Leslie’s Notebook

Congress is set to take a recess from November 21 to December 8–a two-week escape from grim reality. Meanwhile, the stock market goes down another 200-400 points each day, more layoffs are announced, and businesses seem to be crumbling everywhere.

While Americans may well wonder if their Thanksgiving turkey will be the last good, big meal they eat until June 2009, our elected representatives will flee to their home districts. U.S. workers, on the other hand, are not getting two weeks off, and indeed, most are scrambling to finish up all their year-end projects to meet 2008 budgets and deadlines for their employers.

If I were president, I would order Congress to stay in session until it passes some kind of temporary relief, bridge loan–albeit with many strings attached–for the auto industry.

Talk about fiddling while Rome burns!

Here’s an idea for financing the “bailout”: why not use the nearly $18 billion that the MMS just returned to the U.S. Treasury from oil and gas royalties and lease bonuses in fiscal 2008? After all, if there is no robust U.S. auto industry in two years, how much oil will we need by then?

–Leslie Haines, Editor-in-chief, Oil and Gas Investor

First the disclaimer: None of these remarks that follow includes any fallout from whatever the new Obama Administration may do/announce/plan once it takes office in January 2009. These predictions are based on news and anecdotes appearing this month, and do not take into account changes to oil and gas regulations or taxation that may be coming later.

The worldwide outlook for E&P spending has deteriorated in recent weeks. The global financial turmoil, falling oil demand, and lower oil and gas prices continue to take their toll on E&Ps and service companies.  Now Barclays Capital analysts Tom Driscoll and Jim Crandell (formerly of Lehman Brothers) report that spending will fall as much as 25% in 2009.

They continue to conduct their annual E&P spending survey, which will be released in December, but preliminary results show a slow first-half 2009. They base this outlook on anecdotal information, announced budget cuts, and a recently-lowered Barclays price forecast of $60 oil and $6.50 per Mcf natural gas.

“We are now estimating flat spending internationally in 2009 and a 25% reduction in North America.  A recovery of 5% internationally and 10% in North America is forecast for 2010,” says Crandall.

Meanwhile, crack energy analyst John Olson, of Sanders Morris Harris in Houston, thinks the first-half of 2009 will be slow and the pond will be full of danger. He co-manages three energy hedge funds for the firm and is the dean of Houston-based analysts. He called this banking meltdown when he last spoke to the group in April 2008.

Speaking to the Houston Producers Forum this week, he said the only way E&Ps can attract investors back at this point is to increase their dividends. Stock buybacks do not help the average investor, he said.

“The government will bail out some industries but it won’t bail out any investors. I would urge you to stay away from the market for the next six weeks. There are too many crocodiles out there.”

For more on Olson’s remarks, and a brief video interview, see  the premium content section of OilandGasInvestor.com. To subscribe, contact Jim Hart at jhart@hartenergy.com.

–Leslie Haines, Editor in chief, Oil and Gas Investor

The current market crisis is astonishing for its depth and breadth. Lehman Brothers’ credit default swaps are held by some 350 financial institutions around the world. This is like one huge global margin call. No one seems to be immune. The lack of confidence and trust in markets and market participants is somewhat akin to what happens during a run on the bank–something I experienced first-hand in 1983 when I lived in Midland, Texas. Indeed, Wachovia had $5 billion withdrawn before and during the days Citi and Wells Fargo were fighting over it. Wells won. Let’s hope it doesn’t end up with buyer’s remorse.

Combined with lower commodity prices and stocks that have tanked beyond all reason, we are seeing an early Halloween. Investors are clearly spooked.

The flight to quality is so overbooked, weary–and wary–investors are standing in line 10 deep at the counter!

E&P companies that have low debt ratios and that operate within cash flow, have good acreage positions and reserve growth in sight for 2008 and 2009, should do well, but their cash flows will be anemic compared to first-half 2008–unless production growth can overcome that.

Meanwhile, natural gas prices will be under pressure for the rest of the year. The EIA reports that natural gas production onshore was up 12% year-over-year through July, increasing by 5.8 Bcf a day. The Powell Barnett Shale Newsletter out of Fort Worth reported earlier this year that as of January 2008, some 1,459 wells were still in the pending file at the Texas Railroad Commission–and that their production averaged an aggregate 1.5 Bcf a day at the time.

