Monday, October 26, 2015; Duke Energy Is Buying Piedmont Natural Gas, $4.9 Billion

Whiting reports three nice wells in Truax oil field; eight more DUCs reported over the weekend.

After years of decline, US crude oil imports rise again. At least that's what the Wall Street Journal is reporting:

U.S. imports of foreign oil are rising again after a long decline, as the oil bust forces domestic producers to scale back.

Less than a year after the Organization of the Petroleum Exporting Countries opted to continue production despite plummeting prices, member countries including Saudi Arabia and Iraq are clawing back market share they ceded to oil companies pumping in Texas and North Dakota.

U.S. crude imports declined 20% between 2010 and 2014 amid the domestic energy boom but have recently started to rise again. Total crude-oil imports rose for three straight months between April and July, according to the most recently available data from the Energy Information Administration. Imports of light crude grew more rapidly, from 5.6% of total imports in April to 11% in July. [Read the entire article at the link to learn why.]

On the Gulf Coast, vessels carrying nearly a week’s worth of imports waited offshore Friday to unload.

The slowdown in the nation’s shale-oil output has pushed up the price of high-quality U.S. oil relative to global prices, giving U.S. refiners a reason to buy from countries such as Nigeria. Until very recently, the boom in U.S. shale-oil production forced countries that exported oil to the U.S. to hustle for new customers.

US new home sales drop to near one-year low.

Active rigs:

	10/26/2015	10/26/2014	10/26/2013	10/26/2012	10/26/2011
Active Rigs	68	194	182	186	199

RBN Energy: Can the Jones Act Tanker Market Keep Growing?

The cost to charter U.S. Flag Jones Act tankers that are used to transport crude and refined products along U.S. coastal waters is still as high as $75,000/day for medium-range 330 MBbl vessels. That’s four times what it costs for an equivalent foreign flag tanker. Higher charter rates – caused by tight vessel supply in a regulated market – have attracted investment from Kinder Morgan and other midstream companies and the tanker fleet will expand by 40% in the next 3 years. Today we discuss the market potential.

The Jones Act is a federal statute requiring that all goods transported by water between U.S. ports be carried in U.S. Flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and/or U.S. permanent residents. Because of the regulations, operating expenses are higher for Jones Act vessels (as much as 2.7 times non-flag alternatives according to a U.S. Maritime Administration (MORAD) study in 2011). We have provided considerable coverage of the role that Jones Act vessels have played in the U.S. crude oil distribution system over the past 4 years since shale production increased domestic output including our Rock The Boat series in the spring of 2014. 

The Jones Act fleet used by the petroleum industry consists of three main categories of vessel. The first are smaller barges that typically carry either 10 MBbl or 30 MBbl of crude or refined products and operate on inland waterways as well as coastal canals – the fleet size is approximately 3,750 tank barges (source: Kirby Corp.). The second vessel type is the coastal barge - including larger articulated tug barges, ATBs. The fleet of coastal barges numbers 269 having capacity larger than 195 MBbl.

The third vessel class is self-propelled tankers that operate in both coastal and international waters and generally carry over 300 MBbl of crude oil or refined product.

This latter Jones Act tanker category currently numbers 43 vessels of which 31 are medium-range “Handy” size meaning they carry about 330 MBbl and 11 are Aframax or Suezmax vessels that carry 800-1500 MBbl.

The 11 larger vessels are currently dedicated to the Alaska trade– moving Alaska North Slope (ANS) crude oil from the Port of Valdez, AK down the West Coast to refineries in Washington State or California. The Handysize fleet is largely engaged on long term charters by oil companies to move crude or refined products between ports on the East or West Coast although a few are also used as “shuttle” tankers to ship production crude to port from Gulf of Mexico offshore wells.

The size of the Jones Act tanker fleet is limited for a couple of reasons (as we said - there are just 43 operating today). First the regulations require they be built in U.S. shipyards – of which there are only two currently operating that can build Jones Act tankers – Akers Philadelphia (soon to be renamed Philly Shipyard) and General Dynamics NASSCO shipyard in San Diego. Between them these two shipyards could produce at most 7 vessels per year and NASSCO builds navy vessels as well – reducing their Jones Act capacity.

