Jane Nielson Blew It -- Or Her Timing Was Off -- She May Still Be Right Yet -- The Bakken, North Dakota, USA

I'm in the process of deciding whether to continue the "milliondollarway" when I return to my granddaughters in Boston later this week.

I started the blog for a couple of reasons: a) for my own benefit, to learn about the Bakken, to see if I could make sense of it; and, b) to counter the folks who thought the talk of the Bakken was just "hype."

This was a typical post from those who felt the Bakken was just hype.

There are many ways to gauge the Bakken; investing in Bakken drillers is just one method.

The linked site was posted June 25, 2010.

On that day you could have bought a share of each of the four companies for the price shown:

• KOG: $3.65
• BEXP: $16.94
• WLL: $42.37
• OAS: $14.75

Today, shares in those companies are trading for:

• KOG: $8.16
• BEXP: $36.42
• WLL: $88.00 (split-adjusted)
• OAS: $28.54 (Oasis has been as high as $35.76)

A "dumb" investor would have bought on June 25, 2010. A "smart" investor could have followed these companies for awhile and bought on a pullback. But even a "dumb" investor's return:

• KOG: 123% (remember, 100% is doubling your money)
• BEXP: 115%
• WLL: 108%
• OAS: 93%

(No one will believe me but I put those four companies up in random order; and I chose those four completely randomly of the many companies one could have invested in, in the Bakken. It is purely coincidental how the racking and stacking turned out. Quite interesting.)

If you bought before June 25, 2010, your returns are even bigger, and in some cases could be huge. One could have bought KOG for 60 cents at one time, I believe.  If so, $6,000 investment would now be worth $48,000. That's not a "Peter Lynch 10-bagger" but it's not bad. Folks playing the lottery have not come close.

It doesn't matter to an individual investor how big or small the Bakken is; to the individual investor, it is one's rate of return, or something along those lines.

On the other hand, a President Obama devotee would be down 60 percent year-to-date by having invested in a solar energy ETF.  According to SeekingAlpha.com, the best nuclear energy ETF (NUCL) has lost 23 percent to date. I'm curious if Jane invests in solar or nuclear or anything.

There is another way to measure the Bakken. The Bakken will soon move North Dakota from the seventh in the nation to second in the nation in oil production, assuming the EPA doesn't shut it down, a huge assumption (and one I'm not willing to bet on). 

Or you could measure the Bakken by the number of jobs it provides. North Dakota has the lowest unemployment rate in the nation; there are currently 20,000 unfilled jobs in North Dakota. A new McDonald's employee can earn $48,000/year in the heart of the Bakken (Williston, North Dakota).

Or you could measure the Bakken this way: North Dakota is about the only state with no budget crisis or any debt. In fact, North Dakotans will vote on whether to eliminate -- not just lower, but completely eliminate -- the property tax starting next year.

So, if you read Jane Nielson and listened to her advice, well, what can I say -- she blew it big time -- or her timing was off. She can honestly say the jury is still out: if the EPA shuts it down, the Bakken will have been a flash in the pan.

But back to the original conundrum.

I feel I understand the Bakken about as well as I ever will. The Bakken has entered its manufacturing stage and its future is in the hands of the EPA. When something moves from science to politics, I become anxious. Jane Nielson could still be right; if so, her timing was simply off; it happens to the best of us. The Bakken will have been all hype if the feds shut it down. But I digress. I have satisfied one of the two main reasons for blogging on the Bakken: to help me understand it.

The second reason was to counter postings like those of Jane Nielson. To her credit, she blogged using her name (I assume it's her real name). But she was wrong. The Bakken lived up to its "hype" in many more ways that she can even imagine.

So, having satisfied the two reasons I started the blog in the first place, I now have to decide whether to continue. The first step was eliminating comments. I need to make the decision on my own. Thank you for understanding.

At least she was right on one thing: fast tracking wind farms on western lands was a bad thing. She lost that fight, also. They're building wind farms as fast as Congress can pass tax incentives. And now that whooping crane killing is no longer frowned upon by the feds, it makes wind turbines all the more appealing.