This is why T. Boone Pickens and Aubrey McClendon are pushing more gas use, and why House Speaker Nancy Pelosi finally gets it and agrees. 

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

We begin today a collection of insights on the current market situation from CEOs of various companies–energy and otherwise–to shed some light on where we may be headed next.

First up: Words of wisdom and caution from Andrew Gould, CEO and chairman of Schlumberger, when reporting the global service company’s positive third-quarter results (revenues and income higher than 3Q 07 and 2Q 08):

“As we enter the fourth quarter, the recent rapid deterioration in credit markets will undoubtedly have an effect on our activity though we anticipate this will largely be limited to North America and in some emerging exploration markets overseas. The strengthening production of North American natural gas has also led a number of customers to reduce spending early.

“At the present time, the rate at which the world economy will slow has become increasingly uncertain. We have always maintained that the one event that could slow the rate of increase in worldwide exploration and production spending would be a reduction in the demand for oil caused by a severe global recession. At the moment, it is still too soon to predict to what extent current events will affect overall activity in 2009, but we anticipate a slowing in the rate of increase of customer spending.

“However, the weakness of the current supply base, the age of the production profile and the decrease in reserve replacement — all of which we have indicated on many occasions — are such that any significant drop in exploration and production investment would rapidly provoke an even stronger recovery. ”

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When hurricanes strike, we hear a lot about rig and platform evacuations offshore and shut-in production. At last count the Minerals Management Service said 49 production facilities were destroyed when Hurricane Ike came through on the night of September 12. And BP’s Mad Dog platform lost its derrick to Davy Jones’ Locker.

Devon Energy Corp. lost two production platforms in Eugene Island.  Ironically, these had survived Katrina and Rita in 2005, but the company, wanting to be prudent, spent about $5 million to upgrade them for the next big storm. Now they are gone anyway, and so is about 1,200 barrels a day of production that Devon operated.

“We were so proud of the fact that we recognized their vulnerability, and we proactively raised their decks by another 14 feet higher. Lo and behold, a loose drilling platform came through and took them out,” spokesman Chip Minty tells me.

Note that Ike wreaked havoc in the onshore oil patch as well. It went right up through East Texas where the Haynesville/Bossier play is.

GMX Resources Inc., of Oklahoma City, said on Sept. 22 that three of its Haynesville horizontal spuds there have been delayed from the third quarter of this year to the fourth thanks to Ike.

“We are also experiencing delays in shipments of critical materials, causing the delay of two proposed Haynesville horizontal wells,” the company announced.

This will move production from three planned fourth-quarter wells to an early 2009 time frame.

You know about the JPMorgan Chase tower in downtown Houston, where most of the windows were blown out. But Devon Energy also suffered damage to its offices downtown, at Two Allen Center and Three Allen Center. The firm has about 1,200 employees in Houston.

The roof of one of the buildings was peeled back and thus, Devon Energy suffered severe water and wind damage to the top two floors. Offices there will basically have to be ripped back to the wall studs and rebuilt, Minty tells me. There is water damage to the two floors below those as well.

Essential personnel are working from home and a few critical people are coming to the office downtown, he said. Throughout the Gulf Coast, some 1,600 employees were affected by the storm.

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

We’ve been out of the office for six working days, since we abandoned ship on Friday the 12th in order to prepare for Ike. But what we didn’t count on was having to prepare ourselves to survive the financial hurricane on Wall Street that happened last week.

The much-touted, free-market form of American capitalism (that we have tried to export all over the world) is under grave assault due to this year’s market events–and the federal government’s far-reaching response.

This mother of all bailouts will cost our children and grandchildren in both their money and in their ability to spend on more worthy causes, such as medical care and R&D and green technologies and the military and God knows what else.

It remains to be seen if the response of the Fed, the Treasury and the White House will be approved by Congress, or will be upheld by whoever wins the presidency in November.  But more troubling, it is not clear if this whole scheme will work.

Meanwhile, for those of us having to make a living on Main Street, it’s time to put on those hurricane shutters, store some extra water, non-perishable foods and batteries. Invest in oil and gas stocks and hope the creeks don’t rise–but that the energy stocks do. No matter what else is going on, we will still need oil and gas energy, and lots of it, to repair this economy, to recover the American dream, and to move forward.

