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

[Cardboard]

Saudi Arabia reportedly shuts down half its oil production after drone attack

https://www.cnbc.com/2019/09/14/saudi-arabia-is-shutting-down-half-of-its-oil-production-after-drone-attack-wsj-says.html

[Joe689]

This could be the big one, the ME meltdown, the 100 oil situation.    Would fit a bad situation with lowering rates and no inflation.  Oil spikes coincide with recessions.  Feds are running out of tools.  Iran may be taking the rest of the world with it

[SharperDingaan]

The ME is where an ‘eye-for-an-eye’ was invented, and goes back to Hammurabi’s Code and the Babylonian Empire;

start a conflict, and there will be no winners. Take out my oil facilities, and I will take yours.; WTI spikes, inflated US and EIA inventory reserves on stand-by to mitigate?

 

Notable is that Iran needs (short-term) higher crude prices (to discount from), and the US/SA/etc. needs lower ones (long-term) to prevent demand collapse and a resurgence of US shale production. WTI at maybe USD 55-60 for the US, USD 65-75 for the Iranians?

 

Iraq used to have Hussein, Iran used to have Khomeini? SA used to have King Abdullah/MBS?

 

 

Sadly, selected quotes from a previous post .. that would seem somewhat precscient today.

The reality is that oil facilities cannot be protected against against attack, no matter how mighty your weaponry. The real protection was an 'eye for an eye', now being tested. SA needs the Aramco IPO to go through, and the new oil minister (MBS) needs to demonstrate strength. Not a healthy combination. 

 

SA will allready be sucking hard on global inventory, and WTI prices will reflect it. Most would expect additional sucks as retallitory strikes take place, and daily draws continue for longer than anticipated. The US/SA will have itchy fingers; and it is not hard to launch additional strikes on previously damaged facilities, and/or sever pipelines to prevent egress from Red Sea loading facilities.

 

The long-term 'plan' may be 'regime change' in Iran. But today; most would argue that it's really 'regime change' in BOTH Iran and SA.

They are each others Yin/Yang, take one and the other collapses as well.

 

Interesting times.

 

SD

 

 

[Joe689]

Iran might be playing "if we go down, everyone goes down" in relation to the economies.  Iran may calculate that a spiking oil price could easily lead to world recession.  Historic low rates and spiking consumer gas prices is a dangerous combination.  Iran may play that card. 

[Spekulatius]

I think the spike in crude will be relatively contained and short lived.Aramco is probably going to restore the destroyed facilities in a few weeks and the release from the strategic reserve will compensate for any short term restrictions. If we indeed go into a recession, crude prices will go down anyways.

[sculpin]

https://www.cnbc.com/video/2019/09/16/sophisticated-actor-targeted-saudi-oil-facility-says-expert.html

[SharperDingaan]

We think that KSA has to reply in weeks versus months, and do it before the strip goes into contango in any major way.

As long as the focus stays on the physical spot, and successful ability to meet the on-demand draw through global inventory/reserves; WTI can stay at around 55-65. Start delaying, and it is hard to see how pricing on the future months does not go up. If/when the strip goes into significant contango; the whole world starts hedging again, and US shale starts back up.

 

Aramco is already delaying Chinese October loadings by up to 10 days, and short-loading light crude. 1 VLCC/day x 10 days is only 20M boe. Rationing because Aramco just does NOT have it in inventory? And future months on the strip are NOT going to reflect this?

https://oilprice.com/Latest-Energy-News/World-News/Aramco-Delays-Some-Oil-Loadings-For-PetroChina-After-Attacks.html

 

It's still early days.

 

SD

 

 

 

[Pick52]

https://www.msn.com/en-us/money/markets/shale-boom-is-slowing-just-when-the-world-needs-oil-most/ar-AAI1N1D

[SharperDingaan]

Shale isn't going away. While bankers may foreclose on current players, they aren't in the business of running o/g assets - and will do everything they can to get rid of them. New players simply buy cheap, wait for prices to turn, then borrow to the max again. Rinse and repeat.

 

Different story for KSA.

2,500 Saudi troops captured/killed over the weekend, the east-west pipeline is now unprotected, and the UAE is withdrawing troops from Yemen. The Saudis also haven't repaired their facility, they've just replaced production - from inventory & others excess capacity; a large portion of which can only be 're-branded' Iranian oil. Captive Saudis are being pressured to support the domestic tranche of the Aramco IPO, and the Saudi military has been unable to respond to the Houthi attacks. MBS is dripping blood in the water - amidst a lot of very unhappy people. And lots of people playing with matches .....

 

https://www.theguardian.com/world/2019/sep/29/houthis-claim-killed-hundreds-saudi-soldiers-captured-thousands

 

SD

 

[Joe689]

Now Iraq chaos is brewing.  This middle east powder keg is getting worse.

