Monday, June 19, 2017

Empire Builder -- June 19, 2017

Disclaimer: this is not an investment site. Do not make any investment, financial, travel, job, or relationship decisions based on anything you read here or think you may have read here.


November 12, 2017: shareholders approve the deal

June 25, 2017: from The WSJ -- "How Four Brothers Survived the Gas Bust to Make Family a Billion: merger of Appalachian gas producer EQT Corp and Rice Energy will create one of the country's largest natural gas producers."
Eighteen months ago, the Rice family was pressured to sell shares in their family gas company at all-time-low prices as the natural gas market tanked. Now the Rice family is selling again. But this time, it is the entire company, and under much more favorable circumstances.
On Monday, rival Appalachian gas producer EQT Corp. EQT 8.00% said it would buy Rice Energy Inc. RICE 6.74% for $6.7 billion in a deal that is poised to deliver more than $1 billion to the family, whose members make up much of Rice’s management and control roughly 18% of the company’s shares, according to securities filings.

In late 2015, the warmest winter on record pulled down gas futures to all-time, inflation-adjusted lows, dragging down Rice’s stock. To avoid a margin call, the family sold a slug of shares they had borrowed against. Had they been able to hang on to those five million shares, the family would now be nearly $100 million richer.
Under terms of the EQT deal, Rice shareholders are due $5.30 in cash and about one-third of an EQT share. Based on EQT’s closing stock price the day before the deal was announced, that equates to about $27.05 for every Rice share.
Still, the family is likely one of the gas boom’s biggest winners just a decade after Daniel Rice III and his sons created the company from scratch. Their expertise in oil and coal helped them scout land in the early days of the shale-gas boom in Pennsylvania.
Mr. Rice honed his expertise at BlackRock Inc., where he was a mutual-fund manager specializing in energy when his family started the gas company. One early move was a deal to drill in areas controlled by a coal company that Mr. Rice’s BlackRock fund invested in.
Original Post 

EQT to buy Rice Energy. Some data points:
  • $6.7 billion + $1.5 billion in debt = $8.2 billion deal
  • Marcellus/Utica
  • would create the biggest natural gas producer in the US
  • biggest deal ever for EQT
  • EQT's shares fell almost 10% before recovering a bit
  • EQT-Rice would be ahead of Exxon Mobil Corp as the nation's biggest gas producer (see graphic, via twitter)
  • appears to be empire building: analyst
  • would begin monetizing Rice's midstream assets by dropping them down to EQT Midstream Partners; could raise $1.3 billion
  • abuts existing EQT acreage in Pennsylvania
  • EQT is a decade behind in fracking technology; Rice provides EQT what it needs: analyst
  • EQT has been buying Marcellus acreage: most recently, 53,400 acres from Stone Energy
  • Rice Energy: one of Ohio's biggest oil and gas drillers 

Crescent Point Energy With Eight New Permits -- June 19, 2017

Eight new permits:
  • Operator: Crescent Point Energy
  • Field: Lone Tree Lake (Williams)
  • Comments: permits for four two-well pads all in 157-99
Well name change: Hess changed four EN-Vachal wells from "PNC" back to "CONF" status.

Nothing else of consequence.

Active rigs:

Active Rigs562877189186

Random Update On DUCs Nationwide -- Bloomberg -- June 19, 2017

This is for the archives. Nothing new for folks familiar with the Bakken.

Bloomberg is reporting:
  • nationwide, 5,946 DUCs at the end of May, 2017 -- so, let's call it 6,000 DUCs nationwide and around 1,000 in the Bakken
  • this sets a three-year record (hard to believe that it's not an all-time record)
  • the Permian: in May -- operators drill 125 more wells than they would complete
  • the Permian: in May -- nearly 100,000 bopd in DUCs
  • breakeven price in the Permian as low as $35
For newbies, I could be wrong but I believe operators in the Bakken can leave a well uncompleted for up to two years. Prior to the collapse in oil prices, North Dakota required wells be completed within one year after being spud. Operators can get waivers to delay completing wells if not completed within two years, but those requests are considered on a case-by-case basis.

WTI closed at lowest level since November, 2016, and we're approaching the middle of the US driving season.

First World Problems

I just got back from mailing two small, but relatively heavy, packages to family members in Portland, Oregon. Least expensive option, $25 for one and $12 for the other package. Remember those numbers.

Upon arriving home, I checked the WSJ on-line. This headline caught my attention: UPS to Add Delivery Surcharges for Black Friday, Christmas Orders. Delivery company seeks to recoup increase in hiring and reserving extra vehicles during busiest period.

