A Reversal: US Oil Production is Now Up!

Surprised?  I was,  . . .  but its true!   In decline since 1970, the American Petroleum Institute reported US oil production has now turned up, with October production of 5.36 million barrels per day, the most since 2005. See the article here. Even Exxon (XOM) is "coming home" with its proposed acquisition of XTO Energy -- XTO has a large position in North Dakota Bakken Shale acerage.

The Cheyenne River Indian Reservation  in western South Dakota is wild, desolate . . . and beautiful!  Three million acres of rolling prairies and buffalo, just as trappers and the first settlers saw it.  Much of the surface soil here is shale, Pierre Shale.  In the 1970's I found 80 million year old ammonites exposed, right on the ground.  The high clay content makes the soil poor for agriculture (probably why it was given to the Sioux Indians as a reservation in 1889).  Due to surface exposure, the original oil and gas components here are long gone, but not so for the deeper shale and sandstones deposits to the north, where a bonanza in oil and gas has been found.

Further north (meaning North Dakota, Montana, Saskatchewan) oil production is skyrocketing.  North Dakota may be sitting on one of the largest pools of oil in North America.  Bakken Shale oil production alone may reach 500,000 barrels per day in 2011, up 50% from two years ago.   And now, beneath the Bakken a new, apparently just as prolific, oil formation, called the Three Forks, is being explored.  The Three Forks is rumored to contain just as much oil as the Bakken.  Also, newly exploited to the northwest, in Canada, the Cardium formation is showing an abundance of oil.  SA author Keith Schaefer has written extensively on the Cardium.

Multi-stage fracturing, or fracing, of horizontal wells in tight shale formations is providing an unexpected abundance of gas and oil.  This new and rapidly evolving technology involves insertion of various liquids or gases (water, carbon dioxide, nitrogen, air etc.) along with proppants into horizontal bore holes in "tight" rock formations such as shale.  The liquids or gases create fractures in the shale and proppants (sand, ceramics, etc.) keep the fractures open.  Oil and gas then flow into the fractures and can be harvested.  For more information on the technology  read here.

Mid-Continent shale may have as much as 500 billion barrels of oil (admittedly a wildly optimistic estimate but if so think Saudi Arabia).  While it is true that much of this oil may not ever be recoverable, increasing prices and the aforementioned technology is rapidly improving the odds.

And, don't forget the Gulf of Mexico.  Although drilled heavily, companies are also producing more oil from the Gulf. Major projects are now coming on line while old fields, due to technological advances, are producing more than expected. New discoveries keep coming, read about BP's recent "giant" find here.  At the same time, smaller companies such ATP Oil and an Gas (ATPG) are prospering by extracting more oil than ever thought possible from old fields.  Technology is truly evolving and allowing us to find and produce ever more oil and gas.

So,  is all the "gloom and doom" of Peak Oil talk just that -- only talk?  Well, not so fast, the US increase is minuscule when compared to worldwide daily demand of approximately 85 million barrels of oil.  Oil demand, while stagnating in developed countries, is jumping fast in developing countries.  Car sales are exploding upward in India and China as road infrastructure is built out.  The "American Dream"  of car ownership is now becoming the Chinese or Indian dream.  With Asian populations many times that of the US the potential is enormous.

A few years ago severe shortages of natural gas were predicted in the US and several LNG port projects were started in anticipation of imports.  Now, construction has slowed or halted, and the facilities are languishing -- mostly due to US shale gas production.  It seems unlikely the same could happen with oil any time soon, but keep your eye on US domestic production.

Below are some US companies with significant stakes in Mid-Continent (read North Dakota) shale oil plays: 

Continental Resources  (CLR), at $6.7 billion market cap and 605,000 net acres is in both the Mid-Continent and Gulf Coast regions.  82% of the shares are held by insiders, with Harold Hamm, CEO, holding most of it.  Continental under Hamm, excited by the potential, has recently made a major move into the Bakken in North Dakota,

EOG Resources  (EOG), at $23 billion market cap and 513,000 net acres is in the Mid-Continent and Gulf Coast regions.  EOG, an international company, is probably the least speculative way to invest in the Bakken.

Whitting Petroleum  (WLL), at $3.4 billion market cap and 89,000 net acres is in the Mid-Continent Whiting is also in the Permian Basin, the Rocky Mountains, Gulf coast and Michigan.  Whiting is exploring the Three Forks formation under the Bakken.

Below are some Canadian companies that have significant western shale oil stakes.

Crescent Point Energy  (CPGCF.PK) is active in the Canadian Bakken and "believes it has a drilling inventory of 3000 wells to drill."

PetroBakken  (PBKEF.PK) recently combined with TriStar Oil and Gas and supposedly has an inventory of 1,300 Canadian Bakken wells.

Also, many of the Canadian Royalty Trusts have significant land holdings in Canadian shale areas.  An added bonus: they often offer attractive dividends.

A cautionary note:  I am not recommending any of the above equities.  Everyone's situation is different so use your own due diligence and investigation before investing.  It is true that there is a lot oil in North American "tight" shale, and technology is improving the cost of getting it out.  However, a sharp drop in world oil prices could make the shale oil, which is still fairly expensive to pump, uneconomical and many shale oil companies may be adversely affected.

Disclosure: Long BP and PBKEF.PK

Not Telling Jennifer . . .

"I'm not telling Jennifer" he said.  This from the man selling wooden chopping blocks last summer at a Michigan craft festival.  He was responding to my query concerning sales tax.

Not tell Jennifer? . . . Who is Jennifer? . . .   His wife? . . . Co-worker? . . . Why would she care?

Then I got it.  Jennifer Granholm is the governor of Michigan.  Conditions in Michigan are really bad right now and may be looking worse for the future.  The state,  businesses, residents . . .  everyone is scrambling!  Unemployment is 14.3%, up from 8.7% a year ago.

A recent, and rather frightening article, predicts that Michigan's General and School Aid funds will need to be cut almost 50% by 2017 (see here) if the budget is to be balanced   More and more residents are rebelling, clamoring that state employees and social welfare recipients also need to start sharing the pain.  Its a mess.

In a way ,the state brings on its own problems.  We collect sales tax on summer rentals in Michigan.  What I found quite astounding was how difficult it was to set up forwarding the payments on to the state.  You need to fill out forms and jump through a lot of hoops -- and thats to send money to them!

The state doesn't seem to have a provision for individuals to pay sales or use tax, even if they owe it.  The forms are all company oriented, and there is less and less traditional employment in Michigan.  After unproductive phone calls and emails I finally gave up and just put my last name in the "Company Name" field.  Not sure if it was correct, but they are accepting and cashing the checks.

Untaxed, unregulated, unlicensed, unreported . . . America's underground economy keeps growing.  The Christain Science Monitor recently estimated the shadow economy to be as big as $1 trillion or 8% of GDP  (see here).  Every uptick in unemployment, every tax increase, and every new regulation drives the figures up.

If you are unemployed and ambitious you do what it takes to get by.  Telling Jennifer is all too often just not a priority. 

Bargains at McDonald's

This morning, on a whim, I stopped for an early lunch at McDonalds (MCD).  I ordered two regular hamburgers and an iced coffee -- hazelnut, my favorite.   The charge? $3.17!  I looked at the receipt.  I was charged $.99 for the two  hamburgers and $1.99 for the coffee.

I started thinking about that.  Why would McDonald's only charge me $.49 for a hamburger?  That is about the same price I paid in St. Louis over 25 years ago.

The iced coffee I could understand.  You can get Starbucks type beverages for less -- a good way to get "prestige" on the cheap.  Of course the atmosphere isn't quite the same.

But, that $.49  hamburger?  After studying the posted prices over the counter I finally found, in small print near the bottom,  the regular hamburger price. It was marked $.69!  Well, that only deepened the mystery.  Why would they only charge me $.49?  Some kind of senior discount maybe?  I'm 60.  The sales clerk did not ask my age and I could find no promotion advertising a hamburgers or senior specials.

Times are tough,  If people can get 2 hamburgers for $.99 and skip the drink this would be a great way of getting meals on the cheap.  I'm not sure this stuff is good for you but it is cheap!

For what its worth: at the next table two teenage girls were splitting what looked like a large order of fries and a medium drink.  Apparently McDonalds is doing well with this type of stuff.

ETFs for Bear Markets

The dollar keeps falling while "real" assets such as gold, oil, and equities continue to march ever upward.  Its great to go along for the ride but keep in mind that "all good things must come to an end someday".  Sometimes a violent end! When the tide turns ... and you know it will ... how can you position yourself?

Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time.  However, investments that do well when things go the other way are much harder to find.  Here are some ideas on how to hold your own, if not profit.

