Z’s Dictionary

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A Work In Progress… 

Table of Contents:

I. Units

II. Reserve Terms and Metrics

III. E&P Metrics 

IV. Other 

V. Comment Slang 

Units: 

  • Bbls – barrel of oil
  • Mcf – thousand cubic feet of gas
  • Bcf – billion cubic feet
  • Tcf – trillion cubic feet 
  • BOE – unit of equivalence used to lump oil and gas reserves or production together for ease of measurement. 1 BOE = 1 barrel of oil or 6 Mcf of gas.
  • Mcfe – inverse of the above. 1 Mcfe = 1 Mcf of gas or 1/6 of a barrel of oil
  • Bopd – barrels of oil per day
  • BOEpd – Barrel of oil equivalent per day
  • Mcfgpd – million cubic feet of gas per day
  • Bcfgpd – billion cubic feet of gas per day 
  • Bcfepd – billion cubic feet equivalent of gas per day
  • M – thousand
  • MM – million


Reserve Terms & Metrics:

Reserves: -Economically recoverable oil and or natural gas. They are broken down into three primary categories.

  • Proven or P1 Reserves - standard measure of reserves allowed under SEC guidelines. Defined as oil and gas "Reasonably Certain" to be producible using current technology at current prices, with current commercial terms and government consent, also known in the industry as 1P.
  • PDP –  Proved Developed Producing. This is where the production for a company is coming from at the time of the reserve statement. Defined a reserves that can be produced with existing wells and perforations, or from additional reservoirs where minimal additional investment (operating expense) is required. 
  • PUD – Proved Undeveloped. PUD reserves require additional capital investment (drilling new wells, installing gas compression, etc.) to bring the oil and gas to the surface.
  • P2 Reserves (P1+Probables (aka P50)): All of the above plus a less certain category of reserves know as probables. Probables are simply deemed to "probably be there". Strictly speaking they are defined as oil and gas "Reasonably Probable" of being produced using current or likely technology at current prices, with current commercial terms and government consent. The P50 label comes from the generally belief that they have a 50% chance of being developed.
  • P3 Reserves  (P1+P2 + (Possibles aka P10 or longshot)): "having a chance of being developed under favorable circumstances". Some Industry specialists refer to this as P10, i.e., ideally having a 10% certainty of being produced in the foreseeable future.
  • F&D – Finding & Development Costs: The cost of adding reserves. The so called "all in" F&D measures the cost of adding reserves including acquisition and divestitures. Drill bit R&D excludes asset transactions and answers the question, how much did it cost to add reserves through operational activities. The basic equation is: F&D = Cost (C) / change in reserves (dR) and is expressed in $/BOE or $/Mcfe. The lower the better.  
  • Reserve Replacement (RR): measure of production (P) for a period vs change in reserves (dR) for the same period. So RR = dR / P expressed as a percentage. In general the higher the better. Below 100% and you are not replacing reserves that you have produced with new reserves.
  • Reserve Life (RL) aka (RP): Simple measure of the life in years of a company's reserves. A short reserve life might be 3 to 4 years for a GOMex Shelf player where production is very high and quickly drains the reservoir. Conversely, a long life player in a gas shale might have an RP of 10 or more years as those reserves generally take longer to get out of the ground. In general, there is a positive correlation between RP and P/CF (not a rule but a rule of thumb).

E&P Terms

  • E&P – Exploration and Production. This is the part of the business focused on actually looking for and developing oil and gas reserves. Also known as the Upstream portion for a Major like XOM, CVX, COP, BP etc  
  • LOE – lease operating expense. Also referred to as op costs, which is actually incorrect because should include G&A and production taxes, this is essentially the cost of operating the wells. Better expressed in per unit terms like LOE/Mcfe or LOE/ BOE; the lower the better.
  • DD&A – depreciation, depletion, and amortization
  • P/CF – price to cash flow per share. More useful in evaluating E&P companies than PE for a number of reasons not the least of which is that the E&P business lives and dies by cash flow, not earnings. Cash flow is used to fund further development, make land acquisitions, etc. Earnings may or may not be comparable between two different E&P companies since accounting schemes vary (full cost or successful efforts), tax situations can vary widely and a host of other non-cash issues that can cloud an apples to apples picture.
  • TEV / EBITDA – Total Enterprise Value /  Earnings Before Interest Taxes Depreciation and Amortization. TEV = Market Cap + Debt – Working Capital. This measure takes into account varying capital structures when comparing E&Ps.

