cbd, just looked at a piece on oil price, everyone has a forecast now, while no one saw the collapse, so probably have to take it with a grain of salt. Of global 92mmb/d prod, 5mm is US shales that decline 70%, 40%, 20% in first year. The deep water and oil sands didn't do well at $100 oil. Cost reductions of up to 30%, about half are structural. Their conclusion is the new $95 is maybe $75 in terms of profitability. Demand should be up, Iran could come back, my guess is is not a factor. Rigs about to break through 700, amazing. I don't see how they keep up with even keeping prod flat much less supply the maybe 2mmb/d of global demand if growth picks up. We are truly the Saudis of the new oil environment. What struck me is that the 5mm of shale prod is the key to pricing the marginal global barrel. And a new 500b/d shale well is producing 75b/d in three years. And the dollar effect should be considered, heard a guy say $10 reduction in oil is dollar related. Add $10 for cost reductions and $10 for dollar, and $75 could be equilibrium. Wonder if Boone is reconsidering his bullish forecast.
If you have a strong feeling for $4 gas and $80 oil, then MLP bets maybe make sense. If it's $3.50 and $70 for the long term, the sector doesn't work past the hedges. Noticed NRP a coal royalty, also some e and p royalties, aggregates slashed the dist to pay down debt, believe it was $1.40 to .$36. Probably the thing to do as coal is tied to the price of nat gas. Some are expecting a $1 handle for nat gas this summer. We are down to 200 gas rigs, there were that many in the Barnett alone a few years ago. And oil rigs down by over a half and most of those wells were producing 30% or whatever associated gas, that will help, also seems the Marcellus i slowing. That should help gas price but when it starts to recover with lower volumes, the rigs will come back to the Marcellus/Utica where you can make money at $2, the next best play is the core Haynesville and that's around high $3s. And if oil comes back to $70, the Permian will still produce a lot of associated gas, PXD is already talking adding rigs this summer. They can make money at $40. The MLPs can't compete with profitable $40 oil and $2 gas. NRP's dist was over $2 not too long ago. Just a matter of time. If you want e and p, invest in the low cost operators, not the MLPs, who own crummy assets.
ARP as an investment, a flawed form, MLPs don't work, crummy third tier assets at best and lousy management. If you tried to sell the assets, not sure you could even cover the debt. But the distribution will blind investors until it evaporates. Buy an e and p that can find oil and gas at $40 and $2, not $80 and $4.
I think you answered the question, if 23% of reserves are PUDs, then you can't hedge those reserves. Developing those reserves is a money losing proposition if you bought at $100 oil and it's now $60 or $4 gas. All you can do is produce what you have. Probably should cut the capex to zip and pay a declining distribution. I would guess ARP doesn't have any profitable undeveloped reserves at $3 gas or $60 oil. Why would anyone have sold them. Maybe even $3.50 gas and $70 oil. Their capex will destroy value. But probably not much different from most of the other MLPs.
Looked at the analyst comments, no elaboration on the "ineffectiveness" of hedges. If you buy an asset that makes 15% return on the depleting asset at the then current price, you could hedge the revenue, deplete the asset and return 15% to investors. You would need to pay all of the cash flow to investors. Thinking you can keep the revenue stream whole and still return 15% cash, just doesn't work unless you can buy assets cheaply. Why would someone else sell an asset than returns 20% or higher unless you are forced to. Selling companies should keep all assets that return more than their cost of capital. And the cost of capital for the MLPs is more than the well capitalized e and p s. Doesn't make sense. That's not a sustainable model imo. The MLP claim that they can pay a fixed yield 10% or whatever and maintain that yield indefinitely, I just don't buy it. ARP will cut the dist to almost nothing before this cycle plays out, my guess.
If hedges work, why is everyone reducing distributions. If you could hedge the production of every asset buy you made, then the value wouldn't change. I personally don't think it is the hedges, the form doesn't work if you assume the distribution stays level, most MLPs suggested the dist increased. It would work if it was assumed the distribution declined over time, much as was the case with royalty trusts.