Based on a quick reading of her site, it looks like she has the same energy policy as the EPA, except she also disses wind, as noted:
Nuclear --> oil --> natural gas --> wind --> wood --> buffalo chips.

How To Light Your Wood Burning Stove
Or, if that takes too long, or is too complicated, or there are no more trees in your neighbor's yard, consider the alternative, electricity from the Bakken:

How To Set Your Thermostat

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I'm getting a kick out of watching the faux-environmentalists cobble together an ad hoc energy policy to fill the Obama void. Saying "no" to everything pretty much brings us back to burning trees, and when those are gone, buffalo chips. I believe it is against the law (a felony) to remove buffalo chips from the Theodore Roosevelt National Park here in North Dakota -- and as far as I know that's about the only place we have any significant amount of buffalo chips.

******************

With regard to eliminating the property tax: North Dakota citizens vote in June; if passed, the property tax relief is retroactive to January 1, 2011. A while back I said eliminating the property tax was a dumb idea; with the likelihood that the EPA will shut down drilling in North Dakota, eliminating the property tax is a really dumb idea. Of course, by June, 2012, we will have a pretty good idea if the feds will shut down the ND oil patch. Lynn Helms thinks the oil patch could be shut down by January, 2012.

The Bakken, North Dakota, USA -- Autumn Review -- September 8, 2011

With regard to the "manufacturing phase" that we have entered in the Bakken, my thoughts and observations:

Drilling rigs

• We are probably near our top in active drilling rigs. It stands at about 200; most agree that the number will top out at about 225 - 250.
• Older rigs will probably be replaced with newer, more powerful rigs; think H&P
• Roughnecks are gaining experience every day
• More stable employee base is starting to materialize

Fracking crews

• Major players suggest that they have adequate fracking crews, many are dedicated crews
• The smaller players do not have dedicated crews and wait in queue for available crews
• Conference calls: major players say they will catch up on fracking; my numbers suggest they won't catch up in the near term; more than 50 percent of wells coming off confidential list are still being placed on DRL status
• Halliburton recently announced they will hire 11,000 more workers; most to the Bakken
• Schlumberger is building huge new complex west of Williston, ND -- heart of the Bakken
• My hunch is that we are yet to see huge surge in frack teams
• Frack teams still gaining experience

Fracking

• Major players still looking for optimum number of stages (of course, this varies even among wells)
• Major players still testing optimum technology (sliding sleeve; plug and per; zipper)
• Jury still out on sand vs proppants (expense/benefit ratio)
• Water is NOT a problem in the Bakken
• The state cobbled together a $150 million water plan for fracking and drinking water for cities in oil patch

Aging permits

• Lots of chatter on the boards about Bakken players losing their permits leases (see first comment below)
• My hunch: these guys are smart enough to handle this; they won't lose their good permits leases
• Lots of horse-trading could result

Financing

• Wells are expensive to drill, but they now drill two-section horizontals vs one-section horizontals
• Canary-in-the-coal-mine: companies issuing more stock to raise cash
• Canary-in-the-coal-mine: mergers, buyouts
• Carnary-in-the-coal-mine: poorer wells, dry wells

Manufacturing

• Wells require maintenance
• Winters possibly harder on rigs and maintenance crews, increasing need for maintenance folks during winter
• Few number of Bakken wells to date, few mainentence crews
• As Bakken wells increase (166 new wells/month), expect to see surge in maintenance folks

Infrastructure

• Construction: gathering facilities (natural gas and oil)
• Pipeline infrastructure
• Eectrical substations
• CRYO plants for natural gas (see earlier note on subject); crude-by-rail terminals

Housing

• Despite all the talk about housing issues in the Bakken, projects are moving ahead
• It appears that big operators have "taken by the bull by the horns" in Williston and adding significant housing
• See Kiewit subdivision
• Additional housing now expanding to outlying towns (Killdeer, New Town)
• My hunch: a lot of the roughnecks (single and young) won't move into single-unit homes; will stay in man-camps (for amenities) or move to apartments (with less restrictions)
• Any slack in single-unit housing by roughnecks will be replaced by surge in workers here long-term to maintain the wells

Takeaway Capacity

• With crude-by-rail ramping up, takeaway capacity no longer an issue

Observations in the Bakken -- Housing -- Sunday, September 04, 2011 -- Bakken, North Dakota, USA

See first post on my initial observations in the Bakken, summer, 2011. This continues my observations.

