The decade of tectonic shifts -- 2011 - 2020 -- follows the "lost decade." (Interestingly enough, the fault line for the United States may have been the 2010 election).
There will be several tectonic shifts between now and 2020. One of them, and my primary interest, of course, is energy. The shift will be a realization on Wall Street that after a decade of talking about renewable energy, the real money this decade will be made in fossil fuels. In just the last two weeks, we've seen reporting how GE and T. Boone Pickens have shifted their strategy. A lot of money will be made in solar and wind energy, but the big stories will be about fossil fuels this decade.
Another tectonic shift will be, of course, the events currently unfolding in the Mideast, events which will undoubtedly spread. Already there are headlines saying that the "Cairo" effect has moved to Madison, Wisconsin.
That brings me to another tectonic shift: the realization by property owners and taxpayers that their states truly are broke. Unlike the federal government, the states cannot print money. Regardless of which side of the issue you are on, I am not convinced "we" really comprehend how big the problem is.
But this one observation speaks volumes. All that "noise" in Wisconsin is about an emergency measure that is said to be needed to save $300 million over the next two years to help close a $3.6 billion budget gap.
If that much "noise" is being generated by attempts to save what amounts to only eight (8) percent of the entire budget gap, property owners and taxpayers (and municipal bond investors?) have not seen anything yet.
It's my understanding that Wisconsin is in better shape than many other states because Wisconsin has been more forward-leaning in tackling some difficult budgetary issues. If so, I can only imagine what "we" may see in Illinois, California, New Jersey and New York.
By the way, with an average pay and benefits package worth $50,000/year for a state employee, 8,000 jobs = $400 million. According to an unverified source, the number of state and local government employees in Wisconsin in 2008 was 280,000. Eight thousand of this total represents a little less than three percent. One could argue that attrition alone would save the aforementioned $300 million.
Wisconsin would then only have to worry about the other $3.3 billion gap.
******
[Update: wow, was I wrong on that compensation figure. It turns out the average pay and benefits package for a Milwaukee, Wisconsin, teacher exceeds $100,000/year. Generally speaking, a school year is about eight months long, once holidays, school breaks, etc., are taken out.]
*****
Wisconsin
Eog is trading at around 50 times earnings . Bexp trades at over 100 times earnings. In your view, what is the difference between a tectonic shift (aka earthquake) and a bubble ? These two stocks are priced for perfection. Not sure there is room for more growth, could be but time will tell.
ReplyDeleteP/E's of some Bakken play companies:
ReplyDeleteEOG: 54
BEXP: 110
CLR: 41
WLL: 32
GEOI: 27
SSN: 137
KOG: 400
NOG: 131
It's in the eye of the beholder if these companies are priced for perfection.
If you have followed the Bakken story that I have presented for the past two years, you would know how I feel about the value of these companies. Some of them I like; some of them I like a lot; some of them scare me; some I invest in; some I stay away from.
My site has an overwhelming amount of information, so you might be better off reviewing the corporate presentations of all these companies.
These are a few reasons why people continue to buy shares in these companies (and, of course, for every share bought, someone is selling; except for new issues);
1. Most agree oil prices are headed higher.
2. Everyone agrees that all Bakken play companies are going to produce much more oil from the Bakken formation going forward.
3. Most folks are not aware that the Bakken formation is only one pay zone being factored into the share price. I see today's share price reflecting the value of the Bakken play. The "frosting on the cake" is the oil in the Three Forks formation which about doubles the Bakken formation (not quite, maybe one-half to three-fourths as much).
4. Once a company has a producing well in the Bakken (or any formation), the company holds that lease "forever." It holds that lease as long as the well is producing (these wells are expected to produce for 20, maybe 30, years.
5. BEXP is paying off their wells, on average in 1.3 years (at the wellhead; lots of expenses lengthen the real time period); and the wells will produce for 20 to 30 years.
6. These are growth companies, not value companies, thus part of the reason for the high P/E's.
7. The conservative estimate (state, USGS, etc.) suggest that there is about 4 billion barrels of recoverable oil from the Bakken; there is now enough evidence to argue that there is as much as 24 billion barrels of recoverable oil (Bakken and Three Forks combined). Even if 24 billion is off and is closer to 12 billion, that's still three (3) times the conservative estimates.
8. When I started following the Bakken, started my blog, it was expected that there would be one well on each section. They are now putting as many as 4 wells on each section in the better Bakken.
9. The estimated total return of these wells continues to increase with better technology and better operations.
Most importantly, if one thinks these investments are speculative, bubbles, etc., then invest appropriately. If one thinks these are not speculative, bubbles, etc., then invest appropriately. Or not invest at all.
