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Denbury Resources Inc. Message Board

  • bigriverdago bigriverdago May 6, 2008 1:22 AM Flag

    Kudos

    A very prescient call by pddane. A week or so ago he commented on BDE, a stock I was looking at. Peter opined that it was a spinoff from Comstock, which retained 49% ownership, and may want to cash out.

    Exactly that happened and rather than depress the price by selling, they looked for and found a purchaser, SGY. INitially the price looked to be at a slight discount to what BDE was selling for, but as the purchase price is a combination of cash and shares of SGY, it might wind up being at a small premium.

    Never had the right buying opportunity to own BDE, time to check out SGY. IMO, they got a reasonable buy, doubled their reserves with more potential reserve growth, and there should be some synergies.

    Once again, great call, Peter.

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    • My take,fwiw, is that domestic refiners are part of the "big oil" stigma and will be saddled with more than their share of penalties, nimby's, et al during times like these and then taxed like hell ("windfall taxes") if/when the cycle turns, (for the refiners), making the cycle an overall loser for the next decade or more. I doubt seriously the windfall taxes that probably will be enacted will have crack spreads exemptions in 'em.

      Off shore and integrateds will fare better, but no one will benefit from what I suspicion will occur.

      Just another take... negative though it may be.> Isnabs

      That's what could take place depending on what happens in Nov. Looks like about an even money bet IMO at the moment.
      The demagoguery against the energy industry is outrageous, and it's not just from the usual suspects on the left, but from sources like Bill O'Reilly as well.

      Personally, I think the degree of ingenuity and discovery the energy industry has displayed to both find and bring the increasingly hard to exploit reserves to market matches or exceeds that taking place in any other sector. Yet some would shoot the goose that lays the golden egg.

    • "As a nation, I bet we have the intellectual ability to give us an even greater edge over the rest of the world in refining difficult to refine materials and that would afford us a continuing strategic advantage in processing hydrocarbons over time."

      Peter,
      I respect your opinions enormously, and I hope you're right w/this as well, but.... I doubt it.

      My take,fwiw, is that domestic refiners are part of the "big oil" stigma and will be saddled with more than their share of penalties, nimby's, et al during times like these and then taxed like hell ("windfall taxes") if/when the cycle turns, (for the refiners), making the cycle an overall loser for the next decade or more. I doubt seriously the windfall taxes that probably will be enacted will have crack spreads exemptions in 'em.

      Off shore and integrateds will fare better, but no one will benefit from what I suspicion will occur.

      Just another take... negative though it may be.

      Best,
      Louis

    • Publicus,

      "3. The softening of demand they see so far is for diesel used for farming. The tractors are not in the field very much and the agricultural demand hasn't been seen yet."

      That makes sense. The weather maps still look relatively discouraging for the planting of the corn crop which means less corn and more beans, I guess. The same patterns continue to be in place for the refiners and all else whose cost structure depends on international commodities but who sell into the US retail market.

      Curiously, the BDI is on a tear despite some little strength from the dollar:

      http://investmenttools.com/futures/bdi_baltic_dry_index.htm

      On the sulfur question, instinct tells me that, given the amount of effort that has been expended to reduce emissions by creating both low sulfur diesel and low sulfur gasoline we're a long way along in US refining towards extracting nearly maximum amounts of the element:

      http://en.wikipedia.org/wiki/Hydrodesulfurization

      but, as you note, the cost of converting the remaining refineries to work with high sulfur fuels may well be prohibitive given poor crack spreads. Valero has 5 smallish refineries, presumably older less sophisticated ones, for sale now and they have not made as much progress as you'd think in selling them although they say that they'll all be sold by year end.

      In a very real sense, this illustrates why the economy actually needs higher priced gasoline. $4.50 gasoline would reduce demand a bit and it would also afford the refiners the additional capital that they need to continue to high-grade their operational models. The Chinese, I think, are even more behind the eight ball on this issue. All here are aware that I'm not thrilled by the refining business model currently for the issue noted above but I also recognize that the refiners, as a group, are extraordinarily beat up. As a matter of public policy, we shouldn't want to have beat up refiners. We should want them to have the cash streams that would allow them to invest lustily in their businesses. As a nation, I bet we have the intellectual ability to give us an even greater edge over the rest of the world in refining difficult to refine materials and that would afford us a continuing strategic advantage in processing hydrocarbons over time. An important idea to remember in an era of triple digit oil.