First, this is the best time of the year in western North Dakota. The weather is wonderful; if the US Air Force has sprayed the mosquitoes larvae,  it's great to be outside.

Second, the number one story remains affordable housing. After lots of driving around, specifically looking at all the construction that is going on, I am convinced that the housing situation will be resolved by the end of 2013. If the housing situation remains a problem after 2013, folks have seriously underestimated how huge the Bakken is going to be.

Before the boom, there were probably about 3,000 houses in Williston. The Kiewit subdivision alone will add about 2,000 more units, if completed. There are probably another several hundred or so units that have gone up in the last year or so (apartment units, duplexes, single family homes, etc). Again, these are just wild estimations. My hunch is that the vast majority of young men living in the man-camps will elect not to buy homes here in Williston; they will work here, but return to their own home elsewhere outside of North Dakota. I would not be a bit surprised if there is actually a slight excess of single family homes in 2014 based on the pace at which they are building now.

Third, it will be interesting to see if oil companies decide to frack during the winter or postpone until the spring. Even under the best of circumstances, the numbers suggest that fracking cannot keep up with drilling for the next six to twelve months. If oil companies do not frack during the winter, the backlog in the spring will be significant.

Auto Sales Surge; ATT - T-Mobile Story -- Idle Rambling -- Not a Bakken Story

Updates

May 11, 2012: No link; from print edition, Wall Street Journal, page B5.

T-Mobile said it lost more than a half million of the most lucrative customers in the first quarter, casting doubt on whether the company can regain momentum after regulators blocked its sale to ATT.

Predicted. This, as noted below, was a win-win for ATT. At best they would have gotten T-Mobile all to themselves. At worse, ATT and Verizon would split the spoils as T-Mobile sort of just withers away. This happened some years ago when regulators refused to let two video rental chains merge. One of the two eventually disappeared (going through bankruptcy first?). The other? I don't know if it's still around.

Later: I posted the stories below earlier today.

For the first time this afternoon I have finally had an opportunity to check the news, and this is the story that caught my eye:

Headline: T-Mobile customers fleeing

See my post below, predicting that this would happen.

Original Post

Idle rambling.

Connecting two disconnected dots.

First dot: auto sales surge.

U.S. factory orders rose strongly in July on the biggest jump in demand for autos in more than eight years and a surge in commercial airplane orders.

The Commerce Department says factory orders climbed 2.4 percent, the largest increase since March. Orders for motor vehicles and parts rose 9.8 percent, the largest one-month gain since January 2003.

Second dot: housing sales down.

The already-struggling housing market has another 15% decline in home prices already priced in for homebuilder stocks, according to Stifel Nicolaus analyst Michael Widner.

According to a talking head on CNBC this a.m. the government has made it easier for banks to get out from under their mass of foreclosed homes prior to 2011. However, the relaxation was not extended to new home sales going forward. For any number of reasons, the new rules imposed on banks for home financing have become much more onerous. This is one explanation for disappointing home sales according to the talking head on CNBC.

It's hard to argue with that logic in light of the surge in auto sales. The surge in auto sales suggests that folks have the money to make large purchases, but a) are still scared of the housing market; and, b) unable to get financing due to onerous banking requirements.

A third factor that folks don't talk about: unintended consequences. At their last meeting, the "Fed" announced that it was keeping borrowing rates (or whatever they are called) at their current record low rates for the next two years, which for all practical purposes is zero percent. Until now, the "Fed" has always been vague about its intentions. That means for folks sitting on the fence, trying to make a decision to buy a new home, they can now procrastinate, knowing that rates may not change all that much over the next two years. Yes, I know the two rates are not directly connected; if home buying starts to pick up, mortgage rates can increase. But, in the big scheme of things, to be told that the "Fed" plans to keep rates this low for two years, folks will naturally procrastinate.

