Energy Matters

Greenspan, in his autobiography, cites nuclear as the most reasonable choice of electric-power generation. “The major challenge will be to find an aceptable way to store spent fuel and radioactive waste,” he adds.

That’s the extent of his discussion of nuclear waste. While nuclear physics is a tremendous generator of power, the discussion remains of what to do with the waste. Whle the U.S. today takes issue with nuclear power, a more-energy-strapped U.S. may concede.

One place to store it is the moon. The “blue moon” would be the “green moon.”

T. Boone Pickens describes wind power as equal to creating many times the power of a nuclear reactor. While nuclear power can be a near-term source of power generation, which is using an increasing amount of U.S. natural gas and while growing electricity-based endeavors (e.g. powering computers and eventually cars) will require more U.S. power generation, it will help bridge the gap to wind and solar.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com    

  The newest Fed “Beige Book” contains the following entry from the Federal Reserve Bank of Dallas, of which Anadarko Petroleum Corp. chairman and chief executive Jim Hackett is chairman, succeeding Ray Hunt, chairman of Hunt Oil Co.

The Dallas region includes North Louisiana and all of Texas, which contain the Haynesville and Barnett shale plays, plus southern New Mexico, which includes Permian Basin plays.

“Rising energy prices have pushed oil and natural gas drilling sharply higher in recent months. Land-based drilling directed to unconventional sources of natural gas has seen the largest gains. Drilling companies are adding jobs but report having difficulty finding workers with the skills they need.”

The Atlanta-region report, which includes South Louisiana, does not cite the energy industry among relevant factors in that region’s economy.

However, the Kansas City-region bank, which includes coverage of Oklahoma, Kansas, Colorado, Wyoming and northern New Mexico, reports, “District energy activity continued to be very robust in June and early July. Even though the District count of active drilling rigs was down slightly, contacts reported increased activity since the last survey period.

“In addition, energy firms planned to expand production over the next three months. Filings for intents to drill were up in Oklahoma, and some Colorado contacts noted that companies were exploring the idea of tapping shale oil deposits in northwestern Colorado. Energy companies continued to report that financing was readily available, but production was constrained by a lack of qualified workers and the availability of equipment.”

The St. Louis region, meanwhile, includes the Fayetteville shale play, and the regional bank had no comment on drilling affecting its area, which is Arkansas, northern Mississippi, Missouri and some parts of neighboring states.

The Cleveland-region bank, whose area includes Ohio and the western Pennsylvania coalbed-methane and Marcellus shale plays, reports, “Oil, gas and coal production has been steady to increasing during the past six weeks. Looking forward, almost all our contacts told us that they expect to see a rise in production levels due to increased demand. Reports indicate that spot and contract prices have increased across the board, together with equipment and materials costs. Capital expenditures were on plan or slightly higher than projected.

“Half of our respondents told us they expect to increase the number of capital projects in the upcoming months. Most producers reported that credit remains readily available.

“Almost all oil and gas producers hired additional employees during the past six weeks or plan to expand payrolls in the near future. Wage pressures are an issue due to competition for skilled workers.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com    

The new Fed map of subprime mortgages across the U.S. was announced with fanfare a few months ago but has received little attention. The following will show areas more or less affected.

Worthy of note: mortgages in oil- and gas-producing states, such as Texas, Oklahoma and Louisiana, are holding up well. Here’s the map: http://www.newyorkfed.org/mortgagemaps/

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com   

Greenspan writes in his autobiography, which is also a history book in 20th century and current monetary policy, that corporate governance became lax in time as management gained greater control and board members desired less.

He opens the chapter with an embarrassment: He accepted the “Enron Prize” in November 2001 as the company was crumbling, upon the invitation of friend James Baker. “I had not been aware that an award was being given at the dinner (in Houston),” he writes. But there was no official award or money, so “I agreed to accept the award.”

Greenspan says that, today, “market forces are driving private-equity funds to become increasingly committed to overseeing the management of the properties they own, but while the trend is rapidly growing, these funds remain a very small segment of corporate governance.”

John Moon, a managing director at Riverstone Holdings LLC, an active private-equity investor in the upstream energy space, wrote on this topic in Oil and Gas Investor. Moon, who is also an adjunct professor at Columbia University’s Columbia Business School in New York, examined private- versus public-company performance and involvement of shareholders. He found that performance tended to be better when shareholders took interest, such as that found commonly in private companies.

Greenspan says that SOX “to my surprise” has brought “useful reforms,” but Section 404 “has proved particularly cumbersome.” Overall, SOX is “proving unnecessarily burdensome.”

He concludes, “I assume that eventually some of the more abrasive edges of Sarbanes-Oxley, especially Section 404, will be honed down.” And, that, “ultimate control of American corporations by their shareholders is essential to our market capitalist system.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com   

A reliable source in Shreveport says “it appears the word about FBI agents visiting the (local) banks because of large sums of money (being deposited) is another for the urban-legend books. I have heard the banks are having themselves to borrow large sums of money to cover the large drafts/checks they are getting.”

