The guys with best understanding of managing oil well blowouts want to keep the cap in place now that the new cap has stopped the oil leak (apparently there are now indications that oil is "seeping" from the capped well so this story is not over yet). It was to be a temporary cap until the relief well is completed; that relief well, apparently, is about a month away from reaching its objective. (An earlier story said the relief well was only days away, so who knows what the real story is?)
The Coast Guard wants to remove the cap to allow oil to go to the surface where skimmers (now that they are in place and providing lots of jobs for folks, as well as for the Coast Guard) can continue to remove the oil.
Apparently the Coast Guard is concerned that if the well is successfully capped, this will no longer be a front-page story.
I can't make this stuff up.
(Actually, it's much more complicated than I'm suggesting, but their seems to be too many chefs in the kitchen. Or is it too many chefs stirring the pot?)
Update, July 19, 2010: for now, the chief chef ("the Feds") have allowed the cap to stay on. I have kind of lost track who's in charge here.
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Sunday, July 18, 2010
Wall Street Journal, Page 1: North Dakota Highways
Of all the states in the country to talk about road repair, it is interesting that it was North Dakota that was featured in this story about crisis in road maintenance. I can only assume the Wall Street Journal reporter was in North Dakota to cover other stories, perhaps the oil industry, eh?
If so, the reporter was in Jamestown, ND, nowhere near the oil activity so someone must have gotten lost. More likely they flew into Fargo and drove a rental car out west and got sidetracked by the big buffalo.
Whatever.
It's too bad all of the 2009 $878 billion stimulus money didn't go toward highway and road maintenance around the country. Imagine all the jobs, and the flow of those dollars through the economy. The money would have paid workers, would have bought new machinery, and would have bought raw materials from suppliers in this country, not from overseas.
The dollars used to buy machinery would have gone to workers in the rust belt and stimulated that part of the economy. Certainly, the bill could have mandated that stimulus dollars be spent at heavy construction equipment factories actually physically situated in the US, regardless of ownership, foreign or domestic.
Those workers might have been able to keep up with their mortgages.
Whatever.
It's my myth that most of the stimulus money maintained overstaffed state government bureaucracies and agencies, and prolonged the inevitable (at some point the money would run out). But everyone has his or her own myth with regard to the stimulus. As JRR Tolkien has said, we all have our myths, and once we have them, they are unlikely to change.
Regardless, North Dakota is again on the front page of the Wall Street Journal.
Kewl.
If so, the reporter was in Jamestown, ND, nowhere near the oil activity so someone must have gotten lost. More likely they flew into Fargo and drove a rental car out west and got sidetracked by the big buffalo.
Whatever.
It's too bad all of the 2009 $878 billion stimulus money didn't go toward highway and road maintenance around the country. Imagine all the jobs, and the flow of those dollars through the economy. The money would have paid workers, would have bought new machinery, and would have bought raw materials from suppliers in this country, not from overseas.
The dollars used to buy machinery would have gone to workers in the rust belt and stimulated that part of the economy. Certainly, the bill could have mandated that stimulus dollars be spent at heavy construction equipment factories actually physically situated in the US, regardless of ownership, foreign or domestic.
Those workers might have been able to keep up with their mortgages.
Whatever.
It's my myth that most of the stimulus money maintained overstaffed state government bureaucracies and agencies, and prolonged the inevitable (at some point the money would run out). But everyone has his or her own myth with regard to the stimulus. As JRR Tolkien has said, we all have our myths, and once we have them, they are unlikely to change.
Regardless, North Dakota is again on the front page of the Wall Street Journal.
Kewl.
ERF vs MDU
This is strictly for investors and probably of interest to very few. But in the process of updating my "investment links" at the top of the page, I stumbled on to something interesting: a natural comparison between MDU and ERF as potential investments.
I grew up with MDU; in fact, I worked for MDU one summer during my college years. I held MDU for many, many years, but finally sold it during the worst of the recession. MDU was one of the first investments I ever made. MDU's business model intrigued me: equal parts regulated and non-regulated, seen by many as a stodgy utility, but for those of us in the know, a company with significant growth potential.
I first stumbled across ERF only a couple years ago and traded in and out over the period of six months to a year for the distribution which it paid on a monthly -- yes, monthly -- basis. When Canadian laws changed concerning Canadian royalty trusts ("Canroys") investors were spooked. I stayed with ERF for awhile but took my distributions, sold and moved on.
