How To Invest in Oil & Gas Stocks – Part II

What are the questions that educated investors ask in oil and gas?

Last month I gave investors 10 questions they should be asking management teams, or searching for on the company website, in a recent article. They were basic questions, and you can read them here. After those first 10 are answered, you know how much production a company has, how fast they’re growing, how much cash or debt they have etc. But if you’re still not sure if you want to invest in the company after all that, or just want to know more…what are the right questions to ask? What pitfalls or opportunities might an investor uncover?

1. Decline rates are something management teams don’t really hide, but don’t really talk about either. Every well has declining production until it’s uneconomic. The new shale gas plays often have 85% decline in production in the first year. Tight oil plays (Bakken, Lower Shaunavon etc) have 75% initial decline rates. Decline rates are increasing over time now as the industry drills deeper and tighter plays. Ask management what the initial decline rate is, both company wide, and specifically on their main, big play that they believe will be the growth engine of the company. Then ask what the decline rate flattens out to it’s usually 20-30%.

Why is this important? Because many investors, when forecasting growth, use the only public numbers given for a well – the ones in the press release. Most companies have a production decline graph in their powerpoint, but few actually say what the production levels in the wells in the area flatten out at.....Read the entire article.

What Really Caused The Oil Price to Collapse?

What really caused the oil price to collapse? Philip Treick says it’s not what everybody believes. Conventional thinking believes the oil price collapsed because of the dropping global demand from a world wide recession sparked by the US sub-prime fallout. Treick, founder and principal of Thermopolis Partners LLC, has a slightly different view. He explains how everything – the oil price collapse, the global economy collapse – started with an unannounced policy change in China towards its currency. More importantly, he uses his theory to tell investors what to look for in the coming months and years that will guide us in finding profits. His charts, reproduced below, provide a sharp image to back up his comments.

KS: Most people think the collapse in the US sub prime housing crisis caused the global recession. But you don’t. Why is that?

Treick: Well, I point out if you look at mortgage equity withdrawn in the United States – that peaked in late 2006. Identifying that point in time as the top of the credit cycle, our credit based economy had already started to contract prior to the collapse in oil and copper. So one can’t say that the credit contraction was the sole cause of this collapse in commodity prices, because it was already in full force. It definitely contributed to it, but it wasn’t the sole cause. Something else had to contribute. That something else was an unannounced change in currency policy out of China.....read the entire article, interview and charts.

Increased Natural Gas Pipeline Capacity in US Is Bad News for Canadian Natural Gas

A new natural gas pipeline in the United States is allowing cheap gas from the Rockies to displace more than 10% of Canada’s gas exports to the Midwest US, forcing more Canadian gas into storage and lowering natural gas prices for Canadian producers. The 1,679 mile, $4.4 billion Rockies Express pipeline, or REX, is providing about 1.5 billion cubic feet per day (bcf/d) of cheap gas from the Rockies through the Midwest to Ohio. The latest section of REX just opened June 29.

The new pipeline is displacing about 600 million cubic feet per day (mmcf/d) of Canadian production, says Jack Weixel, director of Energy Analysis for Bentek Energy. Bentek provides specialized energy pipeline information to clients in the oil and gas sector in North America. Weixel estimates the mid-continent corridor of pipelines send just over 5 bcf/d of gas, net, to the US from Canada (some western Canadian gas goes back into Southern Ontario via Michigan). “It has pushed off about 600 million cubic feet per day off the Northern Border Pipeline, which runs into Midwest pipelines at Ventura, Iowa,” Weixel told me over the phone from his Colorado office.....read the entire article.

How to Invest in Oil & Gas Stocks

Investing in oil and gas stocks is actually quite simple, even if you don’t know anything about the energy industry. (My friends in Calgary would say I am living proof of that.)

From my experience in speaking with management teams and reading research reports, I’ve put together a basic information list for retail investors doing initial research into oil & gas companies. It’s not exhaustive, but the answers should provide the basic information to decide if you want to do more due diligence.

Either call management, or go to the company’s website and look at its corporate presentation. The Top 10 bits of information I want to find out initially is:

1. How many barrels of oil per day (bopd, or “boe” for natural gas – barrels of oil equivalent) is the company producing, and how quickly have they grown production in each of the last 3 quarters.
2. How much of their production is oil and how much is natural gas (gas prices are very low right now and doesn’t produce much if any cash flow for companies)
3. How much net cash or net debt do they have? This industry uses a lot of debt, so if a company actually has net cash, they could grow more quickly because they have an entire untapped line of credit waiting to go drilling, and grow the business. And of course no debt means no debt payments and flexibility in doing business......Read the entire article

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