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 fracking good on May 18, 2013 at 12:40pm

to say Swepi (Shell )or any large O/G co. cant drill becaure they lack the capital? Take a look at thier financials, they can buy and drill anywhere. Drill rigs and infrastructure are there limits to getting oil and gas to market

Permalink Reply by Joseph-Ohio on May 18, 2013 at 12:46pm
Fix it.
Do what it takes to fix it.
No more stalling the recovery.
My opinions.
. (That's a period).
Permalink Reply by Sam Hopkins on May 18, 2013 at 1:13pm

No, Shell is tier 1. They have the finances to drill when they want. I am talking about Tier 2 having no capital. However, the other effects of my post are affecting Shell. 

Permalink Reply by Trapper on May 18, 2013 at 2:30pm

Sam, Are you saying Shell will not excercise their option to extend the leases at the same terms?

Or is it your belief that this will only apply to so-called Tier 2 companies?

You make some pretty heavy statements regarding all of this. May I ask what are your credentials and just what is a "private placement meeting"?

Permalink Reply by Sam Hopkins on May 19, 2013 at 5:01am

Shell has the option to renew at the lease signing price. It is a protection for them, to stop the upward momentum of lease prices. This is not what they have to offer you. They can come back and say we are not renewing at that price but we are are paying $1000 an acre if you would like to sign a new lease. If Shell owns a large area where you are, your choices will be slim to lease with someone else. No other company will lease your land at a high dollar amount if you are one lot in an large lot of Shell properties. But that is speculation. Who knows what they will do in 3-5 years.

As far as running out of capital, I was speaking mainly of Tier 2 companies. If they don't have the capital to drill, they most likely will not be able to pay the premium we all enjoyed when we leased. With gas at $4.00 CFM, they can't make much money so it will be harder to raise capital to drill.

I think there may be some confusion with Shell and capital as well. Sure Shell might have $50B in the bank, but what part is allocated to gas? They have oil that pays 4-6 times more profit than gas for the same dollar invested, so I would not expect that they will dump all of their money into gas. They don't want to be left behind though, so as we are seeing, they are drilling a few wells. 

I have no credentials in the oil/gas field. A "private placement" is a type of investment. It is formed with a strategy to do something. You can think of it as a company that is built to take advantage of a specific event or opportunity. When you invest, your money is generally locked up for a duration of time (compared to buying stock where you can sell your stock on the open market at any time). Normally it is 10 years. At the end of 10 years, the investment winds down, the company's assets are sold and you get your money back. An example would be a private placement formed 5 years ago to buy mineral rights while they were low because research was supportive that there was going to be a leasing boom. The private placement would raise a a round (raise capital), buy the mineral rights, wait, sell those rights to Shell, disband the company and pay all the shareholders. 

In the case of my message, the company is a $60B company raising a $1.5B fund. They have already invested $500M into forming the private placement. So believe me when I say they did their research. However, I am not pitching either way. I just thought I would post what they told me. 

Permalink Reply by tony hughes on May 22, 2013 at 3:23am

First i have never posted before,,  My lease is coming due.. i am in a shell dominated area..  shell did offer to release.. but at a very reduced rate from the original lease  ( east)

Permalink Reply by Trapper on May 19, 2013 at 6:28am
Thanks Sam.
Permalink Reply by Armstrong Land on May 19, 2013 at 4:18pm

What's a CFM?

Permalink Reply by Joseph-Ohio on May 19, 2013 at 9:56pm

They mean MCF (for 'Thousand Cubic
Feet') - knowing what they mean, I've been letting that slide.
For info. 'CFM' is an abbreviation commonly
used for 'Cubic Feet per Minute' - commonly used in the HVAC world.

HVAC = Heating Ventilating & Air Conditioning.

 

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