The Discovery that Will Change Oil Investing in the USA

By
Keith Schaefer
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Apache’s new High Alpine discovery on the SW edges of the Permian Basin is one of the three most important inflection points in the North American energy market in the last decade.

(The other two are the rise of the oily Bakken play in North Dakota and the gassy Marcellus play in Pennsylvania.)

The huge size of the new High Alpine discovery, plus  Resolute Energy’s game changing drill results giving them 1 year paybacks at $45/b

WTI—means the entire Delaware basin, almost half the Permian—is now economic right now, at $40-$45 oil.

This is a huge play that will steal capital from other US plays.

To me, it means a clear hierarchy of the horizontal oil plays in the United States has emerged.  There are now Tier 1 plays that make money today while the rest don’t; they’re Tier 2.

Three of the Top Four are sub-basins of The Permian, and the other is the STACK, or Woodford, oil play in Oklahoma.

These are the only two large plays that are economic in the $40-$50/barrel range that WTI has been trading in—and that’s where the Market

now expects it to be for the next 6-9 months.

It really makes the rest of the US plays—second rate.

That sounds harsh, but in this range bound oil pricing–unless some kind of innovation comes along for oily plays like The Bakken—this once leading play will quickly become an afterthought for producers, investors and statistics keepers.

There is no reason to allocated capital to the Bakken today because it is a money losing proposition.  Even at higher oil prices it will make significantly less money that the Tier 1 plays.

I’m not saying that these Tier 1 plays enjoy spectacular economics—but they are solid.  That is not something anyone ever expected from a horizontal oil play at $45 WTI.

Follow The Horizontal Rig Count

Every CEO and company spokesperson is going to tell you great things about his or her company’s assets no matter what the truth is.

You can’t blame them for that.

Imagine the shareholder outcry if the CEO of the producer they owned was going around telling everyone how terrible the company’s drilling opportunities actually are.

Instead of using your ears, use your eyes.

Watch what the industry is doing.

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Source: Pioneer Resources Corporate Presentation

The horizontal rig count chart above paints a very clear picture.

Money is rushing into the Top Tier plays and out of the others.

Follow the money.  Or in this case follow the money that is being spent on drilling.

By doing so we can draw a couple of simple conclusions.

Permian Basin and Woodford = Economics Worth Drilling Today

Bakken and Eagle Ford = Economics Not Worth Drilling Today

If every company in the Bakken had the option to drill in the Permian or Woodford I’m sure the rig count transfer would be even more significant.

Owning the low cost producers is the best way to go for long term energy investors.  Not only can the low cost producers withstand lower commodity prices, they also generate much higher returns on capital invested when commodity prices are higher.

The top tier horizontal oil plays are the ones that investors should want to own.

Low cost wins…always.

In The Top Tier $40 WTI Works – $50 WTI Looks Really Good

The exact economics for all these horizontal oil plays is always a moving target.  Service costs for drilling and fracking will move around, depending on how desperate the service companies are for business.  Plus the big thing is that technologies and techniques are still evolving every month.

What we do know for certain is that the Top Tier plays have superior economics at all oil prices..  We also have a pretty good idea what the economics look like today.

Pioneer Resources is by far the most active Spraberry/Wolfcamp operator in the Midland Basin, which is the eastern side of The Permian in SW Texas.  Everyone now knows the Midland Basin is one of the top horizontal oil plays.

2

Source: Pioneer Resources Corporate Presentation

The current type curve Pioneer presents shows rates of return of up to 100% for Lower Spraberry wells at $40 WTI.  At $50 WTI the returns reach as high as 175%.  The wells are worth drilling at $40 and are great investments at $50.

The Delaware Basin is now—thanks to Resolute Energy’s game changing drill results this summer—clearly the Permian’s second top tier horizontal oil play.  The Delaware has come into focus this year with a number of large transactions taking place (at rich prices) and eye-opening drilling results emerging.

Matador Resources is a significant Delaware Basin operator and is showing Wolfcamp rates of return that are very similar to Pioneer’s Spraberry wells.

3

Source: Matador Corporate Presentation

Again at $40 WTI these wells are worth drilling.  At $50 companies are looking at rates of return that will allow for significant growth.

The Woodford or STACK is the third top tier horizontal oil play.  The STACK isn’t in Texas but rather Oklahoma.

4

Source: OGFG.com

The play itself is different than the Permian plays in that only 40% of production is oil.  A high natural gas liquid content (30% of production) is a big part of what makes the economics here so compelling.

5

Source: Newfield Exploration Corporate Presentation

At current oil and gas prices these STACK wells generate rates of return over 50% and are expected to get closer to 100% as drilling efficiencies continue to improve.   Again, solid rates of return at a very low commodity prices.

The fourth top tier horizontal oil play is the new kid on the block.  It is also in the Permian and is along the southern boundary of the Delaware Basin.

Apache just let the cat out of the bag on this one, stunning investors with a massive acreage position in what it calls the Alpine High.  Apache accumulated this acreage for only $1,300 per acre a mere fraction of the $30,000 per acre prices land elsewhere in the Permian has been going for.

6

Source: Apache Corporate Presentation

The industry had overlooked this corner of the Permian because of what it thought was “challenging” geology.  Apache has gone in, cracked the code and built up a huge land base.

The type curve that Apache is modelling is showing solid rates of return at $40 WTI and outstanding numbers at $50 WTI.

7

Source: Apache Corporate Presentation

With a ramped up drilling program you can bet the well costs will come down further and production rates improve.

For all of these Top Tier plays $40 WTI works and $50 works really well.

Core Bakken Operators Who Are Shutting It Down

To truly appreciate how much of a backseat the Bakken now finds itself in we need look no further than some of the regions dominant producers.

In my next article I’ll dig deeper into Bakken heavyweights Continental Resources and EOG Resources to see what they are saying…..and more importantly doing with their Bakken assets.

Keith
Editor’s Note: All the Big Boys have moved into the Delaware Basin because of the incredible economics.   But I recently found one Micro Cap in the play with Large Cap management. I expect TWO Big CAtalysts in the next 60 days.  The name and symbol are right HERE

 

Does This Man Run The Best Natgas Company in North America?

By
Keith Schaefer
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INTERVIEW WITH PAINTED PONY (PPY-TSX; PDPYF-PINK)
CEO PAT WARD

Shares of natural gas producer Painted Pony have gone from $3-$9 this year–despite Canadian natgas prices trading as low as 65 cents/mcf this year!  They are one of the lowest cost producers, and I think will show the largest percentage increase in both production per share and cash flow growth per share–and that’s what the Market pays for!

