I would like to get some of your thoughts about how you see things progressing. Appears that you and I have been seeing things the same way.
I want to acknowledge that your thoughts about the DUCs makes sense and I found an article quoted above that agrees with your assessment. Pretty obvious that companies will try to limit capex while trying to maintain production. Going to be much more costly to start new projects and going to take much higher oil prices to merit the risk of investment.
Happened to see a post that you also see some potential for DNR management to utilize hedges at these higher prices to help provide financial security going forward. I hope that they are hedges placed as those poor hedges roll off and are a smaller percentage of total production offering more upside as oil prices increase.
At this point, it is difficult to see a very good argument for oil below mid-40s (at worst case) without a global decline in oil demand. Even without an OPEC deal, I cannot believe that world production can keep this pace due to new investment needed to keep things rolling.
I still anticipate that the defining change to the upside will take place in spring of 2017.
could occur with certain oil stocks such as DNR, OAS, and SN that have high levels of short interest.
1. Global and national offshore storage is insignificant at this point.
2. Global production continues to decline with declines seen across the world with Canada, US, China, etc.
3. Ramping up production will take costly investments and time with less availability to capital due to the weakened financial positions of oil companies and oil countries. For a time, production will continue to come from DUCs rather than investment in new wells.
"Companies would have to spend an estimated $15 billion to complete an existing DUC inventory of about 3,700. Actual near-term spending is expected to be less."
4. OPEC has increased production to new all-time highs, yet only increased global supplies by about 600mm b/d last reported quarter.
5. A decrease by OPEC and non-OPEC nations of well over 1mm b/d will cause demand to outweigh production. Considering that it will take quite a bit of time and money to move production back up in US, Canada, China, and elsewhere, global production will surely not increase for quite some time. Plus, it will take much higher oil prices to really get capital investment coming back to the sector.
With a completed deal by OPEC coupled by an admittance that offshore storage is non-meaningful to future inventory levels and that other production will not be able to ramp up for some time, you can imagine what this means to oil prices and, more importantly, oil stocks.
At some point, and it may be soon, oil stocks that have been the most heavily shorted (not considering ones that have liquidity issues and are going to have to reorganize regardless) are going to see a significant move upward due to the massive short covering that is going to occur. Could covering be orderly? Doubtful based on the way oil has moved and the sheer amount of short positions.
Read this article:
"China's Thirst For Oil Sends Beijing Scrambling For Answers"
China's continued growth and industrialization will lead to much higher demand for oil over time and imports will play a major role. China, again, overtook the US as largest oil importer.
On a side note, a Venezuelan announcement indicates that an OPEC deal along with non-OPEC nations is coming close to fruition and could be announced at any time.
Good information PB. Likely, a majority of those rigs are being used to take advantage of completing already existing wells. Least costly solution to survive short term.
DNR has lagged the upward move in oil and is still 40% below highs hit above $4.70 on a few occasions. Of course, DNR is one of many oil plays that have not moved back up. Yet, here are all the positives to consider:
1. DNR bonds continue to trade upward with both the 6.375 bonds breaking $86 and the 5.5 bonds breaking $84 today with both hitting new one year highs.
2. Redetermination of borrowing base reaffirmed at $1.050 billion.
3. Outstanding borrowings reduced to $260mm from $320mm in last quarter alone improving overall liquidity to at least $800mm depending on cash and other liquid assets.
4. Upward revisions for Q3 with estimates at loss of 2 cents and whispers of loss of zero cents.
5. Oil tracking near or above $50/bbl. which dramatically improves cash flow on non-hedged production.
6. DNR can put additional hedges in place going forward two to three quarters at maybe $54-55/bbl. replacing expiring hedges showing improvement of possibly $15/bbl. This would be prudent if DNR management believed that the oil glut will continue to depress oil prices for at least another year.
7. US oil dynamics improving as mentioned in other thread with impressive reduction in overall inventory totals helped most notably by the lack of imports.
8. Global oil dynamics improving as mentioned in other thread showing daily global builds down to maybe 600k barrels a day.
9. OPEC and non-OPEC nations may agree to reduce global production output by more than 1mm barrels a day that should result in reductions of global inventory levels over time. This could be helped by additional drops in world production due to lack of capex spending to replace depleting well or hindered by drop in global demand.
Yet, DNR is sitting in dumps at under $3/sh.
We had no issues where we were located. Just to our East and slightly South, the flooding and the devastation it caused is disheartening. Many lost their homes and it could be months for some to recover.
Some key items to think about related to US and global inventories:
1. US inventory levels are down to 468mm close to 60mm lower than all-time highs hit earlier this year. Inventory levels are no longer above the upper limit of the range.
2. This past week showed imports dropped to 6.9mm barrels a day which is well below the 8+mm we had been seeing in past. This suggests that there is less oil production coming our way and/or offshore storage is no longer subsidizing overall imports. Offshore storage no longer an issue?