Other: In No Particular Order

Average daily revenue – contract drilling revenue earned per revenue earning day in the period.

Revenue earning day – a day for which a rig earns dayrate after commencement of operations. 

Rig utilization – the total actual number of revenue earning days in the period as a percentage of the total number of calendar days in the period for all drilling rigs in a fleet. 

MEND – Movement for the Emancipation of the Niger Delta. Kidnap happy Nigerian rebel group. Here's the Wiki.

CPC – Climate Prediction Center 

NHC – National Hurricane Center 

CDDs – Cooling degree days. A measure how how it is in the US. I employ population weighted CDDs from the CPC.

HDDs – Heating degree days 

GOMex – Gulf of Mexico

Shelf – GOMex drilling or production in less than 1,000 feet of water

Deepwater – > 1,000 feet of water 

Peoples Revolutionary Army (EPR) – A Mexican rebel group responsible for a series of oil and gas infrastructure bombings.

STEO – EIA's short term energy outlook. A highly statistical look at near term energy demand and production (oil, natural gas, coal etc)

NG – Natural Gas, measured in Mcf 

CL – Oil

Crack Spread – the difference between what it costs a refiner to buy a barrel of oil for and what they can sell the various products they crack that barrel into. The generic crack spread is the 3-2-1 or 3 barrels of oil, 2 barrels of gasoline and one of distillates. So if you've got 3 barrels of crude at $70 that theoretically would cost a hypothetical refiner $210. Then you've got your products. Say gasoline is selling wholesale for 2.25 per gallon. 2 barrels or 42 gallons per barrel would be worth $189. On the distillates side, say they are selling for $2 per gallon. One barrel of distillate would yield a selling price of 84. So the 84+189 = $273 less the 3 barrels of crude cost of $210 = which equals a crack spread of $63 which would make the refiners jump for joy at the time of this printing.

Single Digit Midget – any stock that trades under $10 

"Pinning". There are many definitions on the internet so I will add one more, based on my own bought and paid for experience. When I refer to "Pinning Action" or say the stock is getting pinned at $xx I mean the following:

  • 1) Simple Definition. A gravitation towards the nearest strike with subsequent dampening in volatility in the next to last or last day before option expiry. Telltale signs that pinning is setting in:
    • an easy, low volume glide in the direction of the strike
    • followed by back and forth trading around it in tightening standard deviation (think of a metronome running out of momentum or something circling the drain and you've got the right idea).
  • 2) In my experience this occurs more readily when:
    • the stock is near the strike with the highest or next to highest open interest in puts and /or calls,
    • and in underlying issues that have more liquid options trading.
  • 3) It can run contrary to an otherwise sector driven day (as in when the peer group is up 3 to 4% and the stock of the call you are pinned in is flat, slightly up, or slightly down.
  • 4) Pinning occurs in some names with more regularity than others which can yield some nice returns via naked call writing for instance. However, one late trade on the wrong side of the strike can result in you buying and delivering stock to your caller on Monday morning (talk about a case of the Mondays).
  • 5) the cause of this action may not necessarily be as malevolent as some option investors feel it it, especially in issue with high put and call volumes near the strike…here the action may just be traders on both sides the trade unwinding their stocks positions that were hedged with or otherwise linked to options.
  • 6) What to do if you are pinned? Don't panic but sell as soon as you see that volatility ebbing. I have known many a trader (myself included) to try the last day buy for dime and sell for a quarter move only to get pinned, stare unblinkingly at the screen for the rest of the day, finally taking a nickel for their trouble if they are lucky.
  • 7) Pinning = the death of volatility which = the death of premium. When implied volatility collapses all you are left with is the time to expiration and the distance to the strike to determine value (As we're talking about pinning, both of those items are going to be small). This is not advice because as you know I don't do that but be kind to your capital when playing end of expiry games like this.