That’s the kind of market out-performance I look for when choosing companies to present to my subscribers at our annual Subscriber Investment Summit.  CEO Pat Ward presented in March in Toronto, and he will be presenting again on Tuesday October 11 at our annual Vancouver summit–you can register here: http://bit.ly/learn-lots-make-money

The truth is, we are already full with over 500 people registered–but for some reason, many subscribers don’t come to claim their seat.  So you will likely get in!  Our speakers this year are CEO Ryan Dunfield from Stream Asset Financial Management, who will be talking about the debt markets in Canadian energy, and Dan Tsubochi from the firm as well, giving a macro talk on global energy.

Investors can get a full update from Pat’s presentation on October 11.  But last week, I asked Pat to explain how he and his team set the company up to become such a technical success, and a Stock Market Darling to boot.   Here’s our conversation–and don’t forget to sign up for October 11!

Keith:          Pat, you’ve had a couple of great runs in the stock through really what’s been a bearish gas market. So that’s a hell of an accomplishment.

Pat:             Yes–heaven help us if we got a good gas market.

Keith:          But what really set the stage for what’s happening now? If we went back to that event and moment where you said–hey, we are going to make an incredible natgas producer now–what were you thinking at the time? I guess nobody could have foreseen the incredible improvements in technology that’s happened since you started but when you look back to…for you what was the seminal moment of okay now we can build something big here?

Pat:             Okay I’ll give you some of my story and see if that answers your question. About 4 years ago I guess, as a team here, we have annual strategy sessions and we talked about the evolution of the company and where we’re going and what’s working and not working and who’s working and who’s not.

We had purposely built an oil leg to the company and a gas leg and we really liked our oil assets and were doing a good job, but our stuff in the Montney (the prolific natgas/condensate formation on the Alberta/BC border–KS) was over the top. We knew we had a better resource than 90% of the companies and were getting incredible results and whenever we tried something new it got better.

We looked and said gee–there’s a lot of gas here and we’re finding that cheaper than anybody in the Basin. So if anybody can make money we should be able to make money. Of course at that time the big talk was that Petronas / Progress was going to whack us, Shell was going to whack us, BG was going to whack us and so…

Keith:          When you say that do you mean like.. buy you out?

Pat:             That’s what we thought here that they’d buy us. So we considered those options of you could do joint ventures and all that but we said what if we just built this thing ourselves what would it look like? How can we build this without having to raise unlimited amount of capital we may or may not have access too? How fast could we build it and what would it entail?

So we talked about probably one source of financing would be to sell our Saskatchewan (oily Bakken–KS) assets, make sure we have the right blocks to work on and probably about then we bought our Townsend block (in the Montney.  We bought shortly after that the South Townsend block, we sold Saskatchewan and really got focused on just being a BC natural gas company. When you focus people it’s very interesting because it’s very distracting when you have a multitude of properties and plays and there’s expertise in each one you need to focus on.

So we started saying we’re going to build this thing to last. How big can we go? And so we started modeling and came up with our 5 year plan first and said Wow! we can get to 100,000 BOE (barrels of oil equivalent with natgas to oil at 6:1) per day in a about 5 years and this is how we’d do it. We’d look at the financing and how would our bank line grow with that. What kind of costs? What kind of cost efficiencies we might see along the way? How do we build facilities to handle it, pipeline take away and transportation?

We said you’re going to do things differently if you’re building it to sell versus building it to last.

Keith:          Tell me a little about that. Tell me what some of those things are..

Pat:             You’re always worried about, if you’re building it to sell you’re worried about the guy who your potential purchasers are–what are they going to want? So you’ll say they won’t want us to do a big deal with some mid-streamer (pipeline company) because they may not like that mid-streamer or would like to own their own facilities. Gee you make commitments to a Trans Canada and they may have other commitments. So you’re always trying to second guess what they’re doing.

It’s kind of like getting a pig ready for the sale. You put some lipstick on it but you don’t want to put a tattoo on it because the buyers don’t like tattoos on their pigs.

Keith:          Right.

Pat:             So we have to focus on building it to last and building it as a good standalone company. So that’s what we started working on and there’s a lot of iterations of how fast can it grow. Gas plants, take away capacity. What kind of gas prices do we need? What kind of gas price storms can we handle? That’s when we started down the path of building it.

And if you really look, our 5 year plan has really been a 6 year plan because we slowed down at the beginning because 2013 was a terrible gas year but we’re well on our way now and what we’re seeing is really good.

We’re into our second year of our 5 year plan and that’s basically in the bag.  So we have 3 more years and we’ll reach 100,000 BOE per day and it’s going better than we ever thought. Our costs have continued to tumble, our production performance has continued to outperform what we even thought was possible and so everything’s working.

The only thing that’s been a headwind, as you mentioned at the outset, was a low gas price and it has continued to be poor. But we can survive at very low gas prices, lower than anybody we think and it’s just because of our well performance and our costs.

Keith:          When the industry talks about efficiencies there’s service cost reductions and a true technical efficiency improvements. What would you say is a couple of the top truly technical efficiency improvements the industry has developed that’s really helped the industry lower costs or specifically you?

Pat:             The first one is always–how quickly can I drill my wells?–because time is money. So for everyday we save on drilling we save $100,000 and that’s not a bad rule of thumb. If you look back 3 or 4 years ago our average was probably around 25-26 days and now we’ve drilled some in 13 days. We’re averaging around 17-18 days right now including the liner run, which typically adds 1.5 to 2 days.

So we’ve cut probably close to a million bucks off our drilling costs. Then the next big one was fracking. We zeroed in on a very good frack technique, not that we’re not still experimenting, but we really zoned in and do 90% of our wells with our recipe. That saves us time on fracking now and other improvements. We’re using less water and that saves us money, we’re not using an acid spearhead and that saves us money, but time is the biggest one.

Every day I save fracking I save $400,000. Our average fracks were taking 5 days before and now we’re down to just over 2 days, so there is another million dollars of savings. Those are embedded cost things and never have to go up as far as time. People say what if service costs go up? I said that would be wonderful because that means commodity prices are going up.

Keith:          That’s right.

Pat:             I say we’d make a lot more money, but we’ll still save on these other efficiencies, true efficiencies we’ve come up with and there’s lots of other little ones,  like water ponds. We’re sourcing our water now from surface water that the ranchers have on their land. I was out there yesterday and the one pond is nicely filled up for some 2 weeks of rain out there. They’re on a rancher’s land and we haul the water off.

That one is about 2 miles from a pad we’re fracking from that the well’s on right now…while 2 miles of trucking and sometimes we’d be trucking water from 60 miles away of our fracks. We recycle about 100% of our frack water now. We source frack water from the gas plants which is water removed from the gas and use that water for fracking. So we haven’t taken much water from a stream, river or lake for probably 4 years now.

So it’s those kinds of efficiencies we keep chipping away at. And standardizing our equipment on our well site–our well site equipment used to cost us about $900,000 a well and we’re down to $600,000 per well with better equipment and easier equipment to maintain. So looking at the maintenance and how we do our maintenance and build that into the design of the surface equipment.

