Energy, Energy Service, Natural Gas &amp; Oil Sectors

Top 1348. Dec 20, 2005 10:12 AM

» gadget767 - Re: Re: Re: 2006 Oil Price Estimate from China

In response to Re: Re: 2006 Oil Price Estimate from China posted by Kirk:

Driver habits can easily account for more than that amount of difference. However, cars destined for sale in CA are actually built differently due to the stricter CA emission standards.

-- posted by gadget767

Top 1349. Dec 20, 2005 12:02 PM

» AL_W - Re: Re: Re: Re: 2006 Oil Price Estimate from China

In response to Re: Re: Re: 2006 Oil Price Estimate from China posted by gadget767:

Gadget,

In Calif, switching to MTBE gas resulted 6% less BTU/Gallon than the previous formula. As we switch formulas again, we chould see another drop, depending on the amount of ethanol is blended. Years back, it was widely quoted that ethanol would reduce your mileage 10%.

All of this is a political rip-off. The refiners and the State say they can make gas WITHOUT MTBE or Ethanol and meet the same clean burning requirements, but the Fed's will not allow it.

-- posted by AL_W

Top 1350. Dec 24, 2005 5:14 AM

» SteveT - Bullish and Fully Fueled

Interview with Kurt Wulff, Founder, McDep Associates
By SANDRA WARD

IT MAY NOT SPORT the catchiest name, but Needham, Mass.-based McDep Associates and its founder, Wulff, have built a big following among investment banks and individuals for in-depth, independent research on the energy industry. That's partly because he makes his research available on the World Wide Web, at www.mcdep.com1. But partly, too, because he is an enormously insightful and creative thinker. McDep is named for a ratio Wulff devised in the 1980s, while he was a top-ranked oil analyst at the former Donaldson Lufkin & Jenrette, to better appraise the value of energy companies: McDep = market cap and debt (McDe) to present value of energy (p). Last year in these pages ("Drilling for Value2," December 2004), Wulff forecast a value of Burlington Resources stock of $86 a share on $50 oil, and fantasized about a ConocoPhillips takeover of Burlington. Now he makes the case that natural gas isn't expensive at current levels, and that it one day could be worth more than oil.

Barron's: Have the prospects for energy changed since we spoke a year ago?

Wulff: It has been a great year for the stocks, so automatically you have to be a little cautious about anticipating another great year. But the long-term outlook is still pretty powerful. Demand is strong, and higher energy demand means more economic activity. The supply picture, obviously, has changed. Last year we learned Saudi Arabia could no longer produce additional light oil. That hasn't changed. We were happy when oil prices dropped back to $55 a barrel because they had gone up a little too much too soon, but they are in an upward trend. We think $60 a barrel is close to the 40-week moving average. Maybe the higher limit for now might be $80 a barrel rather than $60. We don't ever know what is going to happen in the future, but the momentum is good: Oil prices are above the 200-day moving average, the gas price is above the 200-day moving average, refining margins are above the 200-day moving average and the underlying long-term expectation is that oil could still be a lot higher. So it is better to bet on it going higher than not going higher. My vision for oil is $150 a barrel by 2010. We've only gone up threefold so far this decade and we went up 10 times in the 'Seventies, so who knows what's ahead for us? The upside is still pretty powerful.

What of the relationship between stock prices and the price of the commodity in the futures market?

The McDep ratio I use to calculate present value includes a denominator that is the value of the company's oil and gas resources depending on some oil price and gas price. Last December we were using $35 a barrel as our long-term expectation. In January I raised my long-term number to $40 a barrel and in August I went to $50 a barrel. That didn't take a lot of imagination because the six-year price of crude oil was going up at the same time. So today my values for companies are tied to $50 oil. The futures market is at $61 a barrel for six-year oil. The market is at about $60, I'm at $50 and stocks are at $40 and will probably go a lot higher yet.

ConocoPhillips buying Burlington Resources was on your wish list a year ago. What do you think of this deal?

Burlington Resources [ticker: BR] has been one of my favorite stocks for a long time, and my present value on Burlington is $86 on $50 oil. The current stock price is right at my present value. I've been looking for this deal for a long time, and so I'm delighted that ConocoPhillips [COP] bid for Burlington Resources. It obviously demonstrates confidence in natural gas on the part of ConocoPhillips because Burlington Resources is about 70% natural gas. While I quote the price for Burlington in oil terms, it is really a natural-gas value. Burlington Resources is the largest gas producer in the San Juan Basin, and Phillips was about the third-largest producer. The two together will now be the largest producer in the San Juan Basin, which is the largest gas field in the U.S. It has been a wonderful long-term property, and it just gets better and better.

What now? Should investors continue to hold these stocks?

I continue to recommend both. The deal does change the picture a little. Obviously, if you have a lot of Burlington and you want to cash in, this is the time to do it. You will get cash for half of your Burlington. Part of the rationale would be to take the cash and recycle it in something else. The rationale for holding Burlington would be to get ConocoPhillips, which was a cheap stock before the deal and is a cheap stock after the deal. If you are a taxable investor, you don't pay taxes on the ConocoPhillips part of the transaction, so you may as well buy Burlington. But, of course, Burlington isn't the best buy out there, while ConocoPhillips could be one of the best buys. You could rationalize you are buying ConocoPhillips at a slight discount if you buy Burlington Resources, because of the arbitrage discount. ConocoPhillips is my favorite among the megacaps.

