Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Uccmal]

Wouldn't it be best to buy the cheapest ones that you have confidence can survive until oil goes up?

 

Cause if you believe it won't go up again, even the best operators are a poor investment.

 

I think, and have repeated many times, that we are in a see saw pattern.  WCP pays me a 3% yield while I wait.  And they are making money today on their hedges.  They are skilled operators.  There are others out there to be sure in the same league but not many.  With WCP I have management that made it through the worst of the bust, and grew.  I have management that owns 30-40 million collectively in the stock, is planning to buy back shares, and will keep paying, and has signaled an intention to increase the dividend.  They manage their debt carefully.  They just issued debt at 4.32% which is pretty cheap in the oil patch.  They dont issue a apaper annual report, and keep expensive press releases to a minimum.  Everything in their DNA is careful and considered. 

 

If labour and resources get tight, for whatever reason, who will have an easier time accessing these resources?  The guys who cut off your company's services or fired you will have a harder time.  The guys who kept you on, even at reduced capacity will get first bid.  The WCSB is a small place and a reputation goes a long way. 

[valcont]

Oil bulls , this was trending today.

 

http://www.marketwatch.com/story/opec-have-no-fear-the-us-oil-shale-output-crash-is-here-2017-06-27

[Cardboard]

I printed out the article to check it back in a few months: 100 million fewer barrels in U.S. inventories by the end of September? That would be a really big deal.

 

Regarding shale production, the article may be very well timed as the EIA reported today that Lower 48 States production was down 55,000 barrels/day last week. I had mentioned before that it was looking like plateauing and despite continued rig additions, the count increase has slowed dramatically over the last few months.

 

Cardboard

 

 

[Cardboard]

http://www.zerohedge.com/news/2017-06-30/us-oil-rig-count-drops-first-time-24-weeks-trump-unveils-us-mexico-petroleum-pipelin

 

Cardboard

[SharperDingaan]

The reality is that there is no one 'best' choice for the WCSB.

Arguably there is less risk as an investor taking on a WCP versus an OBE, but both will do very well if there is a upturn - it's just different tolerance for risk.

 

Ultimately it comes down to timing; if you're OPM, the O/G space probably isn't the place for you.

But if you can afford to send ships to the 'new land', & wait for their return; it's hard to find a much better place.

If you know your business, and held your ground - ultimately, you're going to be rewarded.

Put your stock away, do something else, and let the cycle work for you.

 

SD

 

 

 

[JayGatsby]

Interesting strategy: http://www.reuters.com/article/us-saudi-oilexports-kemp-idUSKBN19Y1E3 . They're still selling the oil, just trying to sell it elsewhere first.

 

Crude inventory within ~1M barrels of 2016. Should see the streams cross within the next few weeks, if not next week.

[Cardboard]

It was the third bullish weekly report in a row. Please note that oil products inventories were down 10.2 million barrels last week and that all key inventories are below last year at same date.

 

Then notice that refineries are consumming around 400,000 barrels/day more than last year or in the 17.2 million barrels/day range. This increased demand combined with reduced supply should normalize oil inventories fairly quickly.

 

Then at some point in the near future, all this minimal capex into long lead projects will hit supply. There is just no way around it. And with Libya and Nigeria near fully back on line where is the next supply boost possibly coming from?

 

Demand is growing 1 to 1.5 million barrels/day globally and supply is shrinking around 3 million barrels/day due to natural decline. The more shale in the mix and the worst the decline rate gets. So it is over one Canada or one Iraq that you need to develop each year.

 

Cardboard

[investor1]

Given some conviction that a tightening oil market could send prices to $70+ in the next 12-24 months, what are the best “free options” to get exposure? By “free option”, I’m thinking about companies whose equity value would be largely the same in 12-24 months if oil stayed at $50, but would have many multiples of upside if a price spike occurred.  Here are a couple (under-researched and over-simplified) ideas. Any others folks might add?

 

DNR – Market view: Over-levered and left for dead. PV-10 doesn’t cover debt at $50 oil. Option view: Low decline CO2 flood assets that will largely look the same in 12-24 months. First significant debt maturity in 2021 is a long clock on restructuring. $70 oil would send equity up 5x – 7x.