The guys are always thinking and coming up with stuff that amazes me all the time. And it’s just that attitude to drive down the costs and be more efficient.

Keith:          When you talk about your fracking recipe I guess for the retail guy they know there is slick water and all these terms but even within that–is it pretty site specific from play to play and operator to operator?

Pat:            So we use a slick water open hole ball drop system 1 tonne per meter, high pump rates and that’s probably the 4 biggest things we do.

The other thing we have is a real sweet spot geologically. We have a highly pressured area…we mapped the Montney Trend all the way as far south in Alberta and it goes all the far north in BC, we truly believe we have a sweet spot. There’s a couple of them. Seven Generations has a really nice spot. They’re a little bit deeper and expensive but they’re higher liquids.

It’s that over pressured nature of the rock where we are and the permeability we start with that gives us the most robust wells. I think RBC just put out something this week and mentioned a bunch of companies. They mentioned Painted Pony and the 7 Generations were pushing up the well performance of the Montney.

We’ve done a study in our area of almost 1,000 wells and we’ve got 9 of the top 10. That reaffirms our belief that we’re truly in a sweet spot and real estate is real estate you can’t recreate ocean front.

Keith:          That’s a great line. Okay.

Pat:             So it’s a combination of all those things that allowed us to do it. What we constantly focus on is the full cycle costs. Someone will say…gee…we have really low operating costs because we own our own plant. Well so what? That’s great to stagnate there and you can make cash flow at very low numbers but if you can’t grow and add production because of your drilling cost and well performance…that’s the difference we’re growing. We’re showing the biggest growth we’ve seen of any company among our industry peers on a per share basis.

People say why are you doing that? I say why are you asking us that? Why don’t you ask the guys who aren’t growing why they’re not? We’re doing it because we can. We set ourselves up and we entered the down-turn with no debt and so we can use our balance sheet now when everyone else is struggling and we’re getting the best industry costs that we’ve seen in 20 years to grow our production. That will be there when gas prices come back. If they don’t we’ll still be making money.

Keith:          So you’re not quite unique but you’re rare. In that entire cycle you had a net cash position a huge chunk of the time.

Pat:             Because we were delineating and exploring and you don’t borrow money when you’re in that phase of a company and that’s where these other guys get off kilter. They need the capital and just aren’t efficient. They ran too many plays, they didn’t build a solid foundation, didn’t get focused.

I think selling Saskatchewan was a very tough decision but we sold it when oil was at $104 a barrel in July 2014. How the hell did we know to do that? We didn’t but I didn’t expect oil prices to get much better and we knew we needed the money so we pulled the trigger. So we entered 2015 with no debt, we had cash. And we didn’t do it by raising a bunch of capital and diluting our shareholders. Every time we raised capital is because we had something we had to do and that would be make an asset purchase or…so we were always very careful about how we raised money.

So we have very few shares out compared to most of our competitors. Our price right now is still not up to the average of the industry. If you believe we’ll be at 40,000 barrels a day or 240 million cubic feet equivalent per day which we will be shortly, very shortly, our stock looks very cheap.

Keith:          You look at the growth that’s happened here and I guess to a certain degree success breeds success. Is it true that with what you’ve been able to achieve you get basically a better quality groups knocking on your door asking to be part of the play and asking whether it’s on the drilling side or services side or the midstream side or even the off take side. Is that something that is true or the business is just all about the numbers and that’s it?

Pat:             I went out to the field yesterday for the opening of the Townsend plant and we stopped at one of our rig sites there that’s been drilling. I said you guys have been drilling for us for a long time. God it’s got to be over 3 years now, this is the Trinidad rig. They said no actually it’s been 5 years now, 5 years. They were asking me are you guys going to keep going. Oh we’re going to drill more wells next year than we did this year so just keep drilling. As long as you’re doing the best job.

We pay our bills on time, we don’t drag we don’t use our suppliers to extend our credit line.  We tell them if we’re going to slow down 2 or 3 wells in advance.

So we treat our partners fairly, contractors well, we have a great relationship with AltaGas and they’re as happy as we are with the plant and getting it on stream and seeing the production and it’s a very efficient modern plant and they’re very happy. We’re talking about the potential for the next expansion already.

They have a pipeline that will take all the liquids down to the Alaska Highway and saves us about 2 ½ hours of trucking and it’s a very efficient system. Plus you’re not driving on slippery muddy roads to get oil condensate and propane butane out.

Keith:          This is a gathering line you’re talking about?

Pat:             No it’s from the plant and it goes right to the Alaska Highway, basically straight east/west of the plant and goes right to the Alaska Highway and saves us trucking time. For a truck loaded with liquids it would take them about 2 ½ hours or maybe 3 hours round trip compared to where they pick it up now where they were having to pick it up at the plant site. So we’re continuing to see our transportation costs drop. They’re putting in a rail terminal because they’re considering building a propane export facility near Prince Rupert and we’ll be tied into that and selling our propane into Asia.

Keith:          Wow. Let’s quickly run through some questions about what is happening now.  In Q2, PPY reported one Townsend plant now reached 50 million cubic feet a day of gas processing, and on course for 150 million by Q4. What’s your timeline here on 150?

Pat:             So 50 million cubic feet of gas per day we added again just this week and so we’re pushing around 100 million cubic feet of gas per  day right now–so that was Step 2. And Step 3–October 1st or so–we’ll add another 50 million a day.  So everything is going fine and like I say, I was up there yesterday and things are humming along. I haven’t had any real issues with the plant at all.  Yes the next 50 million cubic feet of gas per day will be on in October so we’re humming along here and it’s going really well.

Keith:          What future strip gas prices do you think you’re going to grow spending even more? Is there a line in the sand a number that you say if gas can hold 3 and a ¼ for next year then we can go to “x”? Is there a certain price level that’s a trigger for you guys?

Pat:             We think it’s a forward strip as it is and with our hedges in place we can grow as quickly as we can getting both facilities and transportation lined up. You’re really looking, we’re looking 2 to 3 years down the road already.  What we’re seeing is not only are we going to add more processing facilities, but also more take away capacity cheaper than we had ever budgeted for.

The first plant we had budgeted in our 5 year plan–the second phase would be the same cost and it looks like that cost is going to be less than the original cost or less to add the processing capacity. That’s what we’re looking at.

How do we drive down those costs and make more nickels per MCFE? We’d love a better gas price we’d get more cash flow, etc. but we’re going to continue to follow our plan and we don’t see gas prices or forward strips slowing us down at all.

Keith:          You don’t see egress–getting the gas to market–as any issue for yourselves there?

Pat:             Well we got take away capacity well planned out. We’re fine and some expansions to Spectra’s system and to TCPL’s system which we committed to and they’re getting built. Things are fine and we’ll make our 5 year plan we’re very convinced.

What do the next 5 years look like beyond that? I think this year with our budget we’ll talk about 2021. We’ll continue to see ourselves grow and add significant production.