****************

On another note, the Obama administration has filed to block the proposed buyout of T-Mobile by ATT. This is really bad news for T-Mobile; great news for Verizon, and maybe Sprint; and so-so news for ATT. Common sense tells me that T-Mobile was ready to shut their operations down when they agreed to be bought out by ATT, and common sense tells me that psyscologcally, at least, that process has begun. Regardless, how many folks are signing up for T-Mobile not knowing who their new service provider might be. So, this is not good news for T-Mobile.

I'm not sure this is the worse news for ATT or its shareholders. This was going to be a huge chunk of change all at one time. Now, if the buyout is stopped by the Justice Department, the Verizon, ATT, and Sprint folks will simply divide the spoils as T-Mobile implodes from lack of growth. Obviously if the Justice Department nixes ATT, it should also nix Verizon buying T-Mobile, but it's always possible Sprint-T-Mobile will find a way to get together. I used to follow the various systems (e.g., CDMA) the different providers used, but have long given up on that. It turns out the providers have ways of making any combination work, it seems.

Observations in the Bakken -- Widening the Highway South of Williston -- Sunday, August 28, 2011 -- Bakken, North Dakota, USA

Fourteen Observations -- Some Related To The Bakken

First and foremost: thank goodness for McDonald's. The company-owned franchise restaurants offer free wi-fi. I just walked from where I am staying to city library, about a 2-mile walk to use wi-fi there. When I got there, the library was closed. During the summer, the city library is closed on weekends except for Sunday evenings, 6 - 9 p.m.

But's it's an "evil" free market that has free wi-fi 24/7. Almost 24-7.

Second: shovel-ready jobs: I was last in the Bakken about six weeks ago. I don't recall any road construction on the two-lane road south of Williston to Alexander. Today, I drove that two-lane highway to Alexander and it appears that it will be a four-lane highway by winter. I asked a local about the highway: he said it was not going to be a four-lane highway, but rather stretches of four lanes for passing lanes. From a practical point of view, it certainly seemed to me that most of the Williston-Alexander stretch would be four lanes, and as noted, I don't recall any evidence of construction six weeks ago, and now it is close to being blacktopped. See Williston Herald for more on this project.

Third: this is a Sunday and everywhere building was going on. This is a right-to-work state; I have no idea if that has any impact. But on public projects (the aforementioned highway) and on private projects (the new Schlumberger complex going up) construction workers were out there working.

Fourth: speaking of working 24/7, the back-hoes were working digging ditches for the new water pipeline that is being paid for by the oil companies. See WAWS, a $150 million shovel-ready job. This new water system will include a significant upgrade and capacity expansion at the Williston city water plant and drinking water will be piped to surrounding communities fifty miles away, including Grenora, Watford City, Alexander, etc. I don't know the extent of this system but it will be huge. Geographically, it may be one of the largest water systems in the US. Six weeks ago I saw some pipeline being laid near the water plant; today I saw pipeline stretching north, south, east and west of Williston. Again, the back-hoes were digging on a Sunday; there is a sense of urgency here in the Bakken. No doubt there is a reason for this sense of urgency: it's but a few months to very cold winter weather. For newbies, the winter won't affect drilling operations until late January, February. The first freeze is around Halloween, but the severe winter doesn't kick in until after the new year.

Fifth: there's no pleasing everybody.  I talked to a local resident about the new four-lane highway being put in between Alexander and Williston. At least when I asked him about it, I thought it was a four-lane highway being put it, expanding from the current two-lane highway. He corrected me, saying that the project was a "waste of money." He said that it wasn't going to be a four-lane highway, just stretches of passing lanes. He thought "they" should have put in a four-lane highway. I agree with some of what he said, but from my perspective, the passing lanes seemed to be most of the stretch between Alexander and Williston, essentially making it a four-lane highway. And, oh by the way, for all the complaints about the roads, the highway between Alexander and Williston was in perfect condition.