 

BTE – Has been discussed extensively on this board. But similar situation to DNR: highly levered with long dated maturities, FCF break-even (accounting for sustaining capex) at $50 oil, so it looks the same in 12-24 months save for shorter duration on the debt. FCF generation explodes above $50.

 

Obviously in both cases, if nothing changes, the debt maturities will be two years out rather than four. But these equities remind me of LEAPs, wherein the time decay is gradual when far out from expiration (or restructuring). Thus, I think a basket strategy with these sorts of names might be the cheapest way to get oil upside exposure with a favorable return profile. It seems like the oil bulls are going to have their story either proven or disproved over the next 1-2 years, and there might be a “cheap” way to get exposure if they're right.

 

[jmp8822]

Given some conviction that a tightening oil market could send prices to $70+ in the next 12-24 months, what are the best “free options” to get exposure? By “free option”, I’m thinking about companies whose equity value would be largely the same in 12-24 months if oil stayed at $50, but would have many multiples of upside if a price spike occurred.  Here are a couple (under-researched and over-simplified) ideas. Any others folks might add?

 

DNR – Market view: Over-levered and left for dead. PV-10 doesn’t cover debt at $50 oil. Option view: Low decline CO2 flood assets that will largely look the same in 12-24 months. First significant debt maturity in 2021 is a long clock on restructuring. $70 oil would send equity up 5x – 7x.

 

BTE – Has been discussed extensively on this board. But similar situation to DNR: highly levered with long dated maturities, FCF break-even (accounting for sustaining capex) at $50 oil, so it looks the same in 12-24 months save for shorter duration on the debt. FCF generation explodes above $50.

 

Obviously in both cases, if nothing changes, the debt maturities will be two years out rather than four. But these equities remind me of LEAPs, wherein the time decay is gradual when far out from expiration (or restructuring). Thus, I think a basket strategy with these sorts of names might be the cheapest way to get oil upside exposure with a favorable return profile. It seems like the oil bulls are going to have their story either proven or disproved over the next 1-2 years, and there might be a “cheap” way to get exposure if they're right.

 

BTE has been the closest thing I've found to what you are describing. I'd been looking for a similar LEAP-esque oil stock. That said, I haven't looked at DNR. Timing and position sizing has been my hang-up on how to play in this space. Anyone have thoughts on when/if oil hits $65-$70 in the next 24 months and why?

[investor1]

Anyone have thoughts on when/if oil hits $65-$70 in the next 24 months and why?

 

I think it's hard to get conviction on specifics (look at the small number of truly successful oil traders still intact) but I do know this: sentiment is bearish, and supply-demand fundamentals are improving. That's a recipe for a great set-up, but the trick is expressing the view in way that gives your flexibility on timing and a way out if you're wrong.

 

Additional food for thought:

- Since the end of February, U.S. core petroleum inventories (crude, gasoline, distillate, jet fuel, residual fuel) have experienced the sharpest decline since record keeping began in 1983.

 

[Uccmal]

Anyone have thoughts on when/if oil hits $65-$70 in the next 24 months and why?

 

I think it's hard to get conviction on specifics (look at the small number of truly successful oil traders still intact) but I do know this: sentiment is bearish, and supply-demand fundamentals are improving. That's a recipe for a great set-up, but the trick is expressing the view in way that gives your flexibility on timing and a way out if you're wrong.

 

Additional food for thought:

- Since the end of February, U.S. core petroleum inventories (crude, gasoline, distillate, jet fuel, residual fuel) have experienced the sharpest decline since record keeping began in 1983.

 

Apparently, no one has told the oil traders.

 

Happy to be holding Whitecap in this environment.  3% dividend on my purchase price.  Plenty of dividend coverage.  CEO buys shares every time the price gets this low: 20,000 this week alone.  Expanding production, EPs profitable.... 

 

Baytex has no downside protection, and gets worse as this drags out, with all that leverage.  If interest rates rise they are going to have to leverage at higher rates. 

 

As to price sensitivity I think, and this is just my opinion, that holding a really good company such as WCP, which is trading obscenely cheap, gets you nearly the upside of a Baytex with massively less risk.  Obviously there are others getting not much love such as Raging River, or Seven Generations in a similar situation. 

