Saturday, June 14, 2014

Random Note On American Eagle Operations In Far Northwest Corner Of North Dakota -- Happy Father's Day

I haven't linked articles from Petroleum News in quite some time, and now, all of a sudden, two different readers have each sent me an article from the Petroleum News. I linked the first one earlier; this is the second one.

Petroleum News is reporting that American Eagle is puzzled by a Three Forks well on the MT/ND border as other operators begin operations within Divide County:
An unusually high water cut and some chemical emulsion issues have brought fluctuating oil rates for American Eagle’s test well in Flat Lake East field along the North Dakota and Montana border in northwest Divide County.
The Haugen well, which targets the Three Forks formation, gained much of the attention in a May 14 first quarter conference call with analysts. The well has produced 60 to 192 barrels of oil estimated per day, boepd, so the company is still evaluating the well to determine the how much of a prospect the Three Forks really is along that western edge.
“There is nothing unusual about the proppant flowback,” said Tom Lantz, American Eagle’s chief operating officer. “So the only distinction out there is the water salinities are slightly higher, about 10 percent higher than other parts of the field. But we’re doing some further analysis on that and will find out how significant that is and how much that’s affecting oil fluctuations.”
American Eagle found the upper Three Forks to be slightly thicker than expected, but said it still looks very similar to what the company has seen on other wells, giving no indication of why it should be showing production fluctuations. Lantz said the company will review additional rock samples to see if there is a change in mineralogy that would explain the emulsion problem. 
Much, much more at the linked article.

The Haugen well they are talking about:
  • 27128, conf, American Eagle Energy Corporation, Haugen 15-12-163-103, Flat Lake East, a Three Forks well, confidential, but the well reported "runs" of 1,351 bbls of oil in April, 2014, the first month production was reported.
A Note to the Granddaughters

In early July, we plan to take a cross-country trip with the two granddaughters from Dallas to Los Angeles with a side-trip to the Grand Canyon.

I am starting to get my summer library ready for the road trip. I've been looking at the 2014 hard-cover, Supreme City: How Jazz Age Manhattan Gave Birth to Modern America for several days now and finally decided to buy it at Barnes and Noble this evening. I was on my bike and my backpack was already quite full with the laptop computer but I had room for this very, very thick book (760 pages including index). And then, on the spur of the moment, as they say, I also bought the 2012 soft-cover The Plantagenets: The Warrior Kings and Queens Who Made England, by Dan Jones. The backpack was very, very heavy on the five-mile ride home but it as worth it.

Ever since my years in England, particularly the later trips, I have been fascinated by British history. If I don't read British history on a regular basis, I forget it, so I get quite excited when a new history comes out, especially a history written by someone other than Alison Weir who seems to have cornered the cottage industry on writing about British royalty.

On the other hand, I have had very, very little experience with New York City. I have spent very little time in New York City, perhaps measured in days, maybe weeks, but not even a full month over the course of my 60+ years of life. However, ever since the summer I spent in a suburb of New York City across the river in New Jersey, there is a special place in my heart for that city. I look forward to this book.

DNR's Current Corporate Presentation

Disclaimer: this is for my use only to help me understand this company. Feel free to read it but do so at your own risk; it is better if you go to the source document (linked below). I have a tendency to misread things and misunderstand things. I go through this exercise purely for my own benefit to try to get a better understanding of the oil and gas industry and to put the Bakken into perspective. 

Don sent me this link earlier: DNR's current corporate presentation (linked below).

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

Take a look at the presentation. I'm curious if readers, from an investment point of view, see the same thing that jumped out at me.

Here's the link to the pdf:

Some general observations and comments before I get to the point I eventually hope to make.

Denbury has an interesting niche in the oil and gas industry. I associate the name, right or wrong, predominantly with CO2 enhanced oil recovery, also known as tertiary recovery. I consider Denbury to be in a somewhat unique niche because I honestly cannot think of any "direct competitor" with Denbury. Fortunately, YahooFinance provides some (?) help. If the list is accurate, the list is short and unremarkable: Newfield; privately held Occidental Permian; Swift; and, .... that's it.

In a second database, YahooFinance lists a number of energy companies ranked by sales, but the list seems somewhat irrelevant.

So, now back to the presentation. 

I have looked at DNR presentations for the past couple of years. Maybe this was here all the time and I missed it. Maybe not; I don't know.