Thoughts on insider transactions:

  1. CEO's and other executives sell their own stock for a variety of reasons: diversification and new or additional house being chief among them. Approaching retirement, illness, mistress, yachts, and approaching bad news for the stock fall further down the reason list.
  2. CEO's and other executives buy their own stock chiefly for two reasons: either they think it is going to go up or they want you to think it is going to go up.
  3. In looking at insider selling key considerations I look at are as follows:
    1. How much was sold as a percentage of holdings. If they sell out, especially top management this is obviously a red flag. As a general rule, the larger the company, the more I get uncomfortable with large percentage transactions by top management but I don't have a strict level since it depends on how people are paid (cash vs stock).
    2. What was paid for those shares or what level were they acquired at.
    3. Is the sale part of a planned diversification program or 10b5-1 program?
    4. Percentage of compensation from shares vs cash. If they are paid entirely in shares than you should expect to see more in share sales.
    5. Is there a continual outflow with no purchases or is the sale more one-time in nature.
    6. Is it just one member of management or is everyone jumping ship?
    7. What has the stock been doing and what is the current and long term business outlook?

Comment Slang:

LOL – laughing out loud

ROFL – rolling on floor laughing. 

TY – thank you

Here's a whole list but I would ask that you please keep it clean and respectful in the comment area. I don't want to see any inappropriate or derogatory acronym usage. TY

Beer Thirty – the time on the site on Friday's or just before holiday's when things tend to get a little silly in the comment area. Sambone's "Tini Time" is the more refined equivalent. 

Bank Line Redeterminations. This fear applies to firms big and small but the smaller the firm, the more likely it is to be critical or even entity ending. In a nutshell, the lending group for a bank line of credit (usually more than one and often upwards of 20 banks) determines what amount of money they will lend on a revolving basis, like a charge card, to exploration and production companies based upon the perceived value of the company’s Proven Reserves and the company’s balance sheet. All other things being equal, the greater the discounted present value of your reserves, the more the banks will lend you.

The discounted value is a reflection of the reserve report based upon commodity prices. Periodically (usually once a year but sometimes more frequently), the banking group conducts a redetermination of the borrowing base. For E&P companies this usually occurs in March or April once the group has had a time to look at the fresh prior year’s reserve report. They take a look at:

  1. what changes have occured relative to the reserve report (did the company replace its production or not? how much did it grow?)
  2. commodity prices (are they up or down making some of the reserves more or less or not economic at all?),
  3. the forecasted outlook for commodity prices and costs,
  4. the changes that have occured with the balance sheet  of the firm,
  5. the firm’s capital budget for the coming year (what’s the plan and is it doable?)
  6. and a host of other lessor variables.

There are  restrictions (covenants) placed on the company like, if you sell more senior debt, your borrowing base will be reduced or you must keep your debt to reserves ratio below a certain level or your debt to equity below 50%, etc. The tricky part occurs when a company has "charged up" its line of credit and the bank reduces the borrowing base below that level.  The company will then need to raise equity capital or sell assets to reduce its borrowing to a level within the banks’ allowance. If they can’t raise capital or otherwise reduce their bank debt ("borrowings" under their  borrowing base) , its up to the company and the banking group to either work something out … or not.  If it falls out on the "or not" side, then the bank can move to seize the assets, which the company will pre-empt by declaring a Chapter 11 ("Voluntary") Bankruptcy.  This is how a bank can push a company into a Chapter 11 situation.   

 

 

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