC is not exactly a pure shale play. It has pretty decent and quite profitable conventional gas plays plus some CBM properties. It has not been resorting to debt as much as other companies in the sector but has sold off assets to close the funding gap.

COG seems worse to me. Not only does it now show much in the way of cash flow growth from operations but it is financing its capital expenditures from asset sales. That hardly looks healthy to me no matter what the promoter's trained monkeys write in their hyped up analyst reports.

 
At 8/07/2012 8:28 PM, Blogger VangelV said...

Hmmm, why would Shell Oil and Dow Chemical be making multi-billion dollar investments associated with what "Vag" insists is a Ponzi scheme? Doesn't anyone at these companies get his newsletters? Are they completely unaware of the accelerated depletion rates? The fraudulent EURs?

Again, show me the cash flow statements. It is one thing to talk about new investments but they are unlikely to take place unless someone will sign long term contracts that guarantees a supply of cheap gas for the life of the plant.

 
At 8/07/2012 8:29 PM, Blogger VangelV said...

In a March 27 report, Merrill-Lynch listed 68 new major industrial investment projects totaling more than $200 billion that have been announced or started just since 2011 in a wide variety of manufacturing industries like petrochemicals, chemicals, steel, refining, autos, heavy equipment, aerospace, plastics and ethylene. Most of this $200 billion in new planned investment is being motivated by abundant, low cost natural gas. Guess they haven't realized yet that they're buying into a Ponzi scheme.

Given the fact that they missed the tech bubble and the housing bubble why would that be a surprise?

 
At 8/07/2012 8:32 PM, Blogger VangelV said...

Then of course there is Super Fracking which, when adopted on a large scale, will bring down the costs of these wells substantially.

And wait till Super Duper Fracking is introduced. Imagine how much the producers will wind up losing then? :)

 
At 8/07/2012 8:35 PM, Blogger Che is dead said...

"... please don't pull the trick of showing us the integrated players or conventional players who also have shale operations" -- "Vag"

Why not? Following your arguments, wouldn't these "integrated players" be just as misinformed or malicious in their investments in shale oil and gas as the "pure players"? Why are they putting any money at all into these plays? Are they all caught up in the Ponzi scheme, or are they just trying to pull a fast one on their investors?


"The fact of the matter is this: we will not know one way or the other for years to come." -- Jon Murphy

No. "Vag" insists that we will know in very short order. Never mind that Arthur Berman's initial predictions should have panned out in falling production numbers and numerous bankruptcies across the sector by now, "Vag" still believes.

“Amongst publications written by research analysts, the article included findings made in a study done by Art Berman, who alleged that shale producers overstated recoverable resources per well. We do not consider research from Mr. Berman new as he has been crusading against data supporting vast shale gas resources for years, despite supply and productivity continuing to exceed expectations.” -- William Featherston, UBS Investment Research, June 2011

As far as Berman’s argument goes, it tends to look a little like this: Data collected from the Barnett over the past 15 years suggests that not all shale wells are created equal; that some produce well-below their expected ultimate recovery (EUR) rates; and that optimistic projections about shale’s future contributions to U.S. energy supply will never be realized, in part because of the clash between low natural gas prices and high drilling and completion costs, and in part because the wells themselves, he argues, tend to peter-out after the first few years of production. Paradoxically, Mr. Berman appears to argue both that new shale wells won’t be productive, and that natural gas prices will remain at their historic lows. How both can be true, we’re not entirely certain of. ...

Art Berman hasn’t ignored the Haynesville. And to his credit, he’s been good enough to admit that his initial assessments of the play weren’t quite right, sort of. In April 2009, Berman wrote that it was “difficult to imagine that the Haynesville Shale can become commercial.” Only two months later, in June, Berman had changed his tune, saying that “I now think that the Haynesville Shale reserve estimates that I presented previously were too low.” Still, in a 2010 article, Berman suggested the Haynesville numbers were “disappointing.” In March 2011, the Haynesville became the top-producing onshore natural gas field in the United States, and now stands among the top five producing fields in the entire world. What a disappointment. -- Energy In Depth

“The idea of private transport needs to go away. The idea that you can just drive yourself anywhere you want to, whenever you want to, and – oh, well the answer is, ‘I’ll just get an electric car.’ No, that’s not the answer.” -- Arthur Berman, Cornell Law School, April 1, 2011 (03:44:50 to 03:45:25)

"Vag" isn't an analyst, he's a disciple.

