Canadian Income

Simply said, $70 would cause a slew of problems for oil producers.  Don’t look now but unless it is being priced of against waterborne oil, we are there.  Economics get very skinny and capital budgets outspend cashflow with low oil prices.  Yes Virginia, the oil producers are very leveraged to commodity prices.  Yet natural gas is showing signs of life and could be the turn-around story next winter, while NGL’s may be the next in the tank.

Today Canada’s Progress Energy ( is higher by 74% after agreeing to be bought by Malaysia’s state oil company for $4.7 billion in cash.  The plan is to send natural gas west in a few years.  Those Asians, always thinking long term!

With oil down $2ish, natty down a dime and the market down a full percent, many energy names are hanging in there.  Canadians income plays BTE, PWE, PGH, ERF, and are all higher as the income seeking money flows to them from  Even if they might have to cut their dividends.

China Meme, Good and Bad

Independent Stock Analysis considers the industrialization of China a major investment theme.  Materials and metals, of course, are how we play it:  Dramatic copper demand growth expected from China, India, Brazil at Mineweb.

Rising China is a Misnomer…and Other Actionable Takeaways from Frank Holmes.

Chinese investing stateside:  Fortune.  Understanding China’s one child policy:  Economist.

Investors must always be vigilant against their biases.  China’s economic fortune sure has been taking a beating in the financial media.  Thus we consider the bear case:

Dr. Copper says watch out below at Sober Look.  And more at Kimble Charting Solutions.  A technical look at FCX:  ChessNwine.

We know from observing the industrialization of that nations iron ore is the first material to peak in usage intensity.  Iron ore has been a whipping boy lately, being priced at 6 month lows.  Yet, Iron ore hits 5-week high as China continues to forge steel near record pace at Mining.  You can be sure they know this too, but Rio Tinto takes next steps in its iron ore development plans at Rio Tinto.

Chinese Data Mask Depth of Slowdown, Executives Say from the New York Times.

The Macroeconomics of Chinese Kleptocracy at Bronte Capital and a follow up.

Vale and Goldcorp by John Tumazos.

Down & Dirty with Coal

Steel-making met coal has remained strong so far, a commodity I lump into the ‘industrialization of China’ investment bucket.  But most U.S. producers are electrical generation thermal coal production heavy.  Thermal coal on its own competes well in the energy marketplace.  However, thermal coal currently has two enemy’s:  The global warming/climate change crowd and excess natural gas production.

Coal: The rising star of global energy production from Globe and Mail.

Coal, Renewable Energy’s Dirty Step Child at Oil Price.

Arch Coal lays off 750 workers due to ‘unprecedented downturn’ from Mining.

Peter Epstein recent well done recent essays:

  1. Is The Powder River Basin The Next Central Appalachia? Peabody, Arch And Cloud Peak Hope Not
  2. Alliance Resource Partners
  3. Coal Stocks Killed, But Survivors Not Hard to Find

A well done piece on very distressed Patriot Coal:  Distressed Debt Investing.

Precious Fix

Ridiculousness continues:  Multi-trillion plan to save the eurozone being prepared at The Telegraph.  State pensions will be papered over imo:  Financial Sense.

Fleckenstein – Fed Takes Half Step, Will Be Forced to Act Again at King World NewsA visible slowdown in global economic activity at Sober Look.

Prepare for the Pivot Point in the Gold Exploration Cycle The Gold Report.  If so, Franco-Nevada would be the bluest of blue chips with their perpetual call option upside.  The occasional junior would explode, senior producers would do fine, SLW and RGLD would be good, but FNV would be best.  If the thesis is correct.

The trader goldbugs love to hate, Dennis Gartman:  “Buy Miners, Not the Metal” at Money News.  Today doesn’t look so good, but are Gold Miners Poised to Rally?  Stock Sage.