ERF will transition to a dividend-paying corporation at the end of the year. Management assures investors the company will maintain the payout beyond 2011, and analysts see enough cash flow to cover the dividend through 2013, possibly through 2015.
So, if one has some money to invest in energy companies, and more specifically in exploration and production, and, then, even more specifically, how do ERF and MDU compare as investment opportunities?
Similarities (all figures rounded; based on Yahoo!Financial site)
This is what bothers me about ERF:
I grew up with MDU; in fact, I worked for MDU one summer during my college years. I held MDU for many, many years, but finally sold it during the worst of the recession. MDU was one of the first investments I ever made. MDU's business model intrigued me: equal parts regulated and non-regulated, seen by many as a stodgy utility, but for those of us in the know, a company with significant growth potential.
I first stumbled across ERF only a couple years ago and traded in and out over the period of six months to a year for the distribution which it paid on a monthly -- yes, monthly -- basis. When Canadian laws changed concerning Canadian royalty trusts ("Canroys") investors were spooked. I stayed with ERF for awhile but took my distributions, sold and moved on.
ERF will transition to a dividend-paying corporation at the end of the year. Management assures investors the company will maintain the payout beyond 2011, and analysts see enough cash flow to cover the dividend through 2013, possibly through 2015.
So, if one has some money to invest in energy companies, and more specifically in exploration and production, and, then, even more specifically, how do ERF and MDU compare as investment opportunities?
Similarities (all figures rounded; based on Yahoo!Financial site)
- They are both mid-cap companies, with almost identical market caps: MDU, $3.6 billion; ERF, $3.9 billion.
- They both have similar amounts of cash: MDU, $107 million; ERF, $80 million.
- Their debt diverges a bit: MDU, $1.5 billion; ERF, $0.5 billion.
- They both have similar operating cash flows: MDU, $680 million; ERF, $770 million.
- They both have similar number of shares outstanding: MDU, 190 million; ERF, 180 million.
- Even their share prices have been almost identical this past year, in an $18 - $24 trading range.
- Their business models could not be more different. One is a pure E&P company with a history of maximizing cash returns to its shareholders (ERF); the other is a conservative conglomerate with a fairly stable regulated division, and several divisions greatly impacted by the American economy, not just regionally (MDU).
- Most analysts agree that the price of oil and natural gas will trend higher over the intermediate term. Everyone agrees that there is a chance that the current global recession / downturn will last longer than expected. The only disagreement is how great that chance is.
- MDU will remain the company it is. Investors can look at history of MDU and come to their own conclusions about its prospects for growth
- ERF is changing dramatically. It is a fact that it will transform from a royalty trust to a dividend-paying corporation at the end of the year. Its most recent presentation suggests that it is going to aggressively grow its oil and natural gas production.
- MDU has a longer history and one can get a gut feeling for MDU's growth potential based on the past. I personally don't see significant growth. MDU appears to going after the Niobrara to make up for missing the Bakken, but is it too little too late? It's construction and materials divisions are greatly affected by the economy and I don't see any great shakes there. Even worse, the stimulus money -- remember the $1 trillion (actually $878 billion) Obama-Reid-Pelosi stimulus? -- has pretty much run its course. The good news over the years for MDU investors has been the fact that MDU is a conservative company; the bad news for investors is that MDU is a conservative company; perhaps that's why they missed the Bakken.
- I don't know that much about ERF, having only discovered it about three years ago, compared to 30 years of familiarity with MDU. But ERF seems to have "risk" and "growth" in its blood and that comes across in its most recent presentation.
- On growth, I give the edge, by quite a margin, to ERF. ERF's quarterly growth earnings, year over year, is 50%. MDU's quarterly growth earnings are N/A. Those numbers have to change going forward; ERF will have to work to maintain that rate; MDU can't do much worse.
- This one is pretty easy. MDU will stay in the same range -- paying about 3.2 percent.
- Likewise, for ERF, this is pretty easy. For the short term. ERF currently pays about 9 percent and management says it will continue this payout beyond 2011. Analysts agree that ERF has the cash to maintain that payout. However, E&P in the Bakken is a capital intensive industry and ERF may find that it needs to reconsider that philosophy. At worse, it will raise more money through public stock offering, diluting current value. It won't be the first Bakken company to do this. BEXP is famous for doing this, and even the most conservative, high profile Bakken company, CLR, just announced a $1.3 billion loan.