For investors, look at slide 4, the right side: income. "Estimated dividend yield of 1.5% for 2014 (this year) and 3.3% for 2015 (next year)." And the small print provides the details. The "mid-point" of guidance for the dividend is 55 cents. That suggests a $16.78 share price (which is stated in the small print). The company paid its first dividend in its history in February, 2014, (6.3 cents/share), and guidance suggests this will remain the quarterly dividend through 2014 (annual: 25 cents). That six cents/share per quarter represents a payout ratio of .... drum roll .... 6%. On slide 18, the company says that the company anticipates "sustained [dividend] growth thereafter]" following the huge dividend increase in 2015.

Oil companies are extremely capital intensive. When I see an oil company initiate a dividend it catches my eye, not from an investor's point of view, but simply as another data point as I try to understand the Bakken.

One could write quite a bit what it means when a company in a capital-intensive industry starts paying a dividend for the first time in its history, and what it means to double that dividend the following year. But I won't (write what I think it means.) It just seems fairly obvious.

I generally don't follow "payout ratios" (dividends) and operating cash flow / enterprise value, so I thought it would be interesting to compare a very small operator, some small to medium side operators and the three large operators.

The numbers below: operating cash flow/enterprise value; payout ratio

  • XOM: 10%; 34%
  • CVX: 15%; 39%
  • COP: 16%; 37%
  • EOG: 13%; 9%
  • KOG: 10%; N/A
  • OAS: 10%; N/A
  • TPLM: 7%/ N/A
And then compare those numbers with DNR's current numbers:
  • DNR: 14%; 6%
Again, this is not an investment site. Don't make any investment decisions based on anything you read here. In addition, I often make simple mathematical errors, and data from sources may be old or inaccurate.

Now, back to the presentation.

Slide 6: how does tertiary recovery compare to primary and secondary (waterfloods) recovery.
Of the original oil in place,
  • primary recovery typically recovers 20% (compare with what they say about tight oil, like the Bakken)
  • secondary recovery: 18%
  • tertiary recovery: 17%
For round numbers, each of the "components" recover about 20% of the OOIP. That speaks volumes about the potential of the Bakken.

Slide 7: EOR has targets in the Gulf Coast region; Wyoming; and, extreme southwest North Dakota extending into east-central/southeast Montana.

Slide 9:
  • the DNR target in North Dakota/Montana is the Cedar Creek anticline area, with an estimated slightly less than 300 million bbls through tertiary recovery 
  • all other DNR prospects in the Rocky Mountain region pale by comparison to the amount of recoverable oil in the Cedar Creek anticline
  • but they won't have their pipeline in place until 2021
Slide 20: DNR compares its 3.3% dividend with dividend of other oil companies (numbers rounded):
  • OXY: 3%
  • MRO: 2%
  • MUR: 2%
  • S&P 500: 2%
  • CHK: 1%
Slide 22:
  • the company will spend about $1 billion on CAPEX in 2014
  • the company will pay about $90 million in dividends in 2014
Slide 27 has too much detail to explain, but it provides the company's peak production rate in its various plays and the estimated time lines.
It appears that much of the tertiary production is yet to come; the peak years for much of this new production will be from 2020 to 2030, with one exception: Denbury does not expect to see first tertiary production in Montana/North Dakota (Cedar Creek anticline) until after 2020. Of all its prospects, the Cedar Creek anticline will also have a significantly longer lifetime of producing oil than any of the other DNR plays. It's a hard slide to understand at first, but if you spend some time with it, it suggests just how long the oil industry is going to be active in North Dakota/Montana.
There are some additional points I would like to make but they would be a bit beyond the scope of the original purpose for going through this exercise. For example, I purposely did not discuss the company's share repurchase program.

But there are many, many story lines that come out of this presentation that apply across the market in general and not just DNR or the oil and gas industry. They are "good news stories" for investors.

Architect's Drawing Of The New Williston High School

The architect's drawing of the new Williston High School:

The site also includes an incredible video. The video is incredibly accurate: few trees, a hallmark of western North Dakota. The video is inaccurate in one regard: the background needs to be peppered with oil-well pads.

A huge "thank you" to a reader for taking time to write / share this link with readers.

Irony In The Gulf; George Bush Heads Toward The Gulf

President Obama is in trouble in the Mideast.