First, get into a healthy cash position, then consider these ETFs.  Most did well or at least held their own in the 2008 bear market.  Two are currency ETFs.  Currency markets are much larger and independent of equity markets.

1. UUP  Yes, the much maligned US dollar.  Just how low can it go?  Well, don't answer that question, but do consider that UUP was probably the best performing ETF in the second half of 2008.
2. CYB  The Chinese yuan.  This is an interesting play.  Currently the yuan is pegged to the US dollar but any change will most likely have the yuan appreciating versus the dollar.  Note that the yuan mostly held its own during the second half of 2008.  China is also printing money but doesn't have the deficit problems the US does.
3. TIP and BND  TIP invests in inflation protected US bonds and did not do well the second half of 2008.   However, if you see a stagflation scenario ahead TIP may be a good place to be. BND tracks a "broad, market weighed index" of bonds and except for a violent but brief spike down in September, when everyone was panicking, held its own throughout 2008.
4. DOG, SH, PSQ and RWM.  These inverse ETFs are a convenient way for investors to "short" the market and a great place to be in falling markets.  But, remember these ETFs are subject to tracking error and values decay over periods of time.  Also, see the comment about "bear" ETFs below.
5. GLD  Gold is commonly thought of as an inflation hedge.  Yet, more than anything, it is a store of value in uncertain times.  If you see greater than normal financial and social unrest ahead -- and most of us do -- you may want some gold investments.

If you are a day trader you can see a list of Yahoo Finance's "bear" ETFs here. Remember, most if not all, of these are for day traders only because of daily rebalancing.  Held long term, they not only can, but will, destroy your portfolio.  Click the "Return (Mkt)" tab on the Yahoo site to view the "Red Sea" of three year returns, losses run up to 70, 80, even 90 percent.  Only one, UDN, shows a positive three year return -- wonder why?

So, when will the equity-commodity-bond market run end?  Consider these potential early warning signs:  long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which may cause the US Federal Reserve to raise rates.  For now the "herd" is jumping on the band wagon -- and more are boarding every day --  so enjoy the party.  But, be ready to jump when the music gets out of tune and the wagon starts swaying.

Disclosure:  I have a small "precautionary" position in SH

SunTrust, Signs of a Solid Investment?

The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave.  A dome of sauna-like high pressure blanketed the state.

The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.

First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers.  More signs than customers, all touting SunTrust's "SOLID" message.  I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest.  You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's  web site here.

Mid-December of last year -- in the middle of the crash -- I posted a SA article on how business, at least from a customer's perspective, appeared normal at SunTrust.  See the earlier article here.   SunTrust's stock then was in the upper 20's and dropping -- it was destined to hit a low of 6 in March of 2009.  Now, on October 26 it is just below 20.

The bank recently posted it's 4th straight quarterly loss, revenue is down 21%, non-performing loans up 65% and charge offs up 26% (see here).

From a customer's perspective the changes are more subtle.  Well, there are the signs, "SOLID" is everywhere.  Some signs, such as "SOLID ADDS MORE OOMPH" -- I'm not sure what the meaning is.

Gone are the Home Equity Loan promotional signs.  Indeed, SunTrust froze my own HEL account several months ago.  I did see a small sign on a desk touting auto loans.

I was struck by the quiet and lack of customers, maybe it was the late Tuesday morning time frame. Only two of the seven lobby offices and one one of the five lobby desks had staff.  Six months ago there were Saturday hours, now gone.

During past visits I noted stacks of loan applications on lobby desks.  Now, the desk I sat in front of had only some kind of subpoena -- quickly whisked out of sight.  Even the pens looked like they came from Wal-Mart.

I like SunTrust -- even if they did freeze my HEL account. Staff are mostly friendly and helpful, the lobbies well air conditioned (important in Florida), and branches are convenient.  The website layout is easy to follow and I like the logo (see picture above).

Residential, and commercial real estate values are down close to 50% from 2006  in the northerly suburbs of Tampa.   Considering the 100% loans originated in those boom years all kinds of stuff is now "underwater".  This must be a huge problem for SunTrust and other area banks.  Foreclosures are skyrocketing.

Nearby is a new 16 unit strip mall, quite attractive, completed well over a year ago.  So far it boasts only one tenant, a doughnut shop.  Someone has to be losing a lot of money here. Don't know if it's SunTrust financed, you don't see the "Financed By" signs around anymore.

With ZIRP financial institutions can purchase longer term treasuries and profit from the spread.  This may explain the market for10 year US Treasury Bonds, paying 3.5% despite years of trillion dollar deficits staring us in the face.  Thank you taxpayers, just don't expect to get it back on your savings accounts.

The biggest beneficiaries of tax-payer bailouts pay the least interest on savings.  Back of America (BAC) pays .1% a year, Wells Fargo (WFC) .05%, Chase (JPM) .01%.  See here.  Hmm ... let's see now.  $5,000 in a Chase saving's account (or Washington Mutual, which is now JP Morgan Chase) would earn $5 for the year.  Las Vegas, here we come!

And Suntrust?  Well, SunTrust paid me 1 cent (rounded up?) interest last month on my $162 savings account.  At this rate I will report a grand total of 12 cents in interest income on 2009 taxes!  Sure hope the IRS isn't expending too much time and effort pursuing interest income cheats this year!

Yet Bernanke has to keep rates low.  To increase short term rates would devastate the profit spreads, crashing housing, equity and bond markets yet again.   We would be right back to last fall.  Question is: how long will US savers put up with these abysmal rates?  Recent market jitters are unnerving.

So is SunTrust a "SOLID" investment?  Despite the signs, I would have to say no.  Not picking on SunTrust, same goes for other banks.  Considering the craziness and shenanigans going on with interest rates and the Fed's MBS purchases (which could end) I would avoid investing in any US financial institutions at this point.

Reality is not far from the air conditioned lobby.  A few blocks away, a well dressed, unhappy looking middle aged woman is sitting on the sidewalk, clutching a large flooring special sign, attempting to fend off the mid-day sun.  These people are hired to jump around, wave at passing motorists, entice them to buy.  Sitting down on the job?  Well, you try jumping around and waving all day in Florida's heat and humidity.  But, hey -- she has a job.

Disclosure:  I have no positions in the stocks mentioned above unless you count my SunTrust accounts.

Why the Big Market Run Up?

Since March lows stocks have rocketed up 50% or more and the trend shows no sign of abating.  Back in March there was almost universal pessimism.  So what has changed?

Have fundamentals really improved?  Unemployment is still going up.  Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money".  I guess California at least gave it a try with those infamous "IOU"s.  How green will the shoots stay if government money slows or stops?

In my opinion this is a tax payer fueled rally.  A massive infusion of newly printed money (backed by US taxpayers) is flooding the system.  The major recipients of this largess, the banks, get this money loaned to them at 0%.   They then do what all good bankers do,  reinvest the money at higher interest rates and profit from the spread.  With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.

The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value.  Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved.  Question is:  Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans?  If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade.  Let's hope they don't start leveraging.

Unfortunately, US taxpayers will pay a terrible price.  Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?).  The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do.  He doesn't dare raise rates, he may have no choice about leaving short term rates low.  I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued.  You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe.  Maybe policitcally they had no choice.

Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward.  Even real estate is showing signs of bottoming.

Devaluing the dollar will cost all Americans dearly.   It will increases the price of just about everything and sets the stage for hyperinflation.  Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40.  Health care?  Well, we don't even want to go there.  Savings and fixed income instruments would be devastated.

We have always had to deal with inflation to some extent.  The problem now is it threatens to spin out of control.  Hitting that magic window of 1-3% inflation may no longer be possible.  People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.

A Timber-Backed ETF for an Historic Commodity

Up until 100 years ago our ancestors needed timber almost as much as water to survive.  Keeping warm, building shelter, constructing tools, all called for timber.  It was necessary for survival and life itself.  Indeed, plant material was (and still is) the basis of all life.

You can invest in timber by buying wooded acreage.  Periodically (like every 10-15 years) a timber company will pay to harvest your trees.  A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF  According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).

CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies.  As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified.  Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY).  A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.

In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and cut over lands, the effects of which can still be seen.

Today, timber is harvested for packaging, paper, building materials, heating and furniture construction.  Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy.  Many of CUT's holdings are packaging companies.

Is CUT a good buy?  You can make an argument either way.  On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand.  If nothing else you can always burn it for heat.  Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.

On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump.  Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment.  CUT, going forward, will undoubtedly mirror the health of the worldwide economy.

You can find more about CUT at this page on Claymore's website.

Disclosure: No Holdings in any of the above.