 

My theory is that the companies with the highest quality balance sheets will be the first to bounce.  The Baytex's of this world will be caught in a wait and see (if this oil price rally holds)situation for months or years into a price rally.  I could be wrong but I have now been observing this unfolding as a shareholder for just about 3 years. 

 

Disclosure: 10-12 % position in WCP, 3-4% in OBE (Pwt); former BTE holder: got out just before the worst of the recent price collapse. 

[sculpin]

Marshall Adkins latest update...

 

Clearly, energy investors continue to express skepticism toward oil market fundamentals as they remain focused on 1) U.S. shale growth, 2) potential negative demand impact from electric vehicles, and 3) OPEC compliance (and noise). This oil pessimism has persisted despite recent huge drawdowns in U.S. oil inventories providing clear evidence of a massively undersupplied oil market. In fact, we think the unprecedented reported U.S. oil inventory reduction over the past six months even understates the tightness in the oil market since these large drawdowns have occurred despite the headwind of sales from the Strategic Petroleum Reserve (SPR).

 

In today’s Stat we’re turning our focus toward the SPR and the impact on U.S. oil inventory trends. In short, we believe that the oil market is even tighter than the bullish U.S. commercial inventory trends suggest because : (1) the dramatic improvements in oil inventories have been partially masked by drawdowns from the SPR, (2) commercial oil inventory trends should continue to improve sharply over the next six weeks, (3) forthcoming SPR sales starting again in October will generate additional noise, and (4) large draws of commercial inventory should still be a major bullish catalyst for oil prices the rest of this year.

Adkins_latest.pdf

[Uccmal]

Can someone decipher this Orwellian doublespeak for me from the EIA highlights thi week:

 

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.4 million barrels from the previous week. At 457.8 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year."

 

The 'middle of the average range'.  Like isn't that right on the average?

[Cigarbutt]

Perhaps this is intentional ambiguity.

 

But you often find this "language" in bureaucratic institutions.

 

To help understand where my kids stood when they went through elementary school, teachers often used a picture which looks similar to the link below.

 

https://www.csd.k12.sd.us/cms/lib/SD01001880/Centricity/Domain/186/Bell_Curve_Visuals.pdf

 

"Most people in the world fall in the average range."

 

Perhaps, it is just a way to say that the true value of the average is uncertain/unknown and they just use a concept of confidence intervals with a certain percentage probability (ie 95%) that the true value lies in the interval.

[JayGatsby]

Can someone decipher this Orwellian doublespeak for me from the EIA highlights thi week:

 

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.4 million barrels from the previous week. At 457.8 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year."

 

The 'middle of the average range'.  Like isn't that right on the average?

I've posted these links before, but I really like John Kemp @ Reuters' graphs of these:

. He's in the UK so on vacation this week and last, but should still paint the general picture. I find it a lot easier to scroll through his tweets weekly rather than try try to decipher a bunch of nonsense articles.

[Cardboard]

U.S. inventories of about everything are down around 5% from last year and the steepness in decline is a record according to some analysts. It has been 7 weeks in a row that we have had large declines.

 

Then you have U.S. refineries processing record amounts of oil and U.S. demand itself for gasoline hit a record this summer, so it is not just exports. Sure there is Harvey that will skew a lot of things temporarily but, I was told that the market was a forward looking mechanism?

 

I use CNBC mobile and everything related to oil is a negative headline. It is as bad as news related to Trump! However, you will not read that inventories are now at around the 5 year average and declining fast. There is not much fanfare either when the rig count declines as in recent weeks or when Lower 48 oil production declines as we saw last week.

 

This stinks manipulation to keep oil prices low. Maybe it is true hate for oil from the leftist media to promote their clean energy agenda or it is setup to help the economy but, eventually, and the longer it goes, we will hit a massive air pocket.

 

Venezuela is out of money and the U.S. is now putting sanctions on. Saudi Arabia still bleeds $50 to $100 billion/year at these prices. Most OPEC countries have large budget problems and Russia is not doing well either. Then there is every other country that you don't hear about with declining production already since a few years.

 

Then growth in demand next year is about all is needed to soak up all the cuts from OPEC and non-OPEC of 1.8 million barrels/day if the cuts are even real.

