Update
June 27, 2011: EOG's CEO Mark Papa responds also. The article in question was outdated and used unnamed sources. Great opportunity to buy shares in natural gas companies during the pullback. CHK's CEO will be on James Cramer's "Fast Money" on Tuesday, June 28, 2011.
Original Post
A big "thank you" to "anon 1" to alerting me to Chesapeake's response to this article. The following is just the beginning of their response:
Over the weekend The New York Times published this story on how the business of drilling natural gas out of shale is some sort of ponzi scheme, even Enron-like. The article suggested that there’s really not as much gas in these plays as the industry wants us to believe, that companies are making false claims about the productivity of wells, and that the costs of extracting the gas might be so high as to not be economic.This reminds me of DKRW talking about a shortage of natural gas last year. They never responded to my queries, but today I see they have changed their mission statement regarding natural gas:
Most of this argument is absurd on its face. The United States is currently producing more natural gas than at any time in history, on track for 27 trillion cubic feet this year. This is thanks in large part to the breakthroughs in drilling shale formations. And development of these shales has only just begun. In fact, gas is so plentiful in the U.S. right now that companies like Cheniere Energy have gotten the green light to start exporting it.
The shale play that started it all, the Barnett of northern Texas, is today producing more than ever (5.6 billion cubic feet per day) despite there being half as many rigs working the land than there was two years ago (when production was 5.3 bcfd). As analyst Dan Pickering of Tudor, Pickering & Holt wrote in a note this morning, “If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count.”
The most conservative estimates of North American natural gas supply shows a serious increase in production for the foreseeable future. With US supplies increasing and relative prices decreasing, DKRW believes Mexico will be a prime beneficiary of this cheap energy source.This is what DKRW was saying on their website just one year ago:
To meet the need, DKRW along with our partners, is developing the Sonora Pacific Energy Hub in Puerto Libertad, Sonora, Mexico. Cooperation with the Sonora State government in the development of its energy infrastructure will ensure a long-term clean supply of energy that can displace less environmentally friendly forms of energy currently utilized in Sonora, and also fuel economic growth in the region.
The most conservative estimates of North American natural gas supply demonstrate a serious shortfall in production for the foreseeable future. With short supply driving prices higher, we are now seeing some of the highest natural gas prices in the world here in the Southwestern United States and Mexico. With so much of our energy infrastructure and industry tied directly to natural gas, it is necessary to identify and deliver more competitive supply options in order for the US and Mexican economies to grow.That was not true then. DKRW finally changed their website to match reality.
I can't make this stuff up.
Well, the nyt certainly struck a nerve.
ReplyDeleteI must say though that as far as I can tell, the chk "response" failed to address the central thesis of the nyt article namely that shale gas may not be economic.
Highlighting production rates while downplaying decline rates and market prices as the response does avoids the question. Anyone can sell dollar bills for fifty cents and generate a lot of sales. Profit is the question and to me it is still an open question. My favorite line from the response is "MOST" of the article is "absurd...". Oh really. Does that mean that some of the article isn't absurd? Chk could use some serious pr help or better yet, stop the whining and arm waving and lay out the economic case for shale gas in simple terms.
The number crunching began with 2009 figures. CHK has a forward P/E of 9 (very low) and an operating cash flow of $5 billion (annually). For comparison, one of my favorite companies, AAPL, has a forward P/E of 12 (higher than CHK) and an operating cash flow of $26 billion. EOG has a forward P/E of 16, and a cash flow of $3 billion.
ReplyDeleteSo, whatever CHK and EOG are doing with uneconomical natural gas, they are doing a pretty good job.
Having said that, I didn't question the economic side of the report; I've also wondered about the ridiculously low price for natural gas.
But this is what shocked me:
"...analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves."
Anyone who has been following the natural gas story has seen how much natural gas is being produced, and that's the reason for the absurdly low price.
So, I won't argue the economics -- it is tough with natural gas at these low prices, but saying their amount of natural gas reserves are overstated is what got my attention.
So, we will see.
What eog is doing is focusing on liquids and away from gas. The gas eog sells is mostly that produced with the oil.
ReplyDeleteMy point was that the chk response didn't address the issue raised which was to question the economics of shale gas. Further, the response didn't counter any of the emails authenticity or even context or defend the reserve estimates. Rather, the response answered a question that was not asked namely that a lot of gas is being produced. I thought the response was weak and not on point.