A Cold Wind Blowing

It has been a cool summer in the west central Michigan.   I can count on one hand the number of days this fast departing summer had temperatures reaching the low 80's.  Now, in the last days of August, temperatures drop into the 30s overnight.  Cold fall winds are blowing in early off Lake Michigan and the long gray winter suddenly doesn't seem far off.

Like the weather, the Michigan economy is gloomy.  Folks sell firewood, apples and yard sale trinkets to get a small amount of cash.  How much of that gets reported to Uncle Sam?  Wouldn't help anyway. 

Toys from more prosperous times line roads.  Boats, travel trailers and other paraphernalia can be had for a song.  Not many cars, I guess the clunkers program got most of them.  Deteriorating roads make for rough driving. Walk into a store: You will find solicitous clerks but few customers.

With an unemployment rate over 15%, real estate values continuing to drop, and a cold winter approaching things seem bleak.  One hopes the red, orange and gold leaves of October will help.

Oil as an Investment in Deflationary Times

We all know that in an inflationary environment oil and other real assets are good places to put your money.  It is easy to find asset classes which keep pace with inflation.  Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat.  Your choices seem endless.
But what about in today’s deflationary environment?  Investments that do well in a deflationary environment are much more difficult to find.  Here are some possible  candidates with my comments in italics.

1. Cash - No upside, but safe, liquid and purchasing power increases with time.  Example:  If you had sold a Florida house 3 years ago for cash, put the cash in a savings account you can now buy two houses with the money.
2. Quality long term government and corporate bonds - This was a great place to be the last 1/2 of 2008, but the trend runs its course as interest rates approach zero.   Even worse, with trillion dollar deficits and quantitative easing you know this game will end someday.
3. Currency plays such as the US Dollar (UUP) or Japanese Yen (FXY) - These currencies do well when the fear factor is strong and markets tank.
4. Inverse ETFs such as SDS, SH, DOG, and DXD - Great for short term trading, but if you are not a day trader stay away, especially the double inverses.  SA has numerous articles on why.

I propose a 5^_th item,  Investments in companies rich in oil and other natural resources.  Consider Oil Rich Stocks such as OXY, PBR, and EOG.  For diversification, but with a higher natural gas component, consider XLE.
Remember “inflation is always and everywhere a monetary phenomenon”.  Prices are determined by supply/demand, not just inflation/deflation.  Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates.  The large middle eastern fields are in decline.  It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much.  Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming.  Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG.  There is an oversupply of this relatively inelastic commodity thanks to technological advances in production.  Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time.  How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets.  It is best not to buck a trend.  However, nothing goes up forever.  The test will come when market indices decline, then we will see to what extent oil follows.  For this reason, I would stay at least 50% in cash.  You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror.  At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY

Peak Oil Investing

Think back to July of 2008 oil was over $140/barrel and a lot of talk on “Peak Oil” (the point in time when the maximum rate of global petroleum extraction is reached) was floating around.  By late December a hard hitting recession (depression?) and a strengthening dollar drove prices under $35/barrel.  Suddenly there was very little peak oil talk.  Today oil is around $60/barrel -  and dropping.  It is time to again visit peak oil thinking.
Several factors influence oil’s price.  The fundamentals, of course, are supply and demand.  Wars and rumors of wars, especially in the oil rich Middle East, can drive prices sharply higher in just minutes.  Quantitative easing, technological advances, Middle East stability, market manipulation, “herd mentality”, all influence oil prices.  So, any discussion on peak oil must also consider non-fundamentals.
Oil fields, once put into production, go into decline as the easiest to recover oil is drawn off first.  In fields all over the world, the “easy stuff” is now largely gone.   Even the massive Saudi Arabian fields are in decline.  This is true of course for all resources.   Consider copper:  In early settlement days large copper ingots were found simply lying on the ground in parts of Michigan as gold nuggets were found in parts of California.

Arizona Copper Mine

No one finds gold or copper lying around for the taking any more.  We need to dig massive, miles wide, holes in the ground thousands of feet deep.  South Africa goes deeper and deeper to tap their prolific gold fields, yet production is in decline.  Yes, I know this article is about oil, not gold or copper.   The principle is the same though, we must exert greater and greater effort to extract natural resources.
New discoveries can drastically affect prices.  In 1901, in southeastern Texas, after drilling down over a little over 1000 feet, the Spindletop oil well suddenly exploded up, oil gushing 150 feet into the air.  Spindletop, originally expected to produce 50 barrels a day, initially produced an unheard for the time 100,000 barrels a day, more oil than anyone knew what to do with.  By 1902 the price of oil had declined to an all time low of 3 cents a barrel.  Previously most US oil had come from the less prolific Pennsylvania fields.  Read about Spindletop here.  Now, with over one billion cars worldwide predicted by 2010, we know exactly what to do with with oil and gasoline.
We still occasionally find huge oil fields.  However, they are miles deep, under the ocean, rock and salt or locked in tight shale formations.   Read Kurt Wulff’s SA article about the large Petrobras finds off Brazil here.  In the US it has recently been estimated North Dakota’s Bakken shale may contain up to 500 billion barrels, yet only 3-4 billion is recoverable at today’s prices (see here).  Conclusion?   Another “Spindletop” effect is extremely unlikely.

Apache Corporation, A Solid Investment?

No, oil and gas exploration company Apache Inc. (APA), is not directly tied to ancestral Native American lands in the American southwest - though I guess all US lands are ancestral Native American lands.  Nor, as far as I can determine, is the Apache tribe involved in management in any way.   Instead, the name was picked by using the first letters of the last names of Truman Anderson, Raymond Plank and Charles Arnao, the three founders of the company in 1954.  Helen Johnson, an early employee, was awarded a $25 United States savings bond for suggesting the “che” be added, thus the “Apache” name.  Raymond Plank has just retired this year after 54 years of service.
Apache Corporation has grown rapidly in the 54 years since its founding and is now a $26 billion (market cap) international oil and gas exploration, production and development company.  The company reached the $100 million earnings mark in 1996 and $1 billion mark in 2003.  Starting in 1999 Apache has had a steady string of acquisitions.  The acquisitions are continuing.  In April of this year agreement was reached with Marathon (MRO) to acquire 9 Permian Basin oil and gas fields.  This company seems to do acquisitions quite well.
Apache is active in seven regions around the world: the Gulf Coast (onshore and offshore), USA Central, Canada, Egypt, Australia, the North Sea and Australia.  On the the companies’ web site there is a map showing the seven regions they operate in (see it here).  By clicking on the captions on the map you get a summary and details of what the company is doing in that particular region.
Competitors include Exxon Mobil (XOM), BP plc (BP), and Anadarko Petroleum (APC) among others.
Apache, as of December 31 2008, had estimated proved reserves of 1,081 million barrels of crude oil, condensate and natural gas liquids along with 7.9 trillion cubic feet of natural gas.    Reserves are located in mid-continent USA (25%), Canada (22%), Gulf of Mexico area (14%), Egypt (14%), Australia (12%), North Sea (8%) and Argentina (5%).  Apache claims they replaced 122% of production in 2008.
Apache had a $5.25/share loss first quarter of 2009.  In the Earnings Transcript release Tom Banks, President of Corporate Planning and Investor Relations, said “Loss was the result of the continuing deterioration in north American gas prices at the end of 2008 which recorded 1.98 billion non-cash after tax reduction in the carrying value of oil and gas properties”   Also, revenue growth is down 48% year over year due to lower oil and gas prices (Yahoo Finance).  In general, however, Apache is regarded as a conservatively run company and should weather the current downturn better than some of its competitors.  Total cash is $1.38 billion and total debt $4.91 billion (Yahoo Finance).
I like to read annual reports.  The annual report always puts a positive spin on things, of course, but it does give you a feel as to where company enthusiasms lie.  The reports are usually available on the company website under “Investor” sections.  Unfortunately, the Apache website said the 2008 annual report was not yet available and when I clicked on the links to the 2007, 2006 and 2005 reports I got a “page not found” message.  Having done some web design I know it is very simple to create pdf links, so not sure what is going on here.
Apache seems to be a good, solid company in which to invest.  Oil and gas reserves are tangible assets that will hold value, it not appreciate, in today’s climate of currency devaluations.  Unlike gold, oil and gas have actual uses (think your car).  Oil, currently near $60 a barrel and natural gas still only marginally higher than 52 week lows, may drop if the current market upswing is just a bear market rally as many, including myself, think.  On the other hand, if you think that all “real” assets are on a tear due to currency debasements now may be the time to invest in apparently solid companies such as Apache selling for a little over 1/2 its 52 week high.
Disclosure: Long APA