 
At 8/07/2012 8:45 PM, Blogger Che is dead said...

"To give you a start I suggest that you look at RRC. If you check the cash flows from production activities you see not much of a change. The 2011 number was $631,637,000 the 2010 number was $513,322,000 and the 2009 number was $591,675,000. But capital expenditures exploded. In 2009 the $528,715,000 that the company spent produced a decline of $60,000,000 in production cash flow. In 2010 the $1 billion in capital expenditures only managed to increase the production cash flows by $118 million." -- "Vag"

In some cases companies have drilled and capped without bringing the gas to market in order to meet regulatory and contractual requirements. Almost one half of the 5000 Marcellus wells are waiting completion - hydraulic fracking - or have been shut in awaiting the construction of pipelines to move the gas. But you know all that, right?

 
At 8/07/2012 8:49 PM, Blogger VangelV said...

Any investment requires debt.

I have no problem with this statement. But the debt has to be paid off from a positive return on the investment made by the company.

These companies have done cash flow analysis, have done projections, have done studies, and have found these projects to be worthwhile.

As I pointed out before, the companies assumed EURs that are not supported by the production data. That means that they can understate the depreciation cost but can't escape the cash flow reality.

Maybe not now. Over the course of 10 years.

But you and others here have admitted that most of the return is made in the first year and a half because of the huge depletion rate. After five years most wells produce very little in the way of cash flows. The fact that the early players could not generate positive cash flows after eight years would be a concern to most rational investors. Look at the statements filed with the SEC. You see massive expenditures but little in the way of additional cash flow. The funding gaps have to be made up by asset sales or by more debt.

A little while ago, a post was done saying the average shale well will make about $20 million over the course of its life. You spend $7 million, you make $20. Seems like a good deal.

Yes it does. But it isn't true. The $20 million is based on the EUR. The E stands for ESTIMATED. If your estimate is off you get a much lower ultimate return and your cash flows remain negative even though you should be getting around $14 million or so back by the end of the second year.

And to counter all this, all you say is "well, they are not making money now."

No. I am countering it by telling you that the $7 million well that should have generated $14 million two years later has only made $4 million.

It took Amazon 10 years to turn a profit. Facebook is in the red. Investments do not immediately turn profits. They take time.

You are missing the point. Amazon's warehouses and systems will still be working and producing cash flows for years in the future. But once a well is drilled most of the cash flows will be produced in the first two years. If you sold the production at a loss you will never get it back to make more money later in the game. The shale gas sector has been a destroyer of capital. You are missing it because you are fooled by high EURs that reduce the depreciation costs.

You are looking at a short term issue and declaring a 20-year project to be false. These companies have done the analysis and come to the conclusion that the projects are worthwhile.

A 20-year project? Once a well is drilled its production falls off a cliff very rapidly. Many will be cemented after five years and only the few in the core areas will provide a good return for investors. Try running your argument with EURs that are more realistic and by paying attention to what the production profiles mean for the generation of cash flow over time.

 
At 8/07/2012 9:03 PM, Blogger VangelV said...

The fact of the matter is this: we will not know one way or the other for years to come. Maybe these wells will be a bad investment, but one cannot possibly tell that now. To say this is a failure simply because the companies are in debt is illogical and flies in the face of entrepreneurship.

But we already know. Some companies have already began to write down their shale gas properties and others have resorted to selling off pieces to keep their operations going for a while longer. Other than a few wells in the sweet spots of the core areas there is no profit to be had in the sector. Which is why the rig count has declined and companies are now trying to reposition themselves as shale liquids plays.

 
At 8/07/2012 9:18 PM, Blogger VangelV said...