- For dividends then, I give the edge, again, by quite a margin to ERF, at least for the next two years. Investors will get their dividends, but share price could be diluted if ERF needs to raise cash for CAPEX; or, ERF could take on more debt.
- At some point MDU will again be the company for conservative investors with a long-term horizon but I don't think that moment is here yet. We need to see confirmation that global recovery is real, and then confirmation that the American economy will participate. Regionally, MDU is well positioned.
- ERF just has a lot of excitement associated with it. But excitement usually means risk. The high dividend payout protects share price to some extent. It appears that like BEXP, WLL, and CLR, ERF has "risk" and "growth" in its blood.
This is what bothers me about ERF:
- ERF will soon be a dividend-paying corporation in a very capital-intensive industry. I'm at a loss to find another mid-cap E&P company that is able to pay this high a dividend as well as promote an aggressive drilling program. Perhaps ERF's emphasis will continue to be on current income and not necessarily growth: a trust in corporation clothing?
- ERF transitions to a dividend-paying corporation just as US tax law is changing and will be more punitive toward dividends. I don't think the "no new taxes for those with incomes less than $250,000" mantra will pertain to dividends or capital gains.
- ERF is exposed to natural gas as much as oil. The North American continent is swimming in natural gas. Margins for natural gas are simply not as great as those for oil.
- ERF is heavily exposed to Marcellus. Its most recent presentation emphasizes the Marcellus and I think there is real risk of a drilling moratorium there in light of recent events.
- That risk is offset by ERF's oily footprint in North Dakota, albeit relatively small, and its oily footprint in Canada.
- Somewhat off-topic, but relevant to the discussion is the capacity to bring Canadian oil to American refineries. That appears not to be an issue. The TransCanada Pipeline announced its first delivery this past week at its terminus in Illinois. The TransCanada Keystone XL project remains on schedule despite some political maneuvering which could slow it down.
How Big Is the Bakken Impact On Williston?
The Williston Basin, the oil basin that includes the prolific Bakken formation, was named after Williston, North Dakota (USA).
Williston is located about as far west as possible and still be in North Dakota; it is 18 miles from the Montana border. It is often said that Williston is not at the end of the world, but you can see the end of the world from Williston. Yes, it's pretty remote.
Williston is the ninth-largest city in North Dakota, with about 13,000 people. Fargo, the largest has 100,000 and Bismarck has nearly 61,000 people. Fargo's metropolitan area population is considered to be about 200,000.
But the most recent data (first quarter, 2010) revealed that Williston was now number three in North Dakota in taxable sales and purchases, surpassing Minot and Grand Forks. Minot's population is about 37, 000 and the Grand Forks metropolitan area population was over 97,000 in the 2000 census.
Local folks expected taxable sales in Williston to exceed those of Minot, but they did not expect sales to exceed those of Grand Forks. I, too, find that incredible. Williston, with a population of 13,000, has sales that exceeds that of a city with almost 100,000.
Williston is located about as far west as possible and still be in North Dakota; it is 18 miles from the Montana border. It is often said that Williston is not at the end of the world, but you can see the end of the world from Williston. Yes, it's pretty remote.
Williston is the ninth-largest city in North Dakota, with about 13,000 people. Fargo, the largest has 100,000 and Bismarck has nearly 61,000 people. Fargo's metropolitan area population is considered to be about 200,000.
But the most recent data (first quarter, 2010) revealed that Williston was now number three in North Dakota in taxable sales and purchases, surpassing Minot and Grand Forks. Minot's population is about 37, 000 and the Grand Forks metropolitan area population was over 97,000 in the 2000 census.
Local folks expected taxable sales in Williston to exceed those of Minot, but they did not expect sales to exceed those of Grand Forks. I, too, find that incredible. Williston, with a population of 13,000, has sales that exceeds that of a city with almost 100,000.
ERF -- another Bakken Play
Background: I don't own any shares in Enerplus Resources (ERF), a Canadian royalty trust ("Canroy") but I have traded ERF in the past couple of years for the dividend. When I last sold whatever ERF holdings I had, I moved on and sort of just forgot about ERF. Enerplus is a royalty trust and I remembered, but forgot the details, that Canada was changing their tax laws regarding royalty trusts. The announcement spooked investors, and I just sort of forgot all about it when I last sold ERF.
