Sunday, September 2, 2018

Idle Ramblings On A Sunday Morning In North Texas -- September 2, 2018

Updates

Later, 1:04 p.m. CDT: see fracking story below.


Over the past year:
  • AAPL shares appreciated 41%
  • NOG shares appreciated 326%
I'm glad I don't read The NYT for my business news. LOL.
Original Post 

What an incredibly beautiful weekend. I love three-day weekends. There are only two things that drive a five-day week in the US:
  • the economy; and,
  • the educational system.
We all know a little bit about both.

The economy: American productivity is such that most companies could do quite fine with a four-day week. For those companies that need to need to operate 24/7, they could move to a "4-day week" and a "3-day week." Nurses these days often do that -- they get a 4-day week one week, followed by a three-day week the next week.

The education system is so incredibly inefficient, schools could accomplish the same amount of "production" in four days that they do in five. Home schoolers know that, and those who teach as full-time substitutes at public schools know that.

But as long as the "economy" works on a 5-day basis, the schools will remain on a 5-day basis.

Commercial airline pilots have an incredibly efficient schedule, from what I can tell, and emergency room physicians do so, also. Regulations and policies probably discourage this practice now, but in the "old days," emergency room physicians could work a 48-hour continuous, unbroken stretch at a time. Moonlighting.

A close physician friend did that routinely while in the US Air Force while assigned to Grand Forks AFB in the early 80s. His Air Force job was generally Monday through Friday, giving him weekends off. When he had weekends free, he drove to a rural hospital where he signed in at 6:00 p.m. Friday and signed out at 6 p.m. Sunday -- 48 hours pays for one weekend. Not much activity in the emergency room at a rural hospital, but the service had to be "covered."

I digress. But, wow, three-day weekends are nice.

Took me 23 minutes to get to "work" today -- Starbucks. Normally takes a few minutes more, but it's not the length of the ride that matters; it's the quality of the ride. Today -- everyone in Texas is at church or in bed, except a few cyclists. Beautiful, beautiful ride.

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Fracking
Updates

Later, 12:38 p.m. CDT The "next financial crisis" with regard to fracking took place between 2014 and 2016 when Saudi Arabia tried to crush US oil companies. Saudi Arabia failed, but there was a financial crisis in the US oil sector, and many US oil companies failed/went away and/or declared bankruptcy and reorganized and are still drilling.

But the preponderance of business articles written about the fracking industry today suggests things have turned around quite spectacularly and we will see it in the year-end (2018) earnings reports.

The op-ed actually comes close to that, and then stops short -- it would not fit his thesis. I think most folks who actually follow the oil industry closely would argue that the fracking industry has never looked so robust.

A proxy for the Bakken would be the share price of either NOG (a non-operator) or CLR (an operator). These two companies probably know more about the geology of the entire Bakken than any other single oil company. Analysts and investors have now had almost twenty years of experience and/or records of the US fracking industry to study, and most would say that they have been through the worst. Share prices of CLR,and NOG for exactly one year:





A five-year graph would show exactly what the NY Times writer was writing about. But the article should have been written in 2014.

Original Post
 
A reader sent me a link to a New York Times op-ed / book review on the economics of fracking.

Because the op-ed was really a book review, it was already outdated; some "facts" are wrong; and other facts are not even provided. The book was written by a contributing editor at Vanity Fair, which I believe, is struggling financially (but could be wrong, but I doubt it).

The most glaring error: the real reason fracking succeeded. Not once was the price of oil mentioned nor the OPEC embargo nor the efforts of previous administrations and presidential wannabees to stop fracking.

The op-ed: "The next financial crisis lurks underground."

The writer's thesis: the "decline rate" and the "Red Queen."

From the article:
A key reason for the terrible financial results is that fracked oil wells show a steep decline rate: The amount of oil they produce in the second year is drastically smaller than the amount produced in the first year. According to an economist at the Kansas City Federal Reserve, production in the average well in the Bakken — a key area for fracking shale in North Dakota — declines 69 percent in its first year and more than 85 percent in its first three years. A conventional well might decline by 10 percent a year. For fracking operations to keep growing, they need huge investments each year to offset the decline from the previous years’ wells. 

[Maybe: the writer should look at nameplate capacity of wind and solar.]

And the link goes to a New York Times article dated November 22, 2014, with a byline of Williston, ND. A lot has happened in the oil patch in the past four years.

That was true then and remains true today, although the numbers may be somewhat different.

The bottom line: the author of the book and the writer of the op-ed argue that companies drilling in the Permian and the Bakken must keep drilling to replace the oil they produce every year.

I could be wrong, but doesn't General Motors need to keep producing new cars each year to stay in business.

Profit? Let's talk Amazon and Tesla.

Crisis for investors? Let's talk GE. Wow, let's talk GE.