 

[DooDiligence]

and Mammon is in the White House breeding more chaos.

 

But I lean towards Buddhism, so I'll be back.

[SharperDingaan]

More ominous is the very recent 'test' pullout from the US Al Udeid AFB in Doha, Qatar; the high number of heavy-lift aircraft departures from Niagara Falls AFB's, the loss of 2500 Saudi troops (3 brigades) to the Houthi's over the weekend, and the Saudis still insisting that everything is 'OK'.

 

The Houthi's may be 'rag tag', but  they would seem to be better than the Saudis -and it is the Saudis offering the temporary cease-fire. Yet if SA capacity is fully restored, how come there are no pictures showing those damaged facilities now 'repaired' ?

Because they actually aren't ?

 

There would also appear to also be a 'gag' order on any related ME reporting, as none of the above made the 'main-stream' press.

Most would find it very unlikely that in today's more 'connected' world, the press wasn't aware.

 

SD

 

 

 

 

[Cardboard]

Iranian officials say two rockets struck an Iranian tanker traveling through the Red Sea off the coast of Saudi Arabia

https://www.cnbc.com/2019/10/11/explosion-sets-ablaze-iranian-oil-tanker-near-saudi-port-state-media.html

 

https://mobile.reuters.com/article/amp/idUSKBN1WI161

 

Is generalized conflict next?

 

[SharperDingaan]

I rather suspect that this has more to do with the Aramco IPO, and fore-knowledge that Ecuador was going to declare Force-Majeure.

https://oilprice.com/Latest-Energy-News/World-News/Aramco-Set-To-Approve-Worlds-Largest-IPO-Next-Week.html

https://oilprice.com/Latest-Energy-News/World-News/Ecuador-Declares-Force-Majeure-On-All-Oil-Operations-As-Protests-Escalate.html

 

However, it is also very clear that the US is getting ready to light the match

It would seem that the Niagara Falls heavy-lift aircraft went to Syria/Turkey; they haven't come back, leaving how many US troops/equipment where? Same as Saddam Hussein was, Soleimani (head of the elite Quds Force) is very good at what he does; taking the ayatollah's out, is the same as installing him - and 'they' missed. Iranian loading/processing facilities are bristling with embedded rocketry, Iranian/Chinese/Others tankers have all gone dark, MBS is bleeding in his shark pool, and SA forces are clearly not up to mounting the demanded reprisal - a missile strike on a transiting tanker isn't going to do it.

 

Brexit is in 3 weeks, and the UK/EU needs 'friends'; to most people, that suggests a GW II type combined forces coalition strike.

US troops/equipment are in the area, and very likely 'assisting' SA forces - changing 'decisions'.

Trump has very limited time, and impeachment proceedings are rapidly shrinking it.

Iran knows something is coming, and expects it soon.

None of this is good.

 

Few doubt that there will be regime change, but to many - the day 'after' may well be a lot worse.

The ayatollah's are mullahs; they are not going to be eliminated, and after the 'decapitation' - will back someone wiling to 'reprise'. Hence Soleimani, in conditions favourable to dictatorship. And Iran is the home of the hashishin.

Again, not good.

 

Interesting times.

 

SD

 

 

 

 

[sculpin]

Oil: A Market Divorced from Reality

 

11/ 13/ 2019

 

Topics: Oil Markets, Commodities, Natural Resources

 

“Over the last 120 years, we estimate it took 17 barrels of oil on average to buy one unit of the S&P 500 Index. Today it requires over 53 barrels.”

 

In the thirty years we have been investing in global natural resource markets, we cannot remember seeing greater value than we do today in the global oil markets. With both crude and oil-related securities, the price action appears to have completely divorced itself from underlying fundamentals.

 

By any measure, oil and oil-related securities are radically undervalued. Over the last 120 years, we estimate it took 17 barrels of oil on average to buy one unit of the S&P 500. Today it requires over 53 barrels. The only time it has taken more was during the parabolic dot-com blow off – incidentally, an excellent time to become an oil investor. At the same time, energy-related equities now make up a mere 4% of the S&P 500 by weight. Not only does this represent the lowest level in at least 20 years (when our records begin), it is 75% below the peak levels reached in 2008 at which point energy stocks made up 16% of the S&P 500.

 

In particular, the bear market in oil exploration and production companies has created value that can hardly be believed. We analyzed the universe of all US-listed E&P companies with market capitalizations over $100mm and proved reserves that are at least 50% oil. We then compared the current stock price to the net-debt adjusted SEC PV-10 measure from their 2018 10Ks. As you may recall, a company’s PV-10 measures the discounted cash flow of all proved reserves at the prevailing oil and gas prices. Under normal market conditions, E&P stocks trade at a premium to their SEC PV-10, reflecting the expected value of any future reserves not yet “booked” in the reserve statement. However, due to the overwhelming bearishness among energy investors, the average company now trades at a 12% discount to its net-debt adjusted SEC PV-10 per share value.