 

Right now this feels like a massive coiled spring. It is almost like traders are keeping it as low as possible and once things tighten further, they want to see how fast shale and others meet demand at slightly higher prices. What will be the reaction when there is no immediate response? Or worst, when some event hits supply by a tiny amount?

 

Cardboard

[StevieV]

I have been bludgeoned on my O&G holdings so far this year, but I think the picture for oil is becoming increasingly bullish.

 

The inventory reports pre-Harvey have been starting to show a pretty steady bullish trend.  I think there is growing evidence that US production growth is going to disappoint and EIA 914 report out today adds to that.  I also think that demand trends are picking up.

 

Harvey has thrown a wrench into the data in the short term.  Very hard to say what the inventory reports will show in the next few weeks and what they will mean, if anything.  Nevertheless, I think the supply and demand picture is tightening substantially and is going to support rising prices before too long.

[JayGatsby]

This chart is pretty interesting:

 

So either the weekly production is too high or the monthly production is too low. The recent inventory draws I guess would point to the weekly production being too high. Here's the source data for the monthly: https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_m.htm

[Cigarbutt]

Will venture into this despite the real risk of being called ignorant again.

Maybe slowly catching up though.

 

Looking for true inflection points.

Before shooting the messenger, maybe see this as playing devil's advocate.

 

I realize that a lot of inventory data (trend wise) point in the right direction and some absolute negative inventory changes seem to be significant (ie comparing to some prior years etc) but there is a lot of noise. And what about where the absolute numbers are now compared to historical levels.

 

Perhaps this is linked to the seemingly benign comments about the range of the average from before. One may still be within the average range despite getting across the 15th percentile. To make money as value conscious investors, we have to catch these hidden gems (gap between fundamentals and sentiment). You pay a high price for a cheery consensus. But this seems like a long journey. My question is: Are we there yet?

 

http://www.bessemertrust.com/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/Public/Published/Insights/Documents/Bessemer_Trust_A_Closer_Look_07_22_16_Inventories_and_Oil_Prices.pdf

 

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPC0_SAX_YCUOK_MBBL&f=W

 

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WTTSTUS1&f=W

 

 

[mattee2264]

 

I've done a bit of work on Denbury and it does look promising if you want to speculate on oil prices getting above $60 a barrel in the second half of this year.

 

It is your classic overleveraged high cost producer with debt of $2.8BN versus equity of $500M and with all in sustaining costs of $55/barrel. They have some leg room as the covenants have been relaxed for this year and only apply to bank debt which is only $600M and the notes payable of $2.2BN aren't due until 2021 onwards. They also have $500M or so untapped credit facility. Of course these are subject to re-determination and they are going to need more external funds to sustain production if oil prices stay low. So the spectre of financial distress in a continued weak oil price environment contributing to keeping the stock price down.

 

But it is trading close to early 2016 lows of $1 a share. And later in 2016 when it looked like OPEC would be able to get oil prices well above $50 and optimism returned the price got as high as $4.

 

For some rough numbers Q1 2017 run rate is 60,000 BOE/D or 21.9m a year. With oil prices at $65 they'd make a margin of $10 per barrel or so and would make net income of just under $220m or lets say $132m after tax. There are about 374m shares outstanding so that works out at around 35 cents per share. Put a 10x multiple on that and you get into the mid $3s which is more or less where it traded late in 2016. As a point of reference in the high oil price environment before the crash they were making over $1 a share in income with a much higher cost base.

 

Although my maths clearly indicates traders were being way too optimistic that oil prices would rebound a lot higher than they actually did as in reality they never got high enough for Denbury to break even. I'd expect a bit more scepticism this time round if oil prices started trending upwards. But by virtue of its cost structure and leverage you'd expect the stock price to outpace any oil price increase. And it does have defensive characteristics from the relaxed covenants, lack of near term maturities, and the fact it survived the initial shakeout etc.

 

 

 

 

[Cigarbutt]

mattee2264,

 

I had looked at this company, among a few, in 2015-6 but no longer up to date.

You may find the following helpful.