How You Can Lose with Annuities and Whole Life Policies

“Look, Bruce!”, my 85 year old mother-in-law exclaimed, waving a letter over her head.  “My annuity is now up to $85,000.  I just can’t withdraw my money for 6 months.  I don’t need it now anyway, though”. That got my attention.  Why couldn’t she withdraw?   Turns out, Standard Life of Indiana, her annuity company had  sent her a second letter.  That letter informed all policy holders Standard Life was now under an “Order of Rehabilitation” with the state of Indiana.  The letter went on to assure policy holders that all annuity contract terms would be honored except “partial and full surrenders clauses”. This is kind of like a bank holiday for an insurance company.
For more information policy holders were referred to the website: www.standardlifeofIndiana.com.  On the website the first question in the FAQ section is “What happened to Standard Life Insurance Company?” — a good, if not particularly encouraging starting point.  Other questions address issues such as financial condition and safety.  The answers were reassuring but vague and short on specifics.
The court filed “Order of Rehabilitation” document is more direct.  Basically, Indiana state Insurance Commissioner Jim Atterholt and his appointees now have control of Standard Life of Indiana.  All power formerly vested to the directors, officers and managers now resides with the State Commissioner.  For those who would like to see the court filed document go here. The rehab action is essential so as to prevent a run on the company while the state figures out just what the assets are worth.  A minimum of six months is needed and that time period may be extended.
Standard Life of Indiana may have been a good company at one time.  However, It was acquired in the 1990’s by Capital Assurance Corporation, a private company.  Obviously, they made  investment mistakes and were caught in last years slump.  I don’t know what the outcome will be for Standard Life’s 40,000 policy holders such as my mother-in-law.  It is probably safe to say that after the bad investments are written down and the legal and other state fees are assessed policy holders will take a significant haircut.
Now, I do not know a lot about annuities and the Standard Life of Indiana action is not new (the court document was filed December 18, 2008).  I do know that funds invested in fixed annuities and whole life policies go into the companies’ balance sheet and will take a hit along with the balance sheet.
The purpose of this article is to alert fixed annuity and whole life policy holders: You cannot assume you 100% safe.  The products are only as good as the company and its investments.   Annuities and life insurance is often sold to financially unsophisticated and/or elderly people.  Even with state regulation, the potential for abuse in these non-transparent investments is present
I would be careful with all fixed annuity and whole life products, especially those held by AIG affiliates (AIG), and large annuity providers such as Genworth (GNW), Hartford (HIG) and Allstate (ALL).
It is not easy to find the financial standing of many annuity and whole life holders.  Some, such as Standard Life of Indiana, are privately held.  Others are large company subsidiaries (with different names) or international firms such as Allianze or Aviva.  Many large banks with shaky balance sheets hold annuity money.  The rating firms gradings have been over optimistic in the past.  Those sophisticated in financial analysis may be able to track this stuff down but the vast majority of annuity and whole life policy holders are clueless.
Disclosure: No positions in any of the above mentioned companies

Families showering together may offend some sensibilities.   However, the April, 2009 issue of National Geographic Magazine has a photo (legs only, sorry) of a family doing just that.  Not only do they shower together, they do it standing in flat plastic containers to catch the soapy run off.  The run off is then used to water the garden.  This is one of many measures promoted by the state of South Australia to conserve water in the drought stricken area.  Water is so precious every last drop is reused as often as possible.
Often called Blue Gold, water is the ultimate commodity.   Why?  Simple, without it, for ourselves and our crops, we die.  Life cannot exist without water.  Yet, we often take clean water for granted.  We waste it and dump toxins in it.  In an increasingly crowded world that has to change.
Watts Water (WTS) a $780 million cap company has been around since 1874 and supplies water control systems in North America, Europe and China.  The company has been in China since 1994 but saw Chinese revenue decrease in 2008 due to currency, tax, wage and transportation issues.
The company website is www.wattsind.com The site provides access to SEC filings, annual reports from 2001, dividend and stock data, press releases, webcasts and other company information.
WTS manufactures valves and related products which insure water quality, conservation and control.  Recent focus has been on valves which prevent water back-flow.  Back-flow controls prevent dirty water from contaminating clean supplies.
Smartmoney magazine discusses how Watts Water may benefit from the US $789 billion stimulus plan.  See the article here.  Competitors include Flowserve Corp (FLS) and  some private firms.
Watts had negative publicity last month as it cut jobs but increased executive compensation (see article here).  Also, there are some litigation issues which have dragged on for several years (see the 2008 annual report).
Watts has a PE of 13.7, price/sales ratio of  .53 and a well covered 2.1% dividend.   There have been 22 years of consecutive dividend payments.  Recent market rallies show WTS participating strongly.
China is suffering from major water quality problems while President Obama’s stimulus programs will benefit water infrastructure products in the US.  In a world increasingly needing clean water WTS seems to have a bright future.
This seems to be a solid, long established company.  Recent problems in China, litigation and perhaps ill timed layoffs and executive compensation issues may warrant some caution, however.
Disclosure: Long WTS

Derivatives: Gambling at Public Expense

If, unknown to you,  certain parties had bets totaling millions of dollars on the chance your $200 thousand house will burn down in the coming year, would you be upset?  I suspect so.  Some of those parties may need money,  may send an arsonist over, maybe not even tell you in time to get your family out.  Well… Welcome to the world of derivatives.  Only, forget the $200,000 house, start thinking in the billions and trillions.

Now, sit down, these figures may shock you:  The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me?  Click here for the US government’s recently released fourth quarter OCC Report.  Read the first two bullets.  Remember, this is just derivatives held by US commercial banks, the total derivative market is, as mentioned above, over $700 trillion (see here).
How much is $700 trillion dollars?  Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars”   Well, think about it a minute or so, then go figure $700 trillion.
Okay, critics of this article’s viewpoint will be quick to point out this is not new news and derivatives can be unwound, it is a zero sum game.  Derivatives are useful for farmers, miners and many others, hedging future market commodity risks.  They increase liquidity and facilitate transactions.  Credit Default Swaps (CDSs) can be used to measure perceived risk of an asset.  The purpose of this article is not to demonize all derivatives, rather it is to point out the danger in the speculative components, especially when the public dime (bit of an understatement that) is involved.
The question is: What are commercial banks doing with over $200 trillion of derivatives?  This amount is over three times larger than world GNP , more than all the world’s combined stock and bond markets.
You may wonder; what the hoot is going on here?  Credit Default Swap (CDSs)  didn’t even exist 14 years ago. Now they are a $62  trillion dollar market.  Interest swaps started slowly in the 1980’s, the five banks above alone hold $162 trillion worth.  Why is this rapidly growing market so huge?  Is it necessary? A recent  Newsweek article mentioned the derivative market may be in the quadrillions soon.
I can see only one explanation: large scale speculation.  Another, perhaps more accurate term, would be gambling.
The OCC report tells us which banks are deeply involved in derivatives,  it is five large commercial banks.  They are JP Morgan Chase (JPM), Citigroup (C), Bank of America (BAC), HSBC Bank USA, and Goldman Sachs (GS).  Some 82% of the holdings are interest rate swaps.  Swaps are risky with winners and losers.  Goldman Sachs is the most deeply involved.
Goldman recently reported much higher than expected first quarter earnings.  How much of the earnings is due to AIG (taxpayer) CDS payments to Goldman?  I don’t know.  Don’t ask Goldman’s CFO David Viniar, even he is “mystified”.  Mr Viniar says the trades “netted to zero”.  Perhaps the reason the payments netted to zero is because taxpayers, via AIG, made good for AIG to Goldman’s benefit.  Now they want to repay TARP - a nice public relations  move.  If Mr Viniar is “mystified” by his own firms trading how much more so are taxpayers.  Why does this remind me of  Enron’s CFO statements of awhile back?
Glass-Steagal was repealed in 1999, allowing banks and others, equipped with sophisticated computer systems, to plunge into derivative trading.    A worldwide, unlimited casino opened up.  Hedge funds, banks, insurance companies all taking advantage.
Derivative trading is a huge, unregulated market, run around the world by the self-appointed elite.  They use OPM (other people/countries money) skimming off profits.  Forget lotteries, forget sports betting, forget Vegas.  This stuff is the ultimate!  Look at the sums involved.  A powerful elixir those in power cannot resist playing with.  Gambling at this level for personal accounts may be acceptable - what else can you do with sums that large?  Holding the world economy as hostage and involving taxpayers as backups for losses, however, is criminal.
This high-stakes gambling, like all gambling, has winners and losers.  Consider Bear Sterns, AIG and Lehman Brothers as the losers.  In a deleveraging world, we may be getting more and more losers.  It doesn’t take much of a shift in a $700 trillion market to wipe out world class companies in days, look at AIG.  Look at what may have happened to Citigroup without taxpayer money.
The large commercial banks are heavily into interest rate swaps, with a combined notional value of over $150 billion according to the OCC report.  If these systemically important institutions start losing on their interest rate bets, which the OCC Report said happened in the fourth quarter,  will we the taxpayers be on the hook to  bail them out again?  Remember the interest rate swap market is much bigger than the CDS market brought down AIG.
Forbes magazine, in their March 16, 2009 issue, has an article on how Lawrence Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”.  The Forbes article goes on to say that bad derivative bets may have adversely affected universities and hospitals around the nation.
So, how dangerous are derivatives?  Warren Buffett called Credit Default Swaps “financial weapons of mass destruction”.  AIG proved him right. AIGFP  insured CDS derivatives, lost their bets, didn’t have the money to make good, even all of AIG couldn’t make good.  So the American taxpayer was told they must make good, to the tune of hundreds of billions of dollars.  American taxpayers are the losers, financial institutions world wide are the winners.  Now, after AIG, tell me how you can possibly think derivatives are not dangerous.  And, doesn’t it strike you as strange: few are talking, even now, about reining in the derivative markets?  Perhaps defenders of derivatives can explain to us who “don’t understand” what possible good comes from this bloated market.
Systemically important institutions have no business being major players in this market.  Certainly, taxpayers have not agreed to participate, much less bail out the losers.  This is why US taxpayers are organizing “tea parties”.
The US government has printed, borrowed or promised some $14 trillion so far.  And guess what: It hasn’t worked!The London protesters suddenly don’t look so foolish, they at least aren’t bankrupting companies and countries.  AIG, FANNIE, FREDDIE, JP Morgan, Bank of America, Citigroup will soon want even more taxpayer money.  Will we have the courage to say no to this insanity?
Disclosures: none