3. Offshore storage adding to import totals were likely the cause for less inventory reductions during the summer and, if storage has dwindled as I had surmised, this may be a factor in why imports have dropped so much over last several weeks. (There's more to that story ...)
4. Global inventories only rose 17mm last quarter which is only about 600mm barrels a day. Think about it. OPEC is producing at new historic highs yet they are only creating a small additional build in overall totals. This means that either 1. world demand is very strong and/or 2. non-OPEC world production has dropped dramatically.
5. If global market is effectively balanced by reducing global production by 600mm barrels a day, then the OPEC cuts suggesting possibly 1mm or more barrels overall per day will lead to demand outweighing production causing supply to be reduced over time.
If OPEC and non-OPEC deal comes to fruition, question is how much will oil prices rise (maybe $65/b here in US) and how long will it take to reduce the US and world glut of oil before prices rise further?
You beat me to it. Was in process of posting and saw yours after I added mine. :-)
You noticed that too. Only $260mm drawn down. This likely means that the asset sale closed and DNR did not publicize it. I should have checked in with IR about the asset sale closing. Thought for sure that they would have issued a PR when it closed.
Can anyone confirm with IR? Just too busy working these days.
From DNR website:
"PLANO, Texas, Oct. 17, 2016 (GLOBE NEWSWIRE) -- Denbury Resources Inc. (NYSE:DNR) (“Denbury” or the “Company”) today announced that it has completed its fall 2016 semi-annual borrowing base redetermination under its revolving credit facility (“Facility”), and the syndicate of banks has reaffirmed the previously existing borrowing base of $1.05 billion, the same amount committed by the banks to loan under the Facility. A total of $260 million of borrowings were outstanding under the Facility at September 30, 2016. There were no changes to the terms or conditions of the Facility, and the next regularly scheduled borrowing base redetermination is set to occur on or about May 1, 2017."
This is at least good news. Even better, notice that the outstanding balance has been reduced to $260mm.
Think about this.
Two weeks ago, the 5.5% bonds were averaging around $67. Now, they are trading around $81. Those bonds, have moved up 20% in two weeks dramatically reducing the implied rate of interest on those bonds.
I just cannot see anyone buying bonds at this point AND shorting the stock. Typically, one would buy the bonds when they were much lower and short the equity as a hedge. If one was betting on equity dropping, there would be no reason to own the bonds at this level.
Also, if one was betting on receiving interest on these unsecured bonds, they must be pretty sure that the company is in pretty good shape to 1. continue to pay interest payments and 2. to not default that surely would lead to a reduction in bond's principal value.
So, I believe it is a separate situation in which their is a concerted effort to hold down equity due to the large short position. I believe that the abrupt moves are an attempt to continue to shake out long positions to ultimately cover. However, it appears that this plan is failing because oil prices keep moving higher. The pricing of the bonds becomes a stronger and stronger indication that DNR is under less distress.
Word from BP that we may already be balanced (supply/demand) and that OPEC is trying to make a concerted effort along with non-OPEC players to reduce supply via production could be the perfect storm I have been discussing. Again, things need to play out as discussed such as a reality that offshore storage in US and around the world is waning and that OPEC really does implement a deal. If things go as planned (good luck with that, of course), oil will pierce $60 and DNR will see an abrupt move upward from short-covering. Will it reach $7? Maybe. The key is breaking through $5. No resistance on way up from there AND institutions/funds will likely reload. Think about any upgrades to boot.
Unbelievable. Equity getting destroyed, yet the bonds continue to rally. Something is rotten.
The 6.375 bonds had two large trades at $84/84.25. New High.
The 5.500 bonds had several large trades at $81.25/81.50. New High.
Why would the bonds continue to rally if things look dire? If speculators are selling the bonds at highs, you would have the bonds tracking down trying to find buyers. So, it is buyers that are pushing up the price.
Are short sellers trying to push down stock to shake out weak hands before allowing DNR equity to rally? Oil prices running back up to $50 should have found DNR share price much closer to $4 than to $3. Also, short sellers would not allow DNR to rally up from $3.30 and kept bringing it back down.
How much longer can the short consortium control share price. Surprised no large buyers came in here to squeeze the short positions. Oh well. Guess I will be buying more shares on the cheap.
EF is trying hard to hold that $1.50 level. How much lower can it go if it breaks?
Question is, does BK loom for any of these U players or do they just keep issuing shares?
May have to pony up three shares soon.
More dilution coming?
Energy Fuels has destroyed shareholder wealth, especially those that were holding URZ and kept their transitional shares. Ouch!
Bonds continue to rally. Another large buy at $84 today. On the 5.5% bond, it had two trades today at $79. These are both new one year highs.
What gives with the equity? DNR revenues will be much higher to support operations which pushes BK risk further down the road and gives the company the ability to place better hedges if oil continues to rally.
Sure looks like shorts are trying to contain price not letting share price break through and hold above $3.30. This infers that short interest is increasing which is in direct contrast to the rallying of the bonds.