      Regards,

      Peter

    • "are the refiners making less money, being squeezed with softer demand and crude price rising." In a word, yes. Jim Gibbs of Frontier talks about this at length:
      http://investor.shareholder.com/fto/eventdetail.cfm?EventID=53912
      some of the more interesting nuggets from this call: 1. Diesel spreads for FTO are $25-30 and gas crack spreads are $3-4. As a result he said, and who knows how far his tongue was in his cheek, gas is just a byproduct of the refiners and we only make it because we need to to make diesel.
      2. One big problem with the rising cost of oil is the cash needed to keep it in inventory.
      Working capital needs to finance inventory grew so high that they suspended the share buyback because they needed the cash to buy crude. 3. The softening of demand they see so far is for diesel used for farming. The tractors are not in the field very much and the agricultural demand hasn't been seen yet.
      When it comes, and it had better come or we aren't going to have enough to eat if no one can plant, then the only way to satisfy it is to raise the price of diesel, because they are selling all they can make now. Gas demand was not talked about much because it is just a by product (see above) 4. Those refineries that can only handle light crude, or who can't meet the standards for ultra light diesel, are coming on the market, but FTO has no interest in them because the cost of retro fitting for cokers and hydro crackers is in the billions if you can get the engineering and the materials. 5. Sulfur, which was kind of a throwaway, is now becoming a profit center with the price going from almost nothing to 300 dollars. (my notes here are kinds inexact so you will have to listen, but you get the idea.) If we have any petroleum engineers, could we get an idea of what you need to do to increase sulfur capacity at the refiners. Do you have to interfere with producing product to make more sulfur? Maybe we should buy one of the surplus refineries and produce sulfur instead of gas? Sulfur is a big deal in making phosphate and potash and the fert. people sold off their sulfur supplies when vertical integration was out of style.

    • Harehau,

      Here is the report:

      http://www.realtor.org/press_room/news_releases/2008/ehs_to_stabilize_before_upturn

      What I take away from that report is that this great national institution, The National Association of Realtor's" has their fingers crossed. Things stink now, but just wait. They'll get better.

      Regards,

      Peter

    • Harehau,

      "Are the refiners making less money, being squeezed with softer demand and crude price rising? Hare"

      I think that the refiners are doing a little better now than they were in Q1 but that they aren't doing terribly well and will show numbers way off from last year. Additionally, the problem is one of their prospects, they could do better if they got either (1) $90 crude (and much cheaper heavy sour) or (2) if they got $4.00+ gasoline at the pump. So a reasonable person would simply guess for themselves if either of those things is likely to happen.

      Regards,

      Peter

    • Can't believe it. Daniel Yergin sees $150 oil this year, in WSJ. So they say, only cushion we have is 2 million barrels of surplus capacity in Saudi Arabia. As an informal survey, yesterday as I traveled out of the city, I noticed a disparity in gas prices. Paid 3.37 but prices ranged up to high 3.50's. Are the refiners making less money, being squeezed with softer demand and crude price rising? Hare

    • Harehau et al,

      Ms. Sonders may be criticized for her choice of charts but she can't be criticized for not being au courant. The lead articles on the business page of the Times today are "Gas prices expected to peak in June" and "Some signs of an upturn for the dollar".

      There is also an article about inflation which points out, accurately I think, that we tend to pay more attention to the things that rise in price than the things that fall in price. The Times also reports relief that the Christies Impressionist Sale went well:

      http://www.nytimes.com/2008/05/07/nyregion/07auction.html?_r=1&scp=1&sq=Christie&st=nyt&oref=slogin

      I'm not sure how well for the many but it certainly did for the few. As I read that article, 14 of 58 works offered did not sell and 8 works account for half of the sales volume. 25% unsold is typical. I honestly didn't realize how small a sale it was.

      Mr. Wesbury seems to me to be a reasonable observer although he is often not regarded as one. If his rule were to be applied at this point then Fed Funds would only have to be, say 2.4 (using core CPI) + .6 (a very low growth assumption) or 3%. To my way of thinking, although we don't have many signs yet of Core inflation getting out of control, we do have significant signs of headline inflation tending to get out of control. One of the largest reasons that we don't yet see core follow is that there is next to no wage inflation. Wage inflation would significantly affect the cost of all products and services and would tend to drive them up in price. The lack of wage inflation is not, however, an un-alloyed benefit. Because energy costs especially are rising and because it is likely that food costs will follow, the average American is probably getting a little poorer.

      I appreciate your intelligent comments on the housing market. If the National Association of Realtors is suggesting that houses are about 30% more affordable now than they were at the peak of the market, I'd agree with them. If they are suggesting that houses are now very affordable for the many, I would disagree with them. But it seems to me that you are correct in looking at inventory as a very large problem. I think that there's a reason that inventory has remained stubbornly high and that is that the builders have not dropped house starts low enough. I agree with your point that, for the near distant future, it is unlikely that we'll see the price of homes increase by very much. I also think that they can fall further in many markets.

