Got some insight yesterday

I was in a private placement meeting yesterday on gas and oil. This was my take away for gas:

1. Because of the large amount of money invested to lease land, drillers ran out of capital. They tapped all of their investors to get the money to lease land. Now they can't drill.

2. Drillers use the profit from a well-site to raise capital to drill the next well-site. 

3. Only top tier drillers (i.e. Shell) can drill and make money at $4.00 a CFM. It costs them about $1.79 a CFM to produce. Lower tiered companies can't drill. If you signed with a little guy you probably have no hope to be drilled unless they sell you to a large tier driller. 

4. Come second bonus payment time I would expect that a lot of people will not get much since the lower tiers have no money. Unless you are in an active area I would not count on getting a second payment (remember, it is only an option), or expect significantly lower re-negociated payments. 

5. The USA has a lot of gas, unfortunately, the USA can't use gas. Nor can the USA export the gas. The only things in the USA that use gas is heating and power plants. The push for natural gas cars is stalled because there are no natural gas stations and people won't build natural gas stations because there are no natural gas cars. The USA operates natural gas re-gasing plants (takes liquid gas that we imported and turns it back into a gas) but we do not have any liquidfication plants because we never had gas to export. Liquidfication plants apparently are extremely expensive to build and won't happen anytime soon in any large volume.

6. With the perfection of fracking and horizontal drilling, drillers can now get oil the same way. Drillers get about 4X more profit from oil than gas. (BTU conversion for price would be driller gets $24 for gas and $91 for oil for the same energy unit). In a world where wells generate the capital to drill the next well, drillers are concentrating on drilling for oil now.

7. Gas is expected to creep up a little, but not much. Regardless, you do not want your land to be drilled now because the bulk of your gas will be extracted at very bad prices. It is better that your land is drilled later when the cost per CFM is higher. Not that we can control this though.

Eventually the USA will be able to use our gas but it sounded like 20-30 years from now. The estimate is that it will require $15T in capital to get to all of the frackable gas.

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Permalink Reply by Joseph-Ohio on May 17, 2013 at 7:53am
That's better too.
Permalink Reply by wyalusing jim on May 17, 2013 at 7:45am

there are a few factual and perceptual errors in the opening post.

"1. Because of the large amount of money invested to lease land, drillers ran out of capital. They tapped all of their investors to get the money to lease land. Now they can't drill."

not exactly true. there is plenty of capital to drill, the problem is that the wells drilled must be economical to attract investment capital. at the current price of gas, most investors are willing to wait until the market for natural gas is more favorable.

"2. Drillers use the profit from a well-site to raise capital to drill the next well-site."

definitely not true in all cases. although some companies choose to operate for the most part on cash flow, others use investors money to fund their operations. and if you think about it, how would they fund drilling the first well if they needed capital from a previous well?

"3. Only top tier drillers (i.e. Shell) can drill and make money at $4.00 a CFM. It costs them about $1.79 a CFM to produce. Lower tiered companies can't drill. If you signed with a little guy you probably have no hope to be drilled unless they sell you to a large tier driller."

not necessarily true again. size doesn't matter. (ever hear that one?) it may be true that larger companies have access to larger supplies of capital, but the profitability of a well depends more on the operation and development plans of the company as well as how good their marketing team is.

"4. Come second bonus payment time I would expect that a lot of people will not get much since the lower tiers have no money. Unless you are in an active area I would not count on getting a second payment (remember, it is only an option), or expect significantly lower re-negociated payments."

maybe, maybe not. the likelihood of a good second lease will depend more on the price of natural gas at the time than any of the factors you cite.

"5. The USA has a lot of gas, unfortunately, the USA can't use gas. Nor can the USA export the gas. The only things in the USA that use gas is heating and power plants. The push for natural gas cars is stalled because there are no natural gas stations and people won't build natural gas stations because there are no natural gas cars. The USA operates natural gas re-gasing plants (takes liquid gas that we imported and turns it back into a gas) but we do not have any liquidfication plants because we never had gas to export. Liquidfication plants apparently are extremely expensive to build and won't happen anytime soon in any large volume."

the u.s. can consume a lot of the gas that it can produce, certainly more than it currently is. also, there is currently one lng export facility able to operate in the u.s. with an additional one scheduled to go online in 2015. whether we get more export capabilities anytime soon, depends on whether or not the current administration pulls its' head out of its' butt and starts approving them. I don't see that happening unfortunately because this administration is bent on the eventual destruction of Americas' fossil fuel industries.

"6. With the perfection of fracking and horizontal drilling, drillers can now get oil the same way. Drillers get about 4X more profit from oil than gas. (BTU conversion for price would be driller gets $24 for gas and $91 for oil for the same energy unit). In a world where wells generate the capital to drill the next well, drillers are concentrating on drilling for oil now."

one barrel of oil is roughly equivalent to 5.8 mcf's of nat  gas on a btu basis. $91 divided by 5.8 equals $15.69. one must look more deeply than boe equivalency though, in order to ascertain why there is such a disconnect in the pricing of the 2 commodities. simply put, natural gas is not nearly as convenient a fuel as oil derivatives are. for example, you cannot put a couple of mcf's of nat gas in a can and take it home to refuel your lawnmower. natural gas must be delivered by a utility, which uses pipelines. oil can be trucked, shipped by rail, pipelined etc. and it can also be refined into a number of different products, including natural gas. value cannot be established simply on a btu basis.

