Monday Morning News, Views, And Links -- Norwegians Want To "Scrap The Cap"

Updates

Later, 6:53 pm CST:  I made a mistake -- a huge mistake -- in my post on KOG below. See first comment. I had forgotten about the recent acreage purchase KOG made in the Bakken. My bad. A huge "thank you" to the reader for alerting to me my error. 

Original Post 

It's overcast, drizzling, and looks to be getting worse here in the Dallas area. I rode my bike to Starbucks just so I could post some Bakken stories and there's not much to report. Might as well close it up and go back to bed. Except I can't.

First, of all, let me check the three-hour forecast. Wow, it's hard to say. It looks like the storm cell is moving south and breaking up and maybe nothing to follow. But the clouds certainly look threatening ... for a bike rider.

There really is no news.

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Drudge juxtaposes two John Kerry speeches:

• on Syria, John Kerry has "high confidence" that the Assad used chemical weapons 
• on global warming, John Kerry says the global warming evidence is "irrefutable"

I believe "irrefutable" suggests greater evidence than "high confidence" but I could be wrong.

I know both "irrefutable" and "high confidence" are higher on the evidence scale than "yup, you betcha."

I know that everyone, including the UN, now agrees that the earth has shown no warming in the past 17 years. But once one's mind is made up (and especially where money is involved), it's hard to change. I'm surprised with all that is going on in Syria right now, John Kerry has time to make speeches on global warming. More people will probably die from Obama-launched cruise missiles than global warming in September.

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This Norwegian story has some implications for North Dakota's Legacy Fund.

Norway has a "legacy fund" also, but they are spending some of it. They cap the spending at 4% of whatever is in the fund, but some Norwegians want to "scrap the cap." But there is so much money in Norway's "legacy fund" that they can spend a lot of money and still stay way below the 4% threshhold:

Labor this year proposed spending 3.3 percent of the fund to plug budget deficits, staying within the 4 percent rule for a fourth year. Still, with the fund quadrupling in size since the middle of last decade, that represents a 19 percent increase in government spending versus 2012.

The government estimates the fund will grow about 50 percent by 2020.

My thoughts which I e-mailed to Don earlier this morning:

Norway's "Legacy Fund" has quadrupled in size.

Staying way below the 4% thresh hold (at 3.3%), the Norwegians still increased government spending by almost 20% year over year. What the heck are they spending all this money on?

No defense; no foreign policy; no hurricanes; no earthquakes; no volcanoes; no natural disasters; no Olympics to pay for. What the heck are they spending money on? The country is not getting larger in size so basically just road maintenance; I am not aware of a new, massive highway building program in Norway. Nothing. The 20% is spending must be all on health care, welfare, libraries, wireless build out; and, government salaries.

The Fund will increase by another 50% in the next few years, and the voters are interested in throwing out the 4% limit in spending.

Wow, talk about "opening the cookie jar," as you noted.

Now, think about the same for North Dakota -- in 2017, legislators can start spending Legacy Fund money. In 2017, the Legacy Fund at 4% x $5 billion would be $200 million. I think North Dakota's Legacy Fund hit nearly $1.5 billion mid-year 2013.

North Dakota legislators cannot spend Legacy Fund money until 2017, and must get 2/3rds majority vote to authorize spending. I am not aware of the law imposing any cap, but starting with Norway's example of 4% perhaps that's where North Dakota will start.

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More and more it appears the Libyans want to get out of the oil business.

Libya’s government may stop paying civil servants by the end of the year as protests at petroleum facilities curtail the nation’s oil output to one-tenth of its capacity, a lawmaker warned today.

The North African state is now producing 150,000 barrels a day, after losing 50,000 barrels in daily production yesterday because of strikes by workers and security guards over pay and allegations of corruption, Sliman Qajam, a member of the parliamentary energy committee, said in a telephone interview in Tripoli. Libya needs to produce 400,000 barrels a day just to afford public-sector salaries, he said. 

Wow! That's a bit of a delta between 400K and 150K. North Dakota is producing 800K bopd.