 

While we have seen individual companies trade at a discount, we cannot recall a time when the industry average was less than its SEC PV-10 value. We should point out that the price used in most companies’ SEC PV-10 analysis for 2018 was $55 per barrel, not materially higher than today’s price.

 

We also computed the discounted value of the companies’ proved developed producing reserves (PDPs). This represents the most conservative possible measure of value: a company’s discounted cash flow from currently producing wells only. As you might imagine, it is very unusual for an E&P company to trade at a discount to this most conservative measure. Today, we estimate that twelve of the twenty-nine companies in the universe are trading at a discount to their PV-10 value using only their PDP reserves. Furthermore, the average premium to PDP PV-10 value across the entire industry is now only 7%. Once again, we have never seen anything remotely like this before. Investors often act irrationally at the bottom of long, drawn-out bear markets and we believe that is what we are witnessing today.

 

While the market can famously stay irrational longer than most investors can stay solvent, what we are experiencing today is truly extreme. An entire industry is nearly priced as though it will simply run off its existing assets. How can this be?

 

We believe there are simply no buyers left. In past cycles, as energy prices fell and E&P stocks sold off, two groups of investors would begin to accumulate positions: natural resource specialists and value investors. Our analysis tells us that natural resource funds continue to suffer material redemptions as investors look to reallocate capital away from the industry. We estimate that nearly 25% of the industry’s assets under management are flowing out through redemptions each year and this figure shows no sign of abating. As a result, resource fund managers are constantly forced to sell positions to meet redemptions, instead of stepping in to take advantage of the deep value.

 

Value managers are also suffering net redemptions. After a difficult ten-year period, growth continues to outperform value and investors continue to chase the momentum of the former by selling the latter. In past cycles, value investors could be counted on to buy during extreme bear markets. but today they are either on the sidelines or liquidating positions to meet redemptions as well. In fact, active managers in general are seeing capital being allocated away into passively managed index funds. As we mentioned earlier, energy now makes up its lowest ever weighting in all the major indices. Therefore, as capital gets redirected from actively managed funds towards passive index funds, energy shares end up being liquidated.

 

 

There are no natural buyers for natural resource stocks in general and energy stocks in particular. This has allowed the sell-off to be more severe than past cycles and resulted in unprecedented value for those able to invest in this most contrarian space.

 

https://blog.gorozen.com/blog/oil-a-market-divorced-from-reality

 

[sculpin]

https://www.bnnbloomberg.ca/video/we-ve-never-seen-market-sentiment-this-bearish-on-energy-investor~1830574

 

https://www.bnnbloomberg.ca/video/not-impossible-we-ll-see-triple-digit-oil-prices-in-the-next-two-years-investor~1830578

[SharperDingaan]

There is little doubt that the oil market does not reflect reality, but a lot of the quoted metrics aren't what they seem either.

 

120 years ago, we burnt whale-oil for light, and didn't have the tech to punch far through the ground. A good part of the 53:17 barrel difference, is because today we can - and are multiples of times more production effective/efficient than we were 'back then'. Hence, this is not really a valid metric.

 

PV-10 just measures the PV of currently economic reserves, but it's very deceptive.

A small decline in forecast price could easily shut-in an existing reserve for a period of time, but as it will not be 'forever' - there will still be a PV-10 even if there is currently no flowing production. And as long as the well has a current positive cash margin, it will continue to be produced (to service its debt) - even though the owner is taking an accounting loss on every barrel produced. Hence PV-10 is a bankers metric, not a company one.

 

You only have a 'deal' if you can buy PV-10, at a discount to the market price.

If the reserve is currently shut in (or on the bubble), you have to be buying at a deep discount to the PV-10; you do not care about 'debt-adjustment' - as you're just buying the asset (the reserve), not the company drilling the reserve. If the market value of a shut in field is 10K/flowing barrel, you hope to buy it at 2K/flowing barrel with minimal/no debt, and just shut everything down. When price recovers (& it will as flowing supply progressively declines); sell to someone else, or just open the taps and run the asset down to zero.

 

Some folks believe Shale is going to keep producing at current levels for some time; new flowing production >= depletion. We just recognize that as a well gets older, the gas and water 'cuts' get progressively higher, and that today's reserve buyer (out of BK sales) has a strong incentive to just shut everything down. Hard to see flowing production staying at existing levels.

 

For now, we would suggest that the KSA Aramco offering has merely pushed an Iranian reprisal off the front burner.

Once the offering has taken place; most would expect a coordinated strike on Iranian facilities to reduce production, initiate regime change, spike oil prices, and give initial IPO buyers the opportunity to exit at a good profit. Sales done through derivatives to avoid tripping clauses, &/or premature reporting - and the higher the oil price temporarily is, the better for everyone.

