Should have been B $26 margin vs P $8 unhedged. The $33 no was hedged. Again, If you believe oil is coming back, I do, BCEI looks like a great bet. P does ok but not as dramatic an increase. Has better hedges and less oil in current base. New reserves should be around the same, 65% oil, 5% NGLs and 30% gas.
Going through a comparison of BCEI and PDCE, PDCE definitely has the better hedge for next year, but on unhedged basis, B produces 65% oil vs P 45% oil 35% gas, 20% ngls. If I did the math right, unhedged at $60 Brent, B has the $33/b margin and P has $8/b. Probably why B has fallen more than PDCE. Prod for q3 was about the same, don't see why B couldn't get a 50% increase in prod next year with a comparable $560mm budget. P will have advantage with hedges but seems B is better value. At that level, would average 37k boe/d, 50% increase. And if oil comes back, B will have more upside with more oil.
One other comment, PXD is probably the best e and p in the sector, along with EOG, and they have decades of wells to drill in the Permian. APL will have a hard time keeping up with their growth even if prices are somewhat lower. And think TRGP might be even more attractive after the ATLS deal for the likes of a ETE, WMB, EPD...
Thinking about the comments here, I really like TRGP, owned ATLS since the single digits, can't complain much but definitely wouldn't invest with the Cohens again. Does seem enticing to pick up $26 of TRGP value and cash and be left with a $1.25 dist which I'm guessing is only worth $6 per share in the current energy meltdown. In that scenario, it's a $31 value, maybe 20% gain. Who knows what the $1.25 dist spin co is worth, I would say not much, but could be wrong.
TRGP could be worth $3.60 dist x 40, $144/$92, 50% gain. At that price would move the ATLS value up $9 to $40/$26 current, 50% gain. You lose $5 in taxes short term. Buying TRGP, tax is deferred but probably wouldn't sell for years. ATLS does seem enticing but I'm not sure it's worth it, in this case the market may be efficient. I definitely would be selling the spin co after the deal and I would bet everyone else will too, implication for value??? I will never invest with Cohen again, probably keep the ARP that I got in the spin and will see what he does to screw that up. This guy was at the right place at the right time in the Marcellus, the blind pig, and thinks he's talented instead of lucky.
Getting lost in the weeds with numbers, Buffet calls it false precision. But seems to me that at cash costs of $26 per barrel to produce and $10 per barrel to find it 400k bs per well at $4mm cost, that's $36 oil.
Probably understated some, sev tax and no income tax. Call it $40 per barrel.
Seems this company will do well when oil comes back and they aren't in danger of disappearing as some are. At 42 boe/d in 16, $80 oil, and if they just hold prod flat, $600mm of cash x 6 less debt, $60+. If you figure maybe worst case end of 15, oil price stays in $60s, flat production, spend within cash flow, 5x, $17 per share. Seems the risk/return ratio is good at $19. And if they have 3000 wells inventory, at 100 per year, that's 30 years of activity. Thinking years out, this and probably others seem good bets, just hard for investors to jump back in after the carnage.
I refined my assumptions some, still not that precise but maybe getting closer. If they spend $500mm capex, drill 125 wells, reduced yr 1 prod to 250boe/d from 300, and raised decline rate to 30%, the wells now have 80% first year decline and 40% next year. They would add 125x250/2, 15.6kboe/d, decline 8.4kboe/d, net add of 7.2kboe/d to 28k boe/d, 35.2k boe/d/24.5k, 44% increase in production.
At 35.2k boe/d x $33 margin x 365, $424mm cash flow, would only outspend cash by $75mm. Without the hedges, the cash flow would be $270mm. At $90 oil, the cash margin is $700mm, at 6x gets you a $80 stock price. End of next year production at $500mm capex, would be 42k boe/d. Problem is you have a decline rate of 30% plus and the treadmill gets steeper but such is the business. Another metric, 42boe/d x $100k/b gets you to $80 also. And $100 might be on the low side if oil comes back.
Anyone have ideas for refining this. This does show the potential volatility of the oil markets now with 80% declines first year and 40% second. A 500 b well is producing 60b/d after two years. Won't take long for the industry to correct. I'm tempted to buy more BCEI at $19, even at $60 per b, cash margin is $20 without hedges. But who knows how low oil goes in this downturn, we went from $140 to $40 in 08, but seems the world was much shakier. Again, I've given up trying to bet on the short term, can't be done.
Bison, I have looked at CVX and read a bunch of reports, does seem to be a good bet. A bunch of their big projects are coming on line, low debt, they have a million and a half acres in the Permian, good yield. Probably the best major, but it's hard to bet against Exxon, they are great capital allocator, take the long view, the XTO deal considered nat gas demand growth double oil over the next couple of decades. With both, you could buy and forget about for a decade. And compared to some of the tech companies, imo, they look like extreme bargains. Alternative energies could be set back several years with this oil price drop, although I think this is temporary. The oil and gas business needs high prices and so do the alternative cos.