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Back to the Bakken. There is an intriguing article over at SeekingAlpha: are key investors abandoning KOG? This is way beyond my comfort level, so don't put too much stock into it, but there's not much else to write about today. Don sent me the link; these were my immediate thoughts:

The KOG story is becoming more and more fascinating.

This particular story at Seeking Alpha: the headline is a bit misleading, to get one's attention. The writer is responding to folks who have suggested Wall Street is losing its interest in KOG. This writer appears to be more neutral, suggesting the "jury is still out" with regard to KOG's prospects.

This is what worries me about KOG:

"Vangel" (or whatever his screen-name is; the miserable naysayer who always comments over at Carpe Diem) has suggested that the Bakken operators are in trouble: they need to drill as fast as they can to maintain production. The "Red Queen" essay The Oil Drum said the same thing.  KOG's actions suggest some (much?) validity to that argument.

I assume the increase in CAPEX from $775 to $1,000 million is for drilling operations, not acquiring more acreage. I've often said that it must be fairly easy to figure out how much oil KOG is worth: a) the extent of the Bakken is pretty well known and certainly won't exceed Harold Hamm's one-trillion bbl estimate; b) KOG does not seem to be interested in buying acreage outside the Bakken; c) it doesn't appear that KOG can even afford to buy more acreage inside the Bakken. [Note: when writing this note, I had completely forgotten about KOG's recent purchase of Bakken acreage announced earlier this year. That was a huge deal and adds a nice bit of acreage to KOG's portfolio. I am indebted to me readers for noting this error. Thank you.]

If that assumption is correct, that the increase in CAPEX is for drilling, it suggests to me that KOG is drilling as fast as it can. A healthy, mature operator doesn't have to drill like its hair is on fire. But as fast as KOG appears to be drilling, it seems the company is aware they have to get their balance sheet in order.

The "Key Statistics" at Yahoo!Financial are pretty dismal.

"Enterprise value" is N/A; something I rarely see.

Debt is $1.5 billion, with a market cap of $2.7 billion.
Operating cash flow is $400 million.
Levered free cash flow is an astounding -$500 million.
Quarterly earning growth is down 50%.
Cash on hand: zilch ($14 million, but that's one or two wells).

The rest of the numbers look good, I guess (like earnings/share; forward and trailing P/E; etc).

At this point, many say the Bakken operators have entered the manufacturing stage, which to me means steady, continued drilling, but not drilling as if we are still in the early days of the boom. KOG is drilling like it is still in the early days of the boom, based on CAPEX of $1 billion despite what one sees in the Yahoo financial statement.

Most concerning, and no one mentions this: much of KOG is inside the reservation. The Feds will be announcing new fracking rules by the end of 2014. Even if the fracking rules change NOTHING, the headlines will absolutely strike fear in Wall Street traders.

Disclaimer: this is not an investment site. Do not make any investment decisions based on what you read here or what you think you may have read here.  

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A little literature note:

Through Amazon Vine I got the most interesting book: a biography of Sidney and Violet Schiff by Stephen Klaidman. This is the story of a wealthy novelist and his incredible editor wife about which little is known except through a novel or two by Sydney Schiff and 1200 letters written to them from other writers.

I feel pretty comfortable with Virginia Woolf, but have never fully understood the Modernists. This is the first book that puts it all together in a short 206 pages, which could probably be read in one sitting.

I have no feeling or understanding for Proust, but if one has read anything of Proust (his works or biographies of him), this book provides much, much insight regarding Proust. It makes me want to go back and tackle Proust again. I tried reading his novel, but gave up; I am now energized to go back and try reading it again.

Perhaps the most interesting "character" among the modernists was Wyndham Lewis. I have read "the" biography of Lewis, and it is great to see a biography validating the thoughts I have regarding Lewis: a loser and self-promoter, but apparently incredibly bright and interesting at dinner parties.

TS Eliot also featured.  The targeted audience: folks who want to add to their understanding about the Modernists. I have come away knowing more about Modernism than ever before. It's actually a good book to discuss with high school seniors who are interested in literature -- it provides a nice snapshot of Modernism, TS Eliot, Proust, and Wyndham Lewis.