It's hedges. The model of MLPs buying assets and growing distributions doesn't work. I'm not sure even maintaining volumes works. Most of them are gassy and $3 gas for as far as you can see doesn't give much room to grow or maintain. You can't find new gas and make money at $3 outside of drilling in the Marcellus. I would guess most of the MLPs are like the royalty trusts of the past, they are a declining asset that gyrates downward with changes in the commodity price, primarily gas, which doesn't look too promising on the upside. You end up buying reserves that pay out over time but you replace few reserves if you maintain the distribution. Investors will see the distribution as attractive and get sucked into a depleting investment. Even the oil prospects at the MLPs aren't as attractive as the top tier shale plays. Breakeven is much higher than $60 or $70.
I think it just was oversold, the ML downgrade, speculation of dist cut. I do think they stand a good chance of hooking up with an e and p which would be great for Crestwood.
A comment on mergers in the space. People will hold the MLPs until the distributions are cut to zero. The form doesn't work. Find a good e and p or buy a midstream for income.
Despite the enhanced scale and scope, we maintain serious reservations about the viability of the upstream MLP business model given the ineffectiveness of risk management tools in the face of hydrocarbon cyclicality.
H Hamm on CNBC this a m, said based on 1000 less rigs, production should be down 700kb/d in a year, that would be mid 8mm/d. Assuming the rest of the globe doesn't pump up volumes, that seems enough to raise oil price substantially. He did say it takes min of 6 mos to gear up again. Will be interesting to see how the cycles play out, shorter, in the future. The rest of the globe, the cycles are still longer, coupled with the US short cycle. Interesting times. Have been thinking $75 by end of next year, could maybe push that to $80. Also, 200 gas rigs, that was the number drilling the Barnett a few years ago, now there is one rig drilling. Trying to forecast the future is a challenge. Can't take any forecast too seriously.
Hamm just now on CNBC, said volumes will be down 700kb/d in a year, that would be 8.6mmb/d in a year. But said it will take 6 mos to gear up again, seems the cycles will indeed be much shorter than in the past. Seems you have to look at volumes globally and that doesn't seem promising except maybe the ME.
Blue- You are far too reasonable, knowledgeable for these boards.
Was playing around with 700 oil rigs and came up with mid 8 mm b/d in a year if the number of rigs stays the same. I'm sure my volume number is not that accurate but it does show that a 50% plus cut in rigs will have a substantial effect. Also, I would bet we never see an Iran agreement. Seems the ME is overdue for something major, also China maybe stabilizing at 7% growth is bullish. Plus dollar may have seen it's high water mark, that would help also. But think you are right, going to take some time.
cbd, I don't know, there are some still expecting a swoon, C and GS. We only have 200 gas rigs drilling, would think that keeps falling as well. I forget Boone's forecast for rigs but I think we already have blown through it. Someone mentioned that if Greece pulls from the EC, would be good for the Euro, weaken the dollar, good for oil price, I think. Demand seems to be picking up. Wild card is Iran, middle east. Today was China and Greece, guessing e and p s, just taking some profit. I think the worst is behind but guess it won't sky rocket but less rigs has to have an effect. Couple of analysts say e and p s discounting $70 oil and $3.50 gas, feels like they are ahead of themselves. BCEI still seems cheap long term. Guessing that $80 oil gets it to $50 and $90 to $75 price.
Not an engineer but I believe that there shouldn't be a issue, the casing is intact. That issue is getting a lot of press, Schlumberger mentioned the backlog of wells not completed would be a positive for them.
Oil rigs down to 734, 246 this week, down 55% from the peak, how far can it go. Seems we are setting up for a reduction in volumes. 700 rigs x 24 wells/yr, 2/3 oil, 500b/d to 100b/d end of year, x .67, / 2 to spread over year. Around 17k wells x 100b/d of new oil production, 620kb/d. 9.3mm b/d current prod, decline 20% 1.9mmb/d plus .6mm new prod at 700 rigs, 8mmb/d. 20% may be too high, even 15% would only get no to 8.5mm b/d. Very rough nos guaranteed but does show that a decline is coming. If the world needs 5mm bd/d to replace and est 1 mmb/d of increased demand, those volumes can't come from the US shales at 700 rigs.