Here it must be worry if cash flow will be sufficient to fund ongoing costs of moly mine, our particular negative annuity.
HK may go belly up, but for certain it won't be in 2015. They have 31,322 barrels a day hedged at $88. 2016 is a problem if oil prices stay this low for more than a year. But a year is a long time.
I don't know what you are talking about. ECA made $9 billion on their hedges the last 5 years. That is not too bad, even for old guys. I was surprised they went naked on oil for 2015. But they have made some pretty good calls recently (like recent years).
Hi s. eranger. I am a little encouraged by your comment that "this is different than the other times". Because every time I have heard that at the bottom or top of a cycle it turns out not to be true. Mind you I am NOT criticizing you. I have the same visceral feeling. But that was exactly what was said (and what I felt) when nat gas bounced up over $10 about 5 years ago. $8-$10 was supposed to be the new floor. And oil over $100 seemed to be a given - that height was the new normal, not like the other times. I even remember when Jimmy Carter was president and 30 year treasuries were at 14.5% (not many takers remarkably) ; it was not like the other times and 10% interest on treasuries was widely believed to be the new floor.
I think oil prices will cycle up again. And i am glad HK is strongly hedged and safe for the next year, with 31.322 bopd at $88. A year is a long time. Demand for oil is still increases. Lower prices will shake out some production.
Deep Panuke will have contribute some to cash flow in Q4 and will add hugely to cash flow Q1. Not as good as last year because production is down to 150-175 MMCF/day as compared to 250 plus last year. They had soem problems with water and were shut down for awhile, now on line again at lower rate. Will get more than $10 winter pricing from Algonquin City gates this year and 1 or 2 more years.
But his biggest mistake may have been barreling ahead on growth in oil production without any protective hedges in place. There are some hedges they got with ATH purchase (about 10k bopd) but ECA had not bought any protection from growing oil production elsewhere. Usually they have had a pretty agressive hedging strategy (admittedly it has revolved around nat gas) and they have actually earned $9 billion from their hedges over the last decade. This year they are pretty naked.
"Just wait until the hedges start expiring." There is truth in that. They are okay for 2015. But if oil prices arebelow $50 next january, that will be a problem, not only for HK but for many other shale producers. They do have about 10k bopd hedged through 2016 at good price, but that really won't be enough unless they go into full survival mode and do no drilling. That might allow them to hang in there for 2016 but it would not be pretty. At some point they have to get oil proce near $80 to do well. But that point is not in 2015. And a year is a long time in a highly cyclical industry. If production drops far enough then supply/demand will tip toward more demand than supply. Because demand is not decreasing. It is just increasing at a slightly lower rate than supply. And global economic growth will give demand another boost, if europe, japan, china, brazil get healthier.
People talk like Floyd was being too risky with financing and had no idea of what might happen if oil prices dropped. Ask yourself why HK has among the strongest hedges in the industry, with 88% of production (31,322 bopd) hedged at $88. Do you think that is a total coinicidence, or some kind of accident. Or maybe Floyd was pretty clear about what was needed to fund the growth safely.
That is pretty impressive. All costs on that "nest" are recovered. From here om it is a 20-30 year annuity. Doing that as often as they can is a good idea. At least 2 of the rigs for 2015 will be at FBIR, maybe all three. That is HK's most economic play right now. They are getting $88 a barrel for 31,322 barrels/day through all of 2015. It makes sense to pause at TMS, to throttle down eagleford a little, and to keep adding enough barrels at FBIR to replace overall company declines and grow production somewhat, but not add too much total production incrementally, as that reduced the percent that is hedged at such a favorable rate. Meanwhile they can be poised to hit the throttle at Eagleford (El Halcon) and in Bakken and also begin again to move toward development drilling at TMS - ONCE oil pricing rebounds.
Having dropped by half, they have certainly created some room to run. Question is whether they can do that. I have been building a position for the income stream. I am continuing to add. I'm either filling out my position at bargain prices, or I am doing soemthing foolish.
Phillips swears he has positioned his business to thrive in face of low commodity prices. He says he has done that by structuring their contracts very carefully so they are really not dependent on commodity prices. Still their is soem volume sensitivity if the whole industry crumbles, but i really can't see that happening. Oil consumption is not dropping. Natural gas consumption is not dropping.
I wish they would spin off Fidelity to current shareholders rather than sell it. Give us the choice of what to do with the value of that asset (we can hold it, sell it, or even add to it) rather than monetize it (at the bottom) and leave the choice of how to deploy the money to management which has not been doing all that well with their decisions.
Any idea who holds that risk and how it is distribuetd? There should be soem money to be made by analyzing who will be the biggest losers on that side of the trade. Value of HK hedges (87 vs current 53) is $34 a barrel times 31,322 times 365 days or $388 million for 2015. That is a lot of positive cash flow for HK. And a pretty staggering loss for whoever holds the other side of the trade, not only for HK but for much bigger players with bigger hedge books.
Big drop in production next year, starting this quarter which will be back under Q3 of 2011. Our growth stock had one quarter of growth.
In 2014 USEG spent 30 million of drilling apex to help grow the company. After that investment the market cap of the company is at 40 million and falling, and production and cash flow are falling. As cash flow falls it takes more and more of our oil profits to cover ongoing costs at the Moly Mine.
We do have a new COO, and we think he holds the reins.
If the hedges default that would affect more companies than HK. The whole purpose of hedges is to protect against unexpected drops in price of oil. If the counterparties default, you are talking about another financial crisis.
That is the number of daily barrels that HK has hedged at $87.29 for the entire year of 2015. I really don't see how they can get in any trouble with covenants through next year.
As mentioned continental resources indicated the will lit activity away from Bakken toward SCOOP. But that really doesn't affect the contracts to move oil from Colt hub to west coast refineries and east coast refineries (70/30 split)
They will get an extra 300-400 million in cash flow in Q1 selling Deep Panuke Cash into Boston for over $10. That won't last for very long (at most 1-2 years) but it will come in handy this year. They also have a lot of carried capital in Montney and Duvernay for the next couple of years. Things are not dire with ECA by any means.