Southwestern Energy’s Fayetteville Shale Focus

Arkansas, a oil and gas producing state?  Yes!  Southwestern Energy Company (SWN), an $11billion dollar (market cap) exploration and production company, is here.   Focusing on natural gas extraction from the Fayetteville Shale in the north central part of the state, the company has been a major player since 2004 when production started.
In addition to the Fayetteville play, the company has conventional wells and acreage in other parts of Arkansas, Texas and Oklahoma.  Southwestern also has midstream gathering and marketing subsidiaries.
Southwestern has an attractive, well organized and informative website at www.swn.com  At the site investors can find, among other things, news, annual reports, SEC filings plus they can request information.  There is a two page summary fact sheet which provides the highlights of Southwestern’s revenues and reserves.
Chesapeake Oil (CHK) and BP plc (BP) also are active in the Fayetteville.  BP plc acquired an interest in Chesapeake’s Fayetteville assets for $1.9 billion in late 2008 .  Chesapeake sold the stake to bolster its cash position.
Fayetteville Shale is black, organic rich, rock of Mississippian age (approximately 325 million years ago) and lies at a depth of 1,500 to 6,500 feet in north central Arkansas.  Typically a well is drilled vertically to just above the shale layer, then drilled horizontally for some 3,000 or more feet.  The horizontal boreholes intercept pre-existing vertical fractures.  Then, with the help up hydraulic fracturing, gas flows up the vertical fractures into the horizontal borehole from which it can be collected.  If you are interested you can view here, a short (10-15 minute) video of the process put out by Northern Oil & Gas.
Southwestern’s stock price, currently around 31, is below the July, 2008 high of 52, but well above the low of 19 in October of 2008.  The stock is up since October despite declining gas prices over the same period.
Since some 91% of the stock is held by institutional and mutual funds, thus redemption requests may negatively impact price.
Southwestern’s total proved reserves have increased from 1,026 bcfe (bcf equivalent) year end 2006 to 2,185 bcfe December 31, 2008.  Most of the increase has come from the Fayetteville shale, which now accounts for 1,545 bcfe or 71% of proven reserves.   Southwestern’s natural gas production from the Fayetteville has increased from 53.5 bcef a day in 2007 to an anticipated 229-232 bcef a day in 2009.  Reserve replacement was 386% in 2006, 474% in 2007 and 523% in 2008.  Southwestern seems to be finding lots of gas.
As of 12/31/2008 total cash was $196.28 million ($.571/share) and total debt was $734.5 million.  With the help of hedging, the company, unlike some of its peers, was profitable in the fourth quarter of 2008.  Levered Free Cash Flow (amount of cash available to stock holders after interest payments on debt), however, was  -$831.98 million.
Despite low gas prices Southwestern is still planning a capital program of $1.9 billion for 2009 with the major focus on the Fayetteville shale.  They plan to drill up to 650 wells.  Since, unconventional shale gas in recent years has been found to have lower F&D costs than conventional gas, hence the proliferation of horizontal drilling.
Howard M. Korell, Chairman and CEO sold some $3.2 million in stock the week of March 19-25, 2009.  Mr. Korell sold this stock some 3 weeks after the upbeat teleconference of February 27, 2009.  Mr. Korell intends to retire in the first quarter of 2010.  There are no reported insider buys so far this year.
Natural gas prices continue near record lows, currently the price is below $3.70/Mcf (Mcf is 1000 cubic feet).  Since late February, the price of oil has rebounded some 50%  while the price of gas continues to decline.
Industrial use, residential heating and electricity generation are the major markets for natural gas.  Recession has reduced industrial demand,  the onset of warm weather is dropping heating demand and recession has also somewhat lowered utilities demand.  At the same time, thanks to companies like Southwestern, supplies are increasing, a “perfect storm” driving down gas prices.
We will probably continue to see low gas prices for the next several months.  On the other hand, with the increasing scarcity of oil, I expect natural gas demand to eventually grow as it replaces oil as an energy source.  T. Boone Pickens envisions natural gas replacing or augmenting oil for powering vehicles, a great idea, but this is still in its early developmental stage.
Another wild card is soon to come online LNG production worldwide.  LNG imports, their cost basis and potential impact on US prices probably can only be estimated at this point.
Although Southwestern is rapidly growing reserves and is a low cost producer at around $3/Mcf (scroll down here to see chart), low gas prices will drag on income.  Already some of the higher cost producing companies are shutting down rigs as natural gas prices drop below production cost.  This will eventually tighten supply.  Long term this is bullish for Southwestern.  Dollar devaluation of course (if it occurs) will only make natural gas reserves more valuable.
Demand trends and Southwestern’s levered free cash flow, for now, are bearish.  I would keep on eye on natural gas prices and Southwestern’s debt costs.  A gas price upturn , say above $4.40 mcf, may indicate an entry point into this stock.  Long term investors who don’t want to time the market could consider any significant price dip as an entry point.
Disclosure: None