By the way, if anyone knows about the appropriation process, it is sometimes easier to get an "addition" approved rather than a completely new project. I don't know if this applies in this case -- passing lanes vs four-lane highway but I wouldn't be surprised. 

Sixth: flooding. Much of the flooding is receding. It appears any wells affected by the flood are now high and dry (I'm sure folks will write me and tell my I am stupidly wrong on that; be that as it may), but the water has receded significantly. We drove out to a Madison / Bakken pair of wells that I was curious about, and the road was recently filled in for oil trucks and on the way out, we passed an oil truck heading out to the same well to load oil that was being stored in the on-site tanks. As expected, the Madison was was not pumping (according to the NDIC website, this well is not currently producing, but it is not abandoned). The BEXP Bakken well had a great first month and then the typical horrendous decline. I don't know for sure but this might be the well that BEXP (if it was BEXP, and not Whiting, I forget) that is holding $2 million in royalties until the owner of those mineral rights is sorted out; the horizontal runs under the river).

Seventh: the traffic is incredible. Busy, that is. But drivers seem courteous. Compared to Portland, Oregon, where I have just come from, the traffic in Williston moves smoothly. It seems traffic signals are set correctly and there is minimum congestion at lights (by big-city standards). Long-term residents will disagree and say the traffic congestion at lights is very, very bad.

Eighth: I can't remember if I posted this. Another rant about folks complaining about roads. The roads are bad. In the rural areas, they can be incredibly bad for the the farmers. The Williston Herald recently interviewed six men and posted their photos and their comments regarding the roads. Five said they weren't that bad; the six they said they were very bad. I believe most of the six (or was it five) were truck drivers; none were farmers. All were in their 20's and 30's. But considering there are 200 active drilling rigs in North Dakota, and most of them in four counties (there are 53 counties in North Dakota), the roads (from my viewpoint) are in great shape. Again, considering there are 200 active drilling rigs in these four counties. Seventy-five percent of wells are not connected to pipelines and require trucks to get oil from oil pad to nearest pipeline or rail facility.

Ninth: I asked a long-term resident how many oil service companies he thought were located in Williston. The long-term resident is a business man who deals with businessmen throughout Williston. He is very cognizant of the commercial build in Williston. So, how many oil service companies are located in Williston? He guestimated 25. --- Schlumberger, Halliburton, Sanjel, Baker Hughes, etc., ---

The Williston Herald says there are ... drum roll .. there are more than 135 (that is not a typo, more than 135) oil service companies located not "just" in North Dakota, but located in Williston. I imagine that if you asked the average person how many oil service companies in Williston, one would get the same answer, about 25.

And each of these oil service companies generate other businesses: restaurants, theaters, automobile dealers, construction companies, etc.

Tenth: supposedly there is a yellow Lamborghini in Williston. I have not seen it. It was spotted Friday night. I will keep an eye out for it. Hopefully get a photo in front of a Williston landmark to prove it's in Williston.

11th: I understand the Halliburton complex cost $60 million; and now, Schlumberger is building a complex probably about the same size west of Williston, perhaps about the same amount of money. I could be way off on the $60 million; it was idle chatter. I know I blogged about it months ago, but probably can't find it -- ah, yes, here it is, November 16, 2011.  Only $20 million, but I think that refers to the expansion project. Now there is a brand new Halliburton complex just west of the original site (there is an old, unused (?) Farmers Union building sitting between these two Halliburton sites). So, who knows, $20 million, $60 million? Whatever.

12th: someone recently wrote to complain to me about the long coffee lines at CENEX. I assume that 99.9995 percent of folks standing in line at CENEX have a home and could brew their own coffee and place it in a thermos. There are homeless folks in Williston that would love to have as one of their many complaints that the line for coffee is too long. I spoke to a local pastor earlier today and he brought up the issue of homeless folks. Somehow I just can't get excited about long lines for coffee. I can't wait to hear from folks on this one.

13th: And just for the record: I am impressed in general with how the residents, the county commissioners, the city commissioners, the truckers, the rough necks, the workers from Florida, Louisiana, and Texas, et al, are doing their best to keep this boom under some semblance of normality, if not control. I understand the state of Idaho has moved all its residents to North Dakota to help out with all the work that needs to be done. Right now I'm sitting in McDonald's and it's filled with grandmothers and their grandchildren enjoying an afternoon out. They've learned not to come during the coffee-hour rush.