What is your favorite part of the energy market?

From a commodity point of view, natural gas has to be a favorite. It has always been my favorite.

But is natural gas too high at $15?

Most people think it is, but I don't. The one-year natural-gas-price for the next 12 months is $12 per million BTU [British thermal unit]. For oil it is $63. The conversion rate of oil to gas is 5 to 1, roughly the price of heating oil. At $15 you are paying a little bit of a wintertime premium. But for the full year, at $12, you are not paying any more for natural gas than for heating oil, and natural gas is a cleaner fuel than heating oil.

What's changing is that in former years, natural gas would compete with heavy fuel oil and the high-polluting fuels. But increasingly, with the new electrical-generation capacity that runs on gas, gas competes with jet fuel or heating oil, which can also run those turbines. So, the competitive interface is heating oil. If natural gas goes to $12, or $13 or $14 or $15, that means all of it is being used as competitively as possible. In the U.K. the gas price has been around $18 per million BTU, which is really quite amazing.

But there are big shortages in the U.K.

It's a classic case. The U.K. converted to natural gas in the last 30 years and it has been wonderful for the country. But they have been relying on the North Sea fields, which are now running down, and the substitutes of LNG [liquefied natural gas] are not coming in fast enough. The LNG market is making a point on natural gas very well, because now we have Spain and the U.K. and the U.S. and Japan all bidding against each other for the incremental LNG supplies. There aren't very many available. A tanker might set out for one of these places and change direction midstream.

The competitive equivalent for LNG, again, is oil, not coal. At $18 a million BTU, natural gas is at a premium, but there are some places where you can't burn oil as a substitute for gas. Eventually, gas will be worth more than oil.

What are you referring to?

California is bringing on new gas power plants as we speak. Some of California's electricity comes from coal-fired plants, and environmentally conscious people are objecting to importing electricity from Wyoming that might be generated by a new coal plant.

Everyone's focus has been on $100 oil. Maybe the focus should be on how high natural gas can go. What's your view?

The one-year futures price, or 12-month strip, which is the quote for the next 12 months averaged, is higher than the six-year futures. The six-year average price for gas in the futures market is $9, not $12. That would indicate most people think the price of gas is going to come down. Maybe it will for a while, but in the end there is no reason why natural gas should be any cheaper than oil, and $9 on gas should move up to $12. That's a big, unexploited inefficiency.

An increase in natural-gas prices would be more of a surprise to investors than an increase in oil prices. ConocoPhillips will say they didn't bet on these high prices, but six-year gas going from $9 to $12 makes the Burlington Resources acquisition look a lot better. Burlington Resources is selling at a full net present value, yet it is only 4.6 times unlevered, based on cash flow. So in only two to three years, Conoco gets half its investment back. It all boils down to where the price of the commodity is going. If the price of the commodity stays anywhere near the same level, it is a wonderful deal. The knock on the deal is that Conoco could have bought its own stock back because it is cheaper than Burlington Resources'. I calculate ConocoPhillips' present value before the deal was $100, and its stock was only around $60 or so. After buying Burlington Resources, I put Conoco's present value at 93. If you give them credit for synergies and cost savings, it might be 95. So there are a few dollars a share of value dilution.

What are some takeover candidates?

Close peers to Burlington are Anadarko Petroleum [APC], Devon Energy [DVN] and EnCana [ECA]. I don't cover Apache [APA] but you could probably include it, though it is a different kind of company. XTO Energy [XTO] is also among the large-cap independents I cover.

What's the most appealing?

I'm recommending all of them, but Anadarko is a more obvious takeover candidate because it is out of favor with investors. It was the favorite for most of the 'Nineties, and then investors became disenchanted and the company went through a management change. In the end they couldn't grow production and have retrenched to an asset play from a growth play. Not long ago they sold off their short-life properties to concentrate on their long-life properties, and that reduced their cash flow. It should have increased their multiples, though they haven't gotten the increase in the stock market yet. They put themselves up for sale a few years ago and nobody was interested.

Who would be a likely buyer?

Any megacap. The most likely is Royal Dutch Shell. They've gone through their own troubles and now they are ready to roll. They've been quiet. They haven't been doing deals. They had a controversial cost overrun at their LNG plant in Russia. It's going to cost $20 billion instead of the estimated $10 billion, which is often what happens when we are in this kind of a trend: Everybody tries to build something and it is always much more expensive to build than people think. That contributes to the rising commodity price.

How are you playing the LNG market?

I am paying very close attention to the linking of the global gas markets through LNG, but in the end you play it through natural-gas producers, and that leads to my ultimate natural-gas stock. My most interesting recommendation now is Gazprom. This month the Russian parliament has approved the lifting of ownership restrictions on Gazprom, and President Vladimir Putin should be signing off on that before the end of the year. Before, only 20% of Gazprom shares could be owned by non-Russians, and the stock could only be traded on certain exchanges. There was a little bit of a premium between the Russian shares and the non-Russian shares. Once the restrictions are lifted there should be so much demand for the stock that that premium will easily be absorbed.