      I guess my real point in my post was to argue that the very long period, say from 1955 to 2006, of home prices rising faster than the rate of inflation and of homes being not just a good investment but an easy way to create household wealth, is over for the foreseeable future. So, we agree on that idea, I think.

      Regards,

      Peter

    • Big River,

      Not as prescient as you think. Bois d'Arc has been almost continuously for sale over many years. The issue now is that Stone has paid so much for it that noone else can afford to buy it. Mr. Blackie and his associates also continue on with some sort of highly incentivized deal to drill. La plus ca change la plus c'est la meme. In the end, Comstock got a good deal. If you do the math it looks like more the $5/mcfe.

      I think you could be right in your idea that taking money off the table is an appropriate response to current conditions although one always has to observe that it is very difficult to figure out how overbought (or oversold) something can get.

      The ISM non-manufacturing number yesterday and this article from the Times are signs of the times:

      http://www.nytimes.com/2008/05/06/business/06vegas.html?_r=1&adxnnl=1&oref=slogin&ref=business&adxnnlx=1210073162-qLFWlGtvziAMEWrWCJZljg

      Of interest to me is how little business has declined in Las Vegas. But, as anecdotally noted in the article, it is foreigners making up the difference. Also, anecdotally, as Park noted, an architectural firm in the Rathole could expand dramatically off of providing services to the Middle East. So, what we've talked about for the last year--bet against anything that requires US demand/bet on anything that is supported by international demand--continues to ring true.

      If we don't see any decline in international growth it looks to me like we muddle along just as we have for the last year with a slow drip of the failure of those that are dependent on US health--Countrywide, the various financials, airlines, etc. and a continuing reasonable level of interest in the commodity stocks.

      Regards,

      Peter

      • 3 Replies to pddane_01929
      • <<Not as prescient as you think. Bois d'Arc has been almost continuously for sale over many years. The issue now is that Stone has paid so much for it that noone else can afford to buy it. Mr. Blackie and his associates also continue on with some sort of highly incentivized deal to drill. La plus ca change la plus c'est la meme. In the end, Comstock got a good deal. If you do the math it looks like more the $5/mcfe.>>

        After the initial, fairly typical negative reaction from the market acquiring companies often get, the story of SGY stock the last few days has been, "Houston, we have lift off." Both SGY and BDE substantially exceeded earnings expectations.
        From what I've been able to ascertain, quite a few investors think BDE's leases constitute a target rich environment regarding adding to reserves. Then there's this argument I pulled from the SGY board:


        "....particularly relevant now that SGY merging with a company that has actually invested in building reserves:

        Cabot Oil and Gas: 8x EV/Rev. 13x EV/EBITDA
        Forest Oil: 6x EV/Rev. 9x EV/EBITDA
        Petrohawk: 7x EV/Rev. 10x EV/EBITDA

        SGY/BDE: 3.5x EV/Rev. 5x EV/EBITDA"

      • I think you could be right in your idea that taking money off the table is an appropriate response to current conditions although one always has to observe that it is very difficult to figure out how overbought (or oversold) something can get.......So, what we've talked about for the last year--bet against anything that requires US demand/bet on anything that is supported by international demand--continues to ring true.
        >pddane

        So far yesterday's sales have shown me to be a great idiot, but time will tell. Energy had grown to be over 60% of my investment portfolio. Even after the sales it's about 30%.
        Now I'm about 30% energy, 15% mining/metals, 15% international-heavy emerging markets, 10% a smattering of domestic stocks/funds and have about 30% cash looking for places to park it.

      • Couple of things in the news today. Goldman Sachs is trotting out its super-spike forecast to $200 soon. Hard to argue against. An article in the WSJ that Bernstein, I believe it was, is using satellite imagery to determine production from Saudis largest field. Thought it was interesting that Matt Simmons was questioning the science. But, the piece that got my attention was "The Housing Crisis Is Over", by a guy from Traxis Partners, the hedge fund that Barton Biggs runs. Biggs has always been an original thinker. His claim is that with low mortgage rates, calling for another 30% drop in house value is fallacious, versus what they were in early 80s, high teens. The bust has been substracting 2% pts from GDP from a sector that is 5% of economic activity. And he thinks the banks are extrapolating losses that will prove to be to large in their write offs. Result is, the securities that have been written off will need to be marked up. If we can put this mess behind us, with the growth from the rest of the world, the future doesn't appear to be that bad. And, I don't see how oil prices are going to retreat any time soon.

        Having said that, Big River, I was seriously considering doing what you did, trimming back on energy. Probably on hold for a while. Cheers. Hare

 
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