"7. Gas is expected to creep up a little, but not much. Regardless, you do not want your land to be drilled now because the bulk of your gas will be extracted at very bad prices. It is better that your land is drilled later when the cost per CFM is higher. Not that we can control this though."

we have no way of telling where the price of nat gas will go nor how soon. biggest current factor is the weather. find a way to accurately predict that...and you can make millions trading nat gas.

and speaking strictly for myself, I certainly do want my gas produced and sold right now. not all of it mind you, but enough to keep me comfortable in my old age. I think most folks regardless of their age would likely feel pretty much the same.

you are correct however when you say that we will not as mineral owners control development schedules.

wj

 

 

Permalink Reply by Joseph-Ohio on May 17, 2013 at 7:57am
Keep us honest wj.
Permalink Reply by p umpjack on May 17, 2013 at 8:36am

I am getting the impression on this site none of us like anything but our own opinion

 

wait and see some soy sauce sucking mention something soon

Permalink Reply by H Bale on May 17, 2013 at 8:42am

"wait and see some soy sauce sucking mention something soon"

That's a pretty oblique reference, but I think I even have an idea who you're referring to, and I haven't been visiting this site all that long.

Permalink Reply by H Bale on May 17, 2013 at 8:26am

I'll take issue with number 5.

As Fracking Good suggested in his second link (about UPS buying trucks with LNG engines) the transportation industry is easing their way into LNG. First of all while there has been an availability of engines for a few years now, no one company up to this point has been willing to take the plunge and see how a fleet of any size actually fares in day to day operation in the real world, in all types of terrain with LNG.With UPS adding 700 more LNG tractors to the 120 or so already running in CA, they are probably fairly sure of what they are going to get. For the large truck fleets it's just a matter of someone jumping in the deep end of the pool and doing OK. Truck Stops really started adding LNG fueling points last year, and most of the bigger chains will move aggressively to add capabilities to all locations once they see that the trucking industry will use it.

The same applies to the railroads. http://www.rbnenergy.com/methane-train-runnin-big-savings-from-lng-... Burlington Northern operated LNG units in the past along with Canadian National but the financial and enviroment incentives weren't there to keep LNG units in service. Now they are and BNSF is getting ready to run mainline trials with LNG units again. If BNSF is happy with the results the other Class 1s' won't be far behind.

There is also a place for LNG in airplanes. http://www.apga.org/i4a/headlines/headlinedetails.cfm?id=1466&p...  http://www.usnews.com/science/articles/2009/10/13/qatar-first-to-fl...

The key is getting infrastructure in place.  Going from diesel to LNG will be easy (not cheap, but easy).If the big users of diesel like what they see, most will probably be switched to LNG within 10 years.

Permalink Reply by Tusc Follower on May 17, 2013 at 8:56am
Permalink Reply by Sam Hopkins on May 18, 2013 at 10:54am

They did talk about plants to export but they said that the supply is so over demand that it did not matter. Meaning, sure these plants can come on eventually, but if they export .0005% of yearly supply, they don't matter in the grand scheme of things. Don't confuse a plant online to export with the ability to not only export all supply but that there is a demand elsewhere for a supply. Countries that need to import gas already can import gas from others so now we are competing with those countries that already export. It's not like we are exporting and there are no other countries that are exporting. Those other countries face the same usage restrictions, they use gas for heat and for power plants. There is no other large use for natural gas now.

Permalink Reply by Joseph-Ohio on May 18, 2013 at 10:59am

'There is no other large use for natural gas now.'

Exactly, and I think our country needs to change that to create a large domestic use for our natural gas !

Permalink Reply by Sam Hopkins on May 18, 2013 at 11:01am

BTW, don't shoot the messenger. This company has 500M invested and are raising a 1.5B round so I tend to at least listen to what they say.

Permalink Reply by fracking good on May 18, 2013 at 12:09pm

again misleading, your source (or you) is downplaying the importance of this emerging energy source while investing 1.5 billion, so you say. The Russians (Putin) supply 30% of europes natural gas needs at 4 times our rate and are trying to limit competition, Points 1-7 are pretty much all wrong and misleading.

(1) "They tapped all of their investors to get the money to lease land. Now they can't drill."

are you kidding me? That statement alone shows a lack of busineess sense, they dont invest if they dont have the capital. They didnt become a billion dollar business by being stupid

(2) Drillers use the profit from a well-site to raise capital to drill the next well-site. What! (there not selling pizza)

most wells dug now cant be put on line and gas sold until infrastructure is in place.

.I could go through 3-7 but I won't.

Dont listen to them, they have no clue of whay they say

Permalink Reply by Sam Hopkins on May 18, 2013 at 12:24pm

Hey, I'm not here to argue either way. I could care less. I was at the meeting and thought I would pass along the info I got. They are a no joke company. Take it for what it is and add it to your diligence.

In reference to your response though, the drillers leased tens of thousands of acres and how many wells are going in around you or me? 1? 2? Sure they will raise the capital eventually, the point is that none of these companies are awash with cash to throw in 10,000 wells and make everyone rich in the foreseeable future. They are out of cash and need to raise money to drill.

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