What's your target for the stock?

It's $120 a share, and the stock is trading at $77. What's interesting about the present value is that it is tied to what they get for their gas, and that's only about one-fourth of world levels. The Russians are getting only 2.50 rubles per cubic meter -- coincidentally, rubles per cubic meter is the same as dollars a million BTU, or close enough. That's about $2.50 a million BTU based on $15 on a near-month basis, $12 on the next 12 months and $9 on the next six years. But we think the $9 is low, so there is a four-fold-type potential gain for Gazprom.

What are they doing to get the price to the world level?

It is controversial. Gazprom's pipeline to Europe goes across other countries, including Ukraine, and Ukraine apparently steals gas from the pipeline. They are arguing right now over transit fees. Gazprom wants to get the price up and Ukraine wants to get a big chunk of it. Gazprom is building a pipeline under the Baltic Sea that won't pass through Ukraine and other countries. They also built one under the Black Sea to Turkey and southern Europe. They'll have LNG going across the Arctic, and they will be part of an LNG project in far eastern Russia.

What about Russian price controls?

They are being relaxed gradually. There is no assurance they are going to go away, but I think they will. In Gazprom's case there is one oligarch who might own 10% or so. The Russian government now owns 50% of it, and presumably a million Russians own the stock. Twenty percent is owned outside of Russia by people in the global capital markets. So the interests are aligned, and if Gazprom makes a lot of money, the Russian government gets half of it and Russian citizens make a lot of money. The international guys can help drive up the price, and if Gazprom becomes a trillion-dollar stock eventually, it is a great flagship for the whole country. There is talk about Gazprom being bigger than Exxon some day.

Gazprom does have an ambitious energy strategy. They want to export LNG to the U.S. Russia has more natural gas than Saudi Arabia has oil. Gazprom has 90% of the production in Russia, and it is not hard to make the case they already own or have access to more resources than any other company. They are bent on marketing those resources, so it should follow they get more recognition in the stock market. It has the lowest McDep ratio of all the major companies at 0.64 on a net present value of $120. They generate $23 billion in cash flow a year. Put a multiple of 11 times on the unlevered cash flow, which is a little higher than normal because Gazprom has very, very long-lived reserves, and you get to $120 present value.

How about an income stock?

In the income category, the Canadian Oil Sands Trust is still one of my favorites. They doubled the dividend, but the yield is still 3.1%. If you want a 10% yield or so, my recommended stock is Penn West Energy Trust, another Canadian company. It is a new trust formed this year, the largest in Canada after Canadian Oil Sands. You can't buy it on a U.S. exchange, though they expect to list in the U.S. next year. The yield is 9.82%, but that will probably increase in the next year to more than 10%. The distribution is only 50% of the equity cash flow, so they are still reinvesting 50% of their cash flow, which will help keep that distribution going indefinitely. Reserve life is about eight years.

The McDep ratio on Penn West, at 1.16, is not very low compared with most income stocks, but they have a long-term project I don't count in my McDep ratio yet. They own a major portion of a giant old oil field in Canada. They will be applying tertiary recovery techniques and injecting carbon dioxide to extract the oil in the next two years. That will add a lot of cash flow. It is actually kind of a miraculous project because, as Canada is a signatory to the Kyoto Treaty, there are companies in Canada that have to get rid of their CO2 emissions. CO2 is a useful product to help get the last bit of oil out of old fields in a clean way.

What's your pick in the small-cap category?

Among small-cap independents, Cimarex Energy [XEC] is a real laggard. It is the only one of my stocks that hasn't gone up much this year. It is run by a fellow by the name of Mick Merelli, who was an officer at Apache in the late 1980s and who has had a 10-bagger-type experience in a company called Key Production. Cimarex acquired Magnum Hunter this year, and I thought it was a good acquisition that added value. But the stock has gone nowhere.

Some years ago Cimarex made an acquisition and it took a few quarters to absorb the new company. They lost momentum in their business. Investors might be concerned about a replay here. Cimarex has a low McDep ratio, 0.69, and has a shorter reserve life, seven years. It is 71% gas and it is selling at 2.8 times unlevered cash flow. They are drillers. They look for wells that will produce a lot of production initially and then drop off. It is a rate-of-return business, and if they can make a 20%-25% rate of return on it, they do it. They've been successful for a long time doing just that, as opposed to somebody who just sits on assets and watches them grow in value.

Thanks, Kurt.

Kurt Wulff's Picks
Company Ticker Recent Price
ConocoPhillips COP $59.35
Anadarko Petroleum APC 96.26
Gazprom ADR OGZPF 77.60
Penn West Energy Trust ADR PWTFF 31.94
Cimarex Energy XEC 41.26

source: Bloomberg

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URL for this article:
http://online.barrons.com/article/SB1135...
Hyperlinks in this Article:
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-- posted by SteveT

Top 1351. Dec 24, 2005 5:25 AM

» SteveT - Hot as Ever

SIZING UP SMALL CAPS
By RHONDA BRAMMER

DESPITE RUMBLES FROM WASHINGTON, mounting skepticism among the pundits on Wall Street and assurances from the oleaginous spokesmen for OPEC, energy prices occasionally bend but refuse to break.