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

Another Summer NAPE Expo come and gone. Good times, good news, good people. Lots of shale prospects in every other booth. Traffic seemed a little slower and less over-heated than at the previous NAPE.  But several people said it seemed the prospects being shown were better and the resulting talk more serious about real deal-making. 

Heard that at least $2 billion in fresh capital is being raised, to close by the fall, in two new private equity funds.

Heard a long-time Pennsylvania oilman complain that the new shale players have “ruined it” for traditional shallow-gas leasing–for drilling the typical well to 3,000 feet in the Upper Devonian Bradford or Elk sands, that might only flow 200,000 cubic feet a day. Why would any landowner lease for $50 an acre when he hears about shale players now offering $2,000, or $20,000?

“The old beat-up Appalachian Basin has changed. When was the last time anyone drilled a real oil or gas well there?”

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

We like a man who puts his money where his mouth is–and Texas energy entrepreneur T. Boone Pickens certainly has the money to back up his words. What’s more, he has the passion.

At Oil and Gas Investor’s Energy Capital Forum held in Houston in June, he told attendees he planned a major media campaign about energy solutions for America. (See OilandGasInvestor.com for video of his remarks and a press conference as well.)

But we never dreamed that Pickens’ energy campaign would turn out to be so big. A new website: pickensplan.com. A series of high-profile TV ads airing on the major networks, CNN and more, in prime time and during the Sunday morning political talk shows. Daily email alerts on the latest news, sent to Pickens Army.  

Then on Tuesday, August 26, NBC News apparently rejected his latest ad, dubbed “Iran Ad.” In this one, Pickens claims that Iran is moving to have more of its domestic cars fueled by natural gas, so that it can export more of its oil at high prices, (currently about $116 a barrel)–while the U.S. “is not doing anything” to curb its oil consumption.

NBC allegedly said that the ad was too controversial and contained unsubstantiated claims. On August 27, prominent law firm Patton Boggs sent a letter of protest to NBC on Pickens’ behalf, accusing NBC of selectively applying the First Amendment. The network has already aired Pickens’ other seven ads in his energy campaign, which touts wind power for electricity, natural gas for vehicles, and reduced oil imports.

However, the ad matter appears to be resolved.

Adweek, the advertising industry trade publication, said on August 28 that NBC relented, or reconsidered, and has accepted the Iran ad to run–without any changes–on NBC, MSNBC and CNBC. It is not clear when the ad will air.

Pickens has always been an intriguing oilman, admired for his successes, looked to for his bold speaking, and counted on for his generous donations to charities, universities and other causes. Now, he is a hero to First Amendment supporters as well. A welcome, if unlikely, event.

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

The Democratic National Convention opened today in Denver, and energy will be a part of the discussion for the speeches and the party platform. It remains to be seen just how much air time energy will get–and no doubt it will be mostly about renewables and that old myth that the U.S. can become independent of foreign oil–or any oil–if we would just try.

Meanwhile, one of the local trade groups–the Independent Petroleum Association of Mountain States (IPAMS)–today reminded Sen. Obama and the delegates that policies calling for more renewables such as wind and solar “must be accompanied by a plan for increased development of domestic natural gas.  “Solar and wind facilities simply cannot exist without increased supplies of natural gas,” said Marc Smith, IPAMS executive director. “As we welcome the Democratic delegates to Denver, we remind them that efforts to increase our reliance on wind and solar energy will require increased domestic natural gas supplies.”

According to the Department of Energy, by 2030, 25% of our energy will come from natural gas (an increase of 5% from 2007), and about 8% will come from renewable energy sources, IPAMS said.

“As the U.S. increases its reliance on solar and wind energy, more clean-burning natural gas will be needed to fill the gaps when the wind isn’t blowing and the sun isn’t shining. For example, with each kilowatt hour of wind power installed, there is a corresponding kilowatt hour of natural gas back-up capacity added.“Natural gas producers are proud to be the silent partners to renewable energy,” said Smith.  “As the delegates craft their party’s platform and vision for the future this week, we hope they’ll remember that policies creating a higher demand for natural gas while limiting the creation of new supplies are a recipe for disaster. “Legislation that causes more bureaucratic delays and further limits access to federal lands where vast amounts of our energy resources are located will limit domestic natural gas supplies and keep wind and solar from becoming a viable energy sources,” concluded Smith

Visit www.ipams.org/dnc for more information.

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