Derivatives: Gambling with Taxpayer Money

f parties, unknown to you,  had multimillion dollar bets that your $200 thousand house will burn down in the coming year, would you be upset?  I suspect so.  Some of those parties may need money,  may send an arsonist over, maybe not even tell you in time to get your family out.  Well… Welcome to the world of derivatives.  Only, forget the $200,000 house, start thinking in the billions and trillions.
Now, sit down, these figures may shock you:  The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me?  Click here for the US government’s 4th quarter OCC Report, released last Friday.  Read the first two bullets.  Remember, this is just derivatives held by US commercial banks, the total market is, as mentioned above, over $700 trillion (see here).
How much is $700 trillion dollars?  Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars”   Well, think about it a minute or so, then go figure $700 trillion.
Okay, these figures are scary and many derivatives are useful and can be unwound.  Derivatives are also useful hedges for farmers, miners and others to smooth out market fluctuations.  They increase liquidity and facilitate transactions.  Credit Default Swaps (CDSs) can measure perceived risk.  The purpose of this article is not to demonize all derivatives.  My question is: why do commercial banks doing with over $200 trillion of them?  This amount is almost four times larger than the total GNP of the entire world, more than all the combined stock and bond values of the world.  Their is only one explanation and that is large scale leveraged speculation.  Another, maybe more accurate term, would be gambling.
Which banks hold much of these derivatives?  The OCC report tells us.  It is five large commercial banks.  They are JP Morgan Chase (JPM), Citibank (C), Bank of America (BAC), HSBC Bank USA, and Goldman Sachs (GS).  Some 82%  of the holdings are interest rate swaps.  Swaps are risky with winners and losers.  Goldman Sachs is most deeply involved.
Now, like me, you may wonder what the hoot is going on here?  Credit Default Swap (CDSs)  didn’t even exist 14 years ago. Now they are a $62  trillion dollar market.  Interest swaps started slowly in the 1980’s, the five banks above alone hold $162 trillion worth.  Why is this rapidly growing market so huge?  A recent  Newsweek article even mentioned the market will be in the Quadrillions soon.
Glass-Steagal was repealed in 1999, allowing banks and others, equipped with sophisticated computer systems, to plunge into derivative trading.    A worldwide, unlimited casino opened up.  Hedge funds, banks, insurance companies took advantage.
Systemically important institutions have no business being major players in this market.  Certainly, taxpayers have not agreed to participate, much less bail out the losers.
The claim is made that derivatives are just paper entities in which assets and liabilities zero out.  Well, yes, there is truth to that.  But, this high-stakes gambling, like all gambling, has winners and losers.  Consider Bear Sterns, AIG and Lehman Brothers, all losers.  In a deleveraging world, we are getting more and more losers.  It doesn’t take much of a shift in a $600 trillion market to wipe out huge companies in days, look at AIG.  Look at what would have happened to Citigroup without taxpayer money.
So, how dangerous are derivatives?  Warren Buffett called Credit Default Swaps “financial weapons of mass destruction”.  AIG proved him right.
Forbes magazine, in their March 16, 2009 issue, has an article on how Lawrence Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”.  The Forbes article goes on to say that bad  derivative bets may have adversely affected univerisites and hospitals around the nation.
AIGFP  insured CDS derivatives, lost their bets, didn’t have the money to make good, even all of AIG couldn’t make good.  So now the American taxpayer was told they must make good, to the tune of hundreds of billions of dollars.  American taxpayers are the losers, financial institutions world wide are the winners.  Now, after AIG, tell me how you can possibly think derivatives are not dangerous.  And, doesn’t it strike you as strange: few are talking, even now, about reining in the derivative markets?
The megabanks are heavily into interest rate swaps, with a combined notional value of over $150 billion according to the OCC report.  If these systemically important institutions start losing on their interest rate derivatives, which the OCC Report said they did in the 4th quarter,  will we the taxpayers be on the hook to  bail them out again?  Remember the interest rate swap market is much bigger than the CDS market which got AIGFP into trouble.
Derivative trading seems to be a huge, unregulated market, run by the self-appointed elite all over the world amongst themselves.  They use OPM (other people’s money) skimming off profits.  Forget lotteries, forget sports betting, forget Vegas.  This stuff is the ultimate!  A powerful elixir those in power cannot resist playing with.  Doing this for there personal accounts is one thing but  Holding the world economy as hostange and involving taxpayers as backups for losses, however, is criminal.
One wonders how much of the pre TARP scare mongering last fall was true.   Now, the bailouts are bankrupting our nation and there is no end in sight.   We need to start listening to people like Richard Shelby and Ron Paul, not Paulson, Geithner and their cronies at the big banks and Goldman Sachs.  It is time to make those responsible take their losses.
The US government has printed, borrowed or promised some $14 trillion so far.  And guess what: It hasn’t worked! The London protestors suddenly don’t look so foolish, they at least aren’t bankrupting us.  AIG, FANNIE, FREDDIE, JP Morgan, Bank of America, Citigroup, Goldman Sachs want even more of our money, there is no end in sight.   This is insanity!
Disclosures: none

ATP Oil and Gas Corporation, Both a Value and Momentum Play

ATP Oil & Gas Corporation (ATPG) is small ($178 million market cap.) oil and natural gas acquisition, development, and production company engaged (mostly) in the Gulf of Mexico.  It also has a significant presence in the North Sea.
Competitors in the Gulf include Apache (APA), Forest Oil (FST) and Newfield (NFX).
Reserves: ATP Oil & Gas Corporation’s estimated net proved reserves on December 31, 2008 were 713.6 billion cubic feet equivalent.  At $4 per 1000 cubic feet this works out to a reserve value of $2,582 billion or roughly $70 a share.  The reserves were “comprised of 321.7 billion cubic feet of natural gas and 65.3 million barrels of crude oil.” or approximately 2/3 oil and 1/3 natural gas by value.  For more detailed reserve reports see the Ryder Scott reports for the Gulf area here and the North Sea area here (pdf formats).  A press release on March 2, 2009 claimed that ATPG replaced 214% of its oil and gas production in 2008 (see here).
Financials: Total cash is $215 million or $5.97/share.  Note, that as of March 25 cash per share is more than the share price.  Total debt is $1.37 billion.  Trailing PE is 1.46 and forward PE is 5.37.  Of course, forward PE’s are only estimates and can be wildly off.  $472 million in recent asset sales have boosted the cash position, so debt should be manageable in today’s low oil and gas price environment.
Insiders: According to Yahoo Finance there are no publicly reported insider sales since the first of the year. There has been over $900,000 acquisitions and purchases since the first of the year.
Summary:  Reserve data, financials, and insider transactions all look bullish to me.  Both oil and gas have been rising the last few weeks.  Even as I write this post, ATPG is on a tear.   The stock bottomed at $2.75 in early March.  Now, on March 25, at over $5 a share, it is up over 80%.   With close to $70/share in reserve value, the stock still seems significantly undervalued.  This could be both a resource and momentum play.
The company seems to have weathered to the 2008 oil and gas price downturn well with asset sales and decreased production.
It should be noted that, due its large Gulf of Mexico presence, ATP Oil & Gas is susceptible to hurricane damage.  The company claimed that Hurricane Ike in 2008 had “minimal impact”.
Disclosure: Long ATPG

A Clash of Cultures: AIG's New Owners

Most Americans cannot even remotely fathom why a company that is near bankruptcy will hand out bonuses.  This is especially true when those companies only exist today because they were bailed out by taxpayers.
Apparently in “Wall Street Culture” bonuses are an integral part of compensation.  But, in “Main Street Culture” bonuses, if they even exist, are reserved only for extraordinarily good job performance.  But now, suddenly, thanks to TARP, Main Street owns Wall Street, or at least some of it.
Companies such as AIG, Citigroup, Bank of America and to a lesser extent, other TARP recipients have a new owner: “We the People”.  And, unlike the former owners, the wiped out share holders, these new owners have fiery spokesmen in Congress.
The culture of entitlement is now being told what to do by Joe the plumber, Jill the waitress and Mike, the laid off auto worker.  They don’t vote proxies but they can and do email and write their congressmen.
Well, Congress is having a real hissy fit.  Thursday night I watched representative Earl Pomeroy from North Dakota grandstanding on TV.  Earl told AIGFP employees “you disgust us, by any measure you are disgraced professional losers…”.  On and on he went.  He must have been either an attorney or an actor in his pre congressional days.  Probably an attorney,  I don’t think North Dakota has many actors.
Reportedly, 11 AIG executives have resigned over the bonus brouhaha.  And now, Thursday evening, the House passed a bill - boy, that was fast - to tax bonuses up to 90%.  Apparently, there is to be a surtax, on bonuses paid to employees earning more than $250,000 if the institution received  more than $5 billion U.S. in bailouts.
Congress is doing what it does best (or worst): passing legislation.   Congressional members can’t wait to tell their constituents they voted against the “outrageous bonuses” come next election.  It would be political suicide to be on the other side of this issue.
Of course, all this is mostly show.  The bonus amounts are minuscule compared to bailout amounts.  The country would much better served by debating how to avoid future AIG type debacles.
So, AIG and other TARP companies:  Welcome to government ownership.  You will have to play by different rules from now on.  Instead of a free wheeling entrepreneurial culture you will have to learn to deal with red tape, committees, delays and political pandering.  Get used to it.
Yet, look at it this way.  None of the AIGFP employees and many of the AIG’s non Financial Products employees would probably even have jobs if it wasn’t for the US taxpayer.  Would you want “Derivatives Trader at AIG” on your resume?  AIG and other TARP recipients, you brought this on themselves.  Now you guys are morphed into beauraucrats.  Take your cue from Mr. Pomeroy.  Speech lessons anyone?
Disclosure: Taxpayer ownership only.

McMoRan Exploration Company, Bonanza or White Elephant?