I gasped -- UPS and FedEx are already more expensive than the US Postal Service. I could only imagine how "bad" the surcharge would be.

Hold your breath.

27 cents/package.

Okay, back to other first world problems. LOL. 

The Political Page, T+150 -- June 19, 2017

Jared Kushner announces huge improvements in the VA system, today. Two big announcements:
  • VA medical records now -- electronic medical records; the active side of the military has had electronic records for over two decades; VA now uses same/similar system (see link below)
  • VA wait time has improved from 25 days to 8 days
I'm sure these announcements will be scrutinized for accuracy. But if in fact it's accurate that the Trump administration was successful in getting the VA to move to electronic medical records in five (5) months, it begs the question: what the heck was the Obama administration doing for eight years? I guess promoting the global warming scam.

More on the VA and electronic medical records:
If the hype is correct, this is a big, big deal, and, of course, the mainstream media (i.e., the nightly news) will not cover it appropriately.

The Bakken Is Back -- June 19, 2017

One "word": DAPL.


The Market And Energy Page, T+150; Texas Acreage Sells For $46,000 / Acre -- June 19, 2017


Later, 4:00 p.m. Central Time: market closed --
  • Dow closes up 140 points
  • S & P 500 closes up 20 points
  • Nasdaq closes up  87 points
  • WTI closes at $44.14
Original Post
This is really quite remarkable:
  • Dow surges 110 points -- hits new all-time record
  • S & P 500 closes in on another new record, up 16 points
  • Nasdaq up an incredible 72 points
Those numbers despite:
  • oil and oil service companies dragging the market down with WTI less than $45
  • Fed announced a rate increase just two business days ago and says it will continue to tighten
Amazon: over $1,000/share.

Grocery market share, from CNBC:
  • Wal-Mart: 21%
  • Target: 3%
  • Whole Foods: 1% 
Back of the envelope: $600 million / 13,000 acres = $46,000 / acre

Active Rigs At 56; WTI Below $45 -- June 19, 2017

Active rigs:

Active Rigs562877189186

RBN Energy: RBN's video replay of its spring, 2017, school of energy is available.

Re-balance: Saudis "talking their book." My thoughts. But hey, the Saudis are a whole smarter than the rest of us. The Saudis have historically budgeted for $100-oil; they have re-budgeted for $80-oil; they might settle for $60 in the near term; they'll be lucky to get $50 by the end of the year without any major geopolitical event.

What a doofus

Global Warming Notes -- June 19, 2017

I didn't see rain in today's forecast when I checked the weather forecast last night (less than 24 hours ago). But now I hear thunder (and now I see lightning -- one-one thousand, two-one thousand, three-one-thousand -- two miles....):

But I do know that the science is settled: the earth will be 1.74534 degrees warmer in one hundred years. The "degrees": I think that's Celsius but don't quote me on that.

By the way, for some "non-fake" news on global warming, be sure to check in on this website at least once a week.

I assume my electricity will go out any moment (due to the electrical storm) and loss of internet will soon follow. Whatever.

Good luck to everyone.

Speaking of Global Warming ... Now It's A Coffee Shortage

From the BBC:
Coffee drinkers could face poorer-tasting, higher-priced brews, as a warming climate causes the amount of land suitable for coffee production to shrink, say scientists from London’s Kew Gardens.
Coffee production in Ethiopia, the birthplace of the high quality Arabica coffee bean and Africa’s largest exporter, could be in serious jeopardy over the next century unless action is taken, according to a report, published today.
“In Ethiopia and all over the world really, if we do nothing there will be less coffee, it will probably taste worse and will cost more,” Dr Aaron Davis, coffee researcher at Kew and one of the report’s authors, told the BBC.
Wow, pulling out all the stops, these idiots.

Minor Notes -- June 19, 2017

Breaking news: it's now 6:21 a.m. Central Time, and the last Donald J. Trump tweet was 13 hours ago.

