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The first natural gas company goes…just not the way I thought! And global oil & gas reserves

The global energy industry has been finding much more natural gas than oil since 1980.  If you are willing to believe “official” stats from anyone, it would be the Energy Information Agency (EIA) in the US. They recently published two excel spread sheets showing the growth in oil reserves and natural gas reserves from 1980-2009. (They may change their forecasts of the future oil and gas prices a lot, but not historical numbers.)

Hard core readers can view the natural gas chart – which outlines reserve increases by country each year, at

http://www.eia.doe.gov/pub/international/iealf/naturalgasreserves.xls

The oil reserve chart is at http://www.eia.doe.gov/pub/international/iealf/crudeoilreserves.xls

In 1980, natural gas reserves were 2.58 tcf, or trillion cubic feet.  The industry kept discovering more:

3 tcf  -1983

4 tcf – 1991

5 tcf – 1998

6 tcf – 2004

6.25 tcf – 2009 – That equals a 149% increase over almost 30 years – during a time of huge population growth and natural gas usage.

Oil reserves in 1980 were 650 billion barrels.  The number increased steadily until 1988 when it jumped more than 25%, from roughly 700 billion to almost 900 million barrels – when Iran, Iraq, and the United Arab Emirates each announced that their reserves had tripled.  This was during the Iran Iraq war, and truth is the first casualty of war.

In 1990 the world reported a total of 1 trillion barrels for the first time, and then didn’t hit that mark again until 1998.   There was a 20% jump to 1.2 trillion barrels in 2003 when the world agreed to include the Athabasca tar sands in Canada as reserves.  And in 2009 the number is estimated to be 1.342 trillion barrels, a 107% increase over 1980.

There is undoubtedly a lot of politics in some of those numbers, but investors can take comfort in the trend.  There are a lot of hydrocarbons available to us.  The price problem has always been infrastructure.  The reason oil went to $147/barrel last year was because global spare capacity had dropped from a regular 5-6 million barrels a day to only 1-2 million, and nobody knew when the trend would end.

 

Tsk, tsk tsk, I’m scratching my head over this one. I have talked about how natural gas prices are low and going lower, how producers will struggle to survive, how mergers will get done buyouts with no premiums because cash flow for these juniors will be anaemic….

And then comes Tusk Energy (TSX-TSK).  A US pension fund bought them out yesterday at $2.15 a share CASH, a 150% premium to the previous day’s close.  It was bought by a US pension fund – total value of $257 million, including about $60 million in debt.

I estimate that at current prices of $5/mcf gas and CAD$50 oil, their 2009 cash flow would AT BEST be in the $40-$45 million range – a 6 year payback at these production levels of 6000 bopd.

They are gas weighted – 70%. They do have 150 low risk wells in an undeveloped land package they estimated to be worth $30 million in their Sept 30 quarterly.  In this February 2009 market that ground would be worth a small fraction of that.   They sold their 2009, $90 oil hedges to reduce their debt.

But even with all that, $2.15 is a large premium – we don’t know the whole story obviously but it would be unlikely there would have been competing bids.  They had a big jump in production in Q3 and if they did the same in Q4 and Q1 2009 so far (not that we would know as there has been no news in the public domain) then Tusk’s production could be much larger than the market is aware of.  However, in my opinion they would have to be VERY low cost wells generating decent returns at $5 gas to warrant such a large premium.  Can’t figure that one out.



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