Keith:          Wow. Last macro question, what is the biggest challenge facing operators in the WCSB right now?

Pat:             Governments and taxes I think is a big problem. Carbon taxes…we’re okay in BC… we’re kind of used to it but Alberta is putting a new carbon tax in. We need to get these pipelines, pipelines that go to LNG projects …we’re not getting well priced for our product and it’s hard to compete if you’re not getting a good price. I think that’s probably the biggest thing.

Certainly energy prices themselves are…these are tough times for 90% of the industry. There are companies going broke. We’re very lucky that we have such a good resource and we’ve done a great job and our timing has been good. But the industry needs better prices to ramp up that question you were asking me. That’s what the rest of the industry needs. We’re okay but much of the rest of the industry is not.

Keith:          Got you. Pat–God bless you and thank you so much.

Pat:             Thanks for the opportunity, and see you on October 11.
I hope I see many of you on October 11 as well!  Sign up here!

How to Avoid Disasters in Energy Stocks

By
Keith Schaefer
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0

Look at this chart!  This kind of visual makes an oil and gas CEO proud when addressing his Board of Directors or shareholders.

southwest-1

Source: Southwestern Energy Corporate Presentation

But despite this beautiful production growth chart–this company has COST investors BUCKETS of money over the past two years.

I’ll explain to you what happened–and how you as an investor can avoid making the mistake of losing money in the future on a company like this.

A Whole Lot Of Running To Get Absolutely Nowhere

That beautiful looking production growth chart is Southwestern Energy’s (SWN:NYSE) average annual production.  The growth is there every year–and it is explosive.

Over this eight year period Southwestern’s production grew by 863%.  That is an annual compound rate of growth over 38%.  This is quite an operational achievement to be sure.

Now as to whether it is actually a financial achievement……that’s an entirely different story.

The next chart is even more impressive–but not in a good way.

southwester-ebitda

Source of Data: Southwestern 10K’s and Corporate Presentation
 
This chart is Southwestern’s historical EBITDA (essentially, cash flow from operations with interest and taxes stripped out) for 2007 through 2015.

The 2016 number is Southwestern’s original 2016 EBITDA guidance.   When looking at this chart, please  remember that production has increased 800%…and then realize that despite that……EBITDA in 2016 is lower than it was in 2007.

An eightfold increase in production, yet no increase in cash flow.  Ouch. Double Ouch.

But there is no mystery as to what has happened here.  Natural gas prices in the first half of 2016 were absurdly low.  The 2016 guidance figure is based on an assumption of $2.35/mcf natural gas.

We’ve had low natural gas prices for a couple of years, but in 2016 the Market is getting to see what the cash flow from shale gas producers looks like without the benefit of hedges that were layered on back when commodity prices were higher.

As full disclosure I’ve used the original Southwestern 2016 EBITDA guidance in my chart.  The company has since revised that number up to $675-$700 million on slightly higher natural gas prices, but also on increased production that is coming as a result of an equity issuance (more dilution!)  done mid-year.

southwest-production

Source: Southwestern Energy Corporate Presentation

Even with the revised guidance that is a result of the equity issuance, EBITDA is still only expected to come in at 2007 levels.

That is a whole lot of running between 2007 and 2016 without actually getting anywhere.  That just says this is a cyclical business (surprise!) and you have to know how to trade these energy producers.  But how do you know when to get off a fast moving bus?  I’ll tell you.

 
The Rest Of The Story – The “I” In EBITDA

The EBITDA numbers are Capital U Ugly.  Southwestern, by the way, has historically been very well respected team with some very high quality natural gas assets.

The story gets even more bleak when you factor in the cost of servicing Southwestern’s debt–which at one point was quite manageable.

In 2007 Southwestern had just $36 million of interest payments for the entire year against $675 million of EBITDA.  That meant that after making those interest payments Southwestern had $639 million of cash flow, or 95%, available for capital expenditures to grow.  Southwestern ended 2007 with $970 million of long term debt.

In 2016 where Southwestern will have similar EBITDA, yet now, interest expense through just six months has already been $109 million through June 30 and will exceed $200 million for the year.

With Southwestern’s new guidance EBITDA of $675 million that leaves only $475 million for capital spending.  That number by itself isn’t that much lower than 2007, but here’s the key point to focus in on:

In 2016 Southwestern needs a capex budget that is multiples of 2007 to offset production declines on the corporate production base that is 8 times larger.  That is why Southwestern’s production is now falling; it doesn’t have the cash flow to sustain it.

Yeah…I should mention that Southwestern now has $5.7 billion of long term debt with EBITDA that is more appropriate for the $1 billion of debt that company had in 2007.  Same cash flow today as then, but nearly six times the debt.

More on how all of that debt got on the books in minute.

The hardest number to look at has to be Southwestern’s cash flow from operations figure for the six months ended June 30, 2016.  After interest expense was paid this company with $5.7 billion of debt generated just $165 million of cash before capital spending.

That annualizes to $330 million or 15.6x debt to cash flow (15.6:1).  Those numbers just don’t work.

If The Market Doesn’t Like An Acquisition – Don’t Hang Around

Southwestern had a “fork in the road” moment in 2014 and the company went the wrong way.

After years of running with a clean balance sheet, Southwestern gambled and took on a huge debt load to acquire some choice Marcellus assets from Chesapeake (CHK-NYSE) near–what management thought–was the bottom of the natural gas market.

inline-image-4

That self-inflicted damage is what drove Southwestern’s share price down 90% to $5 earlier this year.  The decline in natural gas prices has been damaging, having all of that debt is what made the damage life-threatening.

Southwestern’s management felt that the acquisition was going to be a homerun.  Except the ball landed in the graveyard.

They believed that this was a case of the financially strong company being able to take advantage of Chesapeake the desperate seller.  Southwestern’s CEO said as much in the press release that announced the deal:

“Our patience and disciplined approach to investing every dollar we spend has led to this outstanding opportunity,” added Mueller.

It hasn’t worked out that way.

With that deal Southwestern’s debt increased from $1.9 billion entering 2014 to $6.9 billion at the end of the year.  Then–when natural gas prices didn’t recover and instead dropped further–Southwestern’s survival was brought into question.

Shareholders paid–and are still paying–a painful price.

There is a valuable lesson to be learned here for investors!!  And it’s an easy one!

Southwestern is just another in a long line of companies that have ruined years of disciplined balance sheet management with one big acquisition–good companies, with good assets taking the wrong path at the wrong time.

Baytex Energy (BTE:NYSE) buying Aurora in 2014 is one example.  Encana (ECA:NYSE) acquiring Athlon is another.  For a third how about Whiting Petroleum (WLL:NYSE) purchasing Kodiak.

The list goes on….

I’ve avoided getting stuck holding these acquiring companies for the subsequent stock collapse because I have one simple rule:

If the buying company’s stock price drops 10% below the financing price of the equity issue used to pay said acquisition–I sell.  If there was no new shares issued, I just use the closing price of the PREVIOUS day’s market as my benchmark.