They show 10k b'd in the last pres hedged at $88, pg 19 of the pres. If you figure 34kb/d next year, 22k oil, that's almost half of oil. That would save them $15/b on all of oil or thereabouts. Interesting that I don't think the market gives you much credit fo hedges, helps you wind down a drill program but doesn't save the stock price, LINE has good hedges 80, 90% range and they have been decimated. The market seems to mark to market at the current price. They show 5.5kb/d in 16.
Have been looking at BCEI some more. They look better now than they did before the collapse. Their cash costs are $26 per barrel, including interest. At $65 Brent, looks like they still have cash flow of around $21 per barrel, unhedged, they do have hedges that would increase the margin at $33 under the $65 Brent price for 15. Guessing they could still drill 40 wells which would keep production whole at $65. Guessing that they cut capex by 30% and still increase production by 30% or more, with little increase in debt.
didn't print all of the message. They are selling for maybe 4x 15 ebitda under this scenario. I don't think the industry can begin to replace reserves at $60 oil. $20 improvement and a 6x multiple for BCEI and your at $80 a share. Seems it should be $40 even if prices take a while to recover. If oil falls to $40, they survive and the whole industry is in turmoil. I don't see it but who knows. Thinking about buying more but probably am as gun shy as most are right now. Still think that they could get a decent pop with '15 guidance, don't know why it shouldn't be similar to PDCE.
cbd, just playing with numbers for BCEI and new price assumptions. Rough and probably needs refining. Their cash costs are running about $26 per barrel including interest. For q 3 that would have been $40/b of margin. Figured they end the year at 28k boe/d. Assuming Brent stays at $65 next year, WTI at $60 and BCEI diff at $5, think they were using higher no. That would get a net back of $55 for oil. I played around with prod ending the year at 28kboe/d, 65% oil, 5% NGLs and 30% gas. Didn't assume a price change in gas or NGLs from q3. At 28k boe/d for '15, they would generate $335 mm in cash including the hedges, a cash margin of $33 per boe compared to $40 for q3. Without the hedges the margin would be $21 per barrel. And if they drill 80 wells at $4mm a well, that produce another 12k boe/d volumes, less decline, 20%, of 6kboe/d, prod would avg 34k boe/d in 15, that's around a 40% increase next year over 14. And the new wells would generate another $125mm in 15, total cash of $460mm. They won't spend the $600mm plus but seems they could cut back and still show a decent increase in volumes next year. Even if prices don't recover quickly, the $800mm debt doesn't look onerous. If my numbers are right, you are looking at a
Thinking about the $40 drop in oil price, at 9 mm bs/d, that's $130 billion less revenue. If the industry drills 24k wells per yr, 1000 rigs, at $5mm per well, that's $120 billion in capex. At $60 Brent, the industry can't begin to even keep production flat. In the case of DNR, cash breakeven around $50 per barrel, $60 Brent, less $5 to $55 WTI, $5 cash flow x 9mm/d x 365 days that's $16 billion of cash flow, that would drill 3200 wells, 300bs/d, 60% oil, 600mb/d of increased production, decline is 2.2mm. Clearly doesn't keep up.
If you assume 1000 rigs, 24 wells per rig, $5 mm/well, $120 billion of reinvestment is need to stay whole. $120billion/ 9mmb/d / 365, that's $37/b over Brent $60, or $97 per barrel. Hedges aren't included in the mix, but seems to me that the industry living with cash flow doesn't come close to even replacing barrels. The industry has been living off more borrowing for the past few years and that is clearly coming to a halt. The marginal barrel is now in the US and without OPEC support, it's got to find the equilibrium. My bet is that it's much higher than $60 Brent. Again, $90 +- $10 might do it, moves between those two numbers every few years. Where else in the world can the supply come from, the middle east maybe but where does the capital to develop those reserves come from? And all of those prospects are long lead time investments. The drop in revenue at $40 per barrel on global production is $1.4 trillion, less for reinvestment.
Hang in. Williams is my biggest holding and I remember back a decade or so that it sold for 90+ cents per share during the Enron debacle.
