10
Feb

Wrap – Week Ended 02/08/08 (In progress)

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wrap-020808.jpg

1) As you can see from the first block of the table above, last week was another "tied to the whipping post one" except for the gassy stocks which were saved by a bigger than expected draw and cold weather that just won't seem to go away. 

2) For more thoughts on gas, see the last Thursday Night Gas Review and Gas Thoughts piece on the Gas Storage tab or click here to go there now. 

3) Oil rallied last week, first on further unrest in Nigeria where Shell was forced to keep an additional 130,000 bopd of Bonny Light off the market through March due to an inability to repair a damaged pipeline, then on OPEC comments from several delegates that a quota reduction was under consideration. This morning, a bomb disposal team has been sent out to a North Sea oil platform where 500 workers have been evacuated so look for another volatile week as the "terror premium bulls" jump back into the limelight.

4) Drybulk rates increased into the Chinese New Year. I have now have three positions in Drybulks on.

 

RRC Range Resources - 3 core areas (Southwest - (AR, TX, OK, NM), Gulf Coast, and Appalachia); plays including tight gas sands, coalbed methane, and shales and conventional reservoirs. In some fields, all four plays are stacked. 

  • 2.2 Tcfe - largely unconventional (they're in the following shales: Barnett & Permian Barnett, Woodford, Marcellus-PA, Huron-W. VA & VA, Floyd-AL)
  • They think they have another 3+ Tcfe in unproven reserves and 13
  • 82% gas reserves, 80% of production.
  • long reserve life (17.7 years),
  • very low F&D ($1.53 five year average, drillbit only; $1.61 all sources); 2008 F&D increased to $1.83 / Mcfe all sources which is still near best in show.
  • large drilling inventory (11,250 locations)
  • growth - consistent, double digit, 2007 beat targets
  • highly hedged (2008 77% expected gas production hedged north of $8.50; 36% of 2009 at 8.16)

The juice in the story is the Marcellus Shale in the heart of their Appalachian division where they have 650,000 net acres (they see net unrisked reserve potential of 10- to 15 Tcfe here). They've drilled 5 horizontal wells to date and results would appear. Their acreage and experience in the Barnett Shale will prove invaluable if they can make the Marcellus work. So far, those first five wells had a median IP of 3.7 Mmcfepd which is not too shabby. 

The stock is not cheap but that's probably warranted. Trading at 10.9x 2008 consensus CFPS estimates the stock is relative expensive to all but the growthiest of its competitors. That being said, its modest debt levels, extremely long-lived and low risk reserves, high growth rate, and massive drilling inventory warrant some premium.  The Devonian shale (of which the Marcellus is a part) is homogeneous across portions 4 states and 63 million acres, much larger than the Barnett so the enthusiasm here is that they could be at the forefront of the next Barnett or even something bigger. They plan to step up drilling in the Marcellus this year (60 wells up from 5 drilled so far) and the stock will likely be driven by well results and the price of natural gas. 

I plan to start watching more closely. This is not one of the companies I used to follow in a former life but we often used them as comp when we wanted to show how cheap somebody else we did follow was. So while the phrase "cheap for a reason" is often apt, so is the phrase "you get what you pay for". I'll be watching them more closely to get used to their trading pattern and will likely wait out earnings (which shouldn't provide too much of a shock either was they've pre-announced volumes and their reserve report). I may start using this a slightly less gas-levered, but more liquid play than SWN.

 

 

2 Responses to “Wrap – Week Ended 02/08/08 (In progress)”

  1. 1
    zman Says:

    These comments were made on the EOG post and I though worth repeating here:

    From subscriber Wyoming:

    On falling service costs:

    I mentioned service costs dropping previously. In the Barnett, for example, the completion portion of the well costs more than the drill. In the drilling phase, our main cost is the rig. Rigs are big weights and takes many truckloads to move. Newer generations like H&P Flex rigs are more efficient (less loads) and cut cost and cycle time. During the last boom, no rigs are available, rig companies lock in contracts and the money is almost in the bag. Sometimes, if our Capex changes, we will farm out our rigs and sometimes pay the difference on the day rates should they be lower than our contract.

    The crux, frac crews make up the majority of the completion cost (higher overall than drilling). An entire crew can mobilized from California to East Texas in 2 days and be working on the third day. This equipment is not on a contract like the rigs, when they work the turn $$. No work and they just burn depreciation. When the crew goes to East Texas, it starts an over capacity, price start to significantly drop. Supply demand.

    One last comment; FTI and CAM, I’m not high on for investment. Yes they have some deep water sub sea heads but they have a lot of dumb iron in the US and Canada plus increasing mom and pop competition. Deep water is RIG, DO, OII secodary HAL and SLB. CLB – lab analysis is next to impossible find, huge backlog.

    On shutting in production:

    Nobody really likes to shut wells in. The general experience is that they never come back to the same level of production prior to the shut in. Usually; oil wells are more forgiving than gas wells and it is usually hard to screw up a good reservoir. More than likely you will see a quick boom in services to bring wells back on line. Re-perforating, Coiled Tubing cleanouts and jet jobs, some acid stimulation work, possibly some re-fracs. The usual criminals CLB (Owen tools), HAL, SLB, BJS, Air Products, and a slew of value mom and pops…
    February 9th, 2008 at 1:05 am e

  2. 2
    zman Says:

    Hugo threatens oil war:

    http://ap.google.com/article/ALeqM5hRZxukC9QzFxJwtx5Oo3Ti6yT7gAD8UNOG201

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