Lego: If it weren't for the Lego-Maersk association I probably wouldn't care about this Reuters story.
Maersk, whose container ship and oil businesses have been struggling, announced last year that it would split up into separate companies and said it would unveil details of its structural changes by September 2018.
Market: Wow, that was fast. In an earlier post this morning I mentioned:
  • capitulation; and,
  • sector rotation
Now, this story: "funds pull back from Permian as US shale oil firms go into overdrive." From the Reuters story, data points:
  • cash, people and equipment are pouring into the prolific Permian shale basin in Texas as business booms in the largest U.S. oilfield
  • but one group of investors is heading the other way - concerned that shale may become a victim of its own success.The speed of the recovery in the U.S. shale industry in the past year has surprised oil investors after a global supply glut led to a two-year crude price slump and bankrupted many shale firms
  • eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned producers are pumping oil so fast they will undo the nascent recovery in the industry
Liza. This is pretty cool. I've mentioned ExxonMobil's "elephant" off the coast of Guyana on two occasions:
Now today, over at Reuters some data points:
  • ExxonMobil and partners will spend $4.4 billion to develop part of the Liza oilfield off the coast of Guyana, a megaproject despite glut of oil and focus on US shale
  • this is the fifth deepwater project approved by various operators this year
  • Exxon spent nearly $7 billion earlier this year to more than double its holdings in the Permian
  • Guyana: looks good to Exxon due to its low cost of production
  • Phase One of Liza: expectations -- 450 million bbls total; 120,000 bopd
  • to come online in 2020
  • first phase: 17 wells
  • second phase: not discussed
  • Hess' share in the project: $1 billion (rounded)
Back-of-the-envelope: $4.4 billion / 450 million bbls = $10/bbl (plus, of course, what has already been spent)

Facts: this is pretty cool. At the sidebar at the right, IER suggests that "green technologies cannot survive in the marketplace without subsidies." Does anyone need more proof? Here we go again:
British power producer Drax is assessing whether to convert its remaining coal-fired power units to run on gas instead so they can compete in the country's annual capacity auction.
Drax has converted half of its Yorkshire coal plant, once Europe's most polluting coal-fired power station, to burn wood pellets but plans to switch the remaining units to biomass have stalled since the government changed renewable energy subsidies.
"One option is to repurpose the coal units to run on gas," said Andy Koss, chief executive of Drax's generation business.
But there's even more. This has been a constant theme on the blog: intermittent energy -- solar/wind -- will require additional back-up electricity, and now this in the linked article:
Drax is banking on the need for back-up electricity production capacity to complement solar plants and wind turbines and is forecasting a trebling in earnings by 2025. It is already planning to build four modern open-cycle gas turbine (OCGT) plants.

Long Meandering Commentary: Sector Rotation, Capitulation -- June 19, 2017

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

I first noted this on November 23, 2016: gasoline demand "not particularly comforting."  At the time I do not recall this decline in gasoline demand being noted by the mainstream business media.

Since that post it has been pointed out frequently that US gasoline demand is weak but only recently has the mainstream press picked up on it.

The second thing that was picked up early by the blog: the OPEC cuts weren't cutting it. I don't know if this was the first post on this subject, but it was certainly one of the earlier posts (April 28, 2017). At the time, analysts were still optimistic about the "cut" buying into Saudi's public relations machine.

It was about this time that it was clear that regardless whether Saudi Arabia was cutting production or not (wink, wink), in fact, it was emptying its storage tanks and continuing to flood the US with oil (see more below). (Wow, that's a grammatically awful sentence but I've tried to correct it several times, and I've given up. I need to move on.)

Back to Saudi's production cuts (wink, wink) and US imports: I gave that a "Saudi Shenanigans" tag.

From twitter, 58 minutes ago (as of 6:32 a.m.):

Finally, the mainstream business media -- starting about two weeks ago -- has started talking about this: US gasoline demand is concerning; and, OPEC cuts aren't working.

Today, Rigzone addresses those two issues:
The sustained fall in oil prices over the past week is indicative of the consensus view that the 1.8 million barrel per day coordinated output cut among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC is not deep enough to rebalance global oil markets in 2017, or even in 2018.
Also contributing to this bearish outlook are serious concerns around U.S. gasoline demand. In its Weekly Petroleum Status Report on Wednesday, the U.S. Energy Information Agency (EIA) showed a surprise build to gasoline stocks for the week ending June 9.
The report also showed that gasoline demand in the United States had fallen week over week and was 5 percent lower than during the same period in 2016. Over the last four-week period, total motor gasoline consumption in the United States averaged 9.5 million barrels per day, which was 1.2 percent lower than the same period last year. OPEC cuts not cutting it and US gasoline demand not cutting it.
Note again, from the lede:
... the 1.8 million barrel per day coordinated output cut among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC is not deep enough to rebalance global oil markets in 2017, or even in 2018...Over the last four-week period, total motor gasoline consumption in the United States averaged 9.5 million barrels per day, which was 1.2 percent lower than the same period last year...
I think that's the first time I've seen that in the mainstream business media so explicitly, that at the current rate of US crude oil supply / demand, "re-balancing" is not going to occur any time soon.