For the back story, see “Haynesville Myth No. 1? Banks Flagged For Large Deposits.”  

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com   

 Of 22 U.S. oil and gas basins from which Devon Energy Corp. produces, some 13 account for less than 5% of company output, according to a study by Ben Dell, senior analyst with Bernstein Research.

“Interestingly, while having production in a greater number of basins boosts growth, if those basins account for less than 5% of the company’s gas they actually appear to become a drag. This suggests that, while over time E&Ps must explore new basins to increase production, being too spread out does not help,” he reports.

Dell reviewed several independent producers’ results in 44 U.S. basins to consider whether asset concentration helps or hurts.

Of the producers reviewed, “notably, EOG Resources is absent from this list, since it is not the basin-master in any of its plays–Devon still dominates the Barnett. Newfield Exploration and Murphy Oil are also missing, but this is less surprising given that those companies are considerably smaller.”

He reports that there are “advantages and disadvantages for an E&P to produce from more basins. Concentrated production seems to lower costs, but more dispersed production helps growth prospects. However, being overly dispersed in small basins can be a drag.”

Shining in the study is XTO Energy Inc., which is “well positioned for growth and low costs, with many basins speeding up growth and costs that are even lower than its large concentrated base would imply.”

His top E&P stock picks are XTO, Anadarko Petroleum, Apache Corp., Newfield and Talisman Energy.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com  

It’s time to buy U.S. E&P assets, and it’s time to sell, depending on your long-term goal. Each year, prognosticators suggest major oil companies will buy a large U.S.-focused E&P, such as Devon Energy Corp. or Anadarko Petroleum Corp.

Each year passes, and the forecast is as valuable as the fortune cookie that comes with Chinese take-out: It’s fun, and it was free (well, it didn’t show up on the bill).

As each year passes, the major oils continue to miss opportunities. Of course, ExxonMobil or ConocoPhillips produces out an Anadarko a quarter or at least in under a year, so buying one of these isn’t significant to near-term results. By the SEC’s definition of what is “material,” ExxonMobil might not even need to put out a press release on buying an Anadarko (just joking).

But what the major oils have been missing is the “promise,” i.e. the PDNP and PUD, probable and possible. They do invest heavily abroad on probable and possible; they miss this right at home.

It’s better for the U.S. independent oil industry that the major oils have practically left it alone to grow at home — the evidence is in how they’ve grown since the mid-1980s. Of course, a major buying a Devon Energy would result in a large number of U.S. assets coming onto the market for smaller independents to work and profit from, since the majors would do as they do — divest.

As for a time to sell, it’s profit-taking time for many producers. Sell to a major now at $140 oil and $13 gas and in today’s capital-gains tax regime, and buy a bit of it back next year at a smaller price and virtually untouched.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com  

Wood Mackenzie upstream analyst Connie Lin reports that the Rockies could become a major U.S. shale-gas producer. It’s a bit early to know how the seven studied plays will work out but that’s the potential they may hold, Lin says.

Lin looked at the Gothic, Cody, Cane Creek, Baxter, Mancos, Lewis and Pierre shales, which are in six basins. Initial daily production rates have hit 12 million cubic feet in the Cane Creek play, she adds.

“While the Rockies region has successfully produced from unconventional resource types–such as tight gas, coalbed methane and shale oil–shale-gas plays have largely been untapped,” she says. “Many of these plays are currently being tested for their commerciality. Some of the other plays have been commingled with other reservoirs and produced for many years.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com  

Is Plains Exploration & Production Co., Houston, (NYSE: PXP) already too late for the Haynesville game? The research team at Tudor, Pickering, Holt & Co. Securities Inc., Houston, led by Dan Pickering, says it may not be, and that its entrance may only further fuel the fire.

“Plains has paid up to get in the Haynesville. Are they early or late? History has shown that, if the geology of the play delivers the gas, the industry will deliver improvements in efficiency—e.g. cost improvements—and higher reserves,” Pickering et al. report.

“Obviously gas prices play another important part. We think it is a good bet that Plains’ entry valuation is eclipsed within the next six months, and perhaps by bigger companies that can’t stand to be left out of the play.

“Shell is already leasing. Does it or another major make a bolder move?”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, www.OilandGasInvestor.com; ndarbonne@hartenergy.com  

Is this Haynesville Myth No. 1? A story in Houston this week is that the FBI has been visiting Shreveport banks to check on deposit activity due to large sums of money being run into accounts, auto-tripping the FBI’s money-laundering flag.

Initial word from a well-versed source in Shreveport, however, is that this story hasn’t surfaced there. Often, rumors and legends are rooted in some type of truth. None has been found in this one, though.

What have you heard?

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, www.OilandGasInvestor.com; ndarbonne@hartenergy.com