Crude prices surprised everyone with a -3% drop back to $61.89. The resistance at $66.50 proved too tough and I believe traders simply decided to take profits given the lack of headlines to push prices higher. I consider any return to the vicinity of $60 as a strong buying opportunity ahead of summer driving demand and hurricane season.
Also surprising traders was the sudden spike in natural gas prices to a new four-week high at $8.10. The Sempra Energy (SRE) CEO said on CNBC that he expected gas prices to rise due to the forecast for a warmer than expected summer. Shares of nearly all gas producers rose as the week progressed.
Chesapeake posted a large drop in profits to 50 cents per share compared to $1.44 in the comparison quarter. They were hurt by a $193 million charge from a mark-to-market hedging program. Excluding the charges the operating income came in at 87 cents and nearly a dime more than analysts were expecting. Production rose +12% but prices received fell -15%. Chesapeake's proven reserves rose to 9.4 tcf but that is expected to double as existing fields are proven. CHK has acquired 18,000 acres in the Barnett Shale. They also own 1.1 million acres in the Fayetteville Shale with expectations of 6.5 tcf in additional reserves. They have only drilled 20 test wells in this play and the potential has not yet been proven or priced into CHK stock according to the CEO. They also own 350,000 acres in the Bossier field in East Texas and plan to increase active rigs from the current one rig to six rigs by year-end. Last week they announced plans to acquire additional interests in East Texas from Gastar Exploration for $92 million. CHK also upped its ownership in Gastar Exploration to 20.5%.
Chesapeake also announced plans to drill 16 wells on the 157 acre Colonial Country Club in Fort Worth. The Colonial has sponsored numerous PGA tours over several decades. CHK said with the Colonial agreement they will be able to reach surrounding residential areas like Park Hill and Alamo Heights without having to physically drill within the neighborhoods. Drilling in the Fort Worth area has reached into the city with wells springing up even closer to the downtown area.
I visited the Jonah Field in western Wyoming early this week and it was an amazing visit. The gas wells are literally within a stones throw of each other. Spacing is officially between 5-40 acres but as you can see by the map of the Jonah field below they are literally almost on top of each other.
Pindale, Jonah and Labarge Fields.
Drillers in the area claim a 17-year inventory of wells to be drilled in the Jonah and Pinedale fields. I visited a well owned by Encana and being drilled by Ensign Energy Services, the 5th largest contract driller in the US. While I was there I found out that Encana had just released five of the 12,000 ft Ensign rigs from their contract. Given the inventory of wells to be drilled I was surprised to see a major cutback in the drilling effort. The unofficial explanation had Encana cutting back on expenses while gas prices were significantly cheaper than in prior years. Why rush to production at premium rates only to sell your gas at what they consider is a discount price? Encana just reported a drop in net income of 66% due mostly to a paper loss of $427 million in their hedging operation due to mark-to-market accounting rules. That same rule generated a $830 million paper gain in Q1-2006. Operating earnings rose +24% on a large jump in natural gas production. Earnings came in at $1.10 compared to analyst's estimates of 99 cents. Encana specifically mentioned sharp gains in gas production at the Jonah field and several others as the reason for stronger earnings. It will be interesting to see what happens to those 5 Ensign rigs when they finish their current wells. It could be a day-rate play by Encana to negotiate a better rate or they simply found a cheaper driller. With the dozens of drillers in the field it should not be a problem to find rigs. Likewise with a 17 year inventory of wells to be drilled I would think any rig off contract would not have any trouble finding work.
Jonah Field - This is the view in every direction
Rig Floor Showing Hydraulic Tongs
Ensign Rig #77, Drilling to 12,000 Feet, Note the flag at full
I saw rigs belonging to every company I could think of and several I had never heard of before. There were some huge Helmerich & Payne (HP) rigs dominating the landscape. HP just reported earnings of $1.02 including items and 79 cents after items. Analysts had expected XX cents. HP said it was continuing to deploy new rigs at the rate of four per month and expected to have 18 more at work before year-end. They did report a decline in rig revenue of 5% with 97% of their rigs working compared to 98% in the prior quarter. Net income was $106 million on revenues of $372 million. That is a very nice margin if you can get it. According to the roughnecks I spoke to they were all coveting a position on a new HP rig. HP said there were an increasing number of competitors older rigs stacked and off rent as new and more capable rigs replaced them. We have heard about slowdowns in the gas-drilling sector and it is starting to be seen in even more earnings reports. If gas prices begin to tick up again as they did this week we can expect that slowdown to be brief.
Gas prices rose to a national average of $3.01 for unleaded last week and I can tell you I paid a lot more than that on my latest trip. The highest price paid was $3.44 in western California but I know it is higher than that in some places on both coasts. I was glad to get back to the $2.74 here in Colorado. AAA warned on Friday that prices could hit record highs before month end and many feel $4 is in our immediate future.
Europeans have been paying much more than this for years with equivalent prices in the $5-$7 range. This has forced Europeans to develop a different mindset about transportation and focus on smaller cars. The GM CEO said this week that GM may have to start making more fuel efficient cars to combat the inroads made by Toyota and others. Just how much money are they paying him to make those startling revelations? The key will be to get Americans to buy those cars from GM and not Toyota. Toyota said this week they are expecting to sell 4.3 million vehicles in 2007.
You may have noticed a spike in PetroChina since Tuesday's close under $113. PTR shares spiked to $130 after it announced a major oil find of nearly 7.3 billion barrels of oil equivalent. Three billion of those barrels are already proven. The discovery in the shallow water of the Bohai Bay close to Beijing was more than the total reserves of the countries 3rd largest producer and rival CNOOC Ltd (CEO). They should begin production in 2009 at 100,000 bpd and could ramp up to 500,000 bpd within 10 years. This was the biggest oil discovery since the 2 billion tonne Kashagan field was found in the Caspian Sea in Kazakhstan in 2000. The Kashagan field is expected to eventually produce 1.5 mbpd but requires billions in investment to make it commercially viable. This discovery in China is in shallow water and can be produced rather quickly and cheaply once infrastructure is completed. It was China's largest find since 1974. China currently imports 43% of its oil and demand rose 14.4% in 2006.
Warren Buffet is a major shareholder in PetroChina (1.3%) and with the annual shareholder meeting this Saturday several shareholder groups were planning demonstrations in an attempt to get Berkshire Hathaway to unload its investment in PTR because it has operations in the Sudan. There is also a shareholder resolution up for a vote to force Berkshire to divest its PTR holdings. I wonder how this will play out now that PTR is up +12% for the week and has the potential to double or triple over the next several years? Berkshire contends that PetroChina has no direct involvement in the Sudan and selling its stake would have no impact on the Darfur problem.
The PetroChina discovery will undoubtedly bring up questions about the validity of Peak Oil. Fortunately for investors the data is still on our side. A recent study by prominent geologist Myron Horn shows 220 such fields were discovered in the 1970s compared to only 72 in the current decade. The Centre for Global Energy Studies calculated that the average output from giant fields found in the 1990s is only about half of that of the 1970 fields. Current finds are normally harder to produce and are more expensive.
June Gas Futures Chart - Daily
June Gasoline Chart - RBOB Daily