Sure, the price of crude, which briefly spiked above $70 a barrel in the wake of Hurricane Katrina, has slipped to about $58 these days. But that's still a fair piece north of the $43 or so where it started the year.

And natural gas, after falling briefly to around $9 per million British thermal units in November, bolted sharply higher again this month, soaring to well above $15 per million BTU, before slipping to $11 and change on Friday -- still a far cry from around $6 a year ago.

Indeed, natural gas, especially reserves of the stuff right here in the good old U.S. of A., is becoming a very hot commodity. As prices have risen, giants of the oil patch, like ExxonMobil, Royal Dutch Shell and BP, which long ignored the continental U.S. as they set their sights on finding huge deposits of crude abroad, have suddenly been taking a keen interest in domestic natural gas and beefed up their spending accordingly. In the fullness of time, this turn homeward will translate into more gas.

But not tomorrow. And, meanwhile, the stocks of energy producers continue to rise, as merger activity heats up. Just two weeks ago, in the largest oil-and-gas deal in years, ConocoPhillips agreed to fork over a cool $35 billion for Burlington Resources. About 80% of Burlington's reserves are North American natural gas, for which ConocoPhillips has agreed to pay just under $3 per thousand cubic feet.

The comparatively rich price underscores a conviction among the big-buck buyers that high energy prices are here to stay. Indeed, by one analyst's reckoning, for Conoco to earn a 10% return on its Burlington purchase, the long-term price of natural gas would need to average at least $8 per million BTU.

As the accompanying chart shows, shares of exploration and production outfits have gone through the roof this year, soaring almost 70% and far outdistancing small-caps (the S&P SmallCap 600 is ahead 8%) and large-caps alike (the S&P 500 is up 5%).

Is the buying spree overdone?

Probably yes, at least in the short run. Come some warm weather and once damage by Katrina to Gulf Coast pipelines is repaired, natural gas prices are likely to moderate. But, contrary to the skeptics and the fervent prayers of consumers, energy prices aren't destined to collapse. Even an energy analyst like Jon Wolff at Credit Suisse First Boston, who sees the E&P group in general as "overbought" near term, is forecasting crude of $62.50 a barrel, on average, for next year, and gas of $7.75 per thousand cubic feet, or mcf.

The Burlington deal is ample proof that big oil outfits, with dough piling up on their balance sheets, are more than happy to write hefty checks, a trend not apt to stop anytime soon. Among small-caps that might prove attractive to an energy-hungry acquisitor Wolff mentions enhanced oil recovery outfits like Whiting Petroleum (ticker: WLL) and Denbury Resources (DNR). He's also keen on Range Resources (RRC), an onshore gas producer that he believes can dramatically increase its long-life reserves from a vast drilling inventory of low-risk prospects in Appalachia.

The Conoco-Burlington deal was priced at 5.6 times enterprise value (market cap plus net debt) to Ebitda (earnings before interest, taxes, depreciation and amortization). That price tag was hardly a wake-up call that the industry was wildly undervalued, Wolff argues, since his universe of 50-plus E&P stocks was already selling at more than that -- at an average of six times enterprise value to Ebitda.

Some E&P companies, obviously, fetch woefully less than that lofty average of six times. And among them is one selling at a mere 3.8 times estimated 2006 Ebitda: Cimarex Energy, a company, readers may recall, we mentioned positively in February, at $34 and change. The stock is now $41, up about 17%. Compared with the 60% gain of the average E&P stock this year, that move is darn anemic. (For more on Cimarex and natural gas, see this week's interview1.)

Cimarex (XEC) lost much of its allure as a take-out target by becoming the acquirer itself, buying Magnum Hunter in a deal valued at some $2 billion, which closed in June. Paying $2.33 an mcf for proved reserves, Cimarex doubled production and tripled reserves, but slightly diluted this year's earnings.

As part of the deal, moreover, Cimarex not only took on some debt, but it also booked undeveloped reserves, which before it had staunchly refused to do, and, more dismaying, because Magnum Hunter had sold some of its production forward, nearly a fifth of total 2005 production was hedged. A painful prospect in a year of soaring energy prices.

What attracted us to Cimarex in the first place was its conservative way of booking reserves; its big holdings of natural gas in the Lower 48 (it's still about 70% gas); its robust balance sheet; its enviable record of boosting production and replacing reserves, all via the drill bit; its veteran management, headed by F.H. "Mick" Merelli, former president of Apache, and -- last but not least -- its dogged refusal to sell forward or hedge its production.

Mick Merelli, however, when we chatted with him back in February, insisted it would be only a matter of time until the hedges were rolled off, the debt was paid down and the undeveloped reserves drilled.