Fourteenth: I was reminded last night that sales tax receipts in Williams County exceed sales receipts in any other North Dakota county, including Cass County, home of North Dakota's largest city, Fargo, North Dakota, with a population of 106,600 with huge regional farming population, on both sides of the border, North Dakota and Minnesota. The population of Williston is 15,000. Fargo is more than 7 times larger than Williston, and yet the county where Williston is located had a higher sales tax receipt total than the county where Fargo is located. Cass County, home of Fargo, also includes West Fargo with a population of 26,000. Moorhead, Minnesota, across the river from Fargo, has a population of 38,000 and more Minnesota folks probably shop in Fargo than vice versa (sales tax difference; retail shopping opportunities, etc). When you include West Fargo (in Cass County) but not Moorhead, Minnesota, Fargo is almost 9 times larger than Williston. But Williams County has a larger total sales tax receipt.

Enough for now.

Connecting Widely Dispersed Dots -- Maybe a Bridge Too Far, But Perhaps Not

This was my initial post regarding NuStar, EOG and crude-by-rail in Louisiana. Bottom line: Bakken oil can be shipped by rail, making the Keystone XL redundant, and providing an outlet of sweet, light crude to the rest of the world.

Now read this thread regarding concerns of those receiving royalties from Bakken wells. Some comments may or may not make sense, but it gets folks to start thinking.

Now read this story about how Chesapeake will start charging mineral owners to gather, compress, and transport (GCT) natural gas from the Barnett shale in Texas.

No comments. I'm simply linking two new stories and a discussion thread. I have no thoughts on this one way or the other to express in this posting. I think there could be dots to connect, but I could be wrong, Perhaps it's simply a bridge too far.

Huge, Huge, Huge: Disruptive Technology To Increase Oil Production

Link here.

Then re-acquaint yourself with this story which has been posted "forever" on this blog.

Now, remind yourself that UND has, perhaps, the best library of oil cores in the world (of course, limited to North Dakota and the Williston Basin).

That should be enough to get you started, but if you are an investor, think about this:

• Continental Resources is either the operator or a non-operator partner on every sixth well drilled in North Dakota
• To get to the Bakken, a driller needs to drill through several payzones in the Williston Basin; the Continental Resources geologists have studied the cores of every payzones from every sixth well in the Williston Basin
• Continental Resources has amassed almost 1,000,000 acres of the best oil basin in the world, according to Jason Wrangler
• CLR has initiated a program to target the Red River formation, the deepest formation in the Williston Basin;  CLR geologists will see the core samples of every pay zone in the Williston Basin

Now, go back to the first link and start connecting the dots.

The first link above starts out:

Tom Smith helps oil companies find their next big field using a very advanced technology that has been successfully applied in financial, military, and other industries. Smith, along with partner Sven Treitel, are developing and applying what are called unsupervised neural networks. Smith and others are now convinced that analyzing multiple seismic attributes simultaneously reveals information about the potential location of hydrocarbons that may go unnoticed using conventional interpretation methods.

Smith began the investigation into using unsupervised neural networks for seismic interpretation after learning from Turhan Tanner, an award winning geophysicist who passed away in February 2010. Smith and Tanner became co-researchers in this area prior to his death. Treitel, who was Tanner's colleague, then paired with Smith to continue neural network research.

As Smith explains, neurons learn and adapt to the characteristics of the data with which they are presented. Today, seismic interpretation involves six to 100 attributes of seismic data. Every one of those attributes constitutes a 3-D image.

And then this:

"In 1981, when I was teaching and doing consulting work, I was intrigued by the desktop computers at the time. I was teaching three 5-day seminars -- Seismic Data Acquisition, Seismic Data Processing, and Seismic Interpretation. That third class was a computer workshop. With the experience in data processing I gained at Chevron, I found you can learn a lot by running software, and making a fool out of yourself by making mistakes along the way."