Tonight, while updating my "investment links" at the top of my web page, I thought again of ERF (I guess, sort of like thinking of an old girl friend -- or boy friend for the women you might be reading this) -- and wondered whatever happened to ERF.
So, I took a look. And, lo and behold, there's a July 9, 2010, commentary on Seeking Alpha.com about ERF.
Conversion: Yes, ERF will convert from a royalty trust to a dividend-paying corporation at the end of the year, but the company expects to maintain its current payout, but now as a dividend instead of a distribution. The company has enough cash reserve and operating cash flow to maintain that payout to at least sometime between 2013 and 2015 (that seems like quite a long period of uncertainty -- 2013 to 2015 -- but whatever).
I could be wrong, but I believe the precipitous drop in share price in late 2008/early 2009 was a combination of the decline in the market overall, as well as the change in Canadian tax law regarding trusts. Since then, the share price has remained in a trading range between $20 and $25 with a monthly distribution that equated to a 9 percent payout.
Obviously the transformation from a royalty trust to a corporation has been priced into the share price and, all things being equal, one would not expect a significant share price change going into 2011.
The Bakken Connection: It was interesting to note that the Seeking Alpha commentary said that ERF's holdings in North Dakota appear not to be priced into its current share price. The author says that ERF holds 180,000 acres of tight oil land in Saskatchewan and North Dakota, according to their July, 2010, corporate presentation. (I believe "tight" refers to the geology of the Bakken formations, but I could be wrong.) For comparison, Whiting has 87,000 net acres in the Sanish and Parshall oil fields in North Dakota. Continental Resources has 775,000 net acres in the Bakken (North Dakota and Montana). Most (all?) of ERF's North Dakota Bakken acreage is inside the Fort Berthold Indian Reservation.
Unintended Consequences: If the tax benefits to dividends go away at the end of the year for US taxpayers, it is ironic that ERF would be converting to a dividend-paying corporation at this moment. Of course they did so as a response to Canada's new (punitive) tax policy on royalty trust. This just goes to show that a) you can't outfox taxing authorities; and, b) what makes sense one year, may not make sense the next year due to unforeseen policies. (By the way, that's one reason the job market and the stock market are, respectively, in the doldrums and volatile: corporations are hesitant to add new employees or expand when they don't know what Congress is going to do next, especially with an anti-business administration in power.)
Weyerhaeuser (WY) is doing just the opposite in this country: at the end of the year WY will be converting from a dividend-paying corporation to a real estate investment trust (REIT). This is something their investors had been requesting for quite some time, but I think the timing had to do with expected tax changes going into 2011 in our own country.
With taxes going up on dividends, for some folks distributions from trusts make more financial sense.
Risks: It looks like ERF is about 50/50 oil/natural gas. Natural gas has been a laggard in price appreciation compared to oil. The good news is that ERF has entered into the Marcellus in a big way; it is very productive. The bad news is that ERF has entered into the Marcellus in a big way; threat of EPA or state moratorium on drilling. Offsetting that, of course, is the fact that ERF has significant holdings in western Canada. At the moment, Canada seems to have a more favorable business climate than the US.
The break-even point for Marcellus natural gas is about $3.85; natural gas is priced at about $4.50 right now. To me that is not a huge spread compared to oil which has a finding/production cost of under $20/bbl for most companies (it seems) and price of oil is consistently above $40/bbl for Bakken after taking out transportation discounts, etc. Again, my strong point is not financials, and I may be completely wrong on this.
Bottom line: For me personally, there seems to be plenty of places to invest for the dividend that doesn't involve the transformation of a company, unless of course, the SeekingAlpha author is correct and ERF has some significant growth opportunities. I like the fact that ERF is moving into the Bakken, and I like the fact that ERF is positioned in Canada, which seems a bit more stable than America right now with regard to energy policy. I am concerned about the Marcellus shale story and risk of continued or new moratoriums.
But I hope I remember to watch it closely. If I remember, I will keep provide updates. The Yahoo!Financial ERF message boards are not particularly enlightening; I always appreciate feedback.
Be that as it may, I've added it to my "investment links" at the top of the page to remind me to check in on ERF once in awhile.
Trivia: Thinking back on ERF reminded me of Harvest Energy Trust. Harvest, another Canadian oil trust (another "Canroy"), paid distributions as high as 16 percent but was bought out by the Korean National Oil Corporation in 2009.