Read an analyst comment that the OPEC move, really the Saudis, is a "seminal" event in the history of the oil and gas markets. Time will tell but it does seem that factor is not there anymore and investors don't really know how to react. Also, checked a few e and p s today and the hedge funds had loaded up on several, and they are fast money. And you have the influence of ETFs which makes it easy for fast money to move in and out of the sector. I want to believe that this is a maybe decade if not generational opportunity, maybe right now say generational event, who really knows what effect the Saudis new strategy will have on the markets. Seems they have tried to punish markets before. One comment is that it will take longer for activity to react to lower prices than when SA could turn off or on the spigot faster. Not sure that is the case with the shale wells that decline 80% in the first year. If you have 500 less rigs, 2 wells per mo, 500 bs/d initial to 100 bs/d after a year, avg 300 bs/d first year, that's 500 rigs x 2 wells/mo x 300b/d x 12, that's 3.6 mm bs/ 2 for annual effect, 1.8 mm bs, 6% oil, that's a million barrels per day, that was last year's increase. Replacing current prod, 9mm x 25%, 2.25mm bs, would take 2.25mmbs/ 2k bs/d per rig, 1125 rigs, and we have 1500+ drilling now. We need to have 1000 rigs drilling just to keep production level.
Boudreaux, Stiffel comments couple of days ago. LINE is intriguing, if they still want to buy assets, seems they need to maintain the dist, and the 25% yield looks great, 8x ebitda is hefty for an e and p but not an MLP. They are still predominantly gas and well hedged for a couple of years. In four years if they don't cut the dist, on investor would get the purchase price back.
We are maintaining our Buy rating on the units and lowering our target price to $22 reflecting the lowered commodity price environment. We arrive at our $22 target price applying a FY15E EV/EBITDA multiple of 8.0x. While we believe distribution coverage will be challenged should the current commodity environment persist during FY15, we believe management is committed to maintain the distribution. Investors will benefit in FY15, in our opinion, from management’s moves to lower the corporate decline rate which lowers the maintenance capex needs. We do anticipate LINE to be active in FY15 on the acquisition front particularly should oil prices remain at current levels. With approximately $2.5 billion in liquidity, we believe the partnership could pursue
approximately $1 billion in acquisitions without being forced to access the capital markets.
Birdog, hope you guys have a great holiday. Times like this are why I don't like e and p investing. Your comment about timing, seems that is really the primary issue, the macro matters more than co picks, although the best rocks and low debt do matter. This almost feels like 08. OAS, lots of similar stories, has lost 80% of value in a few months. If I had funds, would be buying the best in the sector in this downturn, not ready to margin, but if things get worse from here, might. Hard to see how the values get worse but they did in 08, back then the whole market was collapsing. Would be interesting to see how fast the million b/d vol increase of the past few years disappears. Seems it takes a year to get back to a stabilized market and at what price? Also, seems to me that every hedge fund had big bets on the e and p sector, those have been disasters and I bet they aren't coming back soon. Also private equity has several disasters. Seems everyone believed that the Saudis wanted $100 oil and that would be enough to keep it there, and now they believe the Saudis want $60 oil, not sure that's accurate either. This could end up being a decade type opp before it's over, doesn't help those that have ridden this down.
Hi to Teresa. How's the ranching bus, had a six oz fillet couple of nights that cost $41, that's $109 per pound, I didn't buy, but seem you ranchers are still doing well. Maybe there's some correlation between beef tenderloin and the price of oil over time. Maybe a new index.
Kind of interesting that LNG is selling for $10/mcf and global oil is near $60 per barrel, here's our 6 to 1 ratio.
IEA demand number was 93.3mm/d for next year, Nov prod was 94.1. Maybe I'm missing something but that doesn't seem a big difference. The 900k increase in demand is half of normal and US supply growth could be non existent at the current price. Combine those two and you get a 1.9mmb/d swing, the 800mm over supply moves to 1.1mm under supplied. And a lot of the marginal supply will disappear, and price will stabilize $90???? The marginal producers are gone and the lower cost producers actually do better with lower costs. PXD, EOG...
Thinking about the collapse of oil, couple things come to mind, that OPEC is toast and we won't have the real or imagined support we thought we had from the cartel, or really SA. Why they did it, we will learn, maybe, over time, probably just the reality that they couldn't do much by themselves, 10% of world supply wouldn't cut it.
And the second reality for the sector is that it will be much more volatile in the future with short cycle shale reserves being the marginal supply, but the peak to trough amplitude would be less because of that short cycle nature of the supply. Different from the long cycle supplies of the past, deep water and oil sands. Not sure
what it means for the sector except maybe higher valuations if the volatility is less.
Boudreaux, I'm not suggesting you don't sell but I really think LINE is irrationally valued right now. It does have a bunch of debt but if they can maintain the dist at $2.90 for the next three years, a 12% yield would get
you a $24 value. Again, I've looked at it and haven't been able to buy it but it seems interesting. If oil recovers, will look like a great buy today. And you could probably say the same thing about 80% of the sector today. There will be a few cos that bite the dust, don't think it will be LINE but who knows for certain.
Boudreaux, sorry to hear. I don't really look at ETFs. It's hard to understand the LINE debacle. I've looked at them a bunch in the past few days, 25% yield and fairly good hedges for the next three years. Don't understand it, seems as irrational as the 08 collapse. If I run across something will mention it.