Smith then formed Seismic Micro–Technology (SMT) in 1984, where he developed software for his Seismic Interpretation seminar. Smith started on IBM AT (advanced technology) computers and was one of the earliest renters of computers.

"I taught classes in London, Calgary and Houston," Smith explained. "It was always a challenge to march down each row of PCs with floppies and load in the software. We'd hold our breath that our printer would actually print. It was challenging and fun. We were breaking new ground."

Investors Only -- Pickens' Picks -- One Surprise -- Nothing To Do With The Bakken

Updates

March 27, 2012: Wow, the news for A123 keeps getting worse. Now, they have a $55 million bill to fix faulty batteries.  Data points from the article:

• 2nd time in three months that A123 found a flaw in its automotive batteries, used in several cars, including hybrid BMWs and the all-electric Karma, manufactured in Finland; Fisker headquarters in Anaheim, CA
• company's stock peaked above $25/share in 2009; now below $1.50
• A123 already shaky after Fisker announced it would be building fewer Karmas; the loss of business there resulted in several hundred Michigan employees being laid off
• Fisker Automotive recent cut off from hundreds of millions in federal funding
• an A123 plan in Livonia, Michigan, received nearly $250 million grant from the government; has not turned a profit since its IPO in 2009
• A123 burning through cash, and probably will need to borrow more money to cover most recent bill

Original Post

At first I was not going to link this article. There were no surprises in the list compiled by an oilman.

Then I took a second look. Look what's missing. There are no -- nada, zip, zilch -- unless I missed them -- no renewable companies in this list. This list was compiled by one of the most vocal advocates for wind energy back in 2008, or whenever it was. No, nothing.

There's a difference between renewables as a significant energy source for the world's needs and the opportunity for a retail investor to make money investing in renewables. It is obvious that renewables will have minimal effect on meeting global energy needs in my investing lifetime, but that doesn't mean investing in small renewable growth companies can't be very rewarding.

So, it's surprising that there are no companies in the renewable energy business on the Pickens list.

One of his very few (only one?) non-oil-related company was A123, and that took a huge hit, down almost 20 percent so far.

A123 is in the electric battery business, particularly for hybrid vehicles. Recently their share price plunged (not my word; "plunged" was used by Motley Fool.com). Motley Fool suggested the plunge was due to financial reasons (dilutive stock offering, and other matters). With 100 million shares outstanding, another 18 million shares is a significant offering. But when oil companies in the Bakken announce a public offering, their share price appreciates as often as not. What Motley Fool failed to note was that simultaneously with the dilutive stock offering, news was coming out of Japan that the automobile industry is in a world of hurt due to rolling blackouts following loss of 30% of their electrical capacity. And correct me if I'm wrong, on top of that, the vast majority of hybrid vehicles are coming out of Japan. And as long as I'm piling on, Motley Fool also failed to note something else (see below).

Incidentally, the headquarters for A123 in Watertown, Massachusetts, is just down the street from where I am typing.

I don't particularly like linking "advertisements" for one's products, but the message in this MarketWatch story is worth the link:

The underlying thesis is that a country in which public unions are starting to strike at the state levels and the federal government is cutting services and welfare for the poor and elderly can no longer afford to subsidize many of these so-called alternative/green companies like A123. And while that thesis continues to play out, one of the other primary tenets behind our bet against A123 specifically is that this Company is nowhere near generating real cash flow and that the Company will have a very hard time surviving without a major dilution or debt raise — or a miracle — in its current iteration. Indeed, on the company’s most recent earnings call, they told analysts to expect their EBITDA loss would widen again this year.

The title of the link from "A123 Headlines" was: "Alternative Energy Is Doomed and How To Profit On the Collapse" and is in the Wall Street Journal.

It will be interesting to hear tomorrow morning whether the president reiterates that oil is yesterday's energy in tonight's energy "security" speech. As one listens to the speech (which I won't hear) keep in mind that his economic czar is the CEO of GE, a huge proponent of wind energy, but a company that has been rapidly diversifying into oil; his Secretary of the Interior formulated the "permitorium" in the Gulf; and his Secretary of Energy is a nuclear physicist who advocates nuclear energy.