Like duh! Even if a lot of wells peter out the price of natural gas would rise. The Baaken and Eastern Rockies formations are a byproduct of the Yellowstone Park caldera. Basically, Yellowstone Park tends to explode once every six to eight hundred thousand years with the last really big explosion two million years ago. The mantel of the earth at Yellowstone (and Hawaii and Alaska's Aulution Islands) is shifting east relative to their calderas.
ReplyDeleteThis leases the smaller eroded western islands in Alaska and Hawaii. In the case of Yellowstone you have the Snake River Basin going almost to the Pacific before there are some pressure ridge mountains. The Snake River basin is the result of the Yellowstone Caldera repeatedly exploding for at least the last fifteen million years.
So what does the Old Faithful geyser have to do with Bakken oil? The Yellowstone Caldera heats the geysers and such in Yellowstone. When it blows it shoots huge quantities of ask into the air. On show that I saw said that a repeat of the smaller explosion 600K years ago would drop six feet of ash directly from the sky over western North Dakota. Figure a far larger watershed and you can easily get twenty feet of this fine ash.
This makes for an excellent "impermeable layer". You have this every six to eight hundred thousand years with organic sediment in between.
There may be some very speculative venture capital operations trying to get into the new gas play. As Warren Buffet likes to say "First you get the Innovators, then you get the imitators, then you get the idiots". That said, there are a lot of long-term players and deep-pockets in the new gas plays. The head of Exon is on a commercial I see often which predicts a century of natural gas.
A lot of oil "prognosticators" are like day traders. Short term thinkers. Many know conventional oil well but this can make then like the generals fighting a current war with the last war's playbook.
That said, I have no investments in anything related to any energy now.
On a lark I looked up the deepest well drilled in North Dakota. 15,380’ http://www.rmoj.com/ or
ReplyDeletehttp://webcache.googleusercontent.com/search?q=cache:x62YIN-wXeQJ:www.rmoj.com/+deepest+North+Dakota+well&cd=3&hl=en&ct=clnk&gl=us&source=www.google.com
"This well bottomed in the Cambrian Deadwood at a depth of 15,059’ and produced more than 117 k bo from the Birdbear and 1,092 bo from the Duperow. This crude is coming from the overall interval at 11,348’– 11,610’. It is interesting to note that this is the fourteenth-deepest vertical well ever drilled in the state of North Dakota, the deepest being 15,380’.
Enterprise adds a sixth natural gas liquids fractionator to Mont Belvieu complex to support Eagle Ford production, June 27, 2011. I doubt they are doing this to lose money.
ReplyDeletehttp://www.pennenergy.com/index/petroleum/display/3982686521/articles/pennenergy/petroleum/refining/2011/06/enterprise-to_add.html?cmpid=EnlDailyPetroJune282011
With regards to Greg's point above about ExxonMobil (XOM). XOM has been very, very prescient about energy going forward over the years; they made public their intention to move into natural gas when others were moving away (due to low price). XOM isn't investing in natural gas to lose money.
ReplyDeleteAgain, the New York Times/MSNBC article seems very much an outlier to what the industry is doing.
Greg's link to the deepest well drilled in North Dakota is very interesting.
ReplyDeleteI have posted it as a stand-alone post, and also linked it at the sidebar at the right, way down on the bottom, under trivia, for future reference.
Unconventional oil needs a market price of from 50$ to 70$ depending on the company to be profitable. I don't recall and shale gas company naming an equivalent gas price. Also I still have not seen anything approaching a direct response to the content of the nyt article. Just a lot of adjectives. In addition to the emails, the fact remains that the decline curve(s) for shale gas are not proven over a long period of time. The gas cos may have it right but they may not which is the whole point of the article that remains unchallenged. Gas price increase if it happens could make up any difference. Again, no economic analysis/forecast has been released. Stating that companies do not invest intending to lose money is not a substitute for eng and financial analysis. Looks to me like nyt has it right. At least with sub 5$ gas at the market. Oh well, there is always the govt bailout option.
ReplyDeleteOne should look at the corporate presentations regarding the cost of extraction for oil from the Bakken and then re-check the $50 - $75 figures.
ReplyDeleteHess: "the Bakken is robust at $40."
http://milliondollarway.blogspot.com/2010/10/flashback-hess-4q2009-bakken-is-robust.html
Annual reports from natural gas companies discuss costs. It's been my contention that if natural gas hits $5.00 these companies will do very, very well. At $4.00 they are doing okay. But not as well as they could be doing with oil and that's why they are shifting to oil.
Again, except for one outlier (the NY Times/MSNBC article, everything else suggests the "big boys" know what they are doing with regard to natural gas.
I will be continuing the discussion elsewhere, but no longer in the comment section.