What's more, while $2.33 an mcf for proven reserves might look dear -- it appears far less so in the wake of the Burlington buyout at $2.77 an mcf -- Merelli argued at the time that Magnum's properties in the midcontinent fit snugly with Cimarex's own, that intriguing prospects in the Gulf didn't cost Cimarex all that much and, best of all, Magnum's sizable footprint in the Permian basin, including huge blocks of territory that Merelli knew well, offered a myriad of high-return prospects where Cimarex could sharply accelerate its drilling.

True to his word, Merelli has already paid off a chunk of debt, the hedges (which clobbered earnings in the third quarter) are being rolled off (they'll disappear entirely by year end 2006) and Cimarex's drilling program is going gangbusters.

The bottom line: For all of this year, even with damage from the hurricanes, if one-time charges are excluded, Cimarex should earn about $5 a share.

Next year's earnings manifestly depend on the price of oil and gas. But even if one is bearish on energy prices and assumes that oil averages only $45 a barrel and gas, $6.70 an mcf -- way below what Cimarex netted this year -- the company would still earn some $3.45 a share and, if priced at 5.5 times Ebitda (still below the industry average of six), would fetch $48.

So calculates hedge-fund manager Tim Curro of Manhattan-based Value Holdings; the fifth largest position in his $250 million hedge fund is Cimarex.

Should oil average $62.50 next year and gas, $7.75 (as Credit Suisse's Jon Wolff forecasts), Cimarex would earn about $5 a share and, at 5.5 times Ebitda, would sell at $63. With $9 gas and $60 crude, Cimarex would earn over $6 and, at 5.5 times Ebitda, the shares would top $70.

In other words, it's still a cheap stock.

URL for this article:
http://online.barrons.com/article/SB1135...

Hyperlinks in this Article:
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-- posted by SteveT

Top 1352. Dec 31, 2005 4:39 AM

» SteveT - Twilight for Oil?

Matthew Simmons, Chairman, Simmons & Co. International
By SANDRA WARD

SINCE PUBLISHING Twilight in the Desert: the Coming Saudi Oil Shock and the World Economy this past summer, and touching off one of the great debates of the early 21st century, energy banker Simmons has been squarely in the spotlight. Simmons argues that Saudi oil fields, contrary to reports, have been in decline for some time, and he views skeptically Saudi claims that it can adequately boost supply to meet accelerating demand. Simmons, who has headed the Houston-based energy investment banking firm Simmons & Co. International for 30 years, is no stranger to bold calls and controversy. His vision of higher energy prices through much of the 'Nineties never really materialized, for instance. For why it's different this time and oil could be headed to $200 a barrel by 2010, give a read.

Barron's: The premise of Twilight in the Desert is that Saudi Arabian oil reserves aren't enough to meet demand and oil prices are going to skyrocket. How did you reach that conclusion, and any second thoughts since you wrote the book?

Simmons: In about the second week in May I made the last changes to the book. I wondered if I could have made a mistake, and yet I felt as confident as if I was a lawyer and had just submitted my papers to the Supreme Court that I couldn't have made a mistake. The data was too compelling and it was the Saudis' data, and judging from the unbelievable knee-jerk negative reaction, I clearly hit a chord.

But your position has been controversial.

The very best criticism -- the most detailed and the best written -- was called "Another Day in the Desert" and was written by a very highly regarded firm in Calgary. But where they went wrong was their assertion that my claim is Saudi Arabia's oil is about to go into a sudden and irreversible production collapse. That's wrong. The summary of my book is the myth that the oil fields could grow forever is false. There is a lot of evidence that each of these key oil fields are very mature and we should start to expect their decline. An analysis of papers from the Society of Petroleum Engineers form the basis of the book. They provided a massive paper trail over three decades of how these oil fields were getting more and more mature and having a tougher and tougher time.

People don't dispute we have reached peak oil production in Saudi Arabia. But they disagree that it is a crisis because advances in technology and other countries' reserves will offset any decline there.

It is a great thesis but there is no data to support it. The book actually is full of praise for the fact they are using the single best technology known to man to fight these problems. It is just that the problems are bigger than the technology. It was the basic understanding of modern oil-field technology that led me into becoming such a worrier about the decline in rates we were creating through the technology. I've taken big issue with the major oil companies, who have talked for the past five to seven years about how they were going to finally start growing their production. They weren't looking at their own numbers. The technology is basically making oil and gas come out of the ground far faster than we could ever do before, and it's creating decline rates of 30% a year when it used to be 3% a year, and it is not recovering vast amounts of additional oil.

The Saudis' response to your concerns has changed, hasn't it?

They have dropped what was a very loud critical campaign. As recently as May they said they could produce 15 million barrels a day for 50 to 75 years. Now the claim is we can develop 12-to-12½ million barrels a day by 2009 by doing five new projects. But the projects won't happen for several more years because they can't get access to enough drilling rigs. The projects they are talking about are very technically demanding projects. They are coming to the end of the very, very highly productive parts of these fields, and they are turning to parts of the fields where the oil comes from rocks that are far tighter and where you need a lot more intense drilling and a lot more intense water injection. They are just starting to go out to bid on the most ambitious of the new projects, the Khurais Field, which is a field that is potentially going to produce 1.2 million barrels a day in 2009, half their new supply. The new cost estimates are $11 billion, and one of the big costs are two massive parallel pipelines coming from the Persian Gulf to inject about seven million barrels of sea water a day into the field to get 1.2 million barrels of oil out. So it gives you a pretty good snapshot of the intensity of these new projects. The risk they don't produce that much is high.