McMoRan Exploration (MMR) is small ($300 million market cap.) exploration and production company that owns or controls interest in some 603 oil and gas leases in the Gulf of Mexico and onshore Louisiana and Texas.  Proved oil and natural gas reserves as of December, 2007 totaled 363.9 bcfe (billion cubic feet equivalent).
McMoRan Exploration has its origins in Freeport-McMoRan Copper & Gold Inc.’s (FCX) oil, gas and sulpher operations which were split off in the 1990s.  Several board members serve on the boards of both companies.
McMoRan has been engaged in the development of the Main Pass Energy Hub, an offshore Liquid Natural (LNG) gas distribution and storage facility (see www.mpeh.com).  The hub is intended to function as a port to offload and store LNG.
As of December 31, 2007 the company had $93 million total cash ($1.327 cash per share) and $374 million in debt.  Like many energy companies, McMoRan reported a loss the last two quarters of 2008.
Researching the company I found potential negative and  potential aspects.
The Negative: It was difficult to find much information on McMoRan’s Main Pass Energy Hub.  The mpeh.com website, has lots of pictures, but the most recent update that I could find, under the “Whats New” link at the top of the home page, had a 2008 heading but the latest post was April 4 of 2007 — not very new and not in 2008.  Either they have a very poor web people or the site is suffering from profound neglect.
Of course, imported LNG no longer is as important to the US as predicted just a few years back.  Significant natural gas reserves have been found domestically in recent years.  Current low gas prices (now under $4 per 1000 cubic feet) have to be a negative for LNG activity.  The hub site’s home page prominently cautions the project is “subject to significant risks, including determining the feasibility of developing the project, securing significant project financing, and obtaining regulatory approval“. From the photos it looks like a lot may have already been invested in this former sulphur mining site,
I am open to the view that this hub may be a gem, waiting to be uncovered, rather than a white elephant.  The company could help with new website updates or press releases concerning the hubs current status.
The positive (maybe): Business Week, in their February 16, 2009 article on Exxon, mentioned that McMoRan took over a deep, abandoned Exxon well (Blackbeard) and, drilling even deeper, found significant oil deposits.   The article says Mr. James R. Moffett, co-chairman of the company, declared that McMoRan “… may have found , between a half-billion and several billion barrels of oil” in Blackbeard.
It is also worth noting that Mr. Moffett on March 4 and 5 of 2009, purchased some $2 million dollars worth of common stock in the company at prices of $3.76 and $3.90 a share (Yahoo Finance).  This may explain the recent uptick in stock price.
I would be cautious with McMoRan.  It will be interesting to see if the former Blackbeard well is as rich in reserves as Mr. Moffett seemed to think.  If so, score one for McMoRan over Exxon.  If not, maybe the rumored discovery is just good PR in a down market.  I look forward to reading the 2008 annual report to see the latest on the former Exxon well.
Disclosure: Long MMR (for now)

EOG Resources and the Bakken Shale

EOG Resources (EOG), a large oil and gas exploration and producing company, is a major driller in North Dakota’s Bakken Shale.  The companies’ former name was Enron Oil and Gas.  It was spun off in 1999 from Enron Corporation (yes, that Enron).  Unlike its disgraced parent, EOG has prospered and now has a market capitalization of $14 billion.
EOG is active in the US, Canada, offshore Trinidad, and the North Sea.  In the US it has interests in the intercontinental region, Fort Worth Basin, Upper Gulf Coast area,  Permian Basin,  Rocky Mountain area, south Texas. Gulf of Mexico, and  Appalachian Basin with approximately 3,204,000 net undeveloped acres.
As of December 31, 2007 EOG’s reserves were roughly 75% natural gas (7.75 trillion cubic feet equivalent) and 25% oil and natural gas liquids (179 million barrels).  In the intercontinental US region the company has a strong presence in North Dakota’s Bakken Shale play.   This, because of the massive reserves found right here in the US, has been in the news a lot in recent years.
The Bakken shale underlies some 200,000 square miles of land in North Dakota, Montana and Saskatchewan in depths up to 10,000 feet.  Basically it consists of shale overlain by sandstone and dolomite, overlain by more shale.  The oil tends to accumulate in the porous siliciclastic dolomite layer.  OIl is not new here as it was discovered back in 1951, but until recently, due to cost, recovery has been slow.  In 2007 EOG produced 1,452,789 barrels of oil from the shale.  Just one year later, in 2008, EOG wells produced 8,613,534 barrels of oil, a 493% increase (see bakkenshale.blogspot.com).  New technology, such as horizontal drilling, has allowed greater exploitation of this formation in recent years.
L.C. Price, a geologist working for the U. S. Geological Survey (USGS) estimates Bakken shale may hold as much as 500 billion barrels of oil. This is a massive, almost like Saudi Arabia!  However, even under the best conditions, the previously linked report says extraction is profitable only at a price of $50/barrel or more.  Even with the latest technology, the USGS in their April 2008 report says only  3-4.3 billion barrels may be recoverable, less than 1%.  Nonetheless, the USGS says Bakken shale “is the largest “continuous” oil accumulation ever assessed by the USGS”.
Some of EOG’s oil wells near Parshall, North Dakota rank among the most prolific land drilled wells in the US, producing over 1000 barrels a day.  This bonanza has made the rural area around Parshall quite prosperous, almost in a Beverly Hillbilly manner.
If you have confidence (as I do) that technology will continue to improve and the price of oil will go up, you may wish to invest in companies active in Bakken Shale.  In addition to EOG check out ConocoPhillips (COP).  ConocoPhillips, with their Burlington Resources acquisition, has a large Bakken presence.  As an aside, ConocoPhillips also owns some 13% of LUKOIL CO (LUKOF.PK), a Russian company with massive oil reserves. That, of course, is a story for some other time.  Also, check out Continental Resources (CLR) and Hess Corporation (HES) as they also have stakes in the Bakken.
Disclosure: No positions at this time.

Quicksilver Resources's Barnett Shale Gamble

No, Quicksilver Resources (KWK) is not a silver or mercury mining outfit.  Nor is it to be confused with Quiksilver Corp. (ZQK), an apparel company.  Rather, it is a $900 million, market cap., independent energy company.  Quicksilver acquires, explores for, drills for and produces natural gas.
Quicksilver’s big story in 2008 has been its foray into Barnett shale gas of the Fort Worth basin of Texas.  Here it competes with much larger companies such as Devon Energy (DVN), Chesapeake Energy (CHK) and XTO Energy (XTO).
In August, 2008 Quicksilver spent $1.3 billion for Barnett Shale assets in Denton and Tarrant counties, just as  natural gas prices were peaking.   For a billion dollars in cash plus 10,400,468 shares of common stock the company picked up 13,000 net acres potentially “containing more than 1 trillion cubic feet of recoverable natural gas resources including approximately 350 billion cubic feet of proved reserves” (see report here).  At the time, natural gas was around $13 per 1000 cubic feet.  Now, the price is only a little above $4 per 1000 cubic feet.  Not surprisingly,  Quicksilver, in the 4th quarter, took an impairment charge totaling $633.5 million on its oil and gas properties and lost $2,79 per diluted share.
This ill timed foray into the Barnett has in all likelihood contributed to the severely impacted the stock price.  Currently, at $5.20/share, the stock is down almost 90% from its 52 week high of $44.98.  Total debt of $2.61 billion dwarfs total cash of $2.85 million.   Quicksilver was downgraded by Jefferies and Co. from buy to hold on February 26 of this year.
The Barnett shale is composed of sea deposits laid down in the Mississippian age, some 350 million years ago.   New technology ,such as horizontal drilling, has opened up the Barnett shale to production in recent years.  The “tight” structure of the shale has trapped a plentiful supplies of gas, but with the shale’s structure and 7,000 depth, it can be difficult and costly to tap.
Some of the most plentiful gas reserves in the Barnett shale are found directly under the city of Fort Worth.  Churches, parks, the American Cancer Society, golf courses, residential areas and even the girl scouts have participated in the bonanza. Since the bust in natural gas prices in the last half of 2008, however, much of the bloom has come off the boom.
Drilling in the Barnett, as elsewhere, is down considerably.  Companies like Quicksilver, with heavy investments in natural gas, may be just hanging on, waiting for higher prices to improve their balance sheets.  The gas has been there hundreds of million years, it can afford to wait.   The question is: can  Quicksilver afford to wait?
Disclosure: No positions

Things That Go Bump in the Night

The party was a great success!  All talked of the spectacular time they had.   A wonderful blend of music, camaraderie, exquisite wine and food, enchanting women.  A truly memorable day in the country, warm in the late summer sun.
But now, the the band is gone, the last of the guests have left.  Having finished cleaning up, you are alone.  Peace and quiet settles in on the old, secluded country house,  a spur of the moment purchase a few years ago.
A hush.  A pause.  Something.  A small gust of wind, a stirring of leaves, you look up.  There, off to the northwest, low on the horizon, thick dark clouds are gathering.  Remembering half-heard murmurings during the party of coming evening storms you hasten to secure the windows.  Afterward, in the deepening twilight, flashes of lightning reveal distant, towering thunderheads.  A vague sense of unease, quickly dismissed, sweeps over you.  Tomorrow, with the morning sun, its back to the city, friends, and home.
Later, settled on the sofa watching TV,  a bulletin scrolls across the screen.  There was a prison break.  Several men from the nearby penitentiary,  armed and dangerous, they say.  The proximity of the prison had been a troubling thought when purchasing the old house.  However, a flush bank account, a great price and the beautiful setting sold you.  You start thinking:  What to do?  The lights flicker once, twice, then darkness.   Ever more brilliant, lightning now heralds the approaching storm.  Thunder rumbles ominously.  The feeling of unease is back.  This time it stays.
With only candles throwing a feeble light, you know morning will come.  It always does.   The crashing thunder, and now outside, a flit of shadow,  some rasping at the gate.  Dawn suddenly seems impossibly far off.
So, here we are.  The party is long over, the financial storm is on us.  Crashing markets, unemployment, bankruptcy, are no longer just rumors.  Talk of Depression is rampant.   Banks, guardians of our wealth, are floundering, even in danger of collapsing.  Commentators talk imminent demise and terrifying deficits.   Our houses are suddenly liabilities.  The best: General Electric, Johnson and Johnson, American Insurance Group and Pfizer totter on news of large dividend and stock value reductions.  Authorities warn precautions need to be taken but go silent on what, where, when and how.  We are left uncertain, questioning, hoping, fearful.
Disclosure:  None, I don’t dare own any of the above.