 

https://tulane.app.box.com/s/54xw38snzfxz3e61xy7gpmj2rra4iluo

 

[sculpin]

QUOTE: "The market is selling inventories from everywhere,” @Mercuria CEO Marco Dunand said in an interview #OOTT

 

https://www.bloomberg.com/news/articles/2017-09-20/oil-traders-empty-key-crude-storage-hub-as-global-demand-booms

 

 

[dyow]

U.S. inventories of about everything are down around 5% from last year and the steepness in decline is a record according to some analysts. It has been 7 weeks in a row that we have had large declines.

 

Then you have U.S. refineries processing record amounts of oil and U.S. demand itself for gasoline hit a record this summer, so it is not just exports. Sure there is Harvey that will skew a lot of things temporarily but, I was told that the market was a forward looking mechanism?

 

I use CNBC mobile and everything related to oil is a negative headline. It is as bad as news related to Trump! However, you will not read that inventories are now at around the 5 year average and declining fast. There is not much fanfare either when the rig count declines as in recent weeks or when Lower 48 oil production declines as we saw last week.

 

This stinks manipulation to keep oil prices low. Maybe it is true hate for oil from the leftist media to promote their clean energy agenda or it is setup to help the economy but, eventually, and the longer it goes, we will hit a massive air pocket.

 

Venezuela is out of money and the U.S. is now putting sanctions on. Saudi Arabia still bleeds $50 to $100 billion/year at these prices. Most OPEC countries have large budget problems and Russia is not doing well either. Then there is every other country that you don't hear about with declining production already since a few years.

 

Then growth in demand next year is about all is needed to soak up all the cuts from OPEC and non-OPEC of 1.8 million barrels/day if the cuts are even real.

 

Right now this feels like a massive coiled spring. It is almost like traders are keeping it as low as possible and once things tighten further, they want to see how fast shale and others meet demand at slightly higher prices. What will be the reaction when there is no immediate response? Or worst, when some event hits supply by a tiny amount?

 

Cardboard

 

where am I?

 

gonna move to planet zolton.

[SharperDingaan]

We might want to think in terms of the 'S' curve of technology - a slow start that builds slowly until adoption hits critical mass, rapid acceleration as per the neck of the curve, then slow fan out as it becomes evident that inflated & unrealistic market expectations are not going to be met. The length of time until critical mass, time in the neck, and time in the fan out; changing with every cycle. However, as with most cycles; the longer it takes to build - the stronger & longer it often turns out to be.

 

Global inventory is being rapidly run down, as per OPEC intent.

Supply disruption from N Korea/Trump, Venezuela, & the collapse of off-shore is sucking hard, resulting in as little price change as possible. Furthermore, pricing WTI at +/- USD 50/bbl keeps demand high - & bleeds out US shale production through high depletion. When the bulk of that global inventory is gone, we will have critical mass.

 

How long to get there is a guess, but most would grant the probability that the fuses are already burning.

 

SD

     

[SharperDingaan]

"Kuwaiti Oil Minister Essam al-Marzouq, who chaired Friday’s meeting in Vienna of the Joint Ministerial Monitoring Committee, said output curbs were helping cut global crude inventories to their five-year average, OPEC’s stated target"

http://ca.reuters.com/article/businessNews/idCAKCN1C002U-OCABS

 

Notable is that he's talking about AVERAGE, without any reference to the fact that supply during some of that time was extremely high as OPEC flooded the market for an extended period of time with the intent of driving US Shale out of business. He's really saying that at the margin, OPEC is going to be cutting back supply to roughly about the degree to which it flooded the market.

 

But during the five-year average period non OPEC production was depleting, & there wasn't much in the way of new global LONG TERM production investment to replace it - it was all shale oil with high immediate production and a typical 35%+ annual depletion rate. Better still is that reliance on shale to meet the GROWING production gap, means more drill crews are needed & pressure on costs - raising the cash cost of drilling by quite a bit. To fund the well, shale producers are going to need higher crude prices.

 

LONG TERM production investment (ie: offshore) costs a lot more upfront, but gives you YEARS of low cost oil as scaling keeps working the cost/bbl down. SHORT TERM production investment (ie: shale) costs less up front, but makes you highly vulnerable to supply shock as you need a new replacement well every 2 years just to stay still. And .... just as we saw with the US housing crises, if the refinancing rate (drilling costs) at the time your teaser rate expires (2 years after that first shale well gusher) is significantly higher, you're f****d.

 

All good  ;)

 

SD