Leslie’s Notebook

Rehan Rashid, the managing director and head of energy research at FBR (Friedman, Billings, Ramsey & Co. in Arlington, Virginia), spoke in Houston on July 16 about his macro energy views, and he threw in many tidbits about shales.

Rashid has done a bottoms-up analysis of 5 key U.S. shale plays in the news: Haynesville, Marcellus, Woodford, Fayetteville and Barnett. He said they stand to generate massive returns and NAV growth for the main E&P companies involved. He wonders about execution of the huge drilling plans being announced by the E&Ps chasing shales.  He is not worried, however, about rig availability–his concern is tubulars, frac capacity and other equipment prices.

Rashid interviewed shale-oriented CEOs and geologists, studied company reports on drilling plans, well spacing, estimated ultimate recoveries (EURs) per well, gas in place, 3P reserves and other metrics to come up with this:

3P reserves in each play: Haynesville 120 Tcf, Marcellus 68 Tcf, Barnett 55 Tcf, Fayetteville 25 Tcf and Woodford, 14 Tcf. 

Recovery factor in each play: Haynesville 20.4%, Marcellus 19.1%, Barnett 13.4%, Fayetteville 20.5% and Woodford 39.5%. 

Estimated total U.S. gas-shale wells drilled in 2006: 1,000. Shale wells to be drilled in 2008: 2,000. Shale wells to be drilled in 2010: nearly 5,000.

 ”Too much NPV is at stake, so these company CEOs will not let it go by. They will figure out how to produce these shales. I estimate there are about 275 rigs drilling in gas shales right now and we could get to 600 rigs by 2018.”

–Leslie Haines, Editor-in-chief, Oil and Gas Investor, lhaines@hartenergy.com

With all the hoopla surrounding the emerging Haynesville shale play in northern Louisiana, it is easy to focus on certain key E&P companies–and their stock prices–that have jumped onto this opportunity in a huge way.

But the local population and community agencies stand to benefit too. In July’s state lease sale, the Louisiana Mineral Board collected $48.7 million. More than $46.4 million of that came from eight shale leases, and seven of those were in Caddo Parish. The monies will go to the Caddo and DeSoto parish government councils.
Average price was a whopping $30,000 per acre in bonuses and 30% royalty. These numbers have now outstripped the hot leasing action in the most competitive areas of the Barnett shale under certain prime Fort Worth subdivisions where residents are increasingly savvy, and are demanding higher bonuses and royalties.

As the Haynesville gas production begins to grow, it will obviously benefit the area’s midstream companies as well.
Here is one example: Regency Energy Partners LP of Dallas on July 14 hiked its 2008 earnings guidance in part thanks to growing production out of northern Louisiana, where it has gas gathering and pipeline facilities.
It raised its guidance by $35 million to a minimum estimate of $255 from the previous number of $220 million. “The increase…is attributable to favorable commodity prices, additional volume growth in North Louisiana, improved fuel efficiencies and higher condensate and sulfur recoveries,” the company reported.

Meanwhile, a new report from Simmons & Co. International, the Houston investment bank, says that the Haynesville may have resource potential of 90 Tcfe (trillion cubic feet equivalent) if 50% of it is prospective.

Goodrich Petroleum, Petrohawk Energy, Cubic Energy and GMX Resources have the highest exposure to the Haynesville on the basis of their enterprise value-to-net prospective acreage, the report says.

–Leslie Haines, editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

I can’t help but notice that now that Bill Gates is retiring from Microsoft, the elegies of high praise are flowing for his accomplishments, with analysis of how much his vision has helped society–even changed it. 

Quite  a contrast to when ExxonMobil chairman Lee Raymond retired last year, amid howls of outrage for his huge retirement package. Why was no one outraged at how much money Gates made/makes? Or for that matter, what about the deep pockets of Warren Buffet or Oprah or Tiger?

Just goes to show you once again the low regard in which the oil industry is held by most uninformed people.

To counteract that, I do hope many are watching Black Gold on TruTV, to see the roughnecks in action on three rigs drilling out in West Texas.

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com 

The Securities and Exchange Commission has finally proposed a revamp of the way it allows E&P companies to report their proved, probable and possible reserves estimates. This is long over-due–about 25 years and “an extended-reach well that’s been frac’ed” overdue. 