EQT Corporation and Appalacian Gas

In 1859, just before the Civil War broke out, Edwin Drake, near Titusville, Pennsylvania, drilled the world’s first commercially successful oil well.   Soon, several hastily thrown together companies were drilling all over western Pennsylvania.  Some of the wells on hitting pressurized pockets, spewed spectacular gushers of oil, equipment and sometimes even men up into the air.  Pollution was not a consideration in the last decades of the 19th century.
Then, in 1878, while drilling for oil east of Pittsburgh, Michael and Obadiah Haymaker struck commercial quantities of natural gas.   Obadiah was later shot dead defending his property.   Out of these rough origins the Equitable Gas company was formed in 1888.  Rapidly growing industries in nearby Pittsburgh provided a ready market.  Equitable Gas grew over the years and was renamed Equitable Resources in 1984.   The company name was changed to  EQT Corporation (EQT) in February 2009.
EQT is now an integrated energy company, one of the largest in the Appalachian area, with growing reserves and some 10,450 miles of gathering lines.  The company operates in  Pennsylvania, West Virginia, eastern Kentucky, and southwestern Virginia.  2007 revenues were $1.58 billion.  EQT operates in two segments, Equitable Supply and Equitable Utilities. The supply segment develops, produces, and sells natural gas, crude oil, and natural gas liquids while the utility segment distributes natural gas to some 270,000  residential and 18,600 commercial and industrial customers.
Natural gas is produced from trapped gas in shale and coal beds in the Appalachian area.  EQT anticipates significant growth in gas production from its Devonian age shale (ocean sediments laid down some 400 million years ago, now at depths of 2,500 to 7,500 feet in the area).  Devonian shale underlies much of  the northern Appalachian area.  Especially promising is the deep lying Marcellus shale beds.
EQT’s current capitalization is around $4.1 billion, the stock price, at 31, is down considerably from the 52 week high of 76.  EQT, with its utility component, may provide some buffering from the price volatility of natural gas.  The dividend is 2.9% and seems to be well covered.  The website  www.eqt.com talkes about the Marcellus shale promise, has a section on investor information and will give you a link to recent annual reports.
EQT is increasingly using new technology, such as horizontal drilling, to develop reserves.  In the 2007 annual report they say “At year end, proved reserves increased by 7% to 2.7 Tcfe.”.  The company, as they explore the high pressure, deeper Marcellus shale,  anticipates even greater growth of reserves and production in 2008.  Cabot Oil (COG), Chesapeake Energy (CHK) and Range Resources (RRC) also drill the Marcellus shale with its exciting potential.
Natural gas is currently priced just over $4 per 1000 cubic feet, well down from its high over $12 in late June, 2008.  At these prices, not unexpectedly, exploration and drilling is slowing dramatically.   EQT, like Chesapeake, XTO and many others  have found abundant reserves in the US shale.   The cost of tapping these reserves continues to drop and promises a greatly expanded use of natural gas here in the US.
A few years ago, the thinking was the US needed large LNG ports to import natural gas for our needs.  Thanks to domestic discoveries the last few years using new technology, such as horizontal drilling, that is no longer the case.  The US can achieve energy independence in gas if not oil.

Real Estate Values and Taxes in Central Florida

In Hernando County, Florida real estate values are now only about half of what they were some 3 years ago.  A few days ago I spoke to an long time real estate agent from ERA Pearson Realty in Spring Hill.  She tells me my house in Spring Hill, which was valued at just under $200,000 three years ago by the website www.zillow.com, will now fetch only about $110,000 –if I’m lucky.  I did some quick checking on my own and yes, it is not difficult at all, to find houses for sale at 1/2 of what they were 3 years ago.
Does this mean our property taxes will, or should, go down some 40-50%?  If so, and It seems quite obvious they should, what does that do to Hernando counties’ Tax base?  If the county tax appraiser does not drastically reduce assessments, property owners will flood his office with requests for lower appraisals.  They will have lots of evidence to back up their claims.
Even worse, the property value decline, both nation wide and here, shows no sign of bottoming.  We can wish and hope, but wishing and hoping leads only to denial.  We are paying dearly for the exuberance of a few years back.
This all makes for some rather sobering thoughts on how the county is going to cope in the coming few years with the apparently much lowered tax collections.  Wall Street has crashed 50%.  Real Estate has crashed 50%.  Are state and local governments like Hernando County ready for their turn?

SandRidge Energy, Debt and Natural Gas

A few years ago we drove to Big Bend National Park (a stunningly beautiful place) through the wild, arid terrain of west Texas.    En route I noticed operating oil and gas wells as we neared the park.
At the the time I didn’t know it, but this is a prime drilling area for SandRidge Energy (SD), operating from their Fort Stockton field office.   SandRidge is drilling and producing in the  Pinon field in the heart of the geological formation known as the West Texas Overthrust (WTO).
SandRidge Energy is headquartered in Oklahoma City, its current capitalization is around $1.3 billion.  The company focuses on exploration and production, but also gathers, treats, processes and distributes natural gas and oil.  Gas constitutes some 86% of reserves.   The bulk of activity is in the WTO area, though the company does oil and gas drilling elsewhere in the US.   Sand Ridge also gathers and sells CO2 - which is abundant in WTO gas deposits, for re-injection into wells to increase production.   A major competitor is the much larger Apache Corp (APA).  SandRidge was formerly known as Riata Energy and changed its name to SandRidge Energy in 2006.  The website is www.sandridgeenergy.com
The WTO, according to the company’s annual report, is relatively unexplored due to difficult terrain, complex geology and a lack of infrastructure in the area.   SandRidge is hoping the geologically complex WTO has abundant undiscovered gas reserves and is concentrating its exploration efforts in the area.
According to its 2007 Annual Report, SandRidge had total estimated net proved reserves of 1,516.2 billion cubic feet equivalent as of December 31, 2007, up from 300 bcfe in 2005.   Recent natural gas prices are around $4.5 per 1000 cubic feet, so reserves, as of December 31, 2007, currently have an in ground value of $8.2 billion.   Compare the $8,2 billion reserve figure to the current market cap of $1.3 billion.  SandRidge also has leases or interests in approximately 822,287 natural gas and oil acres.  Data for 2008 should be coming out soon.  It will be interesting to see how much reserves have increased over the last year.
Thanks to new technology such as horizontal drilling and 3-D seismic mapping, gas reserves, unlike oil, have increased significantly in the US and elsewhere over the last few years.  This increase has given prognosticators, such as T. Boone PIckens,  the promise of potential OPEC independence.  But, the infrastructure for expanding the use of this new-found supply of cheap, clean burning fuel is only just starting.   Using natural natural gas to fuel vehicles, for example, is in its infancy.  The promise is there but so far it is just a promise.
SandRidge’s common stock, at 7.9, is down 88% from its 52 week high of 69.  The stock may make a good re-inflation bet.  The main attraction to investing in this company seems to be its reserves and ability to grow reserves.
SandRidge, however, has close to $2 billion dollars in debt and only $898,000 in cash.  Also, Levered Free Cash Flow is a negative $1.5 billion (see Yahoo Finance). Most of the debt was incurred in the 2006 acquisition of NEG oil and Gas.  Declining gas prices and low cash on hand is not good in today’s credit environment.
Eventually, oil and gas prices will rebound.  Any investment in a company with substantial reserves and high potential growth may be rewarding.  In the mean time though, I would keep a close eye on the liquidity situation.  SandRidge could also be a potential take over target.