OK - by now the 10K has been digested and everyone is looking...

OK - by now the 10K has been digested and everyone is looking forward to the upcoming 10Q (on or before Oct 15).

Appreciate the kind words from Rob, MS and others. Just trying to keep dialogue ongoing to better understand the investment being made in SSN, ASX listed oil juniors, shale E&P andO&G in general. Lots of reading for those interested.

Earlier in the 2015 10K thread Rob posted a link to an article on Shale 2.0. That's actually a synopsis of a paper which can be reviewed in its entirety at this link - it is worth your time to read it and discuss (I actually think it is "price sensitive" for oil into the future - more on that later).
http://www.manhattan-institute.org/pdf/eper_16.pdf


This is a link to a paper I wish I had found and studied back in 2012 - before I made decisions to be overweight energy!
belfercenter.ksg.harvard.edu/publication/22144/oil.html

Read the full paper - its worth it - remember is was written in June 2012 when oil was over $100 Bbl and rising!!

Some excerpts:

"Contrary to what most people believe, oil supply capacity is growing worldwide at such an  unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices."

"Only geopolitical and psychological factors (above all, a major crisis related to Iran) and a still deep-rooted belief that oil is about to become a scarce commodity, can explain the departure of oil prices from economic fundamentals.

Coupled with global market instability, these features of the current oil market will make it highly volatile until 2015, with significant probabilities of an oil price fall due to the fundamentals of supply and demand, and possible new spikes due to geopolitical tensions. This will make difficult for financial investors to devise a sound investment strategy and allocate capital on oil and gas companies.

A hypothetical oil price downturn would have a significant impact, albeit short-lived, if it occurred before most of the projects considered in this paper had advanced significantly - that is, before 2015.

Conversely, if an oil price collapse were to occur after 2015, a prolonged phase of overproduction could take place, because production capacity would have already expanded and production costs would have decreased as expected, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent for the entire decade.

The opposite could also happen. A sudden rebound of the world economy could strain the equilibrium of oil demand and supply, particularly if accompanied by geopolitical tensions."


Looking back I suppose you could call this visionary. It's the outcome described that concerns me - we have had the price collapse and we are in a prolonged phase of overproduction!


And lastly, something from Motley Fool (not that I follow this but the context is important to note and understand)

I watch the debt situation very closely and there have been many capital restructurings (not Ch. 11 although there's been a few of those too). The Oct redeterminations will have almost 12 mths of low avg mthly prices for TTM. Add to that what the FTM strip price curve is and Fed Banking Regulators making sure underperforming loans (which SSN is not) and under collateralized loans are properly revised and it is stressful for the industry. Even those within covenants but with near term maturities are facing concerns over who/terms of refinancing.

So in terms of "Good"
(a) F&D costs coming down industry wide (double edged sword though - see "Bad") and so less capital required to find the stuff and less capital to develop to production

(b) EURs & IP30s going up - this appears to be giving more production sooner, so increasing cash flow and so (capital only) payback time. I say appears only because the "production tail" has not yet really be proven to deliver the expected amounts (not too many examples of 10+, 15+,20+ Hz shale wells

(c) Some major projects are being suspended - so far mostly deepwater harsh environments but also in GoM and expansion to heavy oil sands in addition to shale investments. While this has no immediate effect on current production (as in no real examples of shut ins) it restricts future growth (allowing the natural decline to remove production) and also shared infrastructure investments.


And in terms of "Bad"
(a) Oversupplied market remains. OPEC is increasing (as in to 33MMBopd which is 10% over the supposed limit). Iran production not yet added in which raises amount from OPEC. This is quoted from the Shale 2.0 paper "fluctuations in supply of 1–2 MMbd can swing global oil prices, the infusion of 4 MMbd from U.S. shale did to petroleum prices precisely what would be expected in cyclical markets with huge underlying productive capacity." And so USS (US Shale) is beginning to decline but the big guys (EOG, PXD, CLR, WLL, DVN,COP, sized players) seem to holding flat (or even increasing). The smaller (read costlier) producers and non-high grade acreage areas are not being drilled and seem to make up much of the overall decline

(b) Demand is shrinking. It needs at least a sustained CAGR of 1.6% else the overproduction scenario becomes more of "stabilizer" (that depends on perspective) of low oil price ==> so the lower for longer discussion. China's growth rate is shrinking (yes its still growing in absolute terms but that's what the "R" is) and this has a ripple effect in the global economy. My reading suggests that the demand growth is not where it needs to be

(c) "Shale Surplus" is real. As in these are the DUCs (Drilled Un-Completed) that are in inventory. Effectively for some of the bigger players this is how they can easily maintain the bopd. And with the lower costs of todays environment there will be greater margin in these Bbls. Of course this is not bad if you are EOG etc but it's not good news for small capital constrained E&P as it's likely to limit oil price appreciation (wonder if there is a correlation there to the forward Strip price)


And in terms of "Ugly"

(a) (cheap) Capital is fleeing O&G sector. Understanding how capital is being offered is key to the future of (equity) investors.

(b) from Oil Revolution paper ... "if an oil price collapse were to occur after 2015, a prolonged phase of overproduction could take place, because production capacity would have already accumulated and production costs would have decreased as expected. This is what happened to shale gas production in the United States between 2011 and 2012. In this case, market recovery will depend critically on the strength of the world economy as well as geopolitical factors affecting the steady flow of oil on the global market."  Seems to be playing out. Ouch! Again is the forward strip confirmation of this?

(c) also from Oil Revolution paper... "the worst scenario would involve a collapse of China, which would make any current forecast about the future of the oil market (and the world economy) useless. Being China the current engine of the world economy and of oil price consumption growth, its collapse would leave the oil price fall without a floor." The concession of course is that the reverse could happen - is it equally probable (given China is a command economy and not a market economy)?


Given I am currently overweight in E&P but also in infrastructure (e.g. pipelines/terminals) I think I will not be adding any additional capital to E&P but either re-allocating to "safer" names or selectively reducing positions as opportunities (may) arise.

JMHO
Best Regards

PS ... the forward strip I'm referring to can be easily looked up
http://www.profitquotes.com/commodities-quotes.mpl?c=CS&s=6Z

PPS... just in case readers think Motley Fool is BS (I don't really follow them at all) something I had posted for a previous Qtr was the Macquarie Bank lender survey .... the Q3/15 paper can be found here
http://static.macquarie.com/dafiles...ce-survey/energy_lender_price_survey.pdf?v=33

Survey says (Mean of 40 lenders) base case for 2015 WTI $48.17/Bbl and for 2016 WTI of $54.18. The table provided would permit NPV9 estimates given production volume and costs (and remember the location differential)

Enough from me (I sure more than a few would agree with that - LOL).