And that canard that frackers are not making a profit is outdated. The frackers, in general, are now producing profits. And many of them are paying (and increasing) dividends. Companies don't increase dividends if they're losing money.

But enough of this.

Oh, one last thing, the title of the op-ed and the thesis of the book: the next financial crisis lurks underground.

Without taking this out of context, isn't this a banking / Wall Street / private investment story? If the companies go bankrupt, the US government isn't going to bail them out, and banks are minimally exposed to risk in the oil industry in the big scheme of things.

On the other hand, the US debt is $10 trillion and rising and is "owned" by all Americans.

But, yes, if you don't understand the industry, I would not recommend investing in the oil sector. 

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My Consequential Book This Week

River: One Man's Journey Down the Colorado, Source to Sea, Colin Fletcher, 1997.

I don't particularly care for the writing style -- verbose. One has to read closely and slowly to get any "facts" from the book. It's a great "travelogue" book -- one to read while resting by the poool if one has lots of time, and literally nothing else to do. But it moves glacially, and if one is easily distracted, one won't get far in this book. Maybe one page or two at a sitting.

I got it mostly for the maps.

Some quick notes:
  • the source of the Colorado River is Peak Lake (actually a pond) on Knapsack Col in the Wind River Range on the western side of the Continental Divide
  • the author started his trek at the four ponds just below Peak Lake -- he did not climb the Knapsack Col to get to the "ultimate" source. He started at the "penultimate" source, I guess
  • from the four ponds, the source flows north, at which point it is called Green River
  • about mile 10, the Green River turns south at "Big Bend"
  • about 100 miles south, one reaches Big Piney, still in Wyoming, and then about 20 miles later one gets to the Oregon Trail (Sublette Cutoff), just north of the Fontenelle Reservoir
  • at about 230 miles one reaches Green River, Wyoming, just north of Flaming Gorge Reservoir
  • the Green River enters Utah about 280 miles downstream, into the Uinta Mountains of Utah; Flaming Gorge Dam is in northern Utah on the Green River
  • the Green River exits Utah and enters Colorado for about 40 miles before it re-enters Utah and the Uinta Basin
  • finally, around Mile 650, the Green River meets the Grand River at the "Confluence," still in Utah; from now it's the Colorado River we all know; it was a political decision to rename the Grand River; together, the main river and the former Grand became, together, "the Colorado"; see this post for more of the story;
  • at about Mile 910, the Colorado River exits Utah and enters Arizona; just after entering Arizona, the river is dammed by the Glen Canyon Dam; the Navajo Generating Station is just off the southeast corner of the dam
  • another eighty miles and the Colorado River is in Grand Canyon National Park, where it turns abruptly, making a 90-degree turn, from flowing south to flowing west; standing on the south side of the Grand Canyon, the river flows from your right to your left; from the east to the west
  • the author marks his "Grand Canyon" map from Mile 1003 to Mile 1227
  • the author's "Grand Canyon" map ends at the Arizona/Nevada state line
  • as noted, the author's "Grand Canyon" map ends about Mile 1227, just short of the Nevada/Arizona state line
  • Hoover Dam, on the border between Nevada and Arizona, about 30 miles southeast of Las Vegas, is located around Mile 1290 on the author's map; Lake Mead, behind the dam, extends almost all the way back to the Grand Canyon
  • from Lake Mead, the river flows directly south from Boulder City, between Laughlin/Bullhead City, to Needles, CA, about Mile 1360; "Point 1180" on the author's map is about Mile 1380
  • the river forms the California/Arizona boundary until it reaches Mexico, just west of Yuma, Arizona
  • the Rio Colorado forms the boundary between Baja California and Sonora, Mexico
  • the river ends in the Gulf of [Baja] California, at Mile 1741, El Gulfo de Santa Clara
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Reincarnation

Yesterday, I made a short visit to our local Target store. I had Sophia in tow. A few errands.

I parked the car next to a sleek, black Maserati sedan. It brought back vivid memories of being a passenger in a Maserati being driven by an older male acquaintance at fairly high speeds somewhere in the Italian mountains, a long, long time ago.

I remember it as if it were yesterday. I vividly recall the scenery and the incredibly smooth feel of the Maserati on the straightaways and the smooth handling as it took the curves. I recall the scenery, but I don't recall the "smell" of the forests. But the windows would have been rolled up. I remember the leather seats and how comfortable the bucket seats felt. It was a big sedan, but yet, it was a sports car all the same. It was very, very roomy -- unlike the Porsche 911-- I felt very small in the oversized passenger seat. I remember the manual shift with the wooden knob. I don't remember much else of the interior finish -- other than the exquisite leather seats -- but I do recall the wonderful finish -- most likely a dash with a wood finish.

The only problem: I've never -- in this lifetime -- been in a Maserati in Italy. Or in a Maserati anywhere else for that matter.

Spooky.

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