Can the Saudis keep their current production where it is for quite a while? That is certainly a likelihood. But there is a real but unquantifiable risk that it starts into the same type of decline we've seen in the North Sea. It is utterly obvious the North Sea oil peaked in 1999. In 1995, after a few hours of analysis, I made a presentation in Aberdeen saying with almost total certainty the North Sea would peak between 1998 and 2000. Yet the 10 major oil companies operating in the North Sea were confident the North Sea would not peak until 2010. They estimated by 2000 the U.K. and Norway would be producing 7.3 million barrels a day: the U.K. at 3.6 million and Norway at 3.7. It turns out in 1999 the U.K. and Norway produced just under 6.1 millions barrels a day, and by this summer they are estimated to be down to about 3.5 million barrels a day. You are talking about the most technically advanced oil companies in the world looking at their own fields and getting mesmerized by modern oil-field technology, and the mesmerization turns out to be a myth.

Yes, but does that hold true for other areas such as, say, Nigeria?

It holds true for every area with the exception of heavy oil and unconventional oil. It takes a lot more to refine them, and also they just don't come out of the ground very fast. There's less of a likelihood of production declines with heavy oil because you can't get it out of the ground fast enough to have a production decline. A perfect example of a really heavy oil field is one of the top 10 fields in the United States: the Midway-Sunset Field in Kern County, Calif. It was discovered in 1888 and is producing about 100,000 barrels a day, and it probably will for about another hundred years. But it is a massive steam-injection mining program.

What about the argument that demand will adjust to meet supply?

The likelihood of demand stopping is zero, unless we have a bird-flu pandemic. Demand is still accelerating. For the top 25 emerging markets, GDP [gross domestic product] change year-over-year is averaging up 5.5% for 25 countries. Argentina is 10.1%. Chile is 5.2%. China is 9.4%. Hong Kong, 8.2%. India, 8%. Indonesia, 5.3%. Malaysia is 5.3%. The Philippines is 4.1%. Singapore is 6%. Embedded in that is a continuation of an inexhaustible increase in the use of oil, particularly in the countries where they are barely using any oil. The wealthier they get, the faster they start using oil. The idea that $60 oil is really hurting the emerging economies is a myth. It doesn't seem to be affecting them at all. The Energy Information Administration numbers that came out recently showed the U.S. crossed 22 million barrels a day of petroleum use, a brand new record. So it is not stopping the U.S., either. To everyone's surprise, the economy grew by 4% in the third quarter, even with the hurricanes. That was when we had almost $65 oil.

But oil supply isn't going to grow. As we move into the brutal brunt of the winter, we could easily have 45-to-60 days where demand is basically two-to-four million barrels a day higher than supply. Then we will test how robust our inventories are, because we've never experienced that kind of a stock draw before. In the United States, in some areas we must be down to hours of spare inventory on a days-use basis, particularly in diesel fuel. When 85% of the things in Wal-Mart we buy come from China, the implications for trucks on the highway system is profound. Those trucks are chugging along getting three-to-six miles per gallon, which is why we are setting an all-time record in the use of diesel fuel. I was in Toronto a few weeks ago and there was a front-page story in the Globe and Mail about a tire shortage. The tires are massive -- 13 feet high and six feet wide -- that are used in strip-mining coal and in the oil sands. These tires have a short shelf life because they are used so intensively. We are in the middle of a rubber shortage, so there is a tire shortage. We are not going to have big growth in oil-sands production if we can't expand. We are starting to bump into capacity limitations in the funniest places: tires on big trucks, rigs, people, refineries, pipelines, tankers, well-head capacity.

What do you say to people who view you as an investment banker talking his book? That somehow your thesis on oil will help you get more business?

I'm going smack against and totally opposite from what the major oil companies are saying. So if I'm trying to get more business by disagreeing with them, that's a clever ploy. And if I turn out to be wrong, then I basically have destroyed my career. I would never take the business risk in the hope it would make me a penny an hour selling books.

Are you sticking with your forecast for $200 oil?

Thanks to John Tierney of the New York Times I've placed a $5,000 bet that oil prices will average $200 a barrel in 2010. I don't have any idea where oil prices are headed but they could easily be above $200 a barrel. At $65 a barrel, or 10 cents a cup, we are still grossly underpricing oil, which is why it doesn't have any impact on demand. As the markets get tighter, sooner or later we are going to have shortages. And the two times we have ever had shortages in North America within 90 days, the price of oil went up threefold.

Your critics call you an alarmist. Do you see yourself as an alarmist?

I'm absolutely an alarmist. I'm giving as many speeches as I can because if we don't understand this it will be the single worst event of the 21st century.

What will be the consequences?

We could start fighting over oil and natural gas because we don't have enough. Look at some of the abhorrent individual behavior in the 'Seventies when people were in gas lines; people stole gas and people became violent. We could start to see regional competition, and sooner or later we have country competition and we are in the middle of a really ugly energy war.