But which way?  Gold and Silver on the Verge of Something Huge! – Are You Ready?  Safe Haven

Oil & Gas

Energy investors have one final straw to possibly grasp:  Brent oil spent the previous fourteen months over $100; the 200 day moving average is $112.  Brent now having a $91 handle wouldn’t feel so good.  Perhaps the Saudi’s will cut production.  Meanwhile, US producers are suffering with a WTI price which dipped under $80 last night.  So if mid-continent realizations might be around $70, IRR’s are skinny and capex budgets are underfunded.  Natty will be depressed until injection season ends with the onset of next winter.  Incredibly, Ecana just increased 2012 capex for ‘liquids’:  Globe and Mail.

I do not expect the Iran sactions to mean squat.  Bloomberg

Oil Boom: North Dakota is the Next Hub of U.S. EnergyPopular Mechanics.  (I apologize for forgetting to whom I owe a hat tip for this one.)

Booming US production, you ask?  Did you know the Eagle Ford rig count is about 60 higher than the Bakken?  Eagle Ford Shale

On the one hand, given the opportunity, US gassers would kill LNG pricing in short order.  Yet Apache’s LNG Kitmat was just pushed back a year to get the marriage right:  Financial Post.  However, every commodity for which China becomes a large importer has seen a new higher price deck.  Perhaps natural gas is next at Oil Price.  Additionally, Statoil: Natural Gas to be Fuel of the Future at Rigzone.

Calling this ‘reseach’ on Chevron is a generous term, but perhaps worth a skim:  Turnkey Analysis.

Jaw-Dropping Panoramic Photos Of America’s Early Oil BoomBusiness Insider.

Have you, dear reader, bookmarked Independent Stock Analysis?  Or have you subscribed via RSS or email?  I hope you enjoy the blog!

Natty and UPL

Peter Brandt touched off a conversation with his “Generational Bottom” post this morning on natural gas.  So, what is the financial instrument to play it?

  1. UNG?  With the negative roll, I’ve never seen a crappier product.
  2. Futures?  Premiums over today’s price get large next winter and bigger further out the strip.
  3. Equities?  Let’s consider Ultra Petroleum.

UPL is among the lowest cost producers, with a ginormous asset base, and in spite of their name they are a gasser.  The depressed gas prices led UPL to slash capex for 2012 so production will only grow slightly.  Give them a decent gas price and they will drill their brains out.  Gas at $6 gets them 100% internal rates of return in the Pinedale and Marcellus.

UPL’s market cap is $3.3 billion.  Given them a $5 gas price and their proved PV-10 is $8.9 billion.  With $6 gas P3 PV-10 balloons to $18.7 billion.  Hedges are supporting realized cash flow:  $5.05 gas got them $1.03 billion in 2011 EBITDA and $4.00 gas would get them $840 million in 2012 EBITDA.  Remember, UPL is a growth story in a ‘normalized’ pricing environment.

As for the generational bottom, I am believer.  The $1.90 was the tail end of a bear market driven by the shale gas land grab, punctuated by a really warm winter.  Electricity generation switching will take care of most of the current storage glut this summer.  As for natural gas over-production, supply is down 5 bcfd since November and headed lower based on the gas rig count.

But do not color me bullish.  Natty production is still in over supply and production needs to fall further.  The coal switching will end at $3 and $4 gas.  Gas production associated with booming oil production will continue.  And a host of producers like UPL will be chomping at the drill-bit to ramp production again.  That’s what gassers do.


Mine building delays and cost overruns plaque the industry, though Yamana has consistently got it done.  Yamana bids $400-million for Extorre; plans 18% dividend boost at Globe and Mail.

FNV holds the Taca Taca royalty.  Perhaps TCK is interested.  Lumina Copper mulls options in strategic reviewMineweb.

As copper price falls, high-cost projects lose their lustre at Financial Post.

Juniors staggering mine development:  Financial Post.

Twitter and Stocktwits are the antithesis of my personality and how I invest.  Yet in an effort to grow my blog, I joined them today.  If you tweet or twit, follow me!


The central bankers seem to be in charge.  Oil Gains a Second Day on Stimulus Speculation, OPEC Output Call at Bloomberg.

Oil and price incentives:  Econbrowser.

A conservative take on the Bakken:  NDDMR.  Apache goes big on horizontal liquids:  Apache Corp.

ConocoPhillips CEO causes stir with OPEC warningFinancial PostThe Saudis tightening the noose around IranSober Look.

