Wednesday, September 7, 2016

The Epiphany And The Seven Stages Of Grief -- September 7, 2016

Sometimes it's just an epiphany.
... a sudden, intuitive perception of or insight into the reality or essential meaning of something, usually initiated by some simple, homely, or commonplace occurrence or experience. 
Or perhaps it's simply the seven stages of grief: disbelief, denial, bargaining, guilt, anger, depression, and acceptance/hope.

I went through disbelief but not denial.

I never went through any bargaining or guilt.

Anger, yes, and perhaps even depression.

And now I'm comfortably at acceptance (but not hope).

If it was an epiphany it occurred sometime in the last 24 hours. I can't say when the specter began to appear, but it was staring me in the face, full frontal, when I read the article that Saudi Arabia is looking to cut $20 billion in government spending. That, of course, comes on top of several previous stories in which Saudi Arabia was desperate to cut costs, raise cash.

After I saw that story, I saw a number of articles that pretty much convinced me my epiphany was not off-base.

This morning, after driving one of the granddaughters to school, the business report on the radio stated that "oil would start the day at $44-something." And that was it.

We've been at $44-something for so long, it was no longer news. Yesterday, and over the past few days, there were suggestions that oil was headed higher. Oil went a bit over $45 but that was it. This morning it is being reported that Iran will continue increasing production regardless of what RussiaArabia does.

The epiphany: $45 is good for the US. I am more than happy to see oil in the $46 - $52 range, in current dollars, current circumstances. That's the sweet spot for me. Sixty-dollar oil might be a bit on the high side, but I'll take that, but no more.

I like filling my Honda Civic for less than $2.00 / gallon.

I love to see SUV and big pick-up sales records being broken.

Intermittent energy (wind, solar) requires more and more tax breaks, government mandates to survive. On its own, wind, solar can't compete with "cheap" fossil fuel.

Investors in the oil sector re-set their portfolios when oil hit $30. Oil hit $28.47 on January 19, 2016.

The US economy can't handle a quarter percent raise in the Fed rate -- at least according to conventional wisdom. If the US economy can't handle a quarter percent raise in the Fed rate, could the economy handle $100-oil at this point? Hardly.

US shale operators are making money on $45 oil. North Dakota is doing just fine, thank you. Another $60 million infrastructure project just announced, and Target Logistics is defying Boomtown's directive to shut down mancamps. Apparently the operators and Target know something The Atlantic does not know.

It took two years, but finally low oil is resulting in some merger action; there would be more merger and acquisition activity but US regulators frown on anything "good" happening in the oil sector.

At $45 oil, oil companies are working smarter. We have seen Darwinian economics at work; we will see more.

This is the big story: at $45-oil, the entire Mideast picture changes. Saudi can't survive on $45 oil. Funding terrorist activities will take a low priority. Iran's star is rising. We will see new alignments in the Mideast, to include Russia. OPEC is seldom talked about any more. Now it's simply all about Saudi Arabia, or maybe Saudi Arabia-Russia. Or perhaps, Saudi-Arussia. Not to be confused with Saudi Dakota.

They say Saudi can produce oil for under $10/bbl. That doesn't give the Saudis much incentive to improve technology in the oil patch, and with less and less money to pay for such R&D, US companies will take their business elsewhere. The low hanging fruit in Saudi Arabia is not finding cheaper ways to bring oil to the surface; Saudi's low hanging fruit is cutting the country's social spending, terrorist funding, and long term energy projects -- which, of course, runs the risk of a death spiral.

Meanwhile, the low hanging fruit in the US oil sector:
  • cutting costs to bring profits in at $40 oil
  • taking this opportunity of low costs to continue to build out the infrastructure
  • mergers and acquisitions; we see the true value in established companies, pipelines. infrastructure
  • weed out inefficiencies
  • weed out poor performers
  • award the nimble and aggressive (most recent example: EOG buying the Permian for "a song")
Continental Resources' most recent presentations remind us how far shale operators have come in just a few years. When the boom began, the big talk in the Bakken was one well in every 640 acres and EURs of 350,000. Now, we're talking 12 wells (and more) in every 1280-acre drilling unit and 1 million EURs as a target. Filloon talked about 1 million EURs years ago; he was spot on. When the boom began, wells were costing upwards of $12 million to complete (and many of those were short laterals); the target now, $8 million and some operators even target closer to $6 million. In STACK/SCOOP, CLR expects EURs of 2 million boe.

More interesting, CLR has caught on to "clever" marketing, clever financing, clever bookkeeping -- whatever you want to call it. Taking advantage of the way Wall Street analysts reward and punish public companies (quarterly earnings), CLR now re-sets the bar every quarter. Forget how much it cost to drill a well last quarter. Put that well in SI/NC status, and then report the new completion cost for that well  in the current quarter -- just the $3 million for fracking the well and voilĂ , a 70% ROR. The well was drilled a year ago; the analysts have already moved on. They are looking at future earnings. CLR projects 190 DUCs at the end of the year. The money for those wells to be drilled to total depth has already been expensed. Now CLR just talks about what it will cost to complete those wells.

And guess what? When those wells are completed the price of oil might be a bit higher than when they were drilled. Is this a great way of doing business or what?

I've completed the seven stages of grief (skipping some stages, as noted above). $45 oil is perfect; it's at the low end of the range for the sweet spot, $46 - $52 at current dollars, current conditions.

I'm not even looking for the downside of "low" oil prices any more.

If oil drops below $40, I will go through the seven stages again.

Dorothy Outslicks Grace

When I first heard this group, my first thought was: Grace Slick. I had not heard of the group until recently. See wiki:
DOROTHY fielded early comparisons to The Kills, The White Stripes, Patti Smith and Grace Slick. London-based fashion publication Hunger TV commented "it feels good to know raw power, sex and whiskey is back en vogue".
On July 24, 2014, Huffington Post named "After Midnight" the #1 song on their 12 Songs You Need to Know This Week, calling them "dangerous," "kick-ass" and "exactly what rock needs".
Adele on crack. In a good way.

49 year anniversary.

Dorothy, 2015:

Bang, Bang, Bang, Dorothy

Nancy, 1966:

Bang, Bang, Nancy Sinatra

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