Futures Are Still Green; Idle Rambling On EOG's UBS Presentation

It's hard to believe that after that tremendous run-up we had today, futures now are still green, albeit not by much. Dow futures are up 17 and NYMEX oil is up about 14 cents. I expect these to change significantly when the market opens, but if they hold, it will be quite remarkable.

Of course, we will  have first time unemployment claims data tomorrow, but after last week's mockery of the process, it's hard to even pay attention to whatever the government reports. It almost appears as if the market is becoming more and more disconnected to government reports. The market will respond to actions: like it did today when the Fed took no action to taper.

On another note, if you haven't looked at the EOG transcript of the UBS presentation, it's a good one. Pay close attention to the discussion and Q&A on completion technology being used by EOG; it's quite sensational.

When the Bakken boom began (on the North Dakota side of the basin), folks talked about 1 - 3% recovery rates. Based on what I was seeing, and hints provided by some operators, I opined that recovery rates were probably about 5%. I think a recovery rate of 5% was about as high as anyone thought operators could get in the Bakken with current technology in the first two decades of the 21st century. There were hints that some operators were getting 8% (and I think I blogged about that but cannot remember). But now, EOG clearly states they are getting 8% recovery.

This is one of the reasons I've always felt that the concern mineral owners had for "wasteful" flaring was misplaced. For every $30,000 in crude oil operators are bringing up, they are bringing up $30 worth of natural gas (don't take that out of context; due to high NGL's in Bakken oil, the flared gas is worth more but based on what gas processing plants are paying for natural gas at the wellhead I'm probably not too far off). [Disclaimer: I often make simple math errors, but I posted that data about a week ago and no one has corrected me on it.] Even if my figures are way off, the point is that mineral owners are getting thousands of dollars for crude oil vs tens of dollars for natural gas, and yet some mineral owners are concerned about that waste.

But think about this. If your operator is not EOG, and your operator is getting 2% recovery, or 3% recovery, think what your royalties would be if your operator was EOG and was getting 8% recovery.

It's hard for me to argue against the success of many of the other operators in the Bakken, but EOG seems to have really thought this through. They saw the pipeline constraint and were the first to build their own CBR loading facilities. I remember folks saying that rail would only be temporary. EOG now says rail will be permanent.

In today's transcript, an analyst was surprised to hear that EOG didn't see a huge differential between rail and pipeline transportation. Think about this. Put the differential at whatever number you want. Now imagine that there was no rail, only pipeline, and your product was trapped in Mountrail County and couldn't get out because there was not enough pipeline capacity. Whatever differential you placed on rail/pipeline sort of pales in comparison to the alternative. Also note that at the time EOG was building that Stanley CBR terminal, Bakken oil was priced about $60 - $75/bbl. Now, Bakken approaches WTI which approaches Brent which approaches $110/bbl. The point is: sometimes folks focus on one data point a little bit too much. It's the entire operation.

And speaking of the entire operation, EOG saw another chokepoint: sand. They wanted to control their own destiny and they now own their own sand, much of it in Wisconsin. And they take it seriously. They have a 20-year supply of sand, and plan on replenishing their supply to keep a 20-year supply. It was also interesting to hear that different "kinds" of sand are now used in combination to get a better result. I was aware of that up to a point, but to the extent that EOG talked about it caught my attention.

By the way, what does that little data point tell you, that EOG has a 20-year supply of sand? It tells me they plan to be fracking for 20 more years in the Eagle Ford and the Bakken.

And, if that's not enough, EOG also controls all their own fracking.

Oh, on the safety of railroad cars. EOG has very little capital invested in rail tank cars; the company will deal with new safety standards just fine. EOG occasionally has an excess of rail; when they do, they will ship third party crude oil.

Hey, by the way, the nominee to be the new FERC chairman doesn't seem to be very friendly to the industry; that's a bigger concern than several other issues that analysts raised.

Note the downspacing EOG is testing in the Bakken: 160 acres.

Also, note something that I said a long, long time ago: EOG says the farther away the end of the horizontal is from the vertical, the more difficult it is for effective fracking. I would expand on that but I'm getting out of my comfort zone.

That's all from a layperson's perspective, from someone who probably understands about 1% of all that is going on in the Bakken.

I can hardly wait for tomorrow's news stories. Good luck to all.

For the roughnecks out there whose wife or girlfriend is named Diane:

Oh,Diane, Fleetwood Mac

Wow, they were young when they were at the top of the charts. My wife saw them in concert in Los Angeles. That was far away, and a long, long time ago.

NOTE: after I wrote that stuff up above about EOG, I noted this article at Motley Fool: this oil company is printing money.

What's the quickest way to double an investment these days? Well, according to EOG Resources it would be to drill for oil. The company is enjoying a direct after tax rate of return averaging 100% pretty much every single time it puts a drill bit into the ground.

Over the next four years the company sees this high margin oil production delivering a big growth in earnings and free cash flow. Those funds will be used for healthy annual dividend increases as well as an acceleration in its high rate-of-return drilling program. Let's take a closer look at why EOG is just printing money these days.

Disclaimer: this is not an investment site. Do not make any investment decisions based on what you read here or what you think you may have read here.