Apache with another shale gas play:  Globe and MailEncana’s Ultra-Long Louisiana Laterals produce fat IP at Haynesville Play.

Coal Wins Again: Global Energy Use by Source, from the 2012 BP Statistical ReviewGregor.  Coal use down stateside but higher globally:  Haynesville Play.  Coal stocks and China:  China DailyCoal Stocks – Finally Time to Buy?  Robert Sinn.

COT:  Understanding the commitment of traders reporting:  RBN Energy.  Financial strength has advantages:  CNQ sells 7 year paper at 3.06%.

Off-topic:  Obama says “green jobs” include oil lobbyists working on environmental issues from IPAA.  Deja vu all over again?  Rot needs to be purged!  GM to go bankrupt again?  Yahoo

Weighing China

Metal inventory and attractive stocks:  John Tumazos

Yamana Continues to impressPeter Pham

What flat China steel growth means for iron oreFT Alphaville

China Eases the WayFrank Holmes  Meanwhile, Ominous signs from China at the Humble Student of the Markets.

Chinese human interest story:  University entrance exams, Testing TimesEconomist

Shanghai index:  Kimble Charting Solutions


The Bakken Buck Stops Here-Bakken Crude Pricing-Part 1:  RBN Energy

Enbridge faces Bakken complaints:  Globe and Mail

Multi decade oil inflation-adjusted at Chart of the Day.

Saudi Arabia Achieving $100 Oil Signals Output Reversal at Bloomberg.

Peak Oil Notes at Energy Bulletin.

Natural gas was hit by storage yesterday; results at the Haynesville Play.

We knew all about the extravagance at Chesapeake, just not the details.  My disappointment will surprise:  Happy and productive engineers and geologists are supposed to be more productive.  With the Chesapeake campus, those hard science boys ought be reporting EOG-like results in the Eagle Ford.  Everything else is noise.  Reuters

Human interst story on the Utica lease payment money in Ohio:  New York Times.

Is the QE glass half-full or empty?  Humble Student of the Markets

Newfield Webcast Notes

Newfield (NFX) CEO Lee Boothby spoke for 40 minutes this morning at the the Citi Global Energy Conference.

Q1 2012 oil production was 47% of total production and I estimate using the back of an envelope should be near to mid-fifties by year end.  Oil production growth for 2012 looks to be 25% and average 64,000 barrels a day.

As do all the U.S. E&P’s, Newfield has a deep inventory of assets with the Uinta being core for them.  The Uinta will consumer $500 million of their $1.5-$1.7 billion dollar 2012 capex budget.  Their market cap is under $4 billion and long term debt is $3 billion.  Newfield is hedged better than most independents.

All drilling is oil focused.  With no dry gas drilling, Newfield’s gas production is actually declining, which is unusual for the independent E&P’s.  A most interesting tidbit:  Newfield’s natural gas production profile will actually flatten out in two years because of associated gas production.

The current oil price is not far from where horizontal drilling budgets will need to be pared back for the industry. 

Boothby sees deteriorating NGL pricing.  NGL’s are in the low $30 a barrel, with spreads increasing monthly.  Fortunately only 5% of company production (thus 10% of liquids) is NGL’s.  The black stuff is what Newfield is chasing.


Crude glut, price plunge put oil sands projects at risk at The Globe and Mail.

Monthly U.S. imports:  EIA

“Since 2005 the global capacity of installed wind power has quadrupled, due to a variety of factors such as improved technology, large scale investment, and incentive programs designed to encourage industry growth.  According to the Worldwatch Institute, in 2011 the global installed capacity increased by 21 percent on the previous year…China has already started making improvements to its energy infrastructure, and has plans to invest more than $400 billion in order to connect all of its installed wind capacity to the grid by 2015.”  Oil Price

For a million BTU:  Gregor

Natural gas vehicles will kill the electric car.  I don’t think personal transportation goes to NGV’s; horizontal drilling and regional trucking will do the trick:  Energy and Capital

“Hoglund was the first CEO of Enron Oil & Gas. He retired from the company in 1999, the same year that it became independent from Enron and renamed itself EOG Resources. In the years since EOG has become Chesapeake’s biggest rival in pursuing unconventional shale plays (though EOG’s capital structure has none of Chesapeake’s complexity). Hoglund, 79, retains a sterling reputation, no connection to Chesapeake, and would bring gravitas to the board…It’s unlikely the reconstituted board will get rid of him. McClendon is a brilliant operator, perhaps the ultimate wildcatting visionary of his generation, but sometimes genius operates even better within constraints.”  Forbes

Commodities down 9 months in a row relative to equities at All Star Charts.  And sector charts show it:  Bespoke.