 

So ... Agreed, there is a good chance of price temporarily in the 80-120 range.

But to take advantage, you must be nimble - as no US political party can afford high gasoline prices, when those voters start voting :)

 

Just a different take.

 

SD

 

 

 

[SafetyinNumbers]

I thought this was an interesting transaction that Altura announced this afternoon.

 

They are selling assets at a significant premium to what the share price implies. If the transaction is fully completed it works out to 16.5% for $10m. I work it out to value ATU between 48-55 cents vs the close at 32 cents.

 

The cash will be used to advance their Entice play. This will allow them to see what they have there after drilling a promising vertical well in June. In total, they have 84 sections so it could be Altura's second major play for a very tiny company.

 

https://www.globenewswire.com/news-release/2019/12/04/1956508/0/en/Altura-Energy-Inc-Announces-a-Funding-Arrangement-for-up-to-10-0-Million-and-Drilling-Plans-at-Entice.html

[jeffmori7]

I came across this presentation: https://www.artberman.com/wp-content/uploads/2019/11/LSU-NOV-22-2019_REDUCED-1.pdf?fbclid=IwAR2vp4dMOfs6YcH22SIK7ZNOPbJu9-x6Md4Yb_N-4b9zCYFz65dy7O3CMfU

 

 

[SharperDingaan]

Thanks for sharing the deck. Interesting things in there ....

 

Slide 10_Fracking.

Ever wondered why the water/chemicals used to fracture the well isn't just recycled (net of sand settlement in the tailing pond)? 

Less distance to truck over, less (new) chemical required, less environmental liability - yet typically, not common practice.

.... Lots of room for further cost reduction.

 

Slide 17_Willing Suspension of Disbelief

Consider the below basic technique from the propaganda world

In persuading a person to change a belief, you can take a two-step process: first get them to disbelieve what they once believed, then get them to take up the new belief. It can help if the disbelief is opposite to the new belief as this will effectively 'call in' the belief. http://changingminds.org/explanations/belief/disbelief.htm

.... isn't that EXACTLY what this slide has picked up?

 

Slide 5_End of cheap oil.

The 'idea' that we have to use oil came from Rockefeller - and it was because (at the time) it was a byproduct with no market.

The man was an extremely shrewd operator - and we still believe him today. His business reason for crushing Tesla, and teaming up with Ford, was to get millions of combustion units into circulation - to create a demand for the by-product, which he subsequently controlled. https://www.attendly.com/rockefellers-unconventional-approach-to-getting-rid-of-waste/

 

Of  course ... there are many other things, besides gasoline, that we can run our transportation on.

We just replace one unwanted by-product with another, and cheaper one (methane, hydrogen/oxygen, electric, etc)

End of cheap oil DOES NOT EQUAL end of cheap energy.

 

Slide 18-21_Negative cashflow

Econ 101 tells us that the optimal point at which to shut down is when cash MC > cash MR.

So .... if your industry is continuing to operate with negative cash flow ... it must be liquidating. Ongoing creditors must be asset-stripping, and using the cash flow to reduce their exposure as much as possible - prior to the collapse actually occurring. 

 

Conclusion: We have a propaganda loop - and a section of industry that is liquidating.

The short-term and long-term views are not the same ... and the ongoing opportunities need to be harvested.

Different POV

 

SD

[SafetyinNumbers]

I would definitely argue this is a variant perception:

 

https://app.hedgeye.com/insights/79437-a-real-conversation-with-mark-gordon-an-unprecedented-opportunity-i?type=macro

 

It’s a bullish argument, in case you enjoy confirmation bias or being outraged.

[woodstove]

Thank you both for those presentation links.  Fascinating perspectives.

[sculpin]

https://seekingalpha.com/article/4314248-why-you-should-start-looking-for-investment-ideas-in-oil-sector-2020-looks-promising

 

[sculpin]

https://business.financialpost.com/commodities/energy/shales-amazing-world-changing-lousy-decade

 

Ben Dell, the Bernstein analyst who wrote that report on Chesapeake, went on to found Kimmeridge Energy Management Co., a private equity firm that has engaged in shareholder activism with several E&P companies. These campaigns have echoed the central demands in that report from 2009: better governance and financial discipline.

 

In particular, Kimmeridge urges smaller E&P companies to merge in order to cut overheads, direct the savings into shareholder payouts and completely overhaul management compensation, with a heavy emphasis on stock awards linked to absolute total shareholder return.

[SharperDingaan]

Investors can only buy, hold, or sell. Even if an investor actually can change a company's governance or culture.

Sadly, investors will also either swamp the doors or rush the exits, rather than just accept the hand dealt - or walking away.

All that we can really do is recognize that booms/busts are part of the process, and invest accordingly.

 

SD