I've been postulating for some time that once the backlog of Marcellus wells gets worked thru NG supply will decline during a period of increasing demand. Both CHK and RRC have confirmed that they are hooking up more wells than they are completing in the Marcellus.
Now the CEO of UPL further confirms what I have been saying during their recent CC:
And we'll take our next question from Mark Hanson with Morningstar Equity Research.
Mark P. Hanson - Morningstar Inc., Research Division
This might be more for Mike. I know you've previously shared your view that the domestic natural gas market is near a peak in terms of production. And with yesterday's EIA numbers showing August volumes remaining stubbornly high. I'm just wondering if the internal view there of Ultra is still of a near-term rollover in production, if that still holds?
Michael D. Watford
That's still the view. I mean I think if we look at -- we use Genscape year-to-date data. If we compare 2012 average production of what, 64.2 Bs a day to 2013 average of year-to-date production of 64.6 Bs a day, it's gone up, but it's not a big mover. Again, domestic production has been pretty flat since middle of -- well, since well over a year ago. And again, I think, we're getting through some of the uncompleted, unconnected wells in Marcellus, and I guess we have that in Utica. But I think that backlog disappears first half of 2014 or reduces significantly, and the current drilling paces won't maintain this level of production.
So yet another CEO that is big in the Marcellus says NG production is heading south. In the mean time the LNG exports are on the way, Coal Plants are getting retired, Industrial use is heading way up, and transportation use slowly builds. Another 20bcfd of demand on the way in just a few short years with NG supply heading down.
A good cold winter will set things in motion. If not we will definitely see NG move hard in 2015.
Rainbow, at what price point would it make sense for SD to start drilling NG wells in the WTO to offset the penalties? That is the big question because if its say, $5 we are probably a year to a year and a half away from that and the penalties can disappear pretty quickly. My point is that the penalties give extra incentive for SD to start drilling for NG a lot sooner then they otherwise would have so this price point is what analysts should be asking. At a certain point it starts making sense for SD to start drilling for NG but the amounts of gas needed and rigs directed along with costs are all part of some formula I am sure management has.
Perhaps they can strike a deal with OXY that eliminates the penalties in exchange for x number of wells do commence drilling by such and such date. As you have said many a time this situation is not good for either company and needs to get resolved soon. IF OXY eliminates the penalties for 2014 on condition SD drills say, 24 NG wells at say 3 million each (just a wild guess on my part) without penalties (using the $33 million figure) the 'effective' cost ends up being 39 million for the wells thus a lot more incentive for SD to drill. The amount of CO2 derived from those wells could more then make up the penalty revenues OXY receives from SD? Is that not enough wells for SD to drill and reason enough for OXY to eliminate the penalties for such wells drilled?
Great question Uniowner,
I don't have a firm answer, and its a moving target. The WTO wells have EUR's of 6 to 8 Bcf. That's a huge number for a vertical well that costs around $2,000,000 to drill. But as Longstrong pointed out the combination of high CO2 and plant shrink on processing yields about 25% Methane on the Pinon wells.
So let's just say that SD gets 1.5 Bcf net methane out of a Pinon well. The Company invests $2,000,000 per well. In a $5.50 to $6.00 NG pricing market it might make sense to drill it. Maybe a bit lower to offset penalties, and then you have to consider the price of Oil and Liquids. I think we will likely see a rig or two in the WTO when NG hits the $5.50 area.
Also, SD has found some other really good fields outside of the Pinon in the WTO that are very high methane. These fields have only had a well or two drilled in them and as such are not delineated. They are very high methane, so won't do much to satisfy the CO2 delivery requirements to OXY, but do represent significant long term value to the company.
Back to your original question, I think SD will not drill for NG in the Pinon until NG is 5.50 plus.
JMHO, but I don't see how the returns stack up in the WTO for anything less than $5.50 mcf including the penalty problems.
On the other hand, OXY would love to have the extra CO2. They don't want the penalties and are only getting .25mcf for under delivery at present. Its hard to find info on what CO2 trades for in the open market. And delivery is a big problem. Maybe Nikon or others can fill in some gaps for me but I don't think OXY can get the CO2 anywhere else in significant volumes at anywhere close to .25mcf.
Additionally, OXY built out a pipeline system to deliver the CO2 from the Pinon to their Permian fields. OXY has to be really ticked off with the under delivery of CO2. The CO2 injections are gas gold to them. Those old Permian fields flow like crazy when the pressure is built up.
OXY wants the CO2, SD needs to shed the penalties. A deal between the two is in the future.
Congratulations Rainbow, You asked your Century Plant question this morning. Question was the answer any different than the answer I have given you ? I also heard your friend ask a couple of questions... Are you at peace now Rainbow ?
OXY is the key Rainbow, Not SD......
Happy Payback Himself ; Now Are You Going To Turn Your Attack Dog medi , Otherwise Known As medic_5678 On Me Rainbow ? ? ?
Payback, you flatter me. First you thought I was an Analyst, then maybe on the BOD or Wards purse strings. And now you evidently think I'm the analyst that was inquiring about Century Plant.
The truth of the matter is that I am just an investor that happens to have an extraordinary amount of knowledge about the WTO. I happen to own some minerals in that play and have made it a priority to stay on top of things. I also own minerals in various other TX and OK counties along with surface acreage in some of these counties. My family owns additional acreage as well, we try to stay on top of things.
I stand to gain substantially as a mineral owner if SD were to develop the WTO.
As a stockholder, I got a good grasp on the Century Plant problems long before the analysts started to look into this situation. It's not a pretty picture, and it's going to get worse unless SD starts drilling again in the WTO.
The PGC penalties appear to be booked quarterly, and as I surmised are in the $10,000,000 plus area (check out the 10q). The Century Plant penalties appear to hit in December all at once to the tune of $33,000,000. That's going to be a big hickey on earnings next quarter if I'm right about it being an accrual penalty as opposed to amortized monthly or quarterly.
Payback, I just try to state things the way I see them. I'm long SD, and think the company is onto some great things in the Miss with the multi-stacked plays, improving type curves, cost reductions etc.
Additionally, the GOM may turn out Fantastic. Those salt dome structures used to be inaccessible or considered non commercial. Now they are the biggest thing in the GOM. They are deeper than what SD knows how to drill and expensive to drill. If SD can get a good J/V partner that knows what they are doing it could be huge for SD.
NG supply will soon rollover in an increasing demand environment. This bodes well for SD. Century Plant contract and PGC penalties are holding the stock down, that should change in the next couple of years if NG goes up.
JMHO, good look to all the Longs.
A year ago the same week we had a build of +27 will see the number for this year in the morning. Next week numbers a year ago had a draw of -12, we currently below last yrs numbers in total inv. Co's capex in gas drilling are going lower, next 12-18 mo will be fun to watch. my bet is that nat gas prices start to climb
SD and other companies are not going to sell NG at a loss fopr very long, many things in near horizon as Rainbow says that will turn this around very quickly. I think it was Aubrey that said NG could be 8 dollars and to fuel your car would compare to less than 2.00 at the pump. Oil is not going to dive if this happens either. We are on the cusp of something great, I own more than just SD, O & G is where to be right now and I don't mean the majors, I mean the ECA, SD, CHK, for example.