Bakken Producers

Below is the Q1 2012 production, current market cap and acreage of five favorite Bakken players:

  • CLR    85.5 boed    $13.7b  915k+
  • WLL    80.7 boed    $5.4b    701k
  • OAS    17.6 boed    $2.4b    307k
  • KOG    10.6 boed    $2.2b    157k
  • NOG    8.5 boed      $1.1b    170k

Sustainable oil production alone is often considered to be worth $100,000 per daily flowing barrel.  Growth rates, asset size and debt are important too.

New readers are encouraged to bookmark Independent Stock Analysis.

Chesapeake: Square Peg & Round Hole

Conference call notes:

Thrice they were asked how much was drawn on the revolver as of Friday.  Answer 1:  Referenced March 31 and and $3 billion less than Friday.  Answer 2:  Don’t recall, but $3 billion less than Friday (flippantly)  Answer 3:  Was north of $3 billion (duh!) (remember it’s a $4 billion facility).  Apparently they had been working on this new term loan for several weeks.  Expect to pay it back in the Q3 this year with the Permian sale.  The term was necessary to keep them from being a distressed seller.

The Permian divestiture was announced basically when they thought of the idea.  The last three months were spend getting the data room open.  Could go as one package or three packages.  Do not be surprised by a small June divestiture elsewhere.

They are dismantling the land machine, having spent $5 billion in 2010, $1 billion in Q1 2012, and budgeting $500 million in 2013.

Going forward they look to harvest ‘industry leading returns’ on their ginormous asset base.  Unsaid is they may have the best rock but are behind the technological learning curve.  Just compare EOG’s Eagle Ford results to Chesapeake’s…

Chesapeake’s world class long dated asset base does not fit into the short and medium term liability structure.  The asset base requires Chesapeake to plow forward with horizontal drilling capex.  Depressed natural gas prices have killed cash flow.  The short term debt has covenants.  The asset and liability mismatch could get worse before it gets better.

Aubrey stated $80 oil does not change drilling returns from $100.  I call bullshit.  Horizontal oil drilling is highly capital intensive and affects everyone else!  Let’s be clear:  $80 will exacerbate Chesapeake’s square peg into a round hole problem.

Update:  Chesapeake turned down a $3.5 billion Permian offer from Occidental.  Forbes

Update 2:  Chesapeake term loan carries an effective 20% interest rate.  Valueconcious at Investorvillage


Natural Gas Vehicles:  Raymond James Energy Stat of the Week

Missing from the Export Land Model is the new booming US oil production growth.  Saudi Arabia and solar power?  Peak Oil

Economist Mark J. Perry posts on oil:

1) Peak What?

2)  Green River Formation  (Newfield NFX) loves the Uinta)

3)  Using the Bakken boom to pimp economic policy.

Sinopec In Talks with US, Canada Cos for Unconventional Oil.  Rigzone

Typically the Materials sector rallies when China loosens monetary policy.  Today doesn’t look good.  Bloomberg

Since I opined on Friday, Chesapeake said they can’t sell assets to fund the capex gap because of debt covenants, the stock tanked, Goldman is loaning them $3 billion, Carl Icahn is a disclosing a stake and now a fund manager is calling for Aubrey’s head (per CNBC).  And my call Aubrey will not be there is month seemed audacious!  Chesapeake hosts a 8:30am EST conference call.

Chesapeake Endgame

The news flow surrounding Chesapeake is so heavy I have taken the ticker off my screen.  Everything else was being drowned out.  With every generalist having an opinion this situation looks to last for some time.  Chesapeake has always been widely followed by E&P investors because of flamboyant former Chairman but still CEO Aubrey McClendon.  As a long time observer, I speculate the endgame is coming very soon.