I started out my site purely as educational and wanted to stay away from investment side of the story, but it was impossible to separate the Bakken story from the investment story.
You may want to ignore my investment notes, and just stick with production, etc., and eliminate concern about whether this is all a bubble.
I could write so much more, but the blog site pretty much covers everything else.
Thank you for stopping by. If you have a specific question, please feel free to write.
Oh, I forgot to mention:
ReplyDeleteThroughout my blog, I mention that I am inappropriately exuberant about the Bakken, and I tend to see things through oil-covered glasses.
I'm not making that up; I say it often.
I have on several occasions recommended that folks do their own research before investing.
To the best of my knowledge, I have never made a recommendation on this site. I mostly just aggregate news and occasionally opine on these stories. I don't make recommendations because everyone has their own particular goals.
But, wow, I have to agree. Do not even think of investing in these Bakken companies if you cannot risk losing your entire investment.
I would disagree with the assessment that these are growth companies.
ReplyDeleteKog at a multiple of 400 ? There is a lot of hype and "Baaken" mantra in play. Doesn't mean they won't go higher from here. What will be sustained in this decade in terms of how this equity group performs is very questionable. A lot of their growth may already be priced in. I don't see a tectonic move going forward . Just my opinion.
With regard to growth, that's in the eye of the beholder also, I suppose.
ReplyDeleteBut this is why I would argue that "growth" is more appropriate than value, although I have no idea why I'm going down this road except for argument's sake:
1. KOG will go from two rigs to three rigs this year. On a percent basis, that's huge. That's a fifty percent increase in number of rigs. Two rigs gets them 20 new wells/year; three rigs gets them 30 new wells/year. NPV for wells in the Bakken where KOG is located is estimated about $11 million/well. Rounding to $10 million x 30 wells works out to $300 million. KOG's market cap is currently just slightly less than $1,000 million (one billion). The wells they drill this year (and just this year) could account for one-third of their current market cap. They've been drilling for a couple of years and will be drilling for many more years.
2. If you look at the production graphs for all the Bakken companies, they are clearly growth companies (compare to "value" companies like XOM, CVX, and COP).
3. The big story going forward will be consolidation in the Bakken. Consolidation will reveal true value of these companies.
4. Value companies tend to pay dividends; growth companies commonly do not pay dividends. KOG does not pay a dividend.
5. KOG's profit margins are awful. They're spending a lot of money up front to put in these very expensive wells; the profit margins will increase significantly with each additional well. By the way, there are "no" dry wells in the Bakken -- something generally unheard of (until recently) in the oil industry.
6. The P/E's are trailing P/Es.
Again, I wouldn't get too shook about these things. I just think it's a very exciting story. With regard to KOG, you should take a look at the pipeline story and KOG's partner. It helps explain the share price folks are willing to pay.
Meanwhile, I'm going to go back and look at some more data. The Heart Butte and West Ambrose fields are getting a fair amount of activity.
But what I'm really looking forward to is the IPs of the wells targeting the Lodgepole around Dickinson. If those come in as some predict, we may have another game changer.
Let me know if you have any specific questions.
It should be noted that KOG's forward P/E is 15.
ReplyDeleteI was not aware of that. That's why I enjoy this blog, and why I enjoy folks writing in.
KOG's forward P/E, for year ending December 31, 2011, is only 15. Wow!
KOG reports 4Q10 earnings on March 7, 2011. Check back in then and we'll see what we have.
With regard to tectonic shifts and energy, I'm not talking about tectonic shifts in the Bakken. That story has already been told. So I agree -- no tectonic shift in the Bakken; that occurred in 2000 and again in 2006. There were two epicenters -- the Elm Coulee in Montana, and the Parshall in North Dakota.
ReplyDeleteThe tectonic shift as it relates to energy has to to do with how much energy China and India will need this decade (2011 - 2020).
Bruce Great Job....but the real tectonic shift is the realization that OIL was never a fossil fuel to begin with; That North Dakotas new found wealth is all due to the Red Wing Impactor.
ReplyDeleteHere is a link and images of the Shoemaker Levy bolide string hitting Jupiter.....the effects in black,(hydrocarbons) remained spread across an earths diameter surface of Jupitor for at least 8 months before seeping into the strata. http://www2.jpl.nasa.gov/sl9/hst.html
Titan contains more oil than earth:
http://siliconinvestor.advfn.com/readmsg.aspx?msgid=24312161
I learn something new every day.
ReplyDelete