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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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US Shale Winners And Losers – Part Three

I think that many people are misreading the purpose of this series on $80 oil winners and losers. Most are looking at the most superficial message; as I mention specific companies who run into spend difficulties in a depressed oil environment, they imagine that I’m bashing the companies and telling investors to stay away. Nothing could be further from the truth.

We’ve seen forward-looking CEO’s report this quarter on how lowered margins will trim projected Capex. We’ve heard from companies as well-financed as Hess (HES), which announced an $800m reduction, Conoco Philips (COP) and Rose Resources (ROSE) and particularly Continental Resources (CLR), the best positioned Bakken participant there is.

But understand my point: Spend reductions will lead to production growth reductions, no matter what fantasy world these CEO’s also try to invoke on these conference calls. And as we come to smaller market cap and more specialized oil companies, the fantasies from their conference calls seem to reach Disney-like proportions. Let’s be clear: Production targets missed will further crater these already under pressure stocks, bring out the last ditch revolver credit lines and bond bogeymen – ultimately forcing serious slenderizing of activity and assets in these names.

We need that kind of “oil Darwinism” right now to start to work – not only to stop the breakneck, irresponsible overproduction of US shale assets, but also to allow pipeline and transport networks to ‘catch up’ and restore reasonable basis prices from the Bakken and Permian to WTI.

More importantly, we need some weak hands to fold to deliver again a reasonable premium for oil that allows companies to make good profits for shareholders, allows sovereign nations to balance budgets but also lets alternative energy sources compete with fossil fuels. Did you know that high oil prices are not just an oil traders’ but an environmentalist’s dream as well? But first, this period of low oil prices has to sustain itself long enough to crush the ‘weakies’. And we’ll continue to look for them.

Some of the areas that will be first to show the strain of sustained lower prices will be I believe in the Mississippi Lime and the Tuscaloosa Marine Shale – let’s examine some of the players there.

The TMS is an easy target for difficulty and not a long stretch to focus on – Both Halcon (HK) CEO Floyd Wilson and analysts at several banks have labeled the TMS unviable at $80 oil. Wilson has said that he will abandon development of the TMS, focusing instead on the Bakken assets he owns to try and ride out this $80 winter. But as I pointed out in my last column of this series, their issues in the Bakken are only slightly less challenging.

Goodrich Petroleum (GDP) doesn’t have the ‘luxury’ of withdrawal from the TMS. $300m of the $375m of their capex for 2014 is directed to the TMS while slowly converting out of the Eagle Ford shale; for the 4Q14, their estimates are for more than 2/3rds of production to emerge from the TMS, over 4000 boe/d.

These two mid-cap companies trace the outlines for all the players in the TMS – big troubles are ahead.

Similarly, the Mississippi Lime payback has not shown itself at the level of other major shale plays and is in need of a shake out. The biggest player there is undoubtedly Sandridge energy (SD), still laboring under the mismanagement history of former CEO Tom Ward and his forays into the Gulf of Mexico as well as it’s strange natural gas arrangement with Occidental (OXY), which has likely caused a misstatement of earnings and now a shareholder suit. Its various MLP trusts in the Miss Lime have been investment disasters and this drop in crude prices won’t help one iota. Sandridge is hardly a small oil company, with yearly production of 28 million barrels of oil equivalent, but this one is headed in the wrong direction and speaks volumes about the viability of the Miss Lime with oil at $80.

These three rather large oil companies show the difficulties even multi-billion dollar market cap oil companies are going to experience in an $80 oil environment. The point of this series is to try and total up the production losses from these lesser players and see how that might impact the US market in the long haul. That will be the focus of our last set of columns, scheduled to continue next Friday.

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