I know my posts have gotten pretty sparse, but it isn't because I've lost steam, but rather because I've been too busy at work.
What a wild week. The big news was obviously Iraq. How could something like the takeover of the second largest city come out of no where like this? There are five 24 hr news networks and 3 almost 24 hr business news networks, yet this was a complete surprise. Now Iraq's 3 to 3.5 million barrels a day of production has not been significantly effected yet. Most of their production and their main export rout is in the fairly secure Shiite controlled south. But pipelines are easy things to damage. In the longer term the effect is more significant. Even if this doesn't degenerate into a wider shiite vs sunni regional war, Iraq was supposed to be a leading source of production growth with some (probably unrealistic) projections of 9 million barrels a day by 2020, which was also the stated goal of the Iraqi oil ministry. That was always a stretch, but now it seems preposterously unlikely. I don't have a bloomberg to look at it, but I wouldn't be surprised if the long end of the futures curve moved up even more than the spot price this week.
On the equities front, wow. In a week that the S&P lost 7/10ths the whole E&P subsector was up with a few notable exceptions. I was also glad to see Whiting, my biggest position, up an impressive 7.13%, leading the sector after NOG, a very small company which I've included in the coverage only because it is a Bakken pure-play.
The stand out exceptions in these good times are the Marcellus companies. Range Resources, the dominant company in the Southwestern Sweet spot of the Marcellus, announced they were issuing $500mm of new equity, an exceptionally rare thing to do at present, because of the incredibly low cost of debt. But right now Range's trailing EBITDA is about a billion and their net debt is about $4b. 4x EBITDA is high debt level and often mentioned as a "not to exceed" level in the E&P world. Range is growing production at about 20% per year, but there are tremendous capacity constraints in this area, even more so than Northern Marcellus. Northern Marcellus only has to find somewhere to put their gas. In the Southwest the gas is wet so they have to find somewhere to put all their NGLs, and especially their ethane, and they are competing for takeaway capacity with the nearby Utica as well. But that said, I think Range is indeed a premium company that deserves a premium valuation. The valuation has always just been a bit TOO premium for me. They are sitting on some of the best wet gas assets in the country, and they could drill their current asset base for decades without having to lease a new acre.
I feel that the other Marcellus gas producers were down in sympathy with Range, but the situation in the North is totally different. Cabot, for instance, is growing production while significantly underspending their cashflow. They also have no debt. They are now trading at just over 8x analyst consensus 2014 EBITDA (actually 2014 consensus ebitda as of the last time i was on a bloomberg terminal several months ago). And this for a company that grew 2013 production 50% vs 2012 production and with 2013 capex 10% less than cash flow from operations. I may pick up a bit of this on Monday, which would be my first trade since starting the blog.
What a wild week. The big news was obviously Iraq. How could something like the takeover of the second largest city come out of no where like this? There are five 24 hr news networks and 3 almost 24 hr business news networks, yet this was a complete surprise. Now Iraq's 3 to 3.5 million barrels a day of production has not been significantly effected yet. Most of their production and their main export rout is in the fairly secure Shiite controlled south. But pipelines are easy things to damage. In the longer term the effect is more significant. Even if this doesn't degenerate into a wider shiite vs sunni regional war, Iraq was supposed to be a leading source of production growth with some (probably unrealistic) projections of 9 million barrels a day by 2020, which was also the stated goal of the Iraqi oil ministry. That was always a stretch, but now it seems preposterously unlikely. I don't have a bloomberg to look at it, but I wouldn't be surprised if the long end of the futures curve moved up even more than the spot price this week.
On the equities front, wow. In a week that the S&P lost 7/10ths the whole E&P subsector was up with a few notable exceptions. I was also glad to see Whiting, my biggest position, up an impressive 7.13%, leading the sector after NOG, a very small company which I've included in the coverage only because it is a Bakken pure-play.
The stand out exceptions in these good times are the Marcellus companies. Range Resources, the dominant company in the Southwestern Sweet spot of the Marcellus, announced they were issuing $500mm of new equity, an exceptionally rare thing to do at present, because of the incredibly low cost of debt. But right now Range's trailing EBITDA is about a billion and their net debt is about $4b. 4x EBITDA is high debt level and often mentioned as a "not to exceed" level in the E&P world. Range is growing production at about 20% per year, but there are tremendous capacity constraints in this area, even more so than Northern Marcellus. Northern Marcellus only has to find somewhere to put their gas. In the Southwest the gas is wet so they have to find somewhere to put all their NGLs, and especially their ethane, and they are competing for takeaway capacity with the nearby Utica as well. But that said, I think Range is indeed a premium company that deserves a premium valuation. The valuation has always just been a bit TOO premium for me. They are sitting on some of the best wet gas assets in the country, and they could drill their current asset base for decades without having to lease a new acre.
I feel that the other Marcellus gas producers were down in sympathy with Range, but the situation in the North is totally different. Cabot, for instance, is growing production while significantly underspending their cashflow. They also have no debt. They are now trading at just over 8x analyst consensus 2014 EBITDA (actually 2014 consensus ebitda as of the last time i was on a bloomberg terminal several months ago). And this for a company that grew 2013 production 50% vs 2012 production and with 2013 capex 10% less than cash flow from operations. I may pick up a bit of this on Monday, which would be my first trade since starting the blog.
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