Investing: Energy Musings

COMMENTARY: April 24, 2010

I am not going to update previous commentaries because it would be too much work and it might be nice archive material.

I remain enthusiastic about the Bakken. These are my observations at this point:

1. For investors, I think share prices are fair: neither over-valued nor under-valued. Folks have priced in recent events. All things being equal, share prices will follow price of oil. 

2. Everything suggests that the price of oil now has a trading floor of $80 and will gradually trend up. I find it interesting that when oil spiked to $150 a year or so ago, gasoline prices at the pump were not a whole lot different then they are now -- maybe a buck/gallon more in some areas of the country, but folks seemed to manage it. That suggests to me that the price of oil could easily go to $100 by the end of the summer, 2010, without much effect on the economy.

3. If oil hits $100/bbl, a windfall profits tax (disguised as "cap and trade") is all but guaranteed. And, an additional windfall profits tax might be added. 

4. Energy companies in the Bakken are focused on oil and all oil companies have changed their focus from oil & natural gas to predominantly oil.  If the price of natural gas increases significantly, the share prices of all these companies will appreciate significantly.

5. I find it interesting that there has been a paucity of new wells being reported despite number of active rigs jumping to 109. I first noted this in April (this month). Yes, wells can remain on the confidential list for six months and six months ago we had significantly less than 109 rigs. However, companies are quick to announce the results if it's a good well. Some folks in the oil patch are opining that drillers are stalling completion of their wells. The Bakken wells are front-loaded (decline rates are horrendous) and the price of oil appears headed higher. If so, it only makes sense to hold off for the time-being in completing these wells. 

6. Capacity to ship oil out of the Bakken has caught up with production. North Dakota oil is on par with best ("sweet") oil and sells close to the price one sees on the business network crawlers. There should be little-to-no discount paid for Bakken oil due to transportation costs. 

7. Activity in the reservation was delayed two years compared to activity in the Sanish and Parshall (outside the reservation) due to bureaucratic delays in Washington, DC. Those obstacles have been removed and this year (2010) should be the year in which the reservation (think KOG) catches up. 

COMMENTARY: November/December, 2009

This is why I am very, very bullish on energy: a) North Dakota has been in the news the past two years due to activity in the Bakken. North Dakota set a record in 2009 by producing 80 million barrels of oil. The US uses 80 million barrels/oil/day and North Dakota produced enough oil in one year to provide enough oil for the US for one whole day. And yet the Bakken is in the news. If that little amount of oil is in the news, it tells me there isn't a lot of oil around -- and it's only going to get more expensive; b) wind energy accounts for about 1% of all energy used in the US; it will take huge investments in wind, just to maintain that 1%, due to growth in energy demand over the next several decades; c) despite attempts to kill fossil fuel, coal seems to be holding its own, and if it doesn't, natural gas is ready to step in (Exxon knows that; XOM bought XTO for its natural gas); and, d) solar energy is still too expensive for serious consideration on a macro-scale. Solar energy will play a lesser role than even wind.  Yeah, I'm inappropriately exuberantly bullish on energy. Call me crazy, Ishmael.  December 26, 2009.

Two things have me excited today (November 29, 2009): a) the results of the record-setting North Dakota state land lease auction earlier in November; and b) the docket before the North Dakota Industrial Commission on December 17, 2009.  If I count correctly, producers will be asking the state of North Dakota for permission to drill more than 851 wells, and that's in just one hearing. The state holds an average of two to three hearings each month. For comparison's sake, there were about 400 - 600 wells drilled in North Dakota in each year, 2006 - 2009.  It doesn't take a rocket scientist to think that (a) and (b) are related -- the record land lease in November and the record-setting (?) docket in December, one month later.

By the way, I just counted up the number of wells requested in the July 21/29, 2009, docket: 541. So, two dockets alone and over 1400 new wells. (November 29, 2009).

There are multiple ways to play the energy industry in North Dakota:

Oil, big (EOG, MDU, COP, HES)

Oil, medium (WLL, BEXP, CLR)

Oil, small (KOG, NOG, USEG**)

Oil services (SLB, HAL, BHI)
Refineries (I don't follow; not optimistic on future)

Utilities (MDU, OTTR)

Natural gas (MDU, XTO)

Coal (MDU)

Materials (cement, gravel, sand) (MDU)

Transportation (BNI)

Pipelines (ENB)

Wind (MDU, FPL, ITC)

High dividends (HTE***, ERF, EEP, EPD*, ENP)

*EPD: not in North Dakota.
** I added USEG after it partnered with BEXP  on some interesting acreage/wells.
***HTE no longer exists; bought by a Korean company, posted July 20, 2010.

I missed on EAC and EOG.

But there are a dozen ways to be involved in the Bakken, even for those who do not own mineral rights. I am convinced that Williston could be another "Tulsa." It won't be another "Tulsa" in terms of people -- the weather is too harsh and the region too remote, but in terms of storage, infrastructure, and production, I don't think I'm too far off. Some of the wells are generating $15 million in cash flow each year.

By the way, looking at the results of the November 3, 2009, North Dakota state land lease auction, something tells me that a) it's going to be a very active 2010; and, b) Slawson may be a
"sleeper."  Slawson: not publicly traded; however, Slawson is partnered with NOG in a number of palces.

**********

Earnings calls:

ENB, November 4: great results; raising guidance
CVX, October 30: results delay talk of windfalls profit tax
XOM, October 29: results delay talk of windfalls profit tax
WLL, October 29: great results; raised guidance
CLR, November 5 : great results; will double # of rigs
EOG, November 6: so-so results; exciting 2010
BEXP, November 6: poor results; anticipating better times

Other investing news in general:

The following new share offerings occurred just before the largest North Dakota state land lease auction ever, November 3, 2009. Coincidence? I think not.

NOG: new share offering, October, 2009

BEXP: new share offering, October, 2009

KOG: public offering of new shares closed October 30; sold 13,800,000 including 1,800,000 over-allotment; all sold at $2.20. Net proceeds, after expenses, $28.6 million. Posted October 30, 2009.

**********

December 7, 2009: Oil and Gas MLP likely to increase distributions 6% in 2010.

December 5, 2009: Motley Fool's recommendations.

November 25, 2009: Natural gas up over 8%. Now over $5.00.

November 25, 2009: Is EOG looking at another 570 wells in the Parshall oil field?

November 3, 2009: Largest ever North Dakota land lease auction ($71 million)

November 3, 2009: Warren Buffeet announces he will buy BNI for $100/share (BRK).


November 1, 2009: DNR will buy EAC. Denbury, a powerhouse of a company.


October 27, 2009: Korean company will buy Canadian oil trust.

Wow! Harvest Energy Trust is being bought by Korean company (KNOC): “KNOC has ambitious plans for future growth and is committed to a long-term investment strategy in Canada."

October 26, 2009: Today, CNBC contributor predicts gasoline shortage next spring.

Daniel Dicker, an oil and gas analyst/contributor for CNBC since 2002, predicts a shortage of gasoline at the pump in the spring of 2010 and the price of oil at $110. This is interesting in light of the October 25, 2009 post, regarding the EPA ruling on the BP refinery expansion in Whiting, Indiana.

Updated December 26, 2009.