Monday, June 14, 2010

CNBC and Energy Bull

I haven't watched CNBC in weeks. Today (Monday, June 14, 2010), I just happened to tune in for a few minutes and caught Castellini recommending six energy stocks (the link is to a CNBC video; I don't know how long it will be available for viewing), including WLL and BEXP (Bakken) and EOG and St Mary (Eagle Ford in Texas). I believe Castellini was pushing natural gas as much as oil. This is a nice way to think about it to keep it simple: the biggest oil find in decades in America -- the Bakken; the biggest gas find in decades in America -- Eagle Ford Shale in Texas.

In addition to WLL, BEXP, EOG and St Mary, Jerry Castellini also favors Southwestern Energy and Ranger Resources.

I believe Castellini is generally bullish on commodities including oil; this needs to be taken into consideration if you plan on investing.

127

Even for those who are getting used to "the Bakken," it must be hard for them to contain their enthusiasm when they see the number of active rigs set a new record.

Today, another active rig record has been set: 127 active rigs in North Dakota.

I think the number of active rigs will level off at 130 +/- 5.

Interestingly, one of the most visible Bakken players has not participated in this run-up. During the past nine months or so when the number of active rigs has increased significantly, BEXP has remained steady at five (5) rigs. Continental Resources (CLR), by the way, has increased its number of rigs from five (5) to eighteen (18). I count seventeen active CLR rigs today. I may have miscounted "the 18" -- time will tell.

The point is that BEXP has been reporting some monster wells based on 24-hour flowback numbers but it surprises me that the company hasn't followed through with increasing the number of rigs in North Dakota.  This will keep their CAPEX costs down, and should result in some great near-term quarterly reports.

There are two basic business models in the Bakken: own/lease your own rigs, or take a working interest and partner with an operator. Some do both.

Of the former, WLL, CLR, and KOG are most exciting for me. I own shares in one of these. I can make cases for all three: WLL seems best poised for spectacular results based on its concentration in the prolific Sanish. CLR, as noted above, is putting its money where its mouth is by tripling the number of active rigs -- the most of any Bakken operator. KOG is a little company with greater upside. It is concentrated in the reservation and activity there was delayed due to bureaucratic inefficiency at the Federal level. That has been resolved and KOG should do very well this year and next. American Energy (AEZ; 2 active rigs today) cannot be forgotten either; it is in a period of transition, selling all assets in Wyoming and becoming a Bakken pure play company.

Of those whose business model is as a partner (general term, not legal term), NOG and USEG come to mind.

But don't forget: there are other ways to play the Bakken. MDU is a diversified utility in the Bakken; ENB is an important pipeline play in the Bakken; and then there is the Medora Musical (a great play with lots of energy, but not hydrocarbon).

Price of Oil: Commentary

It appears to me that the two major factors that affect the price of oil are: a) strength/weakness of the American dollar; and, b) global economy/recovery/supply and demand. Some folks use jargon to call the first "financials" and the second "fundamentals."

Some observations:

1. Financials: With recent problems for the euro, the dollar has strengthened. Going forward, there is speculation that the euro will fall to parity with the US dollar in the best case scenario, and in the worst case scenario, disappear altogether. In either case, the US dollar should strengthen. Expectation: price of oil should fall as the dollar strengthens. What are we seeing? Price of oil trending up.

2. Fundamentals: Global economy/recovery/supply and demand: this is a mixed bag. There are arguments for both continuing recovery or a continued meandering along. Expectation: price of oil should stay relatively flat while this is sorted out. What are we seeing? Price of oil trending up. Does this suggest that the price of oil reflects optimism for a global recovery?

I'm not so sure. I think there may be a third factor, a temporary factor for now, but possibly a long term factor.

3. Policy: The third factor: the administration's knee-jerk reaction to suspend all new drilling operations in the gulf (as well as in Alaska, I believe). Unless I'm missing something, I can't imagine taking this much "new" oil off the market would have no effect on the price of oil going forward. We won't see the decrease in production of oil from the gulf for six months (all things being equal) since this moratorium only affected new drilling. But it's often said that the market reflects expectations six months out.

Regardless of how this plays out, most would agree that the cost of deep water drilling will increase going forward. New regulations, but worse, possibly raising caps on liability will certainly raise the cost of deep water drilling. The price of oil will rise due to these policy changes.

What does this mean for the Bakken? It hardly needs saying but this all suggests good news for the Bakken. Until/unless the EPA gets authority to regulate fracking nationwide, the cost of extracting oil from the Bakken should not change a whole lot.

I haven't watched CNBC in weeks. Today (Monday, June 14, 2010), I just happened to tune in for a few minutes and caught Castellini recommending six energy stocks, including WLL and BEXP (Bakken) and EOG and St Mary (Eagle Ford in Texas). I believe Castellini was pushing natural gas as much as oil. This is a nice way to think about it to keep it simple: the biggest oil find in decades in America -- the Bakken; the biggest gas find in decades in America -- Eagle Ford Shale in Texas.

In addition to WLL, BEXP, EOG and St Mary, Jerry Castellini also favors Southwestern Energy and Ranger Resources. 

This is a very random blog I happened across while googling "Eagle Ford St Mary" -- I haven't explored the blog, but it might be worth a second look.