So if reducing demand isn't an option, what do we do?

Let's actually assume there is a reasonable chance this awful peak oil and peak natural gas is real and do something about it, so that if it turns out to be real it isn't a show stopper and if we did something and it turns out it wasn't real, we bought ourselves an insurance policy. We could do something on a global basis that has the intensity of the way we tackled the Marshall Plan when we rebuilt Japan and Europe after World War II. We have to figure out how to make a massive change in the way we use oil so that if it turns out by 2020 we only have 60 million barrels a day versus 120 million barrels a day we can cope. We need to make a major shift in the way we distribute goods over long distances. Go for zero tolerance in shipping goods by trucks over long distances and get the goods on a rail bed till you get them to water and then send them on water to as close as possible to where they will be delivered. By making that transformation, we take a huge chunk out of the energy intensity of shipping goods and we also get trucks off the road system, which saves lives and has a major material impact on traffic congestion. Traffic congestion is Public Enemy No. 1 through 5 on our current fleet of passenger cars. So you probably end up getting greater passenger-car efficiency, then a huge program of new CAFE [Corporate Average Fuel Economy] standards that takes about 25 years to implement. Then we encourage business leaders to start liberating their workforce and let workers work any place they would like to and pay them by productivity versus the system we have in place. Productivity improves as does worker satisfaction. Then we re-engineer how we grow and distribute food and get away from this ridiculous system we have today of creating ornamental food that looks good all year long but doesn't taste very good because it comes from too far away. Have you ever had blueberries from Chile? To have food taste good it has to be grown locally. We are going to end up going back to bottling and canning.

What?

Do you ever cook pasta? Do you cook tomato sauce? Have you ever used local tomatoes?

Yes. Yes. Yes.

Tomatoes by can are fabulous tomatoes because they have been canned at the peak of the tomato season, and that process is still as good today as it was when I was growing up. Then we have to take a page out of Whole Foods, one of the most successful food models ever, by having a stringer system of organic farms within 20 miles of their stores. Organic farms are just victory gardens. Making all of those changes at the same time will leave our economies in better shape. One of the things we have to do to make that plan work is to dredge all of our ports, all of our river systems, and rebuild all of our railroad systems. That will create the biggest construction activity the world has ever seen. It will also create such a shortage of blue- collar workers that the blue-collar workforce will be more prosperous than it has ever been so it won't mind paying $10 a gallon or more for gasoline.

People make the point you are close to members of the Bush administration. Yet the Bush administration doesn't seem to be acknowledging there is much of an energy problem.

Most people in Washington listen to the American Petroleum Institute and to the major oil companies. They lobby, I don't. But in Washington in October there was a two-day workshop at the International Academy of Science & Engineering on peak oil. A few weeks ago there was the first hearing in the history of the Congress on peak oil. A few months ago Energy Secretary Samuel Bodman sent a letter to ExxonMobil's Lee Raymond in his capacity as chairman of the National Petroleum Council and requested the NPC roll up its sleeves and do an intensive study of all issues related to peak oil. In the last couple of months Congressman Tom Udall and Congressman Roscoe Bartlett, one a Democrat, one a Republican, formed the Peak Oil Caucus, and around 13 or 14 congressmen have signed on. For an issue that didn't have any traction, it is gaining big momentum.

What do you say to those who say this is about the umpteenth time we've heard we're running out of oil?

Most of those now most vocal that peak oil is a silly issue or decades away are the same folks who were equally as dismissive of the naysayers who warned the U.S. natural-gas supply was in decline three-to-five years ago. They were contemptuous of a handful of us pessimists that were warning in 1999 through 2002 that we had a massive natural-gas crisis on our hands because we built almost 30% of our generation capacity for electricity and all growth from here on out on gas-powered power plants thinking we had an abundant amount of natural gas. Natural gas has peaked and we are in decline. Recently there was a pretty frightening article in The Wall Street Journal that the energy leadership of New England realizes if we have a really cold winter we could have electricity blackouts this winter. That's dangerous. If we have an electricity blackout of any intensity in the winter, we'll then have an enormous rush to rent power generators and we'll drain the diesel pool and have diesel shortages. It will begin the great American nightmare.

This is Barron's, so how do people profit from this?

If oil prices don't collapse, energy will be the best place to invest in 2006.

Even though the stocks have had such a run-up?

Yes. Maybe they will be only up 1% and everything else will be down 10%, but I doubt that. The current prices we have for energy stocks are finally high enough to start some really significant spending on badly needed projects that have been ignored for a long, long time. The major oil companies can't spend money fast enough. The average E&P budget this coming year is up 35% to 50%. The problem is there are no more drilling rigs. So the backlog in the petroleum-equipment sector is starting to build.

What kinds of companies will benefit?

Engineering. Valve companies. Flange companies. Pipe companies. Construction companies. The oil-service industry. Recently our analysts were updating our year-end earnings models. There were about three instances in a row in which earnings were expected to go from $2 in 2005 to $8 in 2007.