Chesapeake has always pushed the envelope with aggressiveness and has a storied history.  Over the last two decades the share price has had several booms and busts.  The recent screaming over the FWPP and VPP’s have long been understood and known by investors.  In fact, many investors have specifically avoided Chesapeake shares because of their concerns.  Shareholders have long been unhappy and almost pulled off a coup at the shareholder meeting last year.  This year things will change.

This years meeting was announced as I wrote this essay.  Aubrey (known by his first name) and perhaps the board as constructed will not survive.  The already cantankerous individual shareholders will now be joined by the institutions.  Largest shareholder Southeastern Asset Management has turned on the Aubrey and the board.  If the board does not fire Aubrey, my speculation is the directors up for election will not receive the majority votes required to be elected.  Proposals put to the shareholders and supported by the board are in trouble too.

This end to Aubrey’s Chesapeake career stands in stark contrast to his nemesis Bob Simpson from XTO Energy.  Aubrey beat Simpson in the gas land grab.  Simpson considered his outstanding two decade run, looked at the natural gas landscape and sold out to Exxon Mobil.  Then Aubrey did well in the oil land grab!  Hubris and over aggression will be marked as the reasons for Aubrey’s fall.

The endgame did not have to occur in disgrace.  Participation agreements are common place for promoters in the oil patch; they need to stand in the place of out-sized cash and share compensation, especially since they do not fit with large companies.  Why was the news Aubrey borrowed against his well interests so big?  I always assumed he borrowed to fund drilling!  The additional conflicts of interest should never have occurred, thus the board is in trouble.  The VPP‘s have always been known and are legitimate business practice.  The company should treat them as debt; but the media ought not act as though the VPP’s are surprises.  Additionally, the off-balance sheet discussion needs to include the drilling carries for Chesapeake’s account, which are not on the balance sheet either.

Thus the endgame.  Aubrey goes, and maybe the board too.  The assets will be rationalized.  Minority JV partners may take over asset plays.  Complicated transactions will be wound down.  Soon results will rival peers.  Remember when the stock soared for a day over Aubrey losing Chairmanship?  The asset base is ridiculous for the share price.


The mainstream media and blogosphere occasionally seem to begin to understand gold.  Ed Yardeni at Business Insider:  “More broadly, gold is a hedge against reckless fiscal and monetary policies.”  Then he continues:  “The dramatic appreciation in the price of gold may be limiting its upside from here since it has already discounted a great deal of that recklessness.”

Discounted the recklessness?  Gold bottomed at a depressed price of $250 at the end of a two decade bear market.  Since then the credit bubble has grown immensely.  The Fed induced housing bubble was only the largest part, now dwarfed by government debt.  ZIRP?  TARP’s, TALF’s and a myriad of other acronyms?  Does anyone else think the student loan bubble gets monetized this decade?  QE1, QE2, Operation Twist, now talk of seeming expectations of QE3 soon enough.  Does QE to infinity sound funny to the non-goldbugs anymore?  Rather than suggest gold has discounted anything, consider gold could be more fundamentally undervalued now than at any time since Nixon closed the gold window!

Meanwhile, everything depends on money printing.  Gross and Goldman expect it.  Citi’s Buiter begs for it.

Yesterday the gold stocks held the key outside reversal we noted Wednesday.  Humble Student of the Markets on the same thought.  But did Gold break a huge trend line at Chart of the Day?

Kinross, gold producers vow to fight back as shares tumble despite rising prices.  Globe and Mail

Anyone have any thoughts on Kinross?  5X cash flow, $1.7 billion in cash and building Tasiast.  Or is Franco-Nevada through their royalty the best Tasiast play?  Kinross

I wrote an article on an alternative investment strategy to bonds.  The push-back from the mainstream is striking to me.  Seeking Alpha  Meanwhile, the goldbug community is sure to strut with glee over the JPM news.  Make it a good day!