Industry has long argued that due to technology advances since the 1970s, when the SEC last updated its reserve-reporting standards, the definitions of proved (P1), probable (P2) and possible (P3) reserves are much easier to derive, and more accurate. Production from P2 reserves has become more likely as well.

Asset buyers have recognized this in spades, paying more for proved undeveloped reserves than ever before, and assigning more dollar value to the P2 and maybe even P3 categories as well.

“To maximize value, package up all your production, PUDs and probables,” advised Kayne Anderson’s Chuck Yates at the Cosco Private Capital for Energy Forum in 2005. “You’ll get more than by just selling your production. These serial buyers will pay for your probables.”

Now the stock market will too. Imagine the changes upward in all numbers as E&Ps in unconventional plays bring their vast P2 and P3 estimates onto their reserves reports and 10Ks! Now that which CEOs spoke of in their presentations can move from being grand statements of optimism to real numbers on a page.

This changes the landscape. Those multi-trillions of cubic feet of gas that Petrohawk CEO Floyd Wilson speaks of in the Haynesville, and Ultra Petroleum CEO Mike Watford speaks of in Jonah Field, Wyoming, seem more than a distant promise now. 

In-house reservoir engineers and third-party groups like Netherland Sewell or Ryder Scott will have their hands full, drilling deeper into the data and estimates on P2 and P3 reserves.

Investors and analysts will be like kids in the candy store, once they start pouring over this new data. Disappointments and surprises will no doubt surface, but for most E&P companies, this SEC change is good news that will lead to increased valuations.

–Leslie Haines, Oil and Gas Investor, Editor in chief, lhaines@hartenergy.com

The government can tax people to reduce oil consumption, or award them for trying alternative energy sources and to innovate, to reduce consumption. Carrot or stick?

Sen. John McCain says if he becomes president, the federal government will be offering a $300-million prize for the best new technology with regard to cleaner automobile engines that do not use fossil fuels.

Now comes The Freedom Prize Foundation and the U.S. DOE, offering $4 million –in increments of $500,000 to $1 million–to encourage innovative deployment of existing technologies in the industrial, military , school, government and community sectors. Final guidelines and application forms will be released this fall. First disbursement of money will be in 2009.

Go to www.freedomprize.org for more information. This program is part of the Energy Policy Act of 2005.

–Leslie Haines, editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

If one uses the Haynesville shale and Bossier shale interchangeably, (as many are starting to do) then operators will target the Lower Bossier in East Texas and the Haynesville shale in Louisiana. On that score, this play keeps getting better–and bigger.

So says analyst Subash Chandra of Jefferies & Co., in his recent report titled ‘Resource Chronicles.’

People still ask if this play is “real” and he answers that yes, it is. These two  appear to be sides of the same coin–just located on either side of the state line. Based on their shale thickness, natural faulting and fracturing, and high organic content, the Bossier and the Haynesville look good, “confirming the Haynesville as the most dynamic play since the Barnett shale,” Chandra says.

He uses the two terms interchangeably and includes, therefore, the Texas side of the coin (the Lower Bossier).

“If the Haynesville was confined to a 5-county area in northwest Louisiana, the play would be one-third smaller than the Barnett. Instead, the play most certainly overlaps into East Texas, perhaps over a much larger area than just the border counties.”

The analyst says a horizontal well drilled by Penn Virginia (PVA) in Harrison County, Texas,  is a “defining moment” for the play. The Fogle 5-H extends it into Texas and more important, confirmed expectations with a high flow rate–one that can be produced at between 10- and 15 million cubic feet per day.  The well hints that the prospective area for gas production may be larger than anyone thought, because this kind of flow rate was expected in Louisiana first, not necessarily on the Texas side.

Now we just need many more data points–that is, well results–to define the areal extent of this play and what the recoveries will be per well and per section. No worries there–many more wells are to be drilled this year on both sides of the state line.

 –Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Big Western oil companies are in final talks this month to re-enter Iraq with service contracts to help the country boost oil production. The world probably needs that oil, or will soon, although OPEC officials keep insisting it does not–they say there is plenty of oil and customers are not asking for more.