I posted earlier -- I cannot make this up -- that he ruled out "boots on the ground," and he ruled out air strikes when originally requested by the democratically-elected and US ally, the Maliki/Iraq government.

Having ruled out the US Army and US Marines ("boots on the ground") and the US Air Force ("air strikes") I suggested, tongue-in-cheek, that President Obama was probably talking to his admirals over at the US Navy.

It turns out I wasn't wrong. LOL.

Yes, President Obama is calling on the US Navy.

Reuters is reporting:
U.S. Defense Secretary Chuck Hagel ordered an aircraft carrier moved into the Gulf on Saturday, readying it in case Washington decides to pursue a military option after insurgents overwhelmed a string of Iraqi cities this week and threatened Baghdad.
"The order will provide the Commander-in-Chief additional flexibility should military options be required to protect American lives, citizens and interests in Iraq," the Pentagon said in a statement.
It is NOT in the headline and it is not until the third paragraph that we learn that the aircraft carrier the president is calling upon is the USS George H. W. Bush: 
The carrier USS George H.W. Bush, moving from the North Arabian Sea, will be accompanied by the guided-missile cruiser USS Philippine Sea and the guided-missile destroyer USS Truxtun, the statement said. It added the ships were expected to complete their transit into the Gulf later on Saturday.
Such sweet irony.

Meanwhile, the USS Barack Obama is moving towards Hawaii.

On The Weekend That Iraq Implodes

President Obama:
And that, folks, is not humorous. But it is accurate. It is clear his itinerary is planned six months in advance and he will not let world events change his course.

Global Warming

This week's cover story, Time Magazine: "Scientists Said Butter Was They Enemy. They Were Wrong."

Time's cover story two years from now: "Scientists Said Global Warming Was Not Debatable. They Were Wrong."

This is probably one of the best articles I've read recently on Germany, global warming, and renewable energy. Unfortunately, I'm preaching to the choir. Unfortunately the congregation won't read the article. The Hindu is reporting: "Germany: the travails of renewable power."
Germany is indeed avoiding blackouts-by opening new coal and gas fired plants. Renewable electricity is proving so unreliable and chaotic that it is starting to undermine the stability of the European grid and provoke international incidents.
The spiraling cost of the renewables surge has sparked a backlash, including government proposals to slash subsidies and deployment rates” (DISSENT, 2013).
According to Financial Times (FT, January 7, 2014), “the brown coal electricity production in Germany rose last year to its highest level since 1990, despite the country's campaign to shift to green sources of energy.”
Bloomberg, the influential U.S. daily discovered that German Utilities are replacing lost nuclear power with “lignite, a cheap, soft, muddy- brown... form of sedimentary rock that spews more greenhouse gases than any other fossil fuel.” Greens are not amused by the energy shift to a lignite shift.
For all modes of power generation, capacity factor — CF (the amount of electricity, a generator produces in a year divided by the amount it will produce if it ran at full capacity for all 8,760 hrs a year) — is important. Typically during 2012, CFs (per cent) in Germany were, for solar: 11; wind: 17; fossil fuel: 80 and for nuclear: 94. 
This is a must-read, must-keep article. 

Musings On A Saturday Morning: Random Look At Some Big (On-Going) Developments In The North American Oil And Gas Industry


Three minutes later, 11:10 a.m. CDT: I give up. I quit. I can't keep up. I spend untold hours writing the best posts of any blog on the Bakken that has no advertising and no sooner than I get it  posted, than someone sends me another link that proves the point or makes the post seem outdated. No sooner do I post the "musings" below and then Steve sends me a link to an article on yet another Bakken pipeline, from Reuters:
Costar Bakken, LLC, is conducting a binding Open Season for a proposed gathering system in McKenzie County, ND. Upon the successful completion of the Open Season process, Costar will immediately begin construction of the pipeline and associated facilities.  Initial operations are expected to begin in the 4Q14. (That's later this year, folks.)
The crude oil gathering system will have initial capacity of 40,000 bbls/d and will gather crude oil for delivery to the Tesoro Logistics pipeline NE of Watford City, ND.  
The Bakken project represents a significant expansion of the company's asset base which includes current facilities in East Texas and the Permian Basin.  Nation-wide, Costar operates 100,000 Mcfd of gas processing capacity, 8,000 bpd of NGL fractionation capacity, 20,000 horsepower of compression and 30,000 Mcfd of gas treating capacity.
I'm just joking about quitting. This is too much fun. Wait until you see what is going to make activist environmentalists sick -- from a linked article that Don just sent me, but it's going to have to wait. The granddaughters are stirring and I have all day with them: breakfast at cafe next door; geometry lessons for older one; 3rd grade math for the younger one; science session; park; bike-riding; and pool. The parents should be home early (about 4:30 pm today) and then I will be free again. No more soccer this weekend; next weekend, two soccer games back-to-back.