Since you have listened to these conference calls, then what do they say about these projects going forward? This isn't some government project where they have unlimited resources. They have to spend their own. What are the cash flow analyses they discuss? the IRR? The Payback period? The NPVs? Surely you have access to this information if you declare these long-term projects doomed to fail.

What projects?

I have friends in the engineering sector that usually work on chemical plants, refineries, smelters, mines, etc. Most of their business at this time is in the mining sector. I have yet to see anyone get permits and approve a major new project that has been added recently because of the cheap gas situation. While there have to be some new construction going on those projects were likely approved a long time ago.

Talk is cheap. I prefer to see some concrete announcements including long term supply agreements of the type that are in place in Trinidad, Kuwait, or Qatar. Given the fact that the shale producers need well above $8-$12 to be able to produce from non-core areas and you can find long term deals in other countries at a fraction of that a chemical company is unlikely to take the risks that they are talking about taking.

And keep in mind that companies can 'miss' big time. Remember when Methanex was building plants in Chile because it was hoping to take advantage of cheap gas, which was never there to begin with? The location would allow it to ship all over Asia and make big profits. Well, the plants are mainly idle and one is being taken apart and being moved to LA in the hope that shale gas prices will provide a cheap feed for its methanol production process. We will see by 2014 how that works out.

 
At 8/07/2012 9:24 PM, Blogger VangelV said...

Why not? Following your arguments, wouldn't these "integrated players" be just as misinformed or malicious in their investments in shale oil and gas as the "pure players"? Why are they putting any at all money into these plays? Are they all caught up in the Ponzi scheme, or are they just trying to pull a fast one on their investors?


An integrated can produce strong cash flows from conventional or retail operations that can be used to fund negative cash flows in the shale sector. The argument is about shale, not conventional production or running gas stations or refineries. To prove your point you need to show that shale gas companies can self finance their production.

No. "Vag" insists that we will know in very short order. Never mind that Arthur Berman's initial predictions should have panned out in falling production numbers and numerous bankruptcies across the sector by now, "Vag" still believes.

But we do know now. As I said, some of the shale gas producers are already writing down assets and using asset sales to reduce debt. (See Encana and BHP.) We just heard Chesapeake announce plans to cut its gas production by at least 7% next year and say that the supply of natural gas liquids will drop as producers cut back because of the low prices. We have already seen the gas rig counts decline and a large supply of acreage available as fewer companies can afford to keep drilling.

 
At 8/08/2012 7:54 AM, Blogger VangelV said...

Finacially what is the difference between drilling a $10m well and building a $10m office building?

If you don't get most of your money back in the first two years the well will never be profitable. An office building can keep generating cash flow and takes a very long time to depreciate. A well can't.

If you can't understand this difference it is pointless trying to figure out what is being said in this debate.

 
At 8/08/2012 8:08 AM, Blogger VangelV said...

“Amongst publications written by research analysts, the article included findings made in a study done by Art Berman, who alleged that shale producers overstated recoverable resources per well. We do not consider research from Mr. Berman new as he has been crusading against data supporting vast shale gas resources for years, despite supply and productivity continuing to exceed expectations.” -- William Featherston, UBS Investment Research, June 2011

Is this support for my argument? After all Berman was totally right about the overstated EURs and called the Chesapeake fiasco when the USB analysts were cheering Aubrey's misstatements and general hype. The fact that the rig count is falling shows that he was right about the shale gas business models and the promoters were wrong.

As far as Berman’s argument goes, it tends to look a little like this: Data collected from the Barnett over the past 15 years suggests that not all shale wells are created equal; that some produce well-below their expected ultimate recovery (EUR) rates; and that optimistic projections about shale’s future contributions to U.S. energy supply will never be realized, in part because of the clash between low natural gas prices and high drilling and completion costs, and in part because the wells themselves, he argues, tend to peter-out after the first few years of production. Paradoxically, Mr. Berman appears to argue both that new shale wells won’t be productive, and that natural gas prices will remain at their historic lows. How both can be true, we’re not entirely certain of. ...