For Investors: Great 3-Page Article on Oil

Link here.

It was about thirty years ago when an article in Forbes magazine caught my attention that led me to buy shares in Phillips Petroleum, one of the first investment decisions I ever made. I've held those shares all these years and have continued to accumulate even after Phillips and Conoco, Inc., merged (2001) to create the third largest US oil producer at that time.

Now, I see another similar article in Forbes (not that there have not been others in Forbes over the years), and I wish I was thirty years old again. Talk about some great opportunities.

Martin T. Sosnoff has provided a great analysis of where we are likely to go from here.

He falls into the camp that oil is headed for $100/barrel, and as long as the increase is slow and steady, without spikes, it should not lead to undue demand destruction or another recession.

I think it is generally agreed that pricing revolves around OPEC, and by the percentage of the three-page article devoted to OPEC, it appears Mr Sosnoff concurs. (The other factor is the strength of the dollar, which influences the policies of OPEC.)

If so, the first question is whether Saudi Arabia has the reserve capacity to support the demand growth. Some analysts fear that Saudi Arabia has less than three million barrels of reserve capacity; others say Saudi has at least five million barrels of reserve capacity.

According to Sosnoff:

In a demand driven scenario, if OPEC is serious about containing oil prices it must increase production midyear by at least 5 percent. If worldwide GDP grows at 4.5 percent, not 3.5 percent, the Saudi’s spare capacity disappears in under 2 years, assuming they pump it out. Emerging markets, alone, account for all the projected gains in consumption – some 3 million plus barrels over the next 2 years.

It seems to me the world's laggard is the US, and analysts are now saying that US growth should be in the 3.5 to 4.0 range, which suggests to me that worldwide GDP should exceed 4.5.

Sosnoff, again: "... assuming they [the Saudis] pump it out." There are actually three components to that assumption. First, whether Saudi has the ability to pump that much (if there is that much currently available to pump); second, if Saudi has the will (wants) to pump that much; and, 3) whether the global infrastructure can handle that increased production.

The first point: is there that much available to pump? The consensus is yes, but there are plenty of naysayers. The Saudis are now using water injection in their larger fields, suggesting that the fields are significantly depleted compared to the 1950's.

The second point: do the Saudis want to pump more oil? Some Saudis have been on record that they want to stretch their reserves out and are not interested in maximizing production. For their children and grandchildren this is altruistic and magnanimous, but it does place upward pressure on the price of oil, something that is neither altruistic or mangnanimous.

The third point: can the global infrastructure absorb increased capacity. I assume it can. I assume all analysts would argue that infrastructure is not a concern. But I have said a number of times that I'm not so sure. They say there are already tankers full of crude oil streaming slowly to port, slowed down by international agreements. How many empty tankers are there, really? Furthermore, I doubt refining capacity has increased all that much in the past few years. Besides demand destruction due to the global recession of the past couple of years, environmentalists have made it tough on new industrial projects, and, at least for the shareholder, refiners have been losing propositions for the past couple of years. Without refiners, that additional crude oil being pumped by Saudi is not going to do a lot of good. I haven't checked refiner utilization lately, but I know it's been way down, so most folks would argue I am wrong on this. I do remember just before the crash of 2008 (or whenever it was), refining capacity was an issue.

But there is further evidence for concern about the infrastructure: the recent Alaskan pipeline leak and the Enbridge pipeline leak. Of course that had nothing do with OPEC production, but I would assume other companies and other countries are not immune to disruptions in their supply lines due to old systems. I won't even mention political unrest and/or militants disrupting things. Or hurricanes.

But I ramble.

The Forbes/Sosnoff article is one that should be bookmarked and looked at again six months from now and a year from now.

Oh, by the way, for investors, what does Sosnoff like? COP, OXY, SLB, and HAL. All of those companies operate in the Bakken. OXY is a new and very visible player in the Bakken. COP participates through its wholly owned subsidiary, BR. Among other services, SLB and HAL provide fracking services.