The second reason the Jones Act tanker fleet remains small is their high cost of operation compared to non-U.S. flagged vessels that effectively restricts their use to U.S. waters because they cannot compete with tankers registered in other jurisdictions (e.g. Panama) that can operate for a third of the cost or less. Yet despite their limited utility and expensive operating costs – demand for new vessels is currently high. Two new tankers are expected online by the end of 2015 with 15 scheduled for completion by the end of 2018 – expanding the fleet by 40% to 60 vessels. And a number of recent industry consolidations have occurred - reflecting strong interest in owning Jones Act tankers from U.S. midstream companies.

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Big Week: Apple, XOM Report Earnings

It was announced that a Chinese company, having received US approval, will buy mineral acreage just east of Midland, TX. The county seats of Howard and Borden counties are 50 - 100 miles east / northeast of Midland. The linked article did not say how much acreage was involved in the $1.3 billion deal.

The AP is reporting that Duke Energy will buy Piedmont Natural Gas for almost $5 billion. In addition to one million new customers, the big story is that the two companies are partners in the $5 billion Atlantic Coast Pipeline that will be the first major natural gas pipeline to serve the eastern half of North Carolina. The $60 that Piemont shareholders will receive in the deal is a 42% premium to the closing price on Friday.

The Dickinson Press reported over the weekend that the "big crane" business was taking a hit during the slowdown. Not unexpected.

Final three choices for UND's new athletic nickname: Fighting Hawks, Roughriders, and Nodaks.

Tesla posted strongest quarterly sales in China this year for three months that ended in September. Tesla sole 1,345 units in China. They had sold 797 units in the first quarter and 883 units in the second quarter. BloombergBusiness story here. Elon Musk said China's sales could match the US in five years; I'm not sure what he meant by that; it could be taken either way, I suppose.

Initial 3Q15 GDP estimates will be released this week. GDPNow suggests GDP will be well below 2%:

The GDPNow model nowcast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 0.9 percent on October 20, unchanged from October 14. The model's nowcasts of real consumer spending and real government spending in the third quarter fell slightly following last Thursday’s Monthly Treasury Statement and Consumer Price Index release (from the U.S. Bureau of Labor Statistics). This was mostly offset by an increase in the nowcast of motor vehicle and parts dealer inventories after Friday's industrial production release from the Federal Reserve Board.

At least one talking head suggests the Fed will announce "negative" interest rates. I would love to poll that but a) it gets a bit far afield of the Bakken per se; and, b) no way, Jose, will the Fed announce negative interest rates.

GM, UAW reach tentative deal, avoiding strike.

Wow, wow, wow: USAA is dumping Mastercard; will replace it with Visa. Earlier this year Costco dumped American Express and also partnered with Visa. Visa seems to be on a roll.

Upon review, it appears the US House of Representatives thinks corporate welfare is important. The House will vote to re-open the Ex-Im Bank. I have no dog in that fight; it's just interesting to watch the intersection of politics and reality.

Bridgestone to buy Pep Boys for about a billion dollars.

FedEx predicts a 12% increase in holiday shipments. I assume Amazon.com will do incredibly well this holiday season. Amazon reported a surprise profit in 3Q15, but the way Jeff Bezos likes to spend money investing in his company suggests he will increase customer loyalty. I love Amazon. I don't invest in Amazon; never have, no plans to, but as a company I love it on so many levels.

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Notes For The Granddaughters

I always enjoy following "the dots." Today, while trying to sort out Euripides (The Wooden Horse, Keld Zeruneith, c. 2007, p. 478) I learn (again?) about Medea, in Greek mythology, a sorceress, who was the granddaughter of the sun god Helios, and later the wife to the hero Jason, with whom she had two children. Reading about Medea brings one to the goddess Hecate. That brings me full circle to Edmund Wilson's Memoirs of Hecate County. I say "full circle" because I have read it twice, and have forgotten most of it. It looks like I've found the book of fiction that I need to be re-reading now. There is a great review of Memoirs of Hecate County over at The New York Times (January 3, 1960).