Both can be true for several years if companies that have holdings that have to be drilled have to use debt to keep producing. Aubrey made a comment not long ago about not wanting to drill any shale gas wells for a while but having to drill them because of the requirements written into the lease agreements. If you choose not to drill you have to write off the assets. But when you have a massive amount of debt on the books the write-offs of uneconomic properties mean bankruptcy.

Art Berman hasn’t ignored the Haynesville. And to his credit, he’s been good enough to admit that his initial assessments of the play weren’t quite right, sort of. In April 2009, Berman wrote that it was “difficult to imagine that the Haynesville Shale can become commercial.” Only two months later, in June, Berman had changed his tune, saying that “I now think that the Haynesville Shale reserve estimates that I presented previously were too low.” Still, in a 2010 article, Berman suggested the Haynesville numbers were “disappointing.” In March 2011, the Haynesville became the top-producing onshore natural gas field in the United States, and now stands among the top five producing fields in the entire world. What a disappointment. -- Energy In Depth

But Berman was right again. The numbers were disappointing and I have yet to see the industry show that it is self financing. This is why the rig count is down by 78% over the same period last year.

DO YOU EVER CHECK THE CRAP THAT YOU ARE USING TO MAKE SURE THAT IT SUPPORTS YOUR ARGUMENT?

 
At 8/08/2012 8:12 AM, Blogger VangelV said...

In some cases companies have drilled and capped without bringing the gas to market in order to meet regulatory and contractual requirements. Almost one half of the 5000 Marcellus wells are waiting completion - hydraulic fracking - or have been shut in awaiting the construction of pipelines to move the gas. But you know all that, right?

Of course I do. I also know that the price fell to around $1 per Mcf because there was no pipeline capacity to take the gas away.

 
At 8/08/2012 9:44 AM, Blogger Che is dead said...

"This is why the rig count is down by 78% over the same period last year. DO YOU EVER CHECK THE CRAP THAT YOU ARE USING TO MAKE SURE THAT IT SUPPORTS YOUR ARGUMENT?" -- "Vag"

The rig count is down because there is TOO MUCH GAS and producers are retasking toward oil and other liquids. It may take as little as 35-40 rigs to maintain Haynesville production at this point and there are hundreds of wells that have already been drilled and are waiting completion. So, yes, the rig count is down, but that does not support Berman's arguments. Get a fucking clue.


"Of course I do. I also know that the price fell to around $1 per Mcf because there was no pipeline capacity to take the gas away." -- "Vag"

That's right, genius. Companies have already sunk money into these wells and they must wait to sell their product. They are ahead of the infrastructure. See if you can put two and two together.

 
At 8/08/2012 3:07 PM, Blogger VangelV said...

The rig count is down because there is TOO MUCH GAS and producers are retasking toward oil and other liquids. It may take as little as 35-40 rigs to maintain Haynesville production at this point and there are hundreds of wells that have already been drilled and are waiting completion. So, yes, the rig count is down, but that does not support Berman's arguments. Get a fucking clue.

Nice narrative but how much gas is produced is not the issue today. The only issue is price. The gas companies are getting rid of the rigs because there are funding gaps that can no longer be closed by asset sales. There is no bigger fool out there any longer and if you want to close those funding gaps you have to sell off something more than a land package of questionable economic value.

That's right, genius. Companies have already sunk money into these wells and they must wait to sell their product. They are ahead of the infrastructure. See if you can put two and two together.

The problem with your narrative is that the companies are having the same problems in other shale formations where there is sufficient infrastructure to bring the gas to market at a better price. Gas rig counts are falling in most of the formations. And I am still waiting for you and the other cheerleaders to provide me with the companies that are generating positive cash flows in the shale gas sector. As I pointed out, you can ignore the new entrants because we expect them to run negative cash flows for a while. But during periods of high oil prices, as we have today, most producers have historically been able to self finance
gas and oil production in a year or two. The fact that all you have are promotion pieces shows that you are not thinking and have no way to show that the sector is viable.

 

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