I started tracking this several months ago and have posted this chart (update: methodology was wrong in some parts of this table; it has been updated and corrected at this post):) several times showing how long it will take to "re-balance":

Weeks to RB
Week 0
Apr 26, 2017

Week 1
May 3, 2017
Week 2
May 10, 2017
Week 3
May 17, 2017
Week 4
May 24, 2017
Week 5
May 31, 2017
Week 6
June 7, 2017
Week 7
June 14, 2017

By the way, when the mainstream business media talks about "re-balancing," they are talking about getting back to the "5-year-average," whatever that is. I don't know if I've seen the "5-year-average" noted. Whatever it is, it's skewed by the Saudi surge from 2014 to 2016, the first of two trillion-dollar mistakes by the Saudis. In fact, for meaningful "re-balancing" to occur and a return to more bullish crude oil prices we need to see US crude oil supplies fall back to the "historical average" -- a 21-day supply or about 350 million bbls.

Right now, the rate of drawdown, averaging 2.6 million bbls/week since April 26, 2017, means that it will take 63 weeks to "re-balance." That would be late 2018.

Now, Rigzone, today, is suggesting that "re-balancing" won't even happen in 2018. That's as far as I read. Let's go back and see if the writer supplies a "new date."

Nope: no new date is given when "re-balancing" might be reached.

In fact it's worse. Look at this:
Also weighing on prices was Wednesday’s report from the International Energy Agency (IEA), which projected 2018 oil supply from non-OPEC producers to grow by 1.5 million barrels per day (almost twice the increase estimated for 2017).
The significant uptick in estimated production growth for 2018 is due mostly to rising expected production from U.S. tight oil formations. The IEA estimated that demand would grow by 1.4 million barrels a day in 2018 – largely from China and India.
In case you missed it, based on estimates:
  • supply will grow by 1.5 million bopd
  • demand will grow by 1.4 million bopd
Does anyone see the problem?

Two other things are also noted in the Rigzone article, both of which I pointed out some time ago:
  • Saudi Arabia / OPEC made a huge mistake underestimating the amount of oil Nigeria and Libya could bring to the market (and exempting both countries from the agreement to cut OPEC production);
  • Saudi Arabia under-estimating US shale oil resiliency and ability to respond quickly (many analysts have said it would take months for US shale to ramp up; I've always thought it would only take weeks --  DUCs, choking back, amount of infrastructure that has been put in place since 2007)
Perhaps most interesting is the allusion to "Saudi Shenanigans." From the linked Rigzone article:
Saudi Arabia has committed to reducing its exports to the United States to under 1 million barrels per day during the summer months. In addition, the Kingdom has increased its pricing to Asian customers of its crude, which should have the effect of lowering export volumes.
Whether the move to decrease exports to the United States is an attempt at sleight of hand to convince oil markets that crude inventories are draining is up for debate. It should be noted that most crude traders essentially use U.S. crude inventory levels as a proxy for the health of global crude markets due to the availability and quality of data.
Many in the market believe that the Saudis may not be reducing its overall production levels, and could in fact, possibly be using crude that was otherwise destined for the United States as feedstock for power generation in-country – when demand for air-conditioning surges during the summer months.
Remember: Saudi Arabia HAS to cut imports to the US during the summer months -- all things being equal -- if  the kingdom cuts production (wink, wink). Saudi has decreased its crude oil inventories significantly and Saudi's domestic consumption of oil surges in the summer months to provide electricity to run air conditioners.

So, where does this lead us?

Disclaimer: this is not an investment site. Do not make any investment, financial, travel, job, or relationship decisions based on what you read at the blog or what you may have thought you read at the blog.

So, for investors, where does this lead us? The word I have not yet seen in the mainstream business press is "capitulation."

Share prices for oil companies and oil service companies have fallen dramatically since 2014, but the fall has been fairly orderly.

But the Amazon-Whole Foods announcement may accelerate what investment analysts call "sector rotation," when a shift from one sector, let's say the retail sector, to another sector, let's say the tech sector occurs.

Hold that thought.

Generally, oil prices and the US stock market tend to track each other fairly closely. Not always, but generally. Some months ago the price of crude oil and the stock market seemed to track each other. But about a month ago (maybe earlier, I forget) the price of crude oil and the stock market diverged. It's been mentioned rarely on CNBC, that divergence.

It's no longer mentioned.

Today, futures are surging and if everything holds new records will be set -- possibly on all three major indices and yet it looks like WTI will fall again.

Are you still holding that thought? Two things come to mind:
  • capitulation; and,
  • sector rotation
I think I will stop here. I think most folks can connect the dots. Except to say I can hardly wait for the market to open today.

Futures are still up nicely.