Why does ExxonMobil have a different view of where the oil price is headed?

I don't have the vaguest idea why they could ever think we are going back to $25 oil other than their business model desperately needs that to happen to have their long-term strategy work. High oil prices are very bad news for big oil. The higher the price, the more proven reserves they've already booked they lose in these foreign concessions, because once their projects hit their payout targets, then the host government's share rises. I think the major oil companies are lost in the wilderness right now.

Thanks, Matt.

URL for this article:
http://online.barrons.com/article/SB1135...

-- posted by SteveT

Top 1353. Jan 1, 2006 12:57 PM

» lcha - Re: Twilight for Oil?

In response to Twilight for Oil? posted by SteveT:

I was talking to the head of our resources division, the exploration arm of our company, at our Christmas party last week. He is completely frustrated and said this is the worst year he has ever had. Why? He can't get drilling rigs. He can't get completion rigs. The crews on the few rigs he is getting are disappointing. He has a whole slew of prospects to drill ad he can't. The larger oil companies have essentialy leased up most of the drilling rigs and the smaller players are just out of luck. Anf there are a LOT of small players.

-- posted by lcha

Top 1354. Jan 6, 2006 11:56 AM

» gadget767 - Re: Re: Twilight for Oil?

In response to Re: Twilight for Oil? posted by lcha:

I notice today that Transocean (RIG) has leased three jackups with an option to buy. The high quality drilling names (like RIG, NE, etc) have all broken out of trading ranges to new highs and are looking incredibly strong, as if there is new money flowing into the oil service area. I don't think it's just the price of oil(although oil is at $64 while I type this)as earnings estimates have been going up and so have target prices. It looks like inflows of new money to me.

-- posted by gadget767

Top 1355. Jan 6, 2006 1:00 PM

» lcha - Re: Re: Re: Twilight for Oil?

In response to Re: Re: Twilight for Oil? posted by gadget767:

As I related a few post up, our resources people are frustrated by the lack of available drilling and completion rigs. As Kirk rightly pointed out, this is an opportunity and hopefully there is new money chasing it.

Unfortunately, for the time being, small companies like ours are going to suffer delayed revenues as we can't get our wells drilled.

-- posted by lcha

Top 1356. Jan 9, 2006 5:57 AM

» lcha - Cash-flush energy companies ready to loosen purse strings

With an estimated $75 billion in cash in their coffers, the world's 20 largest oil and gas companies are expected to go on a spending spree in 2006.

They'll be increasing their combined exploration and production budgets by as much as 15 percent.

And they'll also be spending cash on more mergers and acquisitions.

In fact, 2006 could be the biggest year for energy mergers and acquisitions since the late 1990s, predicts consulting firm PricewaterhouseCoopers in a recent report.

Meanwhile, a survey of 325 oil and gas companies by Wall Street investment firm Lehman Brothers Inc. found that these companies expect to spend an aggregate $238 billion on exploration and production in 2006 -- an increase of almost 15 percent over 2005.

"Spending budgets will go up, and merger and acquisition activity will go up, too," Rick B. Roberge, head of PricewaterhouseCooper's energy acquisitions division, recently told media.

The cash glut and aggressive spending plans are the result of a lengthy run of record high commodity prices for oil and gas.

In December, Houston-based ConocoPhillips Co. announced a $35.6 billion deal to acquire Houston-based Burlington Resources Inc., which will increase ConocoPhillips' natural gas production by more than 50 percent.

At about the same time, the company also announced a capital expenditures budget of $10.5 billion for 2006, a 45 percent increase over 2005. Of that, $6.7 billion is earmarked for exploration and production.

Chevron Corp., the second-largest U.S. oil company, has announced plans to raise its capital spending by 35 percent to $14.8 billion.

Royal Dutch Shell, whose U.S. exploration division is based in Houston, has said it will increase spending 27 percent to $19 billion, with $15 billion going to exploration and production and $4 billion into refineries and marketing.

But if oil prices remain above $50 a barrel, many energy companies -- particularly independents -- will be looking for acquisitions to secure natural resources far more quickly than through the drill-bit, predicts PricewaterhouseCoopers.

The consulting firm believes such deals could top $383 billion, the record set in 1999.

This year's energy M&A total, including the pending ConocoPhillips/ Burlington deal, is expected to hit $367 billion.

Houston-based companies whose names frequently come up as potential acquisition or merger targets include Anadarko Petroleum Co., Apache Corp., EOG Resources Inc., Newfield Exploration Co., Noble Energy Inc., Plains Exploration & Production Co. and Ultra Petroleum Corp.

Among the most active potential buyers trolling the waters for mega-deals are likely to be international oil companies, particularly China's CNOOC and CNPC, as well as Russia's Lukoil.

Also on target for continued consolidation are regulated utility companies. PricewaterhouseCoopers expects to see such consolidation result in a small number of "super regional" utility companies.

Possible players could be nonregulated utility companies, which for the first time are allowed to make such investments as a result of the repeal of the Public Utility Holding Company Act in the Energy Act passed by Congress this year.

Private equity firms and hedge funds are also expected to continue their investments in power generation assets.

-- posted by lcha