Original Post

It is absolutely impossible for one person to keep up with all that is happening in the oil and gas industry in North Dakota. But with:
  • a focus on the Bakken to understand the US shale revolution;
  • a daily dose of RBN energy for "US Oil and Gas 101"; and,
  • random updates of oil and gas business news in the US --
one starts to get a feeling for the oil and gas industry in the US and how it is changing.

Elsewhere I follow the "Big Stories" from a global perspective, I suppose.

But right now, if I had to list the "Big Stories" that relate to the oil and gas industry in the US, off the cuff, and in no particular order, perhaps:
  • the three great shale plays: the Bakken, the Eagle Ford, the Permian
  • shale and non-shale oil plays to watch closely: Tuscaloosa, Niobrara, SCOOP, Mississippi Lime
  • natural gas plays: Marcellus, Utica; and how natural gas "plays out" this winter
  • new plays in the Rocky Mountains (see below)
  • all the new development along the Gulf coast (see below)
  • all the new pipeline activity (off the radar scope; the Keystone XL is an outlier)
  • understanding the condensate story and feeder stock (see below)
  • EOG to become #1 domestic producer in the US 
What got me to thinking about all this were three stories readers sent me this past week. 

First, this was certainly one of the more interesting stories. Petroleum News was reporting that one of the Slawson brothers has taken his money to form a second "Slawson" company. This company, called Slawson Energy, will focus on four new plays:
  • The "Northern Rockies": 23,000 "thoroughly researched" net acres "in a 35-foot thick, thermally-mature, overlooked region of the Bakken kitchen" that he brought with him through a negotiated buy back from SECI (the "original" Slawson Exploration company). Note: 35-feet thick is about the same thickness as the middle Bakken in North Dakota (on average)
  • SPR, Northern Rockies: 37,000 net acres on a tectonic trend of fractured limestone; also prospective for the Lodgepole and the Red River formations 
  • PRB Whitetail Minnelusa, Wyoming: a waterflood project in the Powder river Basin involving a single injection and a single producing well; looking at doubling primary production
  • South Texas: a "very interesting province" of overlooked combo targets involving Buda, Eagle Ford, Austin Chalk, and Pearsall formations; like the Bakken, the South Texas play has source rock that expelled oil into surrounding formations and thus multiple targets (this is the basis for redefining stratigraphic limits in the Bakken, first proposed by Harold Hamm)
The second story was reported, of course, at multiple sites. I will link Zack's. Enterprise Products inks huge ethane deal (before the Bakken, I didn't even know what ethane was important for, and had last studied it in organic chemistry in my second year of college):
Houston-based pipeline company, Enterprise Products Partners, L.P. (EPD) has declared plans to build its new ethane export facility on Houston Ship Channel. Enterprise Products inked a 30-year agreement with the Port of Houston Authority for using its facilities, which are next to the partnership’s existing terminal at Morgan’s Point.

The terminal is scheduled to come online in the third quarter of 2016.

Enterprise Products intends to build a pipeline from its Mont Belvieu, TX, natural gas liquids fractionation and storage complex, which will provide ethane for export. The export terminal is designed to have a capacity to load fully refrigerated ethane at about 10,000 barrels per hour.
The terminal with a capacity to load 240,000 barrels of ethane per day for export is believed to be the world's largest ethane export terminal.
Again, just in case you missed it, this will be the world's largest ethane export terminal in the world. In the world.

The third story was sent to me by one of three or four regular readers who always send me more links than I can possibly keep up with. I posted the story earlier, and said I would clean that post up, but I think I will leave the post as it is. It is the story of multiple Enbridge pipelines that will finally get western Canadian oil all the way to the Gulf coast. The stand-alone post is hereThere may be errors at that post, but a) the links are there for readers to come to their own conclusions; and, b) the story will become more clear as the weeks and months go by.