Companies bidding are ExxonMobil, Shell, Total, BP, Chevron and some smaller companies.

But what is worse–I can’t believe these new contrcats are no-bid. That will cause howls around the world. The U.S. and KBR already were in hot water for awarding no-bid service contracts in Iraq during the start of the war in 2003.

We cannot and should not allow these new oil-related no-bid service contracts to go through. It looks bad. It’s not fair. It is hypocritical to allow these, while at the same time trying to convince people in the Middle East to adopt a more open, fair, free-market economic system there.

–Leslie Haines, Oil and Gas Investor, lhaines@hartenergy.com  

TrimTabs Investment Research has predicted the price of crude oil will not reach $200 per barrel because the U.S. economy would be broken before that happened.“If oil prices hit $200 per barrel, America’s oil bill would be equal to a staggering 23% of the after-tax income of all Americans who pay taxes,” said Charles Biderman, CEO of TrimTabs.

In a research note to its clients, which include many of the world’s largest hedge funds, TrimTabs said recently that, given that the U.S. consumes about 21 million barrels of oil per day, at $200 per barrel, the cost of oil would reach $1.5 trillion annually!

This staggering sum would be equal to 23% of the $6.5 trillion in after-tax income of all Americans who paid individual income taxes in the past 12 months.

TrimTabs pointed out that when oil prices averaged $70 per barrel in 2007,  America’s oil habit cost a bit more than $500 billion, or 8% of after-tax income.

“At $135 per barrel, America is already spending $1 trillion per year on oil, which is equal to 15% of after-tax income,” Biderman said.  “Such massive spending on oil alone is completely unsustainable.”

TrimTabs also urged the Commodity Futures Trading Commission to boost the margin requirements on oil futures to at least 25%.

“The current margin requirements of no more than 7.5% must be increased to stem the speculation that has inflated oil prices,” said Biderman.  “Stratospheric oil prices are destroying the U.S. economy.”

Biderman disagreed with claims by large oil futures exchanges that high margin requirements would drive trading offshore.

“What really worries officials of the New York Mercantile Exchange and the Intercontinental Exchange is that higher margin requirements would prick the oil bubble, reducing the huge revenue streams of their exchanges and traders,” said Biderman.

He expressed skepticism that if the CFTC reduced margin requires, Dubai, where the volume of oil futures trading is a small fraction of the volume on the NYMEX and the ICE, would allow itself to become the dominant market for oil futures trading because of the political pressure such a move would attract.

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Did a little more figuring today, after my colleague, financial editor Jeannie Stell, showed me some interesting data at www.ewg.org.

Bottom line is this: If an independent oil company called Marbob Energy Corp., based in Artesia, New Mexico, produced 2,992,879 barrels of oil in one year, that oil was consumed in a short 3.6 hours (based on 2003’s rate of U.S. oil consumption).

Today, four years later, the numbers are all going to be a bit bigger–more people, more cars, more electric generation, more petrochemical usage. But in the end, this equals about 0.83 million barrels per hour.

If the U.S. does not adopt energy efficiency to a greater degree than it already has, it will be closing in on consumption of nearly 1 million barrels per hour.

Is anybody finding that much new oil at that rate–and at a price anyone can afford?  

This has got to be reversed! 

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Oilman, hedge-fund investor and wind-power developer T. Boone Pickens is mad and he’s not going to take it any more. That’s a good thing.

He spoke with me in a lively Q&A format on June 10 at our Energy Capital Forum conference in Houston. I say lively because refreshingly, Pickens does not mince words. At age 80, he feels no need to worry about stepping on someone’s toes.

I asked him what the presidential candidates should be telling the American people about energy. ‘The truth,” he said.

 That truth includes the fact that ethanol is an “ugly baby” that will only go so far to satisfy our energy demand.

That truth includes that the U.S. is spending $700 billion a year on imported oil in what Pickens says is “the largest wealth transfer to other nations in history.”

Pickens vows to force himself and energy issues into the coming presidential election debate by his own activism and some new TV commercials.

For more on his remarks, go to www.OilandGasInvestor.com. 

–Leslie Haines, Editor in chief, lhaines@hartenergy.com