No exceptions.

If the deal isn’t a good one–the market will tell me quickly.  And I’m not going down with any ship.

This rule has served me well in the past and I believe will serve you well in the future.  On October 13 2014 SWN closed at $31.99.  It took until Dec 8 of that year for the stock to drop 10% below that price…but that was THE SIGN for investors to leave the stock until it climbed above the price the stock was at the day before the deal was announced.  It never did.

If I buy a financing on an energy producer, I sell the stock if it stays below issue price for more than two days, and will only buy it back once it’s above issue price again.  The odd time I get whipsawed out of a good stock–but very rarely.

With SWN, a good management team made only one mistake and shareholders won’t recover for years. Their cash flow shows how highly cyclical the business is, and I’ve shown you one way to avoid the deep down-drafts off the top.

A company can spend 20 years doing a great job taking care of its balance sheet–and ruin all of that effort with one stroke of a pen.

Keith Schaefer

Why Nobody Can Predict The Oil Price

By
Keith Schaefer
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Were you bullish on oil a year ago–and are now shocked that oil is barely $50/barrel?

You aren’t the only one.

This wasn’t supposed to have been possible.

An oil price crash…ok.

To crash and stay this low for two years….no way.

After reading the just released July 2016 EIA Short Term Energy Outlook (STEO) I went back and compared it to the same report from July 2015.

What I found was yet another reminder of why I have zero faith in the ability of anyone (including me) to predict where oil prices are going.

Comparing the July 2015 STEO with what has actually come to pass provides a very clear explanation as to why 365 days later oil has barely cracked $50 per barrel.

One Year Later – Russian and OPEC Production

It was easy in July 2015 to draft a compelling case for why oil prices would be a lot higher 365 days into the future.

We all know that virtually every onshore oil play can’t deliver a sufficient return on investment at these prices.  U.S. drilling should have and actually did collapse.

U.S. production responded.  Daily oil production in the U.S. peaked at 9.6 million barrels in the spring of 2015 and has now fallen to 8.4 million barrels per day according to the EIA.

So what happened?  How can oil prices still be so low with U.S. production dropping this much?

I dug deep into the data that underpinned the EIA STEO reports for July of this year and last.  What I found was that a year ago the EIA had greatly underestimated how much oil Russia and OPEC would be producing today.

Let’s start with Russia where production should be falling apart after two years of low oil revenues.

The chart below compares what the EIA predicted (as of July 2015) Russia would produce on a monthly basis from January 2015 through the end of 2016.  Note that there are differences in the months prior to July 2015 due to revisions to historical production data.

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There is a big gap between what Russia was expected to do and what it has actually done.

First half 2016 production has exceeded the EIA’s estimate by nearly 500,000 barrels per day.

That is A Big Variance.

The EIA underestimated OPEC production by an even wider margin.

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When the July 2015 STEO was written, Indonesia was not part of OPEC.  I’ve adjusted the July 2015 figures to include Indonesia.

As of June 2016 OPEC production was exceeding what was estimated in the July 2015 STEO by a whopping 1.2 million barrels per day.  Iran, Iraq and Saudi Arabia have all exceeded expectations.

To put this in context consider that OPEC has exceeded the EIAs projection by an amount equal to the entire production from the Bakken shale.

Putting them both together, Russia and OPEC are exceeding the July 2015 STEO by 1.7 million barrels per day as of June 2016.

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Those with a bullish view on oil have some very valid points to make.  Global oil demand continues to move higher.

Onshore production in the United States has taken a hammering.  Exploration budgets everywhere have been decimated.

But when you realize OPEC and Russia have exceeded the EIA’s estimates by 1.7 million barrels per day–it’s easy to understand the problem.

The production surprises from OPEC and Russia are clearly the wet blanket on the oil bull party.  Production from these countries hasn’t been slightly more than expected.  It is a massive amount of oil and THE reason that the much anticipated oil recovery has yet to happen.

Whether it is rational for OPEC and Russia to continue to produce so much oil into these prices is irrelevant.  All that matters is that they are doing it.

Once again many investors get a very real lesson on the difficulties of predicting oil prices.

How Then Does One Make Money Despite Of This…

Despite all this bad news, there is a Bright Light in the North American oilpatch. It’s the Permian Basin of southwest Texas–where a steady improvement in fracking techniques have doubled flow rates in some areas of the play–up to 3000 boepd!

That is giving companies a very fast payout on their wells, even at $45 oil. These stocks are starting to move–and there are four Best of Breed Permian juniors that I believe are THE stocks to own for the next 12 months.

These stocks can grow production quickly, without debt and without new equity–even at these low oil prices.

Every day you don’t CLICK HERE, you lose opportunity. Don’t look back with regret.  CLICK HERE.

The Saudis Did NOT See This Coming From US Oil

By
Keith Schaefer
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The hottest oil play in the western world is the Delaware sub-basin of the Permian in SW Texas.  Producers are seeing huge increases in flow rates as they figure out proper fracking techniques.  Rates are doubling from 1500-3,000 boepd!  And payout times for wells are now as low as seven months–at $45 oil. 

Nobody saw this coming–especially the Saudis.

Junior producers especially need fast payout times on their wells so they can recycle that money back into another well.  If they have longer than 12-15 month payouts, they really can’t grow within cash flow, and end up diluting shareholders through debt and continued equity raises.

In the heart of this Shale Revolution–Resolute Energy.  I added it to the OGIB portfolio on July 12, and added 10,000 shares on Monday Aug. 8 at $7.32 and added another 1000 shares Monday Aug 16 at $16.27.  Here is my original notice to subscribers:

The stock of Resolute Energy (REN-NYSE) has doubled in three trading days, going from $2.80 – $6.07 on the strength of huge flow rates from its Permian Basin play.

And it may double again as the market understands

  1. How close to bankruptcy this stock was priced
  2. How richly other junior Permian stocks are valued at

This is fortuitous, as I’m studying the juniors in the Permian right now.  This is the low cost oil play in North America and Permian stocks are receiving the highest valuation.

Resolute has just 15,000 bopd of production, and a whopping $490 million of long term debt—a Zombie Stock, like I wrote about last week with Athabasca Oil, Birchcliff Energy and PennWest Energy.

Investors have forsaken these heavily indebted companies for good reason.   But as Resolute Energy showed us this week, when a Zombie comes back to life it can be explosive for share prices.

Now, I’m writing about this stock because I did buy 2000 shares at $5.60 today.  It took me that long to notice the stock rocketing up, do the research, figure out what this thing could be worth & decide if I wanted to play or not—because this stock could still double from $6/share–IF oil holds up.

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Everything changed for Resolute with just one press release (July 8) proclaiming amazing drill results– but first let me give you some quick background on Resolute.