It is easy to become cynical when one reads all the stories about how the government puts up obstacles to growth (or however you want to frame the issue) but a) if it were easy, everyone would be doing it, creating even more problems (see below); and, b) all the obstacles give investors time to study the opportunities.

With regard to "if it were easy, everyone would be doing it," as much as I dislike the Bill-Gates-public-person and the Microsoft story, one has to admit, the PC industry was fortunate there was only one operating system when the fledgling industry got started. It was bad enough that Apple was confusing matters with its own operating system (and there were others) but can you imagine the disarray if there had been a dozen equal and competing computer operating systems in 1984? It would have been total chaos. It was the right thing, at the time, for the US to simply not look at the Microsoft Monopoly. Things worked out very, very nicely. Likewise, the oil pipeline story. For whatever reason, there were folks who slowed oil pipeline development, and that left a vacuum for rail to fill. But, the pipeline supporters kept working at it and, off the radar scope, or perhaps not seen on the radar scope because of the blinding light called "Keystone XL" others were able to dream and to proceed. Meanwhile it gave slower investors time to digest what was going on.

Perhaps it is only because I am too focused on the Bakken (and the oil and gas industry in general) that I think there is a lot more business activity than usual in the sector but it certainly seems to be true. I said that to Don yesterday to which he responded: when you have two to three million more barrels of oil per day being produced than several years ago in Texas and North Dakota, one has to improve the logistics to ship it, the terminals to store it, and the refiners to process it.

One last thought: we are at the beginning of the "manufacturing stage" in the Bakken, but as long as we still still single- and two-well pads, we are not quite there yet. I define the "manufacturing stage" in the Bakken when all drilling takes place on four-pad wells or better.

A Note to the Granddaughters

Saturday Morning, June 14, 2014: News And For Investors Only

The Wall Street Journal

A little late? Iraq's most influential Shiite cleric issued a rare call to arms to defend against attacking Sunni insurgents -- yes, the civil war begins.

White House (continues to) weigh military options in Iraq. One word: none.

School cutbacks weigh down Pennsylvania's GOP governor.

The IRS lost all (yes, "all") of Lois Lerner's e-mail in her computer crash of 2011. One "word": LOL.

Kurdish fighters succeed where Iraqi Army fails: Kurdish Peshmerga forces retook the oil-rich city of Kirkuk from Sunni militants who had routed Iraqi forces. The big story here: I had not see that Kirkuk had originally been involved. This is not good news. The Sunnis will be back. Maybe this is where President Obama will place his focus: but no "boots on the ground."

Refugee numbers in Iraq soar.

John Kerry: asking Iran for help in Iraq. US pipelines will have to wait.

White House: Ukraine rebels got tanks from Russia.

Joe Biden: mum.

The sudden escalation of tensions in the Mideast and an unexpected political upheaval helped drive US stocks to their first weekly decline in a month. Crude oil posted its biggest jump of the year. In fact, the market's decline was minimal, considering a) the huge run-up it had experienced; most analysts spoke of a bigger pullback prior to events; b) the fact that problems in the Mideast are just beginning; and, c) a whole bunch of other things.

GM announces more recalls. Now it's a half-million Chevrol Camaros after an internal investigation found the ignition switch is susceptible to being knocked out of the "run" position.

Heard on the street: Tesla's decision to open its patents up is a bold move -- but the competitive threat it faces demands such. Comment: this suggests to me Tesla is struggling.

The Los Angeles Times

The LA Kings take the Stanley Cup. At the moment, they are LA's most successful and best-run pro sports franchise.

Another small (3 - 4) earthquake reported in California, continuing a string of such reports over the past two weeks. Comment: there seems to be a correlation with fracking in the Bakken -- as the fracking increases in the Bakken this summer, the number of small, tension-relieving earthquakes along the Pacific Coast are increasing.

Whooping cough reaches epidemic level in California. Anyone surprised? Next: Arizona. Then Massachusetts. Perhaps Texas.


For Investors Only

Over at Seeking Alpha, Chuck Carnevale has an excellent (and a very, very long) post on long term investing. A must-read, especially for those new to investing.

Also over at Seeking Alpha, Bob Wells has three articles worth reading: