Some readers are wondering when they are going to see a sample company report. I will only publish on a company I would own myself that day, and I have not been in any rush as few listed TSX energy stocks are a buy yet. However I have narrowed the list and hope to publish before the end of the month. Meantime, I am enjoying the traffic and feedback from readers, and writing the articles. Please keep the feedback coming.
ANOTHER SIGN OF THE GROWING IMPORTANCE OF HORIZONTAL DRILLING
Since 1944, Texas based Baker Hughes Inc., a huge oilfields services company, issues a global rig count – how many drills are actively exploring for oil and gas – every Friday. They then compare it to the previous week and the same week the previous year.
The global price of both oil and natural gas move on this news – if the rig count is dropping (which it is now) that is generally bullish for prices, and it’s increasing – meaning more oil and gas will likely be found – that’s bearish. But now they are starting to break out the number of horizontal wells active.
And brokerage firms/research organizations also now regularly quote the number of HD wells active. The number of HD wells is now starting to fall (down 30 last week) after holding up well compared to vertical wells (this only makes sense because of their greater production). There is only one area in all of North America that HD wells are up over the last 9 months – the Haynesville Shale Play in Louisiana/Texas/Arkansas. Its production per well is twice that of the other shale plays in North America. The Barnett Shale was the first shale play, but Haynesville looks like it will be the granddaddy of all.
If you’re curious how one company could provide such a number, their methodology & FAQ page is here: http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
WHAT DOES THIS MEAN FOR INVESTORS
My sense is that the natural gas price and natural gas stocks have been beat up so bad, investor buying is coming into them now
- just for a technical bounce,
- declining rig count
- and people don’t believe that gas could get any cheaper.
I think they’re wrong. Gas could get a bounce out of market sympathy, but it is a trading opportunity only. Jack be nimble. I believe strongly the natural gas price is going lower through the summer, and taking most stocks with it.
(The rig count IS dropping steadily in the US, though slower in Canada. )
Secondly, the stocks of drilling and servicing and completion companies will all go lower as competition will drive prices lower for those drills still active. One oilsands operator was quoted in the media today saying that drilling costs are already down 25% from the high last year.
(One set of companies drill the wells, and another set of companies complete the wells, i.e. frac them (use fluids under high pressure to blow open the rock and free the hydrocarbons) – it’s a very specialized industry!)
Most of these stocks have actually showed a bottoming pattern, indicating much - but I think not all! – of the bad news is already priced into the market. Just like the producers, summer will be the time to buy those drilling companies with good balance sheets, who won’t need to finance and dilute shareholders.
Because many of these companies have debt, they will have to raise equity (issue new shares) to stay alive – and cut/eliminate their dividend, as Precision Drilling just did (PD.UN-TSX). The company does over $1 billion revenue, is profitable, but the stock has gone from $27 in June to $5 now, they just eliminated their dividend/distribution, and are raising $250 million. Good company, but a lot of debt leftover from a bull market. (The same can be said of many natural gas producers!)