12
Jul

Wrap – Week Ended 7/11/08

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Another slow week in the energy patch. Only (CLR)'s Bakken news (see Thursday post) provided any meaningful catalyst to a group that is enduring the summer doldrums before crossing the earnings line into the storm that will be second quarter results. We are in the middle of positioning for 2Q numbers with (SLB) kicking off the season this coming Friday (7/18).

Holdings Watch:

  • (HK) - Sold 1/3 of the July $45 Calls (HKGI) for $4, up 105%.
  • (CHK) - Sold 1/3 of the July $60 CHK Calls (CHKGL), also for $4 for a 41% gain.

The Wiki Holdings Tab is updated. We continue to hold a number of July positions at present (normally I'd be out or almost out of the front month by this date) and will no doubt register two or three scuds at the end of the coming week.  

Question From Crysball on the Friday Post: Subscriber question regarding a post on another energy site regarding natural gas prices. The author had three main points:

  1. He saw BTU convergence between natural gas and oil. On a BTU basis, gas should trade on a 1 to 6 ratio; it currently trades at a 1 to 11 ratio.
  2. He says N. American NG prices are strongly driven by Europe and Asia pricing, says U.S. production is up 5% YoY, and that pipeline and drill rig shortages and rapid depletion rates are limiting production gains.
  3. Finally, he writes NG demand to strengthen as utilities stop adding coal capacity in favor of solar and wind which have their own set of gas demand drivers. Also, talks about substitution of natural gas increasingly for gasoline as a demand driver for natural gas in North America. 

Here are my thoughts: 

  1. I don't see the BTU ratio moving the price of gas. I see oil as an upward dragging influence to be sure but the ratio has been higher than heating value for many years and I'd bet it stays at a 1 to 9 to 1 to 12 ratio for the next several years UNLESS oil were to really crack lower.
  2. On the LNG comment: exactly my point in pointing out each week that the LNG simply is not coming here. Not when the winter strip in Europe, for example, is over $20.
  3. On the production comment: We are running a little hotter than 5% annualized natural gas marketed production growth. More like 9%. This is unheard of growth and gives me cause for pause. However, in raw numbers, taking the dearth of imports and the rise of exports into account, gas available in the U.S. is up only about 2% relative to year ago levels. So as long as Mexico demands increasing volumes from Texas and the Western border states and gas prices in Asia and Europe keep tankered volumes headed in directions other than the Western Hemisphere I'm not overly concerned.
  4. The decline rates in the shale plays are asymptotic as the author indicated. Which is why the dominant producers punch more wells each year. The risk in these plays is next to 0 from an exploratory standpoint so it is really just a function of capital and return. The big players, who represent an overwhelming majority of the production ramp will eventually get the rigs to carry out these accelerated drilling programs at the expense of a lower IRR. Right now the reduction in return is a pittance as the IRR's are in the high double and in some cases triple digits on the newer shale plays at this gas strip.
  5. On his final points: Long term I agree. Near term natural gas demand for electricity generation continues to gain market share on competing fuels. In terms of transportation natural gas consumption is very small and I would not expect it to be a significant price driver for another 5 to 10 years at best. 

Another Question RE The Bakken and TFS: I'll put this one in the comments section on Sunday.

 

On To The Weekend Wrap

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4 Responses to “Wrap – Week Ended 7/11/08”

  1. 1
    zman Says:

    From Crysball on Saturday

    Z, On Thursday you mentioned the recent CLR well in the TFS Stratigraphy:

    “Taking the wells down into a range between the middle Bakken and the TFS can be accomplished for low dollars. They would then frac the horizontal lateral up into the middle Bakken and down into the TFS attempting to drain both zones with a single well bore. Suddenly your F&D costs are dropping severely.”

    Could you elaborate (and perhaps elicit Wyoming’s comments):
    1:Are you suggesting this was done with a single lateral tapping both zones in a single completion, or, will this be accomplished in a staged completion?
    2:Is the the TFS defined, i.e. does it lay congruent with the the Middle Bakken ove the entire Middle Bakken?

  2. 2
    zman Says:

    Staged completion as per their Rocket completion they talked about on the 1Q call.

    plug and packer multi-stage fracs

    This is a quote from my notes:
    It does not take a lot of capital to take it down to the TFS. Trying to frac it and Bakken (from below) with single laterals with multi-stage fracs (every completion going forward will use the method used at Rocket) –

    The TFS is not seen over the whole play but seems to be present in much of the Neeson Anticline region. They either aren’t willing or are not yet ready to share how much of their 500,000 acre position is prospective for TFS as well as middle Bakken. I’m sure an analyst or two or three will try to dig this out of them on the 2Q call. With these kind of rates TFS is not only icing on the cake but economic in an of itself. Could be a size reserve add if much of the region is TFS w/o communication to the Bakken. Don’t have any good feel at all on reserves but it would be significant if the acreage prospective is.

    Other operators are also mention the TFS now so that gives one the thought that its more than just a smattering, maybe not homogeneous but more than just a few bright spot or they and the others would not be making a deal out of it. CLR is not a hypey pr driven firm after all.

  3. 3
    Wyoming Says:

    Crysball,

    I’m not very good on Bakken stratigraphy and there are probably a couple of others on this site who can better describe depositional environments. Generalities just make life simple, shales are part of a marine deposition and the anticline means that tectonics shifted the ground like a sine wave. The anticline is at the top, syncline on bottom. If what Z says is true, erosion and the buckling will make the TFS appear in some trends and then disappear. Good news is the marine environment, offset wells and 3D seismic can pretty much tell you where to drill and delineate.

    For the drill and completion. They will probably drill into a Bakken lens below the TFS and more than likely the frac will grow up into the TFS. There is some technologies which will show them in almost real time where the frac will grow. There is a lot of influences on the rock mechanics, so it is hard for me to be precise on where these fracs are going. Of course faults and natural fractures is a whole other game, depends on the surrounding formations. No Bakken below, no problem, just go horizontal into the TFS or just above, a small amount of the frac will go down more than likely.

    For multi stages they are probably doing plug and shoots, real cheap, simple tried and true method. Some people may use an openhole packer system with sifting sleeves but there is some risk with that.

    Costs – no additional frac costs, a negligable amount on the drill if they have to go lower when the budgeted higher. The curve should be pretty much the same in difficulty to drill.

    Little blabby but I tried to talk a little about everything.

  4. 4
    texana Says:

    http://library.corporate-ir.net/library/19/197/197380/items/297085/Tristone%20conference%2061008%5B1%5D.pdf. I don’t know if this link will work, if not go to clr’s website & click 6/10/08 tristone conf. Slides 12 thru 14 will give a better idea of how the bakken & tfs formations appear thruout the basin. Other factors that stand out 800,000 ac in unconventional resource plays, PRODUCTION SHOULD INCREASE BY 43% YOY to 43k boepd.I don’t know another oil co in this cap range with kind of growth, especially oil production. The stock tends to have large price moves but this is directly related to the fact that Mr. Hamm and other insiders own 75% plus of the stock & very seldom trade the stock. Mr. Hamm is the richest man in Oklahoma & that is saying a lot…I’m more of a stock trader than option trader, so i can take some short term weakness, near term support is 75. Longer term this stock should move up to 125 to 150 range.I can not find a better e&p stock, with a gallery view page on stockcharts.com, than clr. It is only a take out stock if Mr. Hamm says so, but at 150 I think he says yes. E&P prices r high so no body wants to buy at the top, but its about time for w to leave & the future is uncertain. late nite musing of an oil stock trader….tex

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