Eagle Ford

EOG Resources is the furthest along the learning curve with the largest position in the best play.  CEO Mark Papa loves to talk about the Eagle Ford on their conference calls.  Too bad EOG’s stock is richly priced:

“Our press release again contains multiple new well results with IPs for individual wells in the 2,000 to 3,000 barrel oil per day range…

I’ll now discuss 6 key points regarding the Eagle Ford. First, last quarter, we advised you that 65 to 90 acre downspacing was successful, and we’d increased the potential net recoverable reserve estimate from 900 million to 1.6 billion Boes.

Now that we have an additional 90 days of production history, we’re even more comfortable with these downspacing conclusions. We’re now testing space are tighting — tighter than the current 65 to 90 acres, i.e. 40 acres, to determine if further densify will be viable to increase recovery factor and we’ll likely have some results by year end.

Second, we continue to see an improvement in well performance from recent wells compared to wells completed just a year ago. This is likely due to better fracs and better placement of our laterals. This is occurring across essentially all our acreage. We’ve certainly seen this in our more prolific acreage where a year ago, we were highlighting wells with 1,500 barrel oil per day IP rates. And today, in those same areas, the IPs are 2,500 to 3,000 barrels of oil per day. These 2,500 to 3,000 barrel oil per day rates are holding up and have averaged 30-day rates of 1,500 barrel oil per day. We’re also making these type of improvements in areas with lesser quality rock.

With the success in downspacing, we have identified at least 3,200 additional locations to drill. Based on the 300 net wells we plan to drill this year, this gives us an 11-year inventory. The reason we’re not accelerating the drilling of this unusually large well inventory is the technological improvements we’re making. If we’re making better wells than we were a year ago, who’s to say we may not make even better wells a year from now? So why rush to drill wells that may not be technically optimum? We’re closely focused on balancing the present value of this asset versus this technical well improvement. And you’ll hear more about this in subsequent quarters…

And sixth. In early 2013, we expect to commence a dry gas injection pilot to determine whether this enhanced oil recovery technique will improve our current estimated 6% recovery factor. We expect to have preliminary results in late 2013.”

Source:  Seeking Alpha


A bottom for gold stocks?  The group is down another 5% since this Humble Student of the Markets post.

Jeff Saut on the great monetary symbolism and meaning in the yellow brick road.  Following that nice read is his market commentary.  Raymond James

Warren Buffet’s dad was a Ron Paul type congressman in the 1940’s.  Buffet and the goldbugs at cnbc.

My favorite precious metal investment Franco-Nevada posted Q1 results and provided voluminous information in an analyst day presentation.

Commodities to bounce or break:  Global Macro Monitor

Northern Oil and Gas

Hyper-growth continues as Q1 results were reported and the confernce call was held.  Also, they are terming out their debt.

To begin, the investor must know the company is a shit show.  Management are kids who are looting the company.  They can’t model their own simple business.  Warren Buffet:  “Invest in businesses that any idoit can run because, sooner  or later, one will.”

Yet I love the business.  Northern Oil is a finance company with minority working interests in drilling and wells in the Bakken.  Operations need not consist of more than a small amount of simple bookkeeping.  By definition, Northern ought to outperform the Bakken operators as a group because of the lower overhead, having cherry picked acreage, and no involment in the mid-stream business.

Comments on results:  Production was up 114% y/y.  At a Q1 run rate, NOG trades at 6.6 EBITDA.  After badly missing production guidance last year, I speculate management is sandbagging this year.  Differentials in Q1 stunk at -$14 to already relatively depressed WTI.  The industry is leaving an awful lot of money on the table and is working hard at making progress to fix this at no cost to NOG.  Also, as the industry advances quickly up the drilling learning curve NOG benefits.

With the high multiples income investors are willing to pay for assets, management still talks about an MLP drop down in later this year.  This event might shock the street at the value in the shares.

Debt ballooned in the recent quarter to $177.5 million.  Thus the $250 million bond.  The rate they pay will be interesting.

NOG is not financially levered up.  As good a Bakken growth story as is out there, NOG is levered to oil prices.  With decent oil pricing next year the cash flow multiple is somewhere between 2 and 3 times while still being a growth story.  Yeah.  So I overlook the shit show warts.