Tonight, while updating my "investment links" at the top of my web page, I thought again of ERF (I guess, sort of like thinking of an old girl friend -- or boy friend for the women you might be reading this) -- and wondered whatever happened to ERF.
So, I took a look. And, lo and behold, there's a July 9, 2010, commentary on Seeking Alpha.com about ERF.
Conversion: Yes, ERF will convert from a royalty trust to a dividend-paying corporation at the end of the year, but the company expects to maintain its current payout, but now as a dividend instead of a distribution. The company has enough cash reserve and operating cash flow to maintain that payout to at least sometime between 2013 and 2015 (that seems like quite a long period of uncertainty -- 2013 to 2015 -- but whatever).
I could be wrong, but I believe the precipitous drop in share price in late 2008/early 2009 was a combination of the decline in the market overall, as well as the change in Canadian tax law regarding trusts. Since then, the share price has remained in a trading range between $20 and $25 with a monthly distribution that equated to a 9 percent payout.
Obviously the transformation from a royalty trust to a corporation has been priced into the share price and, all things being equal, one would not expect a significant share price change going into 2011.
The Bakken Connection: It was interesting to note that the Seeking Alpha commentary said that ERF's holdings in North Dakota appear not to be priced into its current share price. The author says that ERF holds 180,000 acres of tight oil land in Saskatchewan and North Dakota, according to their July, 2010, corporate presentation. (I believe "tight" refers to the geology of the Bakken formations, but I could be wrong.) For comparison, Whiting has 87,000 net acres in the Sanish and Parshall oil fields in North Dakota. Continental Resources has 775,000 net acres in the Bakken (North Dakota and Montana). Most (all?) of ERF's North Dakota Bakken acreage is inside the Fort Berthold Indian Reservation.
Unintended Consequences: If the tax benefits to dividends go away at the end of the year for US taxpayers, it is ironic that ERF would be converting to a dividend-paying corporation at this moment. Of course they did so as a response to Canada's new (punitive) tax policy on royalty trust. This just goes to show that a) you can't outfox taxing authorities; and, b) what makes sense one year, may not make sense the next year due to unforeseen policies. (By the way, that's one reason the job market and the stock market are, respectively, in the doldrums and volatile: corporations are hesitant to add new employees or expand when they don't know what Congress is going to do next, especially with an anti-business administration in power.)
Weyerhaeuser (WY) is doing just the opposite in this country: at the end of the year WY will be converting from a dividend-paying corporation to a real estate investment trust (REIT). This is something their investors had been requesting for quite some time, but I think the timing had to do with expected tax changes going into 2011 in our own country.
With taxes going up on dividends, for some folks distributions from trusts make more financial sense.
Risks: It looks like ERF is about 50/50 oil/natural gas. Natural gas has been a laggard in price appreciation compared to oil. The good news is that ERF has entered into the Marcellus in a big way; it is very productive. The bad news is that ERF has entered into the Marcellus in a big way; threat of EPA or state moratorium on drilling. Offsetting that, of course, is the fact that ERF has significant holdings in western Canada. At the moment, Canada seems to have a more favorable business climate than the US.
The break-even point for Marcellus natural gas is about $3.85; natural gas is priced at about $4.50 right now. To me that is not a huge spread compared to oil which has a finding/production cost of under $20/bbl for most companies (it seems) and price of oil is consistently above $40/bbl for Bakken after taking out transportation discounts, etc. Again, my strong point is not financials, and I may be completely wrong on this.
Bottom line: For me personally, there seems to be plenty of places to invest for the dividend that doesn't involve the transformation of a company, unless of course, the SeekingAlpha author is correct and ERF has some significant growth opportunities. I like the fact that ERF is moving into the Bakken, and I like the fact that ERF is positioned in Canada, which seems a bit more stable than America right now with regard to energy policy. I am concerned about the Marcellus shale story and risk of continued or new moratoriums.
But I hope I remember to watch it closely. If I remember, I will keep provide updates. The Yahoo!Financial ERF message boards are not particularly enlightening; I always appreciate feedback.
Be that as it may, I've added it to my "investment links" at the top of the page to remind me to check in on ERF once in awhile.
Trivia: Thinking back on ERF reminded me of Harvest Energy Trust. Harvest, another Canadian oil trust (another "Canroy"), paid distributions as high as 16 percent but was bought out by the Korean National Oil Corporation in 2009.