We have informal meeting coming up between OPEC and non-OPEC nations leading into what should be a formal deal next month. Suspect that oil prices will be supported here as long as the deal does not fall apart. Also, keep watching US imports every week. If US imports continue to drag, I am betting on offshore storage playing a major role in the higher imports during the summer that curtailed the inventory decline over the summer even though demand was so strong.
This could be setting up for the perfect storm. Continued strong US demand, lack of imports due to less offshore storage adding to the totals, and OPEC reducing production outputs. This triple combo suggests oil could run up to the $60s.
Found this news blurb on the web (I did not write it - LOL):
"An issue of Denbury Resources Inc. (NYSE:DNR) bonds rose 4.5% as a percentage of their face value during trading on Wednesday. The high-yield debt issue has a 6.375% coupon and is set to mature on August 15, 2021. The bonds in the issue are now trading at $82.00. Price changes in a company’s bonds in credit markets sometimes anticipate parallel changes in its share price."
Found this blurb on the web for today's news:
"Denbury Resources Inc. (NYSE:DNR) – Analysts at Capital One Financial Corp. increased their Q3 2016 EPS estimates for shares of Denbury Resources in a research note issued on Monday. Capital One Financial Corp. analyst R. Tullis now expects that the brokerage will earn $0.00 per share for the quarter, up from their prior estimate of ($0.05)."
I have determined that Denbury can outlast many of the other players including BCEI, NOG, MEMP, EVEP, WTI, VNR, MCEP, LGCY, CRC, BTE, WLL, and others. May be a battle between some of the others like OAS, SN, and AREX.
This means that there will be a stack of companies going under prior to a DNR reorganization which could lead to a turnaround prior to DNR having to file.
My reasoning has to do with DNR's ability to limit Capex spending, their available cash on credit facility (that could change), and their ability to issue more debt that was allowed as part of renegotiation of the facility on last redetermination.
Remember, also, that the last redetermination was done around the time that oil prices were much lower. The consideration of recent higher prices has helped with the long theme at least through this upcoming redetermination.
Also, the closing of the asset sale, providing DNR with additional capital to support operations is key.
Oh, and don't forget, even at lower oil prices, DNR management was boasting that it will end the year with less than $300mm on its facility. This suggests that they will not be tapping the facility further in the second half of the year and will actually throw a few dollars at reducing it.
Breathe, your short-term concern of BK for DNR is unfounded. I have been harping about DNR bond prices rising for a reason. Higher bond prices suggest a company that is under less and less duress.
Would love to see an upgrade come to the debt, but we are some time away from that happening. Keep asking yourself why US oil imports have dropped over past several weeks. I have discussed what I think. If I am right, get ready for what could be a serious spike in oil prices.
By the way, I am quoting the 6.375% bonds that mature in 2021 which are the same bonds I have been following in the other thread. The 5.5% bonds that mature in 2022 just hit a new 14 month high of $78.00 with a couple of very large trades in this area.
Huge trade today at $82.00 on the buy side. Have not seen this level since early August of last year - some 14 months ago. Apparently, there have been some large buys lately betting on Denbury's survival. Remember, these particular bonds are not attached to assets of the company, so their value is somewhat limited in a reorganization. Obviously, there are note holders selling into the rising bond prices that likely bought in at much lower prices and are locking in profits. Otherwise, if they rode the bonds all the way down, why sell now when the oil market is showing signs of a recovery?
Continue to be puzzled by the disparity between DNR bonds and equity. Here we have bonds setting 14 month highs while the equity languishes almost 50% below recent highs and is unable to break through this $3.30 area. Shorting equity and buying the bonds does not make too much sense considering that the bonds will go dramatically lower if reorganization looms. So, one would just short the equity and wait to buy bonds at much larger discount.
Will there be a trigger to move Denbury common equity higher. If oil prices move up a few more dollars, I suspect that management could hedge several months out in the mid $50s which will strengthen its ability to survive any additional short-term downturn. On the other hand, oil could be poised to keep moving higher if inventories continue to contract and OPEC is poised to freeze or reduce production.
I keep believing that world production levels have been coming down for some time and it was the offshore storage that made up the difference. Now that offshore storage has withered (my opinion), world production levels have been reduced enough to more than balance supply/demand equation. Keep looking for a lack of imports coming into the US to support my hypothesis. If my hypothesis is correct and world demand holds steady, there could be a swift rise in oil prices over next few months. This means $60+ oil and DNR at $7+.
Notice that imports are down quite a bit overall in past several weeks. Is this because the overall level of imports were supported by incoming oil from offshore storage and that the offshore storage has withered away that is resulting in less imports overall?
Or, is it that the imports are lower because it is being held up overseas or diverted to other portions of the world that have increasing demand or needs?
Or, is it that the "real" production levels are lower than being touted and this is why there is actually less oil coming our way?
Almost all the answers lead to lower inventory levels going forward coming from lower imports. This would mean higher oil prices in the near future.