Since the oil crash in 2014 Resolute has been selling off assets to try and stay alive.  In 2015 the company sold three assets to bring down debt:

  • March 2015 sold non-core Midland Basin assets for $42 million
  • September 2015 sold its Powder River Basin assets for $55 million
  • November 2015 sold the rest of its Midland Basin assets for $177 million

Besides good drilling results, Resolute’s most recent press release said it had sold some midstream assets and would be getting $32.5 million in cash ASAP. That hardly moves the needle on the company’s $520 million of total long term debt.

A Step Change In The Permian

These recent drill results were awesome (don’t worry, details are coming…) and this will significantly increase the amount of cash flow that Resolute can generate—and improve its net asset value.

A company’s total leverage is determined by how much debt it has relative to its cash flow.  Just as shrinking debt reduces leverage, so does increasing cash flow.

Resolute did this by getting a whole lot better at drilling wells into the Permian.

Resolute’s main remaining Permian acreage is located in Reeves County in the Delaware Basin.  The primary formation that Resolute is chasing on this land is the Wolfcamp A.

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Source: Resolute Corporate Presentation

The last time that Resolute had released details on its Reeves county Permian production was on May 9, 2016.  The company was then able to give IP30s on two recent 7,500 foot lateral wells—which came in at 1,552 boe/day and 1,475 boe/day.

Friday’s release on its most recent Permian wells blew the prior (good) wells completely out of the water.

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Source: Resolute July 8, 2016 Operations Update

Resolute has now moved to 9,000 foot laterals and production rates are much higher.  The initial production rates on these wells are hitting 3,000 boe/day with the IP30 rates expected to double those of the 7,000 foot laterals previously drilled.

With these new data points on its wells and with results from competitors with offsetting acreage, Resolute has significantly updated its Wolfcamp A type curves.

The 7,500 foot laterals are now expected to recovery 56% more oil and gas and the 10,000 foot laterals 51% more than previously believed.  That is like night and day.

4

In addition to getting 51% more oil, Resolute said they were able to lower cost 12-18%.

Lower capex and increased flows puts the PV10 value of $10 million per well at these low oil prices.  Wells costs on the longer laterals are $9.4 million and the shorter ones they’re targeting $8.2 million. Ideally I want to see a PV10 that’s 130-150% of the well cost, but that’s…ok.

Resolute has 22,420 gross / 12,940 net acres under lease in Reeves County where it believes it has identified 255 gross Wolfcamp A and Wolfcamp B locations to drill.  The company has 80% of 2016 hedged at $80/b and 25% of 2017 production at $54/b.

What is the stock worth? The secret here is that Resolute has only 15.5 million shares out.  Callon has 118 million. At $6/share the Resolute market cap is $93 million.  Add $490 million debt to get Enterprise Value (EV) of $583 million.  Divide that by 15,000 boepd to get a per flowing barrel valuation of $38,866.67.

Per flowing boe is the weakest valuation metric to use, but consider Callon paid $80,000 per flowing boe for its latest acquisition, you get a sense Resolute stock could still run up.

If all the increase in EV to get to $80K/per flowing boe came from the stock –well, here’s the stockbroker monkey math—15K x $80K=$1.2 billion – $490 million debt = $710 million market cap / 15.5 million shares = $45.8/share.

That sounds ludicrous doesn’t it? That math shows why per flowing boe is the weakest metric to use.

But this is the Permian and there is a comparative bubble in the Permian.  If someone paid $10/share for Resolute today, that’s only $43K per flowing boe.

That’s hugely accretive to Callon or Diamondback (FANG-NYSE) or Matador (MTDR-NYSE)—why wouldn’t they take it over now just as type curves and EURs are increased dramatically, reducing leverage—and before the Market really catches on.

RISKS

  1. this is all happening as I’m getting very bearish on oil and oil is dropping 50 cents a day.
  2. The wells are only 55-60% oil (though natgas is starting to be worth something!)
  3. Resolute’s average working interest is about 60%
  4. Very good hedges are saving the Company this year–which has 6 months left.

The Bonds Are Also Responding

Stock market investors weren’t the only ones cheering the news from Resolute.  Bond investors also like what they see.  Resolute bonds that were trading for not much more than twenty cents on the dollar just a couple of months ago are now over seventy cents.

5

Another thing I have preached on and on about is…share counts matter.  I LOVE finding low float companies with big revenues.  I think it’s incredible to find a 15000 boepd producer with only 15.5 million shares out.  That is real leverage!  That’s why some monkey math takes this stock to $24-$42…of course commodity prices have to co-operate.  But a low float stock in the highest value play in North America can be a lucrative and beautiful thing.

The other thing I really liked about the stock was how well it traded today–in a straight line, not all over the map.  Steady and real accumulation, not a flood of profit taking from daytraders throughout the day.

The company should be able to use this news to almost get out of the woods and on the path to recovery.  The value of its Permian acreage has permanently increased and will give the company several additional options to bring its balance sheet even more in line.

The stock has since hit a high of $18–a triple in one month from my initial purchase.  I have compiled company reports on FOUR junior Permian plays  that I expect to dramatically outperform the Market–especially if oil prices remain under $50.

Bulletproof your energy portfolio–CLICK HERE to get these four stocks NOW.

Keith Schaefer

The #1 Efficiency Gains in Energy Come From…Sand?

By
Keith Schaefer
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0

It’s clear from comments on Q2 conference calls in the last week that North American producers ARE getting more efficient—lowering costs—in producing tight oil, or shale oil.  And they don’t think they’ve hit their limits yet.

The high tech reason for these improvements? Simple sand.  It is stunning to me how much more sand is getting used in tight oil and gas wells.

Here’s a chart from US Silica (SLCA-NYSE) on what it takes to frack a single well now:

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And here is another visual from energy boutique brokerage firm Tudor Pickering & Holt on where they think frac sand use is going next year in the Permian basin of SW Texas:

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They have a near identical chart for the western Delaware basin of the Permian.

Cimarex (XEC-NYSE) said on their Q2 call on Thursday Aug. 4 that they increased their sand or “proppant” use by 92% to 2400 pounds every linear foot of a 10,000 foot horizontal in a Lower Wolfcamp formation well in Culberson County and increased production 36%.  Here’s a slide that shows how much more sand they use now just over the last 18 months:

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Here’s what Devon Energy (DVN-NYSE) said in their Q2 call last week:

“John P. Herrlin – SG Americas Securities LLC
…with the STACK and also the Woodford, you’re putting in a lot more sand. Do you have any sense of what you think the economic limit is for how much profit you can put in?

Tony D. Vaughn – Chief Operating Officer

I can give you a little bit of a feel. I’ll remind us of the experience that we had in, I believe it was mid-2014 when we started increasing the sand loads in our Delaware completions and we really ran up to – from about 600 pounds per lateral foot in early 2014 up to about 3,000 pounds per lateral foot through 2015…We think we can get the most commercial returns in the current business environment done at about 1,500 to 2,000

“..And then if you move over into the Anadarko Basin, we’re using a slick water job in our Woodford type work, and we continue to increase our proppant loads there. So we’re up to about 2,000 pounds per lateral foot. And after drilling and completing over 800 wells, this last large pad that we brought on had the best results that we’ve ever had in the Cana-Woodford play.

“As we think about the STACK play right now… we are increasing our sand loads there up to about 2,600 to 2,750 pounds per lateral foot and enjoying increasing success there.” (Courtesy of SeekingAlpha.com)

Chesapeake (CHK-NYSE)—never a company to do things in a small way—has the biggest frack I’ve heard of so far.  They put more than 30 million pounds into a Haynesville shale—and the CEO Robert Lawlor said on the Friday Aug. 5 conference call that more sand is so good, he calls drilling now “proppant-geddon’:

“The results have been very impressive, with the restricted initial rate of 38 MMcf/d and a flowing pressure of approximately 7,500 psi,” Lawler said. “We call this new era in completion technology, ‘proppant-geddon.’

“We’ve not yet reached the point of diminishing returns in the Haynesville, and we plan additional tests up to 50 million pounds in the back half of the year.”

No wonder the stock of US Silica has gone from $16-$40 this year—and stayed there.

There’s a couple points here for investors.  Data on how much oil and gas producers are getting per 1000 feet is not easy to come by.  But several presentations are now showing over 3 bcf/1000 feet for natural gas—that’s very impressive.

And I am reading regularly that stretching laterals from 1.5 – 2.0 miles only costs an extra 20%, to get 50% more production.

The point is—economies of scale are absolutely creating lower costs per barrel.  And producers would not be increasing sand use 40% if that wasn’t happening.

Second, not only is an incredible amount of sand being used now, the mix in sand is changing.  The Market at first used mostly coarse sand, but is now using a finer mesh.  And because margins are being squeezed everywhere, producers are finding this method cheaper.

“All the operators are using the slick water completion method,” says Rasool Mohammad, CEO of Select Sands (SNS-TSXv), which is developing a sand deposit in Oklahoma.  “This is cheaper than the cross gel which uses expensive frack fluids. And the slick water primarily uses finer grade sands, 40-70 and 100 mesh.”

Mohammad—who is actually selling sand to industrial users outside of energy—says the coarse sand actually does do a better job in the long run, but right now cheaper costs are the most important factor for producers.

That cost cutting is causing the industry—and that means producers, specialty frac sand suppliers like US Silica and the big service companies like Halliburton & Schlumberger etc.—to start looking at regional sand deposits in the southern US.  Traditionally, very high quality white sand, mostly from Wisconsin, has been used.

But transport costs can be high, and companies like US Silica are now buying brown sand deposits closer to Texas, where it looks like the Permian will be the most active light oil basin in North America.

Mohammad’s sand has all the technical and logistical wants by the majors, and he is hopeful to land his first energy sales contract this fall.

The Market is convinced there will be no more price concessions by sand suppliers, and Mohammad believes there may even be a shortage of the finer sand like the one in his deposit by Q1 2017.  The industry has built and relied on the white coarser sand for the last 7 years of the Shale Revolution; this finer part of the market has been ignored and now is suddenly in high demand.

EDITORS NOTE–The other VERY noticeable trend in Q2 reporting season the last two weeks? Well results in the Permian are soaring.  Permian stocks will absolutely outperform every other oil basin in North America.  The cheapest Permian stock I see is RIGHT HERE.

Keith Schaefer

This Stock Will Be A Disaster or a Massive Win

By
Keith Schaefer
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I can’t decide it Cobalt International (CIE:NYSE) is one announcement way from being a five-bagger or one news release away from being a disaster.

If a person knew which way this was going to go–there are some Big Fast Easy Capital Gains to be made. But I just don’t know how this is going to play out.

Technically, they have had great success–Big Discoveries.  Financially, they are owed $1.7 billion, or $4/share–this on a stock trading at $1.50 or less.  Finally getting paid–that receivable has been on the books for almost a year now–would be a Big Fast Easy Capital Gain for Cobalt shareholders.

This potential trade has a VERY short fuse–if Cobalt doesn’t get paid by August 22, the deal is off–Cobalt will never get paid.  It’s a helluva story to watch for the next three weeks.

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A Business Model Not Made For Widows And Orphans

Cobalt has been an exciting company from the start.

The company was formed by Private Equity money in 2005 and came public in late 2009.  The sole focus for the company from Day One has been to find elephant sized oil and gas reserves under miles of ocean water.

This company is pure run-and-gun Deepwater wildcat exploration–where the exploration wells cost hundreds of millions and any prizes found are worth billions.

This company wasn’t just exciting in theory.  The oil and gas discoveries the company has made were exciting in real life.  Giant discoveries no matter how you slice it.

The exploration wells that Cobalt has been involved with have fund hundreds of millions of barrels of oil and gas over the past decade.  The locations of these wells have been offshore Africa and in the Gulf of Mexico.

On news of those discoveries Cobalt’s share price soared from under $10 to over $30 in 2012 and remained close to their through 2014.

Then the oil crash happened–the damper for every great oil producer story these days.

Low oil prices haven’t been great for a Deepwater specialist.   Deepwater properties require high oil prices to be economic and as an exploration company with little cash flow Cobalt requires access to capital on a fairly regular basis.

Through mid-2015 Cobalt’s share price actually did pretty well all things considered.  The company had enough cash entering 2015 to comfortably withstand a year of low oil prices without having to do anything.

Sensing the oil slump was going to be a long one, on August 24, 2015 Cobalt made a move to take care of any balance sheet issues for the foreseeable future.  Cobalt agreed to sell its 40% interest in some offshore Angolan blocks to Sonangol (the national oil firm) for $1.7 billion.

That lump of cash was enough to see Cobalt through no matter how long the price of oil stayed down.

The Cheque Is In The Mail……Maybe

The Angolan asset sale took place 11 months ago.  As of today only an initial deposit of $250 million has been received.

That is a problem.

Things get a little more uncomfortable from there.

On May 31, 2016 Cobalt’s Chairman and CEO Joseph Bryant resigned effective immediately with no explanation given.

The market loves when that happens (heavy sarcasm intended).

He was replaced with former BHP executive Tim Cutt who has spent the last three years focused on onshore shale which isn’t exactly the same business.

It hasn’t just been the CEO position that has changed.  Cobalt has a new CFO and new Chief Operating Officer as well.  That means the top three slots plus the Chairman position are occupied by people who haven’t been there prior to 2016.

All of this executive drama….the low oil price, the inability to close the Angola asset sale has pushed Cobalt’s share price down to levels that suggest the company’s future is in serious peril.

But is it?

In Cobalt’s last earnings call in early May of this year management indicated that it is in regular contact with executives at Sonangol and Angolan government officials.  The message from all of them is that they expect the deal to close, the only hold-up being the Government approving the deal.

That would take Cobalt’s cash position from $1 billion to $2.9 billion immediately.

With that cash the company would have roughly $2 per share in net cash.  That is considerably more than the current share price.

It is also worth noting that Cobalt has received $250 million from Sonangol so at one point we know there was serious intention to complete the deal.

In addition to that net cash, if the deal closed Cobalt would have something like 600 million barrels of discovered oil and gas resources in the Gulf of Mexico as well as many future high impact exploration opportunities.

With net cash in excess of the share price and all of that oil…..if the deal closes Cobalt shares could double the next day and go higher from there.

(Makes you wish you had a cousin working in the Angolan Government doesn’t it!)

The Market clearly believes that the deal is not going to close.   If the market is right Cobalt has enough liquidity to meet its needs for the rest of 2016 but is going to have to do something for 2017.

That is where visibility on what might happen gets very blurry.

Cobalt has some incredibly big Deepwater discoveries in the Gulf Of Mexico that it could sell all or pieces of.  If the deal with Sonangol doesn’t close those assets would be included in that mix of those available for sale as well.

The entire company could be put on the block as well.

The problem is that everyone will know the weak negotiating position that Cobalt is in so extracting a decent price will be tough.

Making it even more difficult is the forty-something oil price companies are looking at today and the industry-wide pivot away from long lead time Deepwater projects and towards shale assets.

I’ve Got One With Similar Upside Potential Without All The Risk

Cobalt will be on my radar but it isn’t going to get my money at this point.  I’m not interested in betting on whether the Angolan Government is going to make good on a deal.

I have found another oil producer that offers the same kind of upside that Cobalt does without all of the risk.

This unfollowed company has a huge piece of land right in the middle of the hottest play in the United States.  We just saw the “Godfather of shale” bet his entire company on acreage that is in the exact same county as my little producer.

I’m going to give you a chance to learn all about the multi-bagger upside that this company has before the market does.

To get my full company report–CLICK HERE.

Keith Schaefer

Follow the Smartest Man in Oil—Right into the Permian

By
Keith Schaefer
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0

To say that it is a “buyer’s market” for oil and gas properties would be an understatement. If you want to buy production or land, prices have come down by half in many areas.

This is like going fishing and having the fish swim up to your boat and beg to jump in.

That’s what happens two full years into an epic oil collapse, with countless companies desperately trying to sell assets and stay alive.  The Strong weed out The Weak.

Now, imagine if you could hand the most knowledgeable shale man in the business $450 million and give him the green light to go shopping for the best deal he can find in this buyer’s market.

That’s not a hypothetical situation. We have that exact scenario playing out in real life right now.

Regular Oil and Gas Investment Bulletin readers aren’t going to be surprised at what he bought……because we have been talking about these assets for the last two weeks.

Target Identified And Investment Made

Back in early March I wrote about how “the Godfather” of shale oil, former EOG Resources (EOG-NYSE) CEO and Chairman Mark Papa had launched a new company named Silver Run Acquisition Corp (SRAQU-NASD) that was loaded with $450 million of cash.

You may not be familiar with the incredible value Papa created at EOG while he was CEO from 1998 – 2013. He was one of the first into both the Bakken and the Eagle Ford.  The stock went up 650% over 10 years, which Forbes Magazine says was more than any other sizable U.S. oil company. In five years EOG increased its oil output at a compound annual rate of 37% to 190,000 bopd.

Now you have one of the Smartest Men Ever being given $450 million for one reason….to capitalize on a generational oil asset buying opportunity.

Papa took his time and turned over a lot of rocks.  This week we found out on what he has decided to spend some of that money.

Silver Run will be investing a yet to be disclosed amount of money into the privately held Centennial Resource Development LLC.  Papa will be put in full operational control of this company.

This Silver Run purchase comes shortly following after private equity firm Riverstone Holdings LLC (also Silver Run’s sponsor) buying a majority stake in Centennial earlier this month.

Normally getting information on a private company is difficult.  This case is a little different because Centennial had filed an S-1 with the SEC back in early June disclosing an intention to go public.  The recent investments by Silver Run and Riverstone would seem to put the kibosh of that IPO happening in the near term.

That SEC filing and some internet sleuthing has allowed me to put together exactly what Papa is buying into.  And wouldn’t you know–it is almost exactly the same assets that my subscribers and I were investing in just a week ago!

Centennial’s assets are fully concentrated in the Delaware Basin, which is the western sub-basin in the Permian Basin.  The specific acreage controlled by the company is found in Reeves, Ward and Pecos counties.

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Source: Centennial Resource Development Enercom Presentation

Centennial has a lot of running room in this play with its SEC filing showing 1,286 drilling locations across the following formations:

Gross Identified Horizontal Drilling Locations(1)(2)

Total
Zones:
3rd Bone Spring Sandstone 53
Upper Wolfcamp A 384
Lower Wolfcamp A 318
Wolfcamp B 281
Wolfcamp C 250
Total Horizontal Locations(3)(4) 1,286

According to Baker Hughes, three of the top six Permian Basin counties by active horizontal rig count are located in the Delaware Basin.

Reeves County, where the majority Centennial’s acreage is located had the highest number of horizontal rigs of any U.S. county as of the most recent count with 17.

As a result of this the Delaware Basin is the only region in the United States that has experienced sustained fourth quarter-to-fourth quarter production growth rates greater than 25% for the past three years.

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Source: Centennial Development Resources SEC filing

There is a reason that the industry keeps drilling wells here while rigs are shut down at a furious pace elsewhere.  It is because these are the most profitable oil wells in the United States at current (and any) oil prices.

Papa Had The Pick Of The Litter – And This Is What He Chose

I can’t even imagine how many different assets Papa and Silver Run looked at.  There are so many companies that have to sell in order to survive.

But Papa chose to plant his flag in the Delaware Basin.  That says the play is one of the best in the world.

By sheer luck it just so happens that within the past two weeks I had found a company with a BIG acreage position not just in the Delaware Basin, but right in Reeves County where Centennial has the majority of its acreage.

I recently prepared a full report on this company for my subscribers.  In it I walked them through a recent offsetting acreage sale that sold at such a high valuation, the stock price of this ignored little company (with  assets in exact same area!) would be worth four times its current share price just to valued at the going market rate.

In other words, the stock could double tomorrow and still be only half what a very recent and relevant transaction says the ground is worth.

This is no “blue-sky” valuation on my part and it wasn’t me digging through SEC filings that found it.  This is a valuation directly based off of a fresh arm’s length transaction that I was alerted to by a contact of mine in the industry.

As is often the case it isn’t what you know…it is who you know.

Nobody would be embarrased at this company’s valuation if it doubled tomorrow. If you